-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P/4bwp21UYCTlaYezYhQRR90dz84LxBZuIlGW+Pj80f48aO8P86IN3PumMvLMvEe bwlEX4RapD+vHljIFXXSaw== 0000950109-96-001884.txt : 19960402 0000950109-96-001884.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950109-96-001884 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROWN & SHARPE MANUFACTURING CO /DE/ CENTRAL INDEX KEY: 0000014637 STANDARD INDUSTRIAL CLASSIFICATION: METALWORKING MACHINERY & EQUIPMENT [3540] IRS NUMBER: 050113140 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05881 FILM NUMBER: 96542128 BUSINESS ADDRESS: STREET 1: PO BOX 456 STREET 2: PRECISION PK - 200 FRENCHTOWN RD CITY: NORTH KINGSTOWN STATE: RI ZIP: 02852 BUSINESS PHONE: 4018862000 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER COMMISSION FILE NUMBER 1-5881 31, 1995 ---------------- BROWN & SHARPE MANUFACTURING COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 050113140 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OF ORGANIZATION) IDENTIFICATION NO.) PRECISION PARK, 200 FRENCHTOWN ROAD, NORTH KINGSTOWN, RHODE ISLAND 02852 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 401-886-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ Class A Common Stock--Par Value $1.00................ New York Stock Exchange Preferred Stock Purchase Rights...................... New York Stock Exchange 9 1/4% Convertible Subordinated Debentures due New York Stock Exchange December 15, 2005...................................
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: CLASS B COMMON STOCK--PAR VALUE $1.00 (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S) 229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value (as calculated under the rules) of the voting common stock held by non-affiliates of the Registrant was approximately $33,000,000 as of March 22, 1996. There were 8,216,181 Shares of Class A Common Stock and 522,244 Shares of Class B Common Stock, each having a par value of $1.00 per share, outstanding as of March 22, 1996. DOCUMENTS INCORPORATED BY REFERENCE The following documents have been incorporated by reference in the following parts of the Form 10-K: (1) Definitive Proxy Statement for the May 2, 1996 Annual Meeting incorporated by reference (to the extent specified) in Part III. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- BROWN & SHARPE MANUFACTURING COMPANY INDEX
PAGE ------ PART I Item 1 Business........................................................ 3--11 General......................................................... 3 Dimensional Metrology Industry.................................. 3--4 Metrology Business Strategy..................................... 4--5 MS Group........................................................ 5--6 PMI Division.................................................... 6 CM Division..................................................... 6--7 Foreign Operations.............................................. 7 Engineering and Product Development............................. 7--8 Raw Materials and Sources of Supply............................. 8 Patents, Licenses, Trademarks, and Proprietary Information...... 8 Environmental Matters........................................... 8 Employees....................................................... 8--9 Competition..................................................... 9--10 Backlog......................................................... 10 Significant Customers........................................... 10 Working Capital................................................. 10 Segment Information............................................. 10--11 Item 2 Properties...................................................... 12 Item 3 Legal Proceedings............................................... 12 Item 4 Submission of Matters to a Vote of Security Holders............. 12 Item 4A Executive Officers of the Registrant........................... 13 PART II Item 5 Market Price of the Registrant's Common Stock and Related Security Holder Matters......................................... 14 Item 6 Selected Financial Data......................................... 14--15 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 15--22 Item 8 Financial Statements and Supplementary Data..................... 22--41 Item 9 Disagreements With Accountants on Accounting and Financial Disclosure...................................................... 42 PART III Item 10 Directors and Executive Officers of the Registrant............. 42 Item 11 Management Remuneration and Transactions....................... 42 Item 12 Security Ownership of Certain Beneficial Owners and Management..................................................... 42 Item 13 Certain Relationships and Related Transactions................. 42 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 42--43 Signatures..................................................... 44--45 Directors...................................................... 46 Officers....................................................... 46 Investor Information........................................... 46 Financial Statement Schedules.................................. 47 Exhibit Index.................................................. 48--52
2 PART I ITEM 1--BUSINESS (DOLLARS IN THOUSANDS) General Brown & Sharpe Manufacturing Company, together with its domestic and foreign subsidiaries, collectively referred to as "Brown & Sharpe" or the "Company", is a leader in the design, manufacture, and marketing of dimensional metrology products worldwide under several internationally recognized brand names. Brown & Sharpe's products measure the physical dimensions of objects and are used by a wide variety of industrial companies to monitor product conformance to specifications. Manufacturers use Brown & Sharpe's products to monitor product quality and are increasingly integrating quality control functions, and therefore Brown & Shape's products, directly into the manufacturing process. Brown & Sharpe markets its dimensional metrology products and services in North America, Europe, Asia, South America, and the Middle East. Primary end markets for Brown & Sharpe's products are the automotive, aerospace, and industrial machinery industries. Brown & Sharpe's operations are conducted through three units: Measuring Systems, Precision Measuring Instruments, and Custom Metrology. . THE MEASURING SYSTEMS GROUP (the "MS Group"), Brown & Sharpe's largest unit, manufactures and markets a wide range of manual and computer- controlled, high-precision CMMs. CMMs measure manufactured products and their components within exacting dimensional tolerances, thereby enabling manufacturers to minimize scrap and rework costs, reduce warranty expense, and monitor product quality. The MS Group also sells a wide variety of attachments, accessories, and related software and provides aftermarket parts and services. Its products are sold under the Brown & Sharpe(R), DEA(R), and Leitz(R), brand names. Brown & Sharpe believes that it is the leader in the world market for CMM products as measured by net sales. . THE PRECISION MEASURING INSTRUMENTS DIVISION (the "PMI Division") manufactures and markets a wide range of mechanical and electronic measuring and inspection tools including micrometers, dial indicators, calipers, gauge blocks, and height gauges. PMI Division products are sold under the Brown & Sharpe(R), Tesa(R), Etalon(R), Interapid(R), Standard Gage(R), Mauser(R), Select Gauge(TM), Mercer(TM), and Roch(R) brand names. . THE CUSTOM METROLOGY DIVISION (the "CM Division") designs and engineers specialty products and systems to provide customized solutions for unique measurement or inspection problems, such as applications requiring several simultaneous measurements or inspection of an entire object in a high volume production line. CM Division products are sold under the Tesa(R) brand name. Dimensional Metrology Industry Dimensional metrology products measure, digitize, and inspect manufactured parts and components for conformance to specifications. These products include a wide range of measuring devices such as calipers, micrometers, dial indicators, fixed gauges, height gauges, measuring microscopes, electronic probes, customized semiautomatic and automatic measuring devices, optical and laser measuring devices, robots, coordinate measuring machines, and related software. Prices range from $20 for a caliper to over $3 million for a large gantry CMM. A customer generally will choose between different dimensional metrology technologies or products based upon the features, complexity, variety and throughput of the items to be measured, degree of accuracy required, and cost differences between the available metrology products. For example, fixed gauges are more likely to meet a customer's metrology needs if the items that a customer must measure are manufactured in high volume, are all uniform in size and shape, such as automobile connecting rods, and results are needed instantly. If, however, a customer needs to measure a large number of items all having different features from one another, such as the parts of a prototype automobile engine, a more flexible measuring device such as a CMM would more likely meet the customer's metrology needs. As manufactured products and components 3 become more complex, the flexibility of CMMs should give them an advantage in certain applications over less flexible dimensional metrology products such as manual, semiautomatic, and fixed gauges, conversely, the ultimate in speed and accuracy is generally achieved by dedicated fixed gauging. Although the metrology industry is fragmented for lower-priced products, Brown & Sharpe believes it is one of only five major worldwide competitors that manufacture high precision CMMs. CMM products can be grouped into three categories: small (which can be used to measure a product such as an automobile carburetor), medium (which can be used to measure an item such as an engine block), and large (which can be used to measure an item such as the body of a truck or bus). CMMs were first introduced in the 1950s, but early models were only capable of two-axis measurement. Over time, CMMs have evolved into complex, computer assisted or computer driven, multi-axis systems, often with attachments such as two-axis articulated probe holders, contact and non- contact sensors of various types, electronic touch trigger probes, continuous scanning analog probes, marking systems, laser probes, and rotary tables. Today, CMMs are utilized to measure, digitize, and inspect finished products, mechanical components, and families of parts in many basic industries, including the automotive, aerospace, construction and farm equipment, industrial machinery, defense, appliance, computer and electronics, medical equipment, and semiconductor industries. CMM prices range from approximately $10,000 to over $3 million depending upon accuracy, attachments, and size. The increasing use of more sophisticated software has played an important role in the evolution of the CMM. Improved software, CAD/CAM, and network technologies enable CMMs to automatically compensate for the position of the piece to be measured relative to the measuring axes of the machine, eliminating the need for the time-consuming manual positioning necessary with other dimensional metrology products. Although CMM-type software can be added to on-machine gauging, vision systems of various types, and a small percentage of fixed gauges, CMMs are easier to use, more flexible, and generally provide more analytical information than most products using competing technologies. Manufacturers of component parts, as well as manufacturers of finished products, are purchasers of CMMs and other dimensional metrology products. Manufacturers depend upon dimensional metrology products to improve the reliability, fit, and finish of their products and to improve efficiency by reducing errors, scrap, throughput time, and work-in-progress inventories. Traditionally, customers used either fixed gauges, optical comparators or calipers, or other hand or bench tools to inspect product conformance to specifications on the factory floor, while CMMs were used in factory quality control departments due to the necessity for a controlled environment for optimum CMM operation. Improved hardware and software technologies have allowed customers to move CMMs onto the factory floor to facilitate direct integration of CMM measurement capabilities into the manufacturing process. Because CMMs, fixed gauges, and certain other types of dimensional metrology products can be configured to accommodate a wide variety of customer specifications for accuracy, speed, set-up time, and physical characteristics of the objects to be measured, Brown & Sharpe believes these products can effectively meet the