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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-5881
------
BNS Co.
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(Exact name of registrant as specified in its charter)
Delaware 050113140
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 West Natick Road, Warwick, Rhode Island 02886
-----------------------------------------------------
(Address of principal executive offices and zip code)
(401) 244-4500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date, 2,937,350 of Class A
common stock, 63,612 shares of Class B common stock, par value $0.01 per share,
outstanding as of June 30, 2002.
1
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS*
- -----------------------------
BNS Co.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands except per share data)
(Unaudited)
For the Quarter For the Six Months
Ended June 30 Ended June 30
--------------- ---------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales ............................................ $ 15 $ -- $ 26 $ --
Cost of sales ........................................ 307 -- 615 --
Research and development expense ..................... 468 1,104 932 2,243
Selling, general and administrative .................. 2,528 2,555 4,390 5,146
Write-down of subsidiary net assets .................. 909 -- 909 --
-------- -------- -------- --------
Operating loss ....................................... (4,197) (3,659) (6,820) (7,389)
Interest expense ..................................... 105 627 218 2,682
Other income, net .................................... 1,454 1,231 2,677 1,678
-------- -------- -------- --------
Loss from continuing operations before income taxes .. (2,848) (3,055) (4,361) (8,393)
Income tax expense ................................... 61 -- 114 --
-------- -------- -------- --------
Loss before discontinued operations .................. (2,909) (3,055) (4,475) (8,393)
Discontinued operations:
Loss from operations, net of income taxes of $0, $540,
$0 and $1,240 ...................................... -- (3,367) (46) (6,778)
Gain on sale of business ............................. -- 47,492 -- 47,492
-------- -------- -------- --------
Income (loss) before extraordinary item ............ (2,909) 41,070 (4,521) 32,321
Extraordinary item - extinguishment of debt ........ -- 6,566 -- 6,566
-------- -------- -------- --------
Net income (loss) .................................. $ (2,909) $ 34,504 $ (4,521) $ 25,755
======== ======== ======== ========
Income (loss) per share basic and diluted:
Continuing operations .............................. $ (1.00) $ (1.06) $ (1.53) $ (2.98)
Discontinued operations ............................ -- 15.34 (0.02) 14.45
Extraordinary item ................................. -- (2.28) -- (2.33)
-------- -------- -------- --------
Net income (loss) per common share basic and
diluted ............................................ $ (1.00) $ 12.00 $ (1.55) $ 9.14
======== ======== ======== ========
* The accompanying notes are an integral part of the financial statements.
2
Item 1. FINANCIAL STATEMENTS*
- -----------------------------
BNS Co.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
2002 2001
---- ----
(unaudited)
ASSETS
Current assets:
Cash ............................................................ $ 6,720 $ 10,095
Other receivables, net of $724 and $826 allowance at
June 30 and December 31, respectively ...................... 412 1,272
Assets held for sale ............................................ 2,370 2,363
Assets related to discontinued operations ....................... 242 274
Prepaid expenses and other current assets ....................... 388 385
-------- --------
Total current assets ....................................... 10,132 14,389
Property, plant and equipment
Land ............................................................ 426 415
Buildings and improvements ...................................... 105 105
Machinery & equipment ........................................... 1,351 1,244
-------- --------
1,882 1,764
Less accumulated depreciation ................................... 566 420
-------- --------
1,316 1,344
Other assets .................................................... 1,963 3,550
-------- --------
$ 13,411 $ 19,283
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Accounts payable and accrued expenses ........................... $ 5,782 $ 7,141
Current portion of long-term debt ............................... 2,848 3,317
-------- --------
Total current liabilities ....................................... 8,630 10,458
Long-term liabilities ........................................... 3,188 3,676
Commitments and contingencies
Shareowners' equity
Preferred stock; $1.00 par value; authorized 1,000,000 shares;
none issued ................................................... -- --
Common Stock:
Class A, par value, $.01; authorized 30,000,000 shares;
issued 2,937,350 shares in 2002 and 2,861,240 shares in 2001 .. 29 29
Class B, par value, $.01; authorized 2,000,000 shares;
issued 63,612 shares in 2002 and 64,007 shares in 2001 ........ 1 1
Additional paid-in capital ...................................... 86,981 85,950
Retained deficit ................................................ (84,894) (80,373)
Unamortized value of restricted stock awards .................... (168) --
Accumulated other comprehensive income (loss) ................... 99 (3)
Treasury stock; 8,518 shares in 2002 and 2001, at cost .......... (455) (455)
-------- --------
Total shareowners' equity ....................................... 1,593 5,149
-------- --------
$ 13,411 $ 19,283
======== ========
* The accompanying notes are an integral part of the financial statements.