evolving quality control needs of manufacturers. Despite growth in the dimensional metrology markets in China, India, and the Pacific Rim countries, management believes that in the period 1991--1993 the total world market for dimensional metrology products had declined significantly in terms of dollar denominated sales. In the three major world markets, the decline had been more significant in Europe and Japan than in the United States. Brown & Sharpe believes that this overall market decline had been primarily related to global economic conditions which had resulted in reduced levels of capital expenditures by manufacturers in many market segments. In addition, during this period, revenues from sales of CMMs and other dimensional metrology products were impacted by vigorous price and performance competition due to over capacity in the dimensional metrology industry and reduced demand by the capital goods sector for dimensional metrology products. Metrology Business Strategy Brown & Sharpe is implementing a strategy designed to improve its competitiveness and position itself for improvement in its markets, including the currently depressed European market. Key elements of this strategy 4 are (i) expanding its market presence in the metrology industry, including through acquisition and consolidation opportunities, (ii) reducing product costs through more cost-effective product design, selective outsourcing, and consolidation of manufacturing processes, (iii) providing "best in class" customer service and strengthening its worldwide distribution network, and (iv) focusing on technological innovations designed to improve product performance, the development of new products, and the development of new markets in the packaging and electronics industries. . EXPANDED MARKET PRESENCE. Through the acquisition of Roch, Mauser, and DEA, Brown & Sharpe has expanded its product lines and its marketing and distribution capabilities in Europe, South America, the Middle East, India, and China. Brown & Sharpe intends to continue to expand and strengthen its market presence and broaden its product lines and may pursue selected small acquisition and consolidation opportunities within the dimensional metrology industry. Brown & Sharpe believes that the dimensional metrology industry has continuing over capacity and that competitors having complementary product lines and geographic market coverage may continue to become available for acquisition. . COMPETITIVE COSTS. Brown & Sharpe intends to continue to increase production efficiency through more cost-effective product designs and through other cost reductions. Brown & Sharpe intends to reduce costs by using the "Design for Manufacturability and Assembly" (DFMA) engineering principle, which strives to use the fewest parts and the lowest cost assembly process by examining the production processes at each facility in order to maximize efficiency, and by outsourcing components and complete products in cases where it can achieve its high quality standards at reduced costs. . "BEST IN CLASS" CUSTOMER SERVICE AND WORLDWIDE DISTRIBUTION CAPABILITY. Brown & Sharpe provides post-sale service and support to its customers through its customer service departments and its regional and international demonstration centers. Brown & Sharpe is committed to providing "best in class" customer service and believes that the level of customer service provided by Brown & Sharpe has improved in recent years and is superior to the service provided by its principal competitors. In order to continue to improve its customer service, Brown & Sharpe has increased its emphasis on customer training by improving user manuals and documentation relating to Brown & Sharpe's products and directly supporting greater number of its customers by adding new demonstration and service centers in previously unserved geographic areas. In addition, Brown & Sharpe plans to continue to strengthen its worldwide distribution capability, principally by continuing to rationalize its existing distribution network and by opening new demonstration centers and adding new direct sales capacity or distributors where increased volume makes such distribution methods cost effective. . TECHNOLOGICAL INNOVATION. Brown & Sharpe intends to continue to enhance and expand its offering of systems and products through sustained design and manufacturing engineering at levels consistent with the past few years. Brown & Sharpe performs some additional engineering development activities through government grants in some countries and engages in special projects that utilize customer funding. MS Group The MS Group, the largest of Brown & Sharpe's three units, accounted for approximately 65% of Brown & Sharpe's revenues in 1995. The MS Group is headquartered in North Kingstown, Rhode Island. Products sold under the Brown & Sharpe(R) name are manufactured at the North Kingstown facility, products sold under the DEA(R) name are manufactured in Turin, Italy, and products sold under the Leitz(R) name are manufactured in Wetzlar, Germany. Brown & Sharpe also manufactures some CMM products in the United Kingdom. The primary end markets for the CMM products of the MS Group are the automotive, aerospace, and industrial machinery industries. MS Group products range from small, manually operated CMMs to large, high speed, high precision automatic CMMs. In addition to these standard and custom-configured CMMs, Brown & Sharpe also produces and sells high-speed process control robots. The smallest machines can measure in a volume up to 16x14x12 5 inches and are priced at approximately $10,000, and the larger, high speed, high accuracy CMMs with integrated software systems can cost over $3 million. The MS Group also provides optically based measuring machinery from microscopes to vision systems. In addition, the MS Group provides accessories, parts, after-sales service, rebuilds, and computer hardware and software upgrades for Brown & Sharpe's CMMs and competing machines. The MS Group's "user-friendly" CMM application software is an important component of its marketing strategy for its CMM products. Management believes that the MS Group's uniquely functional CMM software packages give it a competitive advantage in the marketplace for CMMs. These proprietary software products provide the MS Group's customers with an easily understood, icon- based inspection analysis capability, graphical user interfaces and outputs, and networking capability with manufacturing systems. The MS Group also provides its customers with special software and systems integration of the MS Group's products with the customer's host computer. The MS Group distributes its products primarily through its worldwide sales force directly to customers, which is supplemented by a distribution network of independent agents and distributors, especially in foreign markets. The typical sales process involves lengthy, technical, one-on-one discussions between the salesperson or the distributor/sales agent and the customer. As an important part of its marketing and distribution strategy, Brown & Sharpe provides in-depth training to the customer at its support and demonstration centers. Brown & Sharpe currently operates demonstration centers in eleven cities throughout the United States, eighteen centers throughout Europe, and two in Asia, including four located at Brown & Sharpe's CMM manufacturing facilities. Brown & Sharpe also operates contract inspection and measuring services from these demonstration centers. Service revenue generated by the demonstration centers offsets a portion of the cost of operating the centers. In 1995, Brown & Sharpe closed three demonstration centers in Europe and one in the United States as part of its planned consolidation. PMI Division The principal products of Brown & Sharpe's PMI Division are precision measuring tools and related instruments such as micrometers, dial indicators, calipers, electronic height gauges, and gauge blocks. These tools and instruments have a broad application and lower unit list prices (with a range of $20 to approximately $13,000) than the prices of the MS Group's products (which range from approximately $10,000 to over $3 million). PMI products account for approximately 30% of Brown & Sharpe's revenues in 1995 and typically measure in one or two dimensions, and are often used in comparative measuring where an unknown part or dimension is compared to a previously measured part or dimension. PMI products also include systems and application software for measuring and statistical process control. The primary end markets for the products of Brown & Sharpe's PMI Division are the automotive, aerospace, metal processing, and defense industries, although Brown & Sharpe's PMI products are used in virtually all types of industrial settings. Brown & Sharpe's PMI Division is headquartered in Renens, Switzerland, and its products are manufactured at its plants in Rolle and Renens, Switzerland; Poughkeepsie, New York; Leicester, St. Albans, and Plymouth, England; and in Luneville, France. The PMI Division generally distributes its products through international import companies, regional distributors, and catalog houses throughout the world. Brown & Sharpe sales offices located in key markets provide support to the distributors and catalog houses. The PMI Division operates four sales offices in the United States and eight in other countries, which are staffed by approximately 74 PMI Division employees. CM Division The CM Division is an engineering division which is headquartered in Telford, England, and designs and engineers specialty products and systems to provide customized solutions for unique measurement or inspection problems. For example, the CM Division recently designed and implemented a system for measuring the thickness of the metal top of a soda can and the thickness of the groove scored around the can's pop-up tab, so that the manufacturer could determine the ease with which the can could be opened by the end user while 6 insuring that the can would not rupture. The CM Division's products include factory networks, contact and optical measuring machines, and fixtures aimed at specific niche markets. Laser interferometers manufactured by the Division set National Metrology Standards in 16 countries. CM Division products also include components such as measuring sensors used in its custom gauges and fixtures as well as those manufactured by other companies. Prices for CM Division products range from approximately $20,000 to $1 million for systems. Often, the CM Division is able to produce a superior customized product while at the same time gaining the expertise necessary to convert such customer-funded research into new, standard Company products. For example, the CM Division has recently developed a family of standard optical measuring systems, with list prices of approximately $50,000 to $500,000. The primary end markets for the custom-designed products of the CM Division currently are automotive, aerospace, defense, package and can manufacturing, oil drilling, and standards laboratories. Sales of these products typically involve a close, highly technical relationship with the customer. This direct relationship with the customer is reinforced by strong and continuing efforts to provide superior customer service through ongoing customer training and technical support. Foreign Operations Brown & Sharpe manufactures and sells substantial amounts of its dimensional metrology products in foreign countries. For fiscal 1995, approximately 65% of Brown & Sharpe's net sales were to customers located outside the United States. Manufacturing operations take place in Italy, Switzerland, Germany, Lithuania, England, and France, as well as in the United States, and Brown & Sharpe's products are sold in over 60 countries worldwide. As of December 31, 1995, approximately 74% of Brown & Sharpe's assets were located outside the United States (based on book values). Accordingly, margins and the ability to export competitively from the Company's manufacturing locations are affected by fluctuations in foreign currency exchange rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Brown & Sharpe" in Item 7 of this Report. For additional financial information concerning the foreign operations of Brown & Sharpe for 1993, 1994, and 1995, see "Segment Information" below in this Item 1. Engineering and Product Development Brown & Sharpe's commercial success is dependent upon its ability to develop products, enhancements, and applications that meet changing customer metrology needs and anticipate and respond to technological changes. Brown & Sharpe designs, develops, and refines its products internally through engineering departments within its product groups and divisions. Brown & Sharpe employs approximately 119 engineers and technicians, the