3
Item 1. FINANCIAL STATEMENTS*
- -----------------------------
BNS Co.
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
For the Six Months Ended June 30,
---------------------------------
2002 2001
---- ----
Cash Used in Operations:
Net income (loss) ............................................. $ (4,521) $ 25,755
Extraordinary item - extinguishment of debt ................... -- 6,566
Adjustments to reconcile net loss to net cash used in operating
activities from continuing operations:
Depreciation and amortization .......................... 832 847
Changes in operating assets and liabilities ............ (596) 3,263
Minority interest ...................................... (764) (157)
Write-down in the value of net assets of a
subsidiary ........................................... 909 --
Changes in assets and liabilities related to
discontinued operations .............................. (250) 1,187
Gain on sale of business ............................... -- (47,492)
--------- ---------
Net Cash Used in Operations ................................... (4,390) (10,031)
--------- ---------
Investment Activities:
Capital expenditures .......................................... (107) (388)
Proceeds from sales of business, net of expenses .............. -- 141,520
--------- ---------
Net Cash Provided by (Used in) Investment Activities .......... (107) 141,132
Financing Transactions:
Payment of notes payable ...................................... (469) (27,400)
Proceeds from issuance of stock of subsidiary ................. 1,500 --
Payment of long-term senior notes ............................. -- (58,278)
Distribution to stockholders .................................. -- (44,480)
Equity distribution ........................................... -- 3,156
--------- ---------
Net Cash Provided by (Used in) Financing Transactions ......... 1,031 (127,002)
--------- ---------
Effect of Exchange Rate Changes on Cash ....................... 91 --
--------- ---------
Cash and Cash Equivalents:
Increase (decrease) during the period ......................... (3,375) 4,099
Beginning balance ............................................. 10,095 8,882
--------- ---------
Ending balance ................................................ $ 6,720 $ 12,981
========= =========
Supplementary Cash Flow Information:
Interest Paid .......................................... $ 199 $ 3,171
========= =========
Taxes Paid ............................................. $ -- $ 230
========= =========
* The accompanying notes are an integral part of the financial statements.
4
Item 1. FINANCIAL STATEMENTS*
- -----------------------------
BNS Co.
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
(in thousands)
For the Six Months Ended June 30, 2002
Unamortized Accumulated
Additional value of other Total
Common paid in Retained restricted comprehensive Treasury Shareowners'
Shares Stock capital deficit stock awards income (loss) stock Equity
----- ----- ------- ------- ------------ ------------- ----- ------
Balance at January 1, 2002 .... 2,925 $30 $85,950 $(80,373) $ -- $ (3) $(455) $ 5,149
Net loss ...................... -- -- -- (1,612) -- -- -- (1,612)
Foreign currency
translation adjustment ...... -- -- -- -- -- (2) -- (2)
----- --- ------- -------- ----- ----- ----- -------
Balance at March 31, 2002 ..... 2,925 30 85,950 (81,985) -- (5) (455) 3,535
Net loss ...................... -- -- -- (2,909) -- -- -- (2,909)
Foreign currency
adjustment .................. -- -- -- -- -- 104 -- 104
Restricted stock awards ....... 75 -- 219 -- (219) -- -- --
Amortization of
restricted stock awards ..... -- -- -- -- 51 -- -- 51
Acquisition of subsidiary
minority interest ........... -- -- 812 -- -- -- -- 812
----- --- ------- -------- ----- ----- ----- -------
Balance at June 30, 2002 ...... 3,000 $30 $86,981 $(84,894) $(168) $ 99 $(455) $ 1,593
===== === ======= ======== ===== ===== ===== =======
* The accompanying notes are an integral part of the financial statements.
5
BNS Co.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except per share data)
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the six months ended June 30, 2002 are not indicative of the results that
may be expected for the year ended December 31, 2002. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year
ended December 31, 2001.
In April 2001, the stockholders of Brown & Sharpe Manufacturing Company
approved a number of transactions including: the sale of the Company's
Metrology Business to Hexagon AB of Sweden ("Hexagon"), the sale of the
Company's North Kingstown Facility to Precision Park Partners LLC,
("Precision Partners"), the change of the Company's name to BNS Co., and
various stock-related transactions including a reverse stock split.
Throughout this document, the "Company" refers to either Brown & Sharpe
Manufacturing Company or BNS Co., as applicable. Due to a failure to reach
mutual agreement on a number of issues, the Company did not complete the
sale of its North Kingstown Facility to Precision Partners.
In connection with the sale of the Metrology Business, Hexagon agreed to
make an initial investment of $2,500 in BNS Co.'s software development
subsidiary, Xygent Inc. ("Xygent"), in exchange for a 16.7% ownership
interest. Additionally, Hexagon had committed, subject to certain
conditions, to invest an additional $4,500 in Xygent over the next three
years in return for additional equity ownership. $1,500 of this $4,500 was
received, as scheduled, in April 2002.
Since the sale of the Company's Metrology Business, the Company conducts
its software development business through Xygent, which could ultimately
lead to a sale or spin-off of that business. The Company continues to plan
to sell its North Kingstown property and its real estate (a gravel pit)
adjacent to the Heathrow Airport in the United Kingdom at later dates. The
Company plans to make additional cash distributions to its shareholders
when those two property sales have been completed. However, the amount of
such future cash distributions is subject to later determination by the
Company's Board of Directors, based on a number of factors as earlier
disclosed in the Company's Proxy Statement dated March 30, 2001 for the
Special Meeting of Stockholders held on April 27, 2001, legal requirements
applicable to dividends and other subsequent developments including
contingent and other retained liabilities.
Subsequent to June 30, 2002, the Company entered into an agreement to sell
its investment in Xygent Inc. for $3,000 to Hexagon AB, subject to certain
closing adjustments.
2. Discontinued Operations - As mentioned above, the Company disposed of its
Metrology Business, effective April 27, 2001. The financial statements for
prior periods have been restated.
3. For the six months ended June 30, 2002, the Company has recorded an income
tax provision of $114. This represents an income tax provision associated
with the gravel royalty income earned in the United Kingdom. No other
income tax provision has been recorded in this period.
6
BNS Co
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands except per share data)
4. The following table sets forth the computation of basic and diluted loss
per share:
For the For the
Quarter Ended Six Months Ended
June 30 June 30
------------------ ------------------
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Loss from continuing operations ............... $(2,909) $ (3,055) $(4,475) $ (8,393)
Income (loss) from discontinued operations .... -- 44,125 (46) 40,714
Extraordinary item ............................ -- (6,566) -- (6,566)
------- -------- ------- --------
Net income (loss) ............................. $(2,909) $ 34,504 $(4,521) $ 25,755
======= ======== ======= ========
Denominator for basic earnings per Share:
Weighted-average shares .................... 2,919 2,875 2,918 2,817
Effect of dilutive securities:
Employee stock options and restricted
stock .................................... -- -- -- --
------- -------- ------- --------
Denominator for diluted earnings per share .... 2,919 2,875 2,918 2,817
Basic and diluted income (loss) per share from:
Continuing operations ......................... $ (1.00) $ (1.06) $ (1.53) $ (2.98)
Discontinued operations ....................... -- 15.34 (0.02) 14.45
Extraordinary item ............................ -- (2.28) -- (2.33)
------- -------- ------- --------
Basic and diluted income (loss) per share ..... $ (1.00) $ 12.00 $ (1.55) $ 9.14
======= ======== ======= ========
Diluted loss per share is the same as basic loss per share in 2002 and 2001
because the computation of diluted earnings per share would have an
antidilutive effect on loss per share calculations, and all options
exercisable prior to the sale of the Metrology Business were exercised and
are included in the basic calculation. Unvested restricted shares have an
antidilutive effect and are not included in the calculation.
5. Comprehensive income (loss) for the quarter ended June 30, 2002 and 2001
amounted to $(2,805) and $54,264, respectively. Comprehensive income (loss)
for the six months ended June 30, 2002 and 2001 amounted to $(4,419) and
$39,970, respectively. Accumulated other comprehensive income (loss) at
June 30, 2002 and December 31, 2001 is comprised of foreign currency
translation adjustments of $99 and $(3), respectively.