majority of whom hold engineering or other university degrees, in its design engineering activities. When it is more cost-effective to do so, Brown & Sharpe purchases product designs or portions of product designs from engineering subcontractors or acquires such designs through licensing arrangements. Brown & Sharpe also benefits from research and development efforts which are subsidized by customer funds and, in certain countries, by government research grants. Brown & Sharpe research, development, and manufacturing engineering activities are conducted in the United States, Italy, France, Switzerland, Germany, the United Kingdom, and Lithuania. Brown & Sharpe derived substantial net sales in 1995 from the sale of products that were introduced into the market since 1993. Brown & Sharpe has been successful in bringing to market new, high-quality products and has introduced at least one major new product every year since 1987. The current objectives of Brown & Sharpe's design and manufacturing engineering activities are the continued integration of the DEA and Roch technologies with Brown & Sharpe's previously existing technologies and the introduction of new MS and PMI products. In 1995, Brown & Sharpe invested $15.8 million in product design and manufacturing engineering, or about 4.9% of its 1995 net sales. In 1993 and 1994, Brown & Sharpe expended $8.7 million and $9.2 million, respectively, for product design, development, refinement, and manufacturing engineering. The increase from $9.2 million is due to the inclusion of DEA for all of 1995. In addition, Brown & Sharpe performs engineering 7 development activities funded by government grants in some countries and engages in special projects that utilize customer funding and are not included in the numbers above. Raw Materials and Sources of Supply Brown & Sharpe purchases certain products, raw materials, supplies, and other components from a variety of suppliers, and considers its source of supply to be adequate. Brown & Sharpe does, at times, depend upon various sole sources of supply for various procurement requirements (generally of items designed by Brown & Sharpe), but has not experienced any significant difficulty in meeting delivery obligations because of its reliance on such a supplier. The loss of any one of these various sole suppliers would not have a material adverse effect on Brown & Sharpe. Brown & Sharpe depends, as do other leading CMM manufacturers, on a sole source of supply for certain of the electronic probes used on CMM machines and, in the event of unavailability of such source, would be adversely affected, as would its competitors. Brown & Sharpe continues to explore means of lowering production costs through selective outsourcing in situations where Brown & Sharpe can achieve its high quality standards via subcontractors. Patents, Licenses, Trademarks, and Proprietary Information Brown & Sharpe's business is not significantly affected by or dependent upon the procurement or maintenance of patents covering Brown & Sharpe's products. Nevertheless, Brown & Sharpe pursues, where appropriate, patent protection for inventions, developments, and improvements relating to its products both in the United States and abroad. Brown & Sharpe owns, or has the right to use, a number of trademarks which it believes are valuable in promoting the sale of certain of its principal products, and it has registered the trademarks that it owns in the United States and in some foreign countries. The internationally recognized brand names under which Brown & Sharpe sells its products are the subject of trademarks owned or licensed by Brown & Sharpe and are important to Brown & Sharpe's marketing strategy, as brand name recognition is a significant factor in the dimensional metrology market. One of Brown & Sharpe's CMM products, a horizontal arm-type CMM, has been manufactured and sold in North America under an exclusive license from an independent German company which has recently been modified to a non-exclusive license agreement. Brown & Sharpe entered into an exclusive arrangement in 1994 with another German CMM manufacturer to market and sell its horizontal CMM on an exclusive basis in North America and on a non-exclusive basis in the rest of the world. In addition, through December 31, 1995, DEA marketed and sold its horizontal arm CMM under a non-exclusive license granted by a German company. In addition, Brown & Sharpe uses the Leitz(R) and Mauser(R) brand names under royalty-free license agreements entered into in connection with Brown & Sharpe's acquisition of these product lines. These licenses expire in 1997 and 1999, respectively. Brown & Sharpe believes it will be able to negotiate satisfactory extensions prior to expiration and/or that the failure to renew these licenses would not have a material adverse effect on Brown & Sharpe. Environmental Matters The Company is not significantly affected by compliance with rules and regulations promulgated under environmental laws since its manufacturing processes do not produce, as a by-product, material amounts of waste, water discharges or air emissions deemed hazardous under such laws. However, the Company is subject from time to time to environmental claims. See Note 8, "Contingencies" of Notes to Consolidated Financial Statements in Item 8 of this Annual Report. Employees At December 31, 1995, Brown & Sharpe had 2,373 employees, (as compared with 2,370 at December 31, 1994), including approximately 1,757 employees located outside the United States. Brown & Sharpe considers 8 its relations with its employees to be good, although there can be no assurance that Brown & Sharpe's cost-cutting efforts or other factors will not cause a deterioration in these relations. Approximately 939 of Brown & Sharpe's employees located at sites in the United States, Italy, Switzerland, England, Germany, and France are covered by collective bargaining agreements which expire at various times between December 31, 1996 and June 30, 1998. Brown & Sharpe expects that these collective bargaining agreements will be renegotiated successfully prior to their expiration. However, there can be no assurance that successor collective bargaining agreements will be successfully negotiated, that negotiations will not result in work stoppages, or that a work stoppage would not materially interfere with Brown & Sharpe's ability to produce the products manufactured