6. Litigation - In July 2002, the Company and two former executives of the
Company reached a final agreement and settled the compensation disputes
between themselves. The terms of settlement include payment of a negotiated
amount plus reasonable and properly documented legal and accounting fees
and disbursements incurred by the former executives. At June 30, the
Company had adequately provided for this contingency.
7. At June 30, 2002, the Company was a defendant in several legal claims that
arose in the normal course of business. Based upon the information
presently available to management, the Company believes that any liability
for these claims would not have a material effect on the Company's results
of operations or financial condition.
7
BNS Co
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands except per share data)
8. Segment Information - Subsequent to the sale of the Metrology Business
mentioned above, the Company conducts its business through its subsidiary
Xygent, its only segment.
9. Executive Compensation - During the second quarter, the Company recorded an
additional charge of $64 in SG&A in connection with a compensation
arrangement, not yet finalized, with its CEO, who has a change in control
agreement (where a change in control occurred upon the April, 2001 sale of
assets to Hexagon). This increased the earlier charge recorded in
connection with such arrangement to $1,400.
10. In April 2002, the Company granted restricted stock awards covering 75,715
shares of common stock to directors of the Company as a means of retaining
and paying directors fees, thereby rewarding them for long-term performance
and to increase their ownership in the Company. Shares awarded under the
plan entitle the shareholders to all rights of common stock ownership
except the shares may not be sold, transferred, pledged, assigned, or
otherwise encumbered or disposed of during the restriction period. The
shares granted shall vest on July 18, 2003, except for 5,715 shares which
became fully vested in June 2002. The shares were recorded at the fair
market value on the date of issuance as deferred compensation and the
related amount is being amortized to operations over the vesting period.
Compensation expense for the six months ended June 30, 2002, related to
these shares of restricted stock was $51.
11. In April 2002, Xygent Inc. adopted the 2002 Equity Incentive Plan ("Plan")
which will utilize stock options and other stock-based awards as part of
its overall management incentive compensation programs to its eligible key
employees. Under the provisions of this Plan, the aggregate number of
shares of stock that may be delivered will be 30,300. No award may be
granted under the Plan after April 8, 2012 but awards previously granted
may extend beyond that date. The Plan permits the granting of stock options
which qualify as incentive stock options under the Internal Revenue Code
and non-statutory options which do not so qualify.
On May 1, 2002, Xygent Inc. granted non-statutory stock options pursuant to
the Plan. The options granted are 27,100 which are exercisable in
installments of 40% at grant date and 3% on and after the last day of each
month during the consecutive 20-month period beginning May 1, 2002 and
ending December 31, 2003 at an exercise price of $13.50 per share.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the market price of the Company's stock
at the date of the grant over the amount an employee must pay to acquire
the stock. The Company recorded no compensation cost related to these
options during the period ended June 30, 2002.
12. Subsequent to June 30, 2002, the Company entered into an agreement to sell
its investment in Xygent Inc. for $3,000 to Hexagon AB, subject to certain
closing adjustments. As a result of this transaction, the Company has
recorded a charge of $909 in continuing operations to reduce the carrying
value of the Xygent Inc. net assets to the net realizable value (in a sale
or otherwise).
13. Reclassification - Certain 2001 balances have been reclassified to conform
with 2002 presentations.
8
BNS Co.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
--------------
Overview
After completing the sale of its Metrology Business to Hexagon AB of
Stockholm, Sweden ("Hexagon") on April 27, 2001, the Company's only actively
conducted business is its Xygent development stage measuring software business,
operated by its Xygent subsidiary, in which it held an 84% equity interest after
the April 27, 2001 closing and then held 77%, after the making of Hexagon's
second $1,500 of its four committed investments in April 2002, and the
conversion to equity in Xygent of $1,500 of Xygent's intercompany debt to the
Company. Subsequent to the end of the second quarter of 2002, the Company and
Hexagon (through one of its subsidiaries) have entered into a securities
purchase agreement (the "Hexagon Agreement") whereby Hexagon will acquire all of
the Company's investment in Xygent for $3,000, of which $2,250 is to be paid at
the closing and $750 is to be paid subsequent to closing subject to compliance
with a Xygent equity value provision (the purchase of the Company's interest in
Xygent under the Hexagon Agreement, the "Hexagon Transaction"). In the event
that the Hexagon Transaction is not consummated, the Company will wind up
Xygent.
The Company holds its North Kingstown Facility, where it acts as landlord,
and the adjoining acreage for sale and its Heathrow, U.K. real estate property
for sale, each at the appropriate time, as determined by the Company's Board of
Directors.
The accompanying financial statements for the second quarter ended June 30,
2002 present the Metrology Business and the former Electronics Division as
discontinued operations, but do not reflect the Hexagon Transaction. The
financial statements for the prior period have been restated. The discussions
below relate only to the Company's continuing operations that were continuing
operations through the end of the second quarter (i.e. the Xygent operations)
and refer to the Company's real estate assets to a limited extent, unless
otherwise noted.
Forward-Looking Statements
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" as well as other portions of this Report contain
forward-looking statements concerning the Hexagon Transaction, the Company's
cash burn rate or cash flow, as the case may be, retained liabilities, capital
requirements, operations, economic performance and financial condition. In
addition, forward-looking statements may be included in various other Company
documents to be issued in the future and various oral statements by Company
representatives to security analysts and investors from time to time. Such
statements are not guarantees of future performance and are subject to various
risks and uncertainties, including those set forth in "Risk Factors", and actual
performance could differ materially from that currently anticipated by the
Company. In addition, this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto included
elsewhere in this Form 10-Q.
Results of Operations
(dollars in thousands)
(Three and Six Months ended June 30, 2002 compared to June 30, 2001)
The Company had net revenue of $15 in the quarter ended June 30, 2002 and
$26 in the six months ended June 30, 2002. There was no revenue in the three
months and six months ended June 30, 2001. Although the Xact measuring software
was officially released on April 24, 2001, the Company did not recognize any
revenue until the fourth quarter of 2001.
Operating loss for the three months ended June 30, 2002 of $4,197 was $538
greater than the three months ended June 30, 2001. For the six months ended June
30, 2002, the operating loss of $6,820 was $569 less than the six months ended
June 30, 2001. The operating loss for the current quarter and the year-to-date
period included a charge of $909 related to the reduction in the carrying value
of the Xygent net assets to the net realizable value (in a sale or otherwise).
Other than the above charge, the principal difference year over year in combined
research and development expenses and selling, general and administrative
expenses relate to the significant reduction in corporate staff and associated
costs in
9
conjunction with the sale of the Metrology Business to Hexagon on April 27,
2001. The reduction in software R&D is due to the shift in resources after the
sale of the Metrology Business to Hexagon to sales support for the introduction
of XactMeasure, in addition to the change of treatment of a portion of these
expenses to selling, general and administrative expenses after XactMeasure was
released to the public on April 24, 2001. Charges to cost of sales for the three
months and six months ended June 30, 2002 consist of amortization of capitalized
software product development costs.
Interest expense for the quarter ended June 30, 2002 of $105 is
significantly lower than the quarter ended June 30, 2001 and principally
reflects the reduced interest expense resulting from the repayment of the
Company's U.S. bank debt and long-term senior notes following the sale of the
Metrology Business. For the six months ended June 30, 2002 interest expense was
$2,464 lower than the $2,682 for the corresponding period in 2001. Other income,
net for quarter ended June 30, 2002, was $1,454 or $223 higher than the same
quarter last year, primarily due to increased losses in Xygent affecting the
minority interest. For the six months ended June 30, 2002 net other income is
higher by $999 over the same period last year of $1,678. This is primarily due
to the rental income from the North Kingstown Facility.
Discontinued operations for the six months ended June 30, 2002 reflects
additional closing expenses incurred in the sale of the Electronics Division.
Discontinued operations for the quarter ended June 30, 2001 reflect the
additional loss from operations of the Metrology Business and the Electronics
Division.
The extraordinary item in 2001 represents the prepayment penalty and
related cost incurred in connection with the repayment of the long-term private
placement senior notes following the sale of the Metrology Business.
Liquidity and Capital Resources
The Company had cash of approximately $6,720 at June 30, 2002, including
approximately $850 cash held by Xygent. The Company is debt free, except for a
$2,848 mortgage on the North Kingstown Facility.
There is no assurance that the future months' expenses of the Company will
not be greater than anticipated, or that its expected cash flow, assuming the
Hexagon Transaction is consummated, subsequent to the sale of Xygent, will not
thereafter be less than anticipated, and that a liquidity problem may not arise
(see Risk Factors: There may not be adequate resources for funding the operation
of the Company; Liquidity Risk). In addition, the Company has not sold the North
Kingstown Facility, or adjoining acreage, or the Heathrow, U.K. property and,
therefore, has not declared any dividend in any amount with respect to the
anticipated proceeds from such sales.