at the affected location. In addition to the collective bargaining agreements that cover workers at certain of Brown & Sharpe's foreign subsidiaries, it is customary for these employees to be represented by various works or shop councils. These councils are governed by applicable labor laws and are comprised of members who are elected or appointed by the work force. Except for the top level of management, these councils represent the entire work force at their location in its dealings with senior management on matters affecting the work force or arising under the relevant labor contracts in effect at the location. A collective bargaining agreement with the International Association of Machinists and Aerospace Workers (the "IAM") relating to certain manufacturing employees in North Kingstown, Rhode Island expired in October 1981. Brown & Sharpe and the IAM failed to reach agreement on the terms of a successor collective bargaining agreement, resulting in a strike by the IAM. See Item 3 "Legal Proceedings" in this Report. No successor collective bargaining agreement was entered into, although the IAM remains the representative of the bargaining unit. Brown & Sharpe continues to satisfy its obligation to bargain with respect to, proposed changes to the terms and conditions of employment, although no collective bargaining has occurred in recent years, and although the manufacturing employees represented by the IAM remain technically on strike, no work stoppage or picket activity has occurred since 1985 and management does not anticipate that any such activities will occur in the future. Following the strike in 1981, and the impasse reached in negotiations, Brown & Sharpe hired new employees to replace striking employees. Since that time, many of the striking employees have been rehired by Brown & Sharpe, but such employees are not working under an IAM contract. The continuing strike by the IAM does not have a material adverse effect on the operations of Brown & Sharpe. The following table sets forth the location of Brown & Sharpe's employees as of December 31, 1995:
COUNTRY EMPLOYEES(1) ------- ------------ France........................................................ 237 Germany....................................................... 269 Italy......................................................... 463 Japan......................................................... 26 Spain......................................................... 16 Switzerland................................................... 332 United Kingdom................................................ 414 United States................................................. 616 ----- TOTAL....................................................... 2,373 =====
- -------- (1) Other part-time employees are included on a full-time equivalent basis. Competition Brown & Sharpe's business is subject to intense direct and indirect competition from a considerable number of domestic and foreign firms, a number of which, in certain markets, are larger in overall size than Brown & Sharpe. 9 Most of these firms, however, do not compete with Brown & Sharpe in all product lines. The principal factors affecting competition include reliability and quality of product, technological proficiency, price, ease of system configuration and use, application expertise, engineering support, local presence, distribution networks, and delivery times. Price competition has been intense for dimensional metrology products, due to the recent period of decreased demand for these products that has resulted in excess capacity within the industry. Brown & Sharpe believes that competition in the dimensional metrology field will continue to be intense in the future as a result of advances in technology, continuing excess capacity in the dimensional metrology industry, and consolidations and/or strategic alliances among competitors. In addition to direct competition from companies that market similar types of products, Brown & Sharpe is also subject to indirect but effective competition from firms that market other dimensional metrology products, such as fixed gauging and vision-based systems, which utilize alternative technology or methodologies to perform functions similar to those of the CMMs and other products manufactured or sold by Brown & Sharpe. Brown & Sharpe's single largest global competitor is Mitutoyo/MTI Corp., a subsidiary of Mitutoyo Solsakusho Co. Ltd., a Japan-based company, which is the largest supplier of metrology equipment and products worldwide. In addition to Mitutoyo, the MS Group's main competitors are Carl Zeiss, Inc., a subsidiary of Carl Zeiss-Stiftung AG, the Sheffield Measurement Division of Giddings & Lewis, Inc., and LK Tool Co. Ltd., a subsidiary of TransTech Ltd. The primary competitors faced by the PMI Division are Mitutoyo, L.S. Starrett Co. and Federal Products Co. (Inc.), a subsidiary of Esterline Technologies Corporation. Marposs S.p.A., an Italian company, is a major competitor of the CM Division for custom metrology sales in all major markets. Backlog The Company's backlog of product orders was $59,000 at year-end 1995, compared to $61,000 and $26,000 at year-end 1994 and 1993, respectively. Backlog at year-end 1995 and 1994 includes $32,000 and $26,000, respectively, attributable to DEA. All of the orders included in the Company's year-end 1995 backlog were requested to be filled and completed within one year and are, subject to possible customer cancellation, expected to be completed in 1996. Significant Customers The Company has no single customer which accounts for 10% or more of its consolidated net sales; however, several well recognized major automotive manufacturers (excluding their suppliers) account for a significant portion of the Company's net sales. The loss of a few of these major manufacturers would have a substantial effect upon the Company. Working Capital A substantial amount of working capital investment in inventory and accounts receivable is required to operate the Company's businesses. Working capital was $87,569 at year-end 1995 compared to $102,883 at year-end 1994. See the discussion of working capital in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Annual Report. Segment Information The Company operates exclusively in the Metrology Business. See Note 1 for a further description of the Company's business. Sales to unaffiliated customers from Europe are defined as sales of products that are primarily assembled in a foreign country. 10