Given its limited resources and its general intentions with respect to
payment of distributions to its shareholders out of a portion of the net
proceeds of future sales of assets (principally its North Kingstown Facility,
and adjoining acreage, and its Heathrow, U.K. real estate property), subject to
later Board determination of the amounts based on a number of factors as earlier
disclosed, legal requirements applicable to dividends and other subsequent
developments, including contingent and other retained liabilities (and including
present and future contingent liabilities related to tort-type claims arising
out of sales of machine tools and hydraulic pumps by the Company prior to its
discontinuance of those businesses by the early 1990's), the Company had decided
not to use for Xygent any of its limited sources of funds beyond the $5,000 of
Metrology Business sales proceeds that the Company had retained and disclosed
that were committed for use in funding the development stage measuring software
business activities of Xygent. The Company had satisfied this commitment in July
2002.
With Xygent generating minimal sales in the first six months of 2002,
although receiving continued technical acclaim for its developed measuring
software, and with the continued unfavorable economic climate for technology in
general and productivity enhancing software of the Xygent type in particular
continuing in 2002, it was evident to the Company that Xygent would not reach
break-even in 2002 with the funds that were available for this purpose at the
end of April 2002. Further, it became evident to the Company that a
restructuring and downsizing of Xygent by the Company did not appear to be a
feasible alternative for the Company to undertake by itself, given the lack of
funding available to the Company and other factors deemed relevant by the
Company.
Accordingly, the Company decided it was in the best interest of its
stockholders not to invest more of its limited funds in Xygent and instead to
enter into the Hexagon Agreement. Among other things, the Company believes that
it would be better to have the Company realize a cash return on its investment
in Xygent through a sale to Hexagon rather than winding-up Xygent, in which
event there would be no assurance that the Company would realize any return on
its investment in Xygent.
Subsequent to the sale of Xygent, the Company's efforts to continue as a
going concern would be negatively affected by any sale of its North Kingstown
Facility and adjoining acreage (and any related distribution of all or a portion
of the net sales proceeds, after providing for retained liabilities and
satisfaction of legal requirements, to stockholders), as to which there can be
no assurance that such sale can be completed. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
10
The accompanying consolidated financial statements for the period ending
June 30, 2002 have been prepared on a going concern basis, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. As previously stated, the net assets of Xygent have been
adjusted to the net realizable value. This adjustment resulted in a charge to
operations of $909. Other than this adjustment, the financial statements do not
include any adjustments relating to the recoverability and classification of
assets for the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Cash Flow and Working Capital
Net cash used in operations for the six months ended June 30, 2002 was
$4,390. Net cash used in investing activities for the six months ended June 30,
2002 was $107. Net cash provided by financing activities for the six months
period ended June 30, 2002 was $1,031. The Company continues to classify the
North Kingstown Facility and the related mortgage as current as the Facility
continues to be held for sale. Excluding this asset along with the related
mortgage and the Electronics Division assets also held for sale, the Company had
working capital of $1,738 at June 30, 2002, as compared with $4,611 at
December 31, 2001.
11
RISK FACTORS
After completing the sale of its Metrology Business to Hexagon AB of
Stockholm, Sweden ("Hexagon") on April 27, 2001, the Company's only actively
conducted business is its Xygent development stage measuring software business,
operated by its Xygent subsidiary, in which it held an 84% equity interest after
the April 27, 2001 closing and then held 77%, after the making of Hexagon's
second $1,500 of its four committed investments in April 2002, and the
conversion to equity in Xygent of $1,500 of Xygent's intercompany debt to the
Company. Subsequent to the end of the second quarter of 2002, the Company and
Hexagon have entered into a securities purchase agreement whereby Hexagon will
acquire all of the Company's investment in Xygent for $3,000 as described above.
The Company holds its North Kingstown Facility, where it acts as landlord,
and the adjoining acreage for sale and its Heathrow, U.K. real estate property
for sale, each at the appropriate time, as determined by the Company's Board of
Directors.
The principal risk remaining with respect to the Company's interest in the
Xygent business are: (i) the risk that the Hexagon Transaction as described
above might not close, (ii) the risk that the Company might not receive the full
amount of the $750 portion of the sale price to be paid after the closing and
(iii) the risk that the Company might have to make an indemnification payment to
Hexagon with respect to the Company's representations and warranties concerning
the business of Xygent set forth in the Hexagon Agreement.
Risk of not having the Proposed Sale of the North Kingstown Facility under a
Purchase and Sale Agreement.
The Agreement dated as of March 2, 2001, as extended by amendments as of
May 31, 2001 and as of September 28, 2001, for the proposed sale of the
Company's North Kingstown Facility (and adjoining acreage) to Precision Park
Partners LLC lapsed in late 2001, as the parties were not able to complete the
transaction on the terms and conditions contemplated by the Agreement. The
Company is in the process of renting out its former office headquarters space in
the North Kingstown Facility. The Company is also continuing to work with the
Rhode Island Department of Environmental Management to whom this Company had
submitted the results of the recently completed Phase II environmental study on
the Facility on October 2, 2001. The Company believes, based on discussions with
its real estate consultant, that completion of leasing the former headquarters
space at the North Kingstown Facility to a new tenant and completion of the
environmental remediation work that appears to be necessary at the North
Kingstown Facility should result in increasing the fair market value of the
Facility for a future sale of the property, although there can be no assurance
that either of these two matters will be completed successfully by the Company
or that the Company's expectation as to future increased market value of the
Facility will prove to be the case. (See "Environmental Risks" below.)
Environmental Risks
Subject to the sale of Xygent to Hexagon as discussed above, the nature of
the Company's operations are not affected by environmental laws, rules and
regulations. However, because the Company and its subsidiaries and predecessors,
prior to the sale to Hexagon on April 27, 2001 (and prior to sales of other
divisions made in prior years) have conducted heavy manufacturing operations and
often in locations at which, or adjacent to which, other industrial operations
were conducted, from time to time the Company is subject to environmental
claims. As with any such operations that involved the use, generation, and
management of hazardous materials, it is possible that prior practices,
including practices that were deemed acceptable by regulatory authorities in the
past, may have created conditions which could give rise to liability under
current or future environmental laws. In addition, the Company receives claims
from time to time for toxic tort-type injuries related to the use of certain
materials in pumps sold by its hydraulic pump operators, which business was sold
many years ago. Thus far the toxic claims have not resulted in any material
exposure, but there is no assurance that this will be the result for all such
future toxic claims. Because the law in this area is developing rapidly, such
environmental laws are subject to amendment and widely varying degrees of
enforcement, the Company may be subject to, and cannot predict with any
certainty the nature and amount of potential environmental liability related to
these operations or locations (including its North Kingstown Facility and
property on which the Facility is located, where, after the sale to Hexagon, the
Company is now solely the landlord) that the Company may face in the future.
A recently completed Phase II environmental investigation on the North
Kingstown Facility has revealed certain environmental problems on the property.
The results of the investigation show some exceedances of environmental
standards for certain contaminants in the soil under the property and minor
groundwater issues. The Company has been advised by its technical consultants
that these exceedances are minor and do not create any hazard to human health or
the environment. The Company submitted the
12
results of the investigation to the Rhode Island Department of Environmental
Management ("RIDEM") on October 2, 2001, May 14, 2002 and June 21, 2002 and has
stated to RIDEM that it will address these exceedances in a timely and
appropriate manner consistent with applicable law and regulation. The Company is
now awaiting the decision of RIDEM on the appropriate remedies to be implemented
to address such exceedances.
The Company believes, based on the preliminary advice of its consultants,
that the estimated costs of investigation and remediation of the identified
exceedances, which have been accrued, approximate $500,000. However, it is
possible that such estimated costs may be more significant. The Company is also
investigating the prospects of obtaining environmental cost cap and liability
insurance to limit its financial exposure relating to such remediation.
Delisting of the Company's Class A Common Stock from the New York Stock Exchange
The Company's Class A Common Stock was delisted from the New York Stock
Exchange and commenced trading on the OTC Bulletin Board under the symbol
"BNSXA" and was listed on the Boston Stock Exchange on February 11, 2002. There
is no assurance that there will continue to be a sufficient number of securities
firms prepared to make an active trading market in our stock and the public
perception of the value of the Class A Common Stock could be materially
adversely affected.
The market price of the Company's Common Stock could decline as a result of
sales of shares by the Company's existing stockholders, including sales
following the consummation of the Hexagon Transaction.