1995 1994 1993 -------- -------- -------- (DOLLARS IN THOUSANDS) GEOGRAPHIC AREA: Sales to Unaffiliated Customers From: United States.................................... $124,673 $ 90,040 $ 78,819 Europe........................................... 196,226 114,960 78,216 -------- -------- -------- $320,899 $205,000 $157,035 ======== ======== ======== Transfers Between Geographic Areas: United States.................................... $ 3,870 $ 3,144 $ 4,040 Europe........................................... 33,713 19,288 12,365 -------- -------- -------- $ 37,583 $ 22,432 $ 16,405 ======== ======== ======== Operating Profit (Loss): United States.................................... $ 492 $ 1,303 $ 5,151 Europe........................................... 11,125 (7,976) (4,431) -------- -------- -------- $ 11,617 $ (5,609) $ 877 ======== ======== ======== Identifiable Assets: United States.................................... $ 77,726 $ 74,252 $ 39,521 Europe........................................... 211,412 191,346 118,178 Corporate........................................ 6,262 6,676 8,172 -------- -------- -------- $295,400 $272,274 $165,871 ======== ======== ========
11 ITEM 2--PROPERTIES The following table sets forth certain information concerning Brown & Sharpe's major operating facilities:
OWNED/ APPROXIMATE LOCATION LEASED PRINCIPAL USE SQUARE FOOTAGE -------- ------ ------------- -------------- UNITED STATES N. Kingstown, Rhode Island.... Owned Manufacturing, Engineering, Sales, and Administration 343,000(1) Poughkeepsie, New York........ Owned Manufacturing 58,000 Farmington Hills, Michigan.... Leased Sales and Administration 31,207 ITALY Moncalieri.................... Leased Engineering, Sales, and Administration 260,000 Grugliasco.................... Leased Assembly 105,000 Moncalieri.................... Leased Manufacturing 70,000 SWITZERLAND Renens........................ Owned Manufacturing, Engineering, Sales, and Administration 139,000 Rolle......................... Owned Manufacturing 51,000 GERMANY Wetzlar....................... Owned Manufacturing, Engineering, Sales, and Administration 280,000 Ludwigsburg................... Leased Sales 15,000 UNITED KINGDOM St. Albans.................... Owned Manufacturing and Sales 36,000 Telford....................... Leased Manufacturing, Engineering, Sales, and Administration 32,000 Leicester..................... Owned Manufacturing 14,000 Swindon....................... Leased Sales 5,200 Plymouth...................... Leased Manufacturing, Sales, and Administration 5,000 FRANCE Luneville..................... Leased Manufacturing, Engineering, and Sales 77,100 Villebon...................... Leased Sales 18,000 SPAIN Barcelona..................... Leased Sales 16,000
- -------- (1) Excludes approximately 417,000 square feet leased to unrelated parties. In addition, Brown & Sharpe leases smaller sales offices located in the United States, Europe, and Asia. In the opinion of management, Brown & Sharpe's properties are in good condition and adequate for Brown & Sharpe's business as presently conducted. ITEM 3--LEGAL PROCEEDINGS Litigation Refer to Note 8 "Contingencies" of Notes to Consolidated Financial Statements in Item 8 of this Annual Report. ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the security holders during the quarter ended December 31, 1995. 12 ITEM 4A--EXECUTIVE OFFICERS OF THE REGISTRANT The following table summarizes information regarding Executive Officers of the Company as of March 22, 1996:
NAME AGE POSITIONS HELD DURING THE LAST FIVE YEARS ---- --- ----------------------------------------- Frank T. Curtin..... 61 President & Chief Executive Officer and a Director of the Company since May 2, 1995; from 1992 to May 1995, Vice President, National Center for Manufacturing Sciences, a research and development organization, Ann Arbor, MI; from 1989 to May 1995, President, Curtin & Associates, a software development company, Santa Barbara, CA and Ann Arbor, MI. Charles A. Junkunc.. 53 Vice President & Chief Financial Officer since May 1, 1992; previously self-employed consultant since November 1990; previously Senior Vice President--Finance and Chief Financial Officer of Data Products Corporation (manufacturer of computer printers) since April 1987. Antonio Aparicio.... 45 Vice President & General Manager--Precision Measuring Instruments since September 1991; previously Marketing Director--Precision Measuring Instruments. John Cooke.......... 59 Vice President & General Manager--Custom Metrology since September 1991; previously Managing Director of Tesa Metrology Limited (a subsidiary). Karl J. Lenz........ 50 Vice President since September 1991: General Manager-- Leitz--Brown & Sharpe Messtechnik GmbH since June 1990; previously General Manager--Messtechnik Division of Leica Industrieverwaltung. Richard F. Paolino.. 51 Vice President & General Manager--Commercial Operations. Robert D. Batting... 54 Vice President & General Manager--Measuring Systems U.S.A. since October 1995; previously President, Clearing-Niagra Inc. since October 1993; Business Consultant--self-employed since September 1991; Group Vice President, Textron Inc. prior to September 1991. Alfred J. Corso..... 59 Controller and Principal Accounting Officer since June 1, 1995; previously Partner with Ernst & Young LLP since 1991.
To the best of the knowledge of the Registrant, none of the Executive Officers has any family relationships with any of the others. Each Executive Officer holds office until the first meeting of the Board of Directors following the next Annual Stockholders' meeting and until his successor is elected or appointed and qualified, unless he dies, resigns, is removed or replaced. 13 PART II ITEM 5--MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Class A Common Stock is listed on the New York Stock Exchange with a symbol "BNS". At March 22, 1996, the Company had approximately 4,400 shareowners of record of its Class A Common Stock including 971 shareowners of record of its Class B Common Stock. The quarterly high and low closing prices of the Class A Common Stock on the New York Stock Exchange (the Class B Common Stock is not traded and is subject to restrictions on transfer) were a high of $10.13 and a low of $8.63 in 1996 through March 22 and were reported during fiscal 1995 and 1994 as presented below.