The market price of the Company's Common Stock could decline as a result of
sales of shares by stockholders who had acquired shares during the period prior
to April 27, 2001 when the Metrology Business was the Company's principal
business, including option holders who became shareholders in connection with
the April 27, 2001 closing under the Acquisition Agreement with Hexagon, sales
by beneficiaries under the Company's Employee Stock Ownership Plan, which
terminated as a result of the closing, sales by beneficiaries of the Company's
401(k) plan or beneficiaries of employee benefit plans of Hexagon which have
received shares of stock of the Company previously held in accounts under the
Company's employee benefit plans and sales of other shares by former employees
of the Company.
The market price of the Company's Common Stock could also decline as a
result of the Hexagon Transaction.
Auditor's Opinion
The Company received a report from its independent auditors for the year
ended December 31, 2001, containing an explanatory paragraph stating the
Company's operating losses raise substantial doubt about the Company's ability
to continue as a going concern. The Company may continue to receive a similar
opinion from the auditors in the future.
There may not be adequate resources for funding the operations of the Company;
Liquidity Risk
There is no assurance that the future months' expenses of the Company will
not be greater than anticipated, or that the expected cash flow, subsequent to
the sale of Xygent, will not thereafter be less than anticipated, and that a
liquidity problem may not arise (see "Liquidity and Capital Resources" in the
Management's Discussion and Analysis). In addition, the Company has not sold the
North Kingstown Facility, or adjoining acreage, or the Heathrow, U.K property
and, therefore, has not declared any dividend in any amount with respect to all
or a portion of the anticipated proceeds for such asset sales, subject to later
Board determination of the amounts based on a number of factors as earlier
disclosed, legal requirements applicable to dividends and other subsequent
developments, including contingent and other retained liabilities (and including
present and future contingent liabilities related to tort-type claims arising
out of sales of machine tools and hydraulic pumps by the Company prior to its
discontinuance of those businesses by the early 1990's).
13
PART II - OTHER INFORMATION
Item 1. N/A
- -------
Item 2. N/A
- -------
Item 3. NONE
- -------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------
The Annual Meeting of Stockholders of the Company was held on June 7, 2002.
The Stockholders of the Company were asked to vote on the following items, and
voted as follows:
Proposal 1: Election of Two Directors to the Board of Directors
Class A For Withheld
------- --- --------
Roger E. Levien 2,438,012 265,036
John M. Nelson 2,447,956 255,092
Class B
-------
John M. Nelson 351,970 93,390
The following persons continued in office as directors for the term
specified
Director Term Ending
-------- -----------
Kenneth Kermes 2003
Richard M. Donnelly 2003
Howard K. Fuguet 2004
J. Robert Held 2004
Henry D. Sharpe, III 2004
Proposal 2: To increase the number of shares deliverable under the
Company's 1999 Equity Incentive Plan
For Against Abstain Broker Non Vote
--- ------- ------- ---------------
926,227 1,403,631 4,163 814,387
Proposal 3: To ratify the election of Ernst & Young LLP as the Company's
independent accountants for fiscal year ending December 31, 2002
For Against Abstain
--- ------- -------
3,109,786 35,992 2,630
14
Item 5. OTHER INFORMATION.
- --------------------------
Accompanying this Form 10-Q are the certificates of the Chief Executive
Officer and Chief Financial Officer required by Section 1350, Chapter
63 of Title 18, United States Code, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, copies of which are furnished as
exhibits to this report.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- -------------------------------------------
(a) Exhibits
--------
10.30 Stock Purchase Agreement, dated April 8, 2002, between Xygent Inc. and
BNS Co.
10.31 2002 Stock Purchase Agreement, dated as of April 8, 2002, between
Xygent Inc. and BNS Co. relating to the purchase of 13,206 shares of
Common Stock of Xygent in connection of retirement of $1.5 million in
intercompany debt (the "2002 SPA")
10.32 Omnibus Agreement, dated April 19, 2002, by and among Xygent Inc.,
Brown & Sharpe Inc., Hexagon Holdings, Inc. and Hexagon AB.
10.33 Xygent 2002 Equity Incentive Plan
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Report on Form 8-K
No Reports on Form 8-K were filed during the quarter ended June 30,
2002.
BNS Co.
By: /s/ Andrew C. Genor
-------------------------------------
Andrew C. Genor
President and Chief Financial Officer
(Principal Financial Officer)
August 19, 2002
15