FISCAL YEAR HIGH LOW ----------- ------ ----- 1995 4th Quarter................................................... $11.88 $9.25 3rd Quarter................................................... 10.63 6.38 2nd Quarter................................................... 7.25 6.25 1st Quarter................................................... 7.50 5.63 1994 4th Quarter................................................... $ 7.25 $5.25 3rd Quarter................................................... 7.50 6.00 2nd Quarter................................................... 6.75 5.75 1st Quarter................................................... 8.00 6.25
No dividends have been paid by the Company since 1990. Dividend payments have been suspended in order to conserve cash. Also, payment of dividends is currently not permitted under an existing loan facility. See Note 5 "Short- Term Borrowings" of Notes to Consolidated Financial Statements in Item 8 of this Annual Report. ITEM 6--SELECTED FINANCIAL DATA The following selected consolidated financial data should be reviewed in conjunction with Part II, Item 7--"Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto in Item 8 of this Annual Report.
1995 1994 1993 1992 1991 -------- -------- -------- -------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, NUMBER OF SHAREOWNERS, AND EMPLOYEES) CONTINUING OPERATIONS FOR THE YEAR: Net sales................ $320,899 $205,000 $157,035 $160,695 $ 175,847 Operating profit (loss).. 11,617 (5,609) 877 (7,613) (42) Percent................ 3.6% (2.7)% .6 % (4.7)% -- % Net income (loss)........ 1,926 (14,335) (2,416 ) (7,984) (2,901) Average shares outstanding and common stock equivalents (thousands)............. 8,773 6,057 4,969 4,899 4,639 Per common share: Net income (loss)...... .22 (2.37) (.49) (1.63) (.62)
14
1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, NUMBER OF SHAREOWNERS, AND EMPLOYEES) AT YEAR-END: Backlog..................... 59,000 61,000 26,000 30,000 23,000 Assets...................... 295,400 272,274 165,871 166,086 183,748 Current ratio............... 1.68 1.95 1.73 1.81 2.17 Long-term debt.............. 56,839 70,215 32,696 34,626 35,310 Total notes payable and long-term debt............. 102,068 92,613 64,500 60,700 61,369 Equity...................... 85,857 78,925 63,520 66,674 80,268 Per share................. 9.85 9.12 12.78 13.43 16.67 Debt ratio.................. .543 .540 .504 .477 .433 Number of shareowners....... 4,400 4,100 4,900 5,400 5,100 Employees................... 2,373 2,370 1,543 1,768 2,000
- -------- (1) In 1995, the Company changed its accounting period from a fiscal year ending on the last Saturday in December to a calendar year ending on the last day in December. All periods presented above contain 52 weeks, except 1993, which contains 53 weeks. See Note 1 to Consolidated Financial Statements for more information. (2) The consolidated financial data for 1995 and 1994 include the results of operations and year-end data of DEA and Roch acquisitions discussed in Note 2 to Consolidated Financial Statements. (3) Net income for 1995 includes a $640 adjustment relating to a revaluation of a 1994 foreign denominated liability recorded at an incorrect foreign exchange rate. See Note 1 to Consolidated Financial Statements for further information. ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) As disclosed in the Footnotes to the Consolidated Financial Statements, Brown & Sharpe made two significant acquisitions in 1994, DEA S.p.A. ("DEA") and Ets. Pierre Roch S.A. and its affiliate, Mauser Prazisions-Messmittel GmbH ("Roch"). The operating results for these companies are included in the 1994 Results of Operations beginning with the date of the acquisition, which was September 28, 1994 for DEA and March 24, 1994 for Roch. These acquisitions, along with the disposition of the Company's machine tool spare parts and rebuild operations in 1993, distort some year-to-year comparisons. In order to make these comparisons more meaningful, the following discussion will provide comparative information excluding the operating results of the acquired companies in order to reflect the trend of the remaining portions of the business. The following discussion of Brown & Sharpe's historical financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements of Brown & Sharpe and the notes thereto included elsewhere in this Annual Report. RESULTS OF OPERATIONS
YEAR ENDED ----------------------------------------- DEC. 31, 1995 DEC. 31, 1994 DEC. 25, 1993 ------------- ------------- ------------- Net sales........................... 100.0% 100.0 % 100.0 % Cost of goods sold.................. 69.1 69.7 70.5 Selling, general, and administrative expense............................ 27.2 31.0 28.9 Restructuring charges............... 0.1 2.0 -- ----- ----- ----- Operating profit (loss)........... 3.6 (2.7) 0.6 Interest expense.................... 2.8 3.2 3.2 Other income, net................... -- 0.1 1.6 ----- ----- ----- Income (Loss) before income taxes... 0.8 (5.8) (1.0) Income tax provision (benefit)...... 0.2 1.2 0.5 ----- ----- ----- Net income (loss)................... 0.6% (7.0)% (1.5)% ===== ===== =====
15 YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Orders. Orders totaled $320.0 million in 1995 which was an increase of $110.1 million, or 52.5%, from the prior year. Adjusted to exclude orders of businesses acquired in 1994, orders in 1995 increased approximately $22.6 million or 13.1% compared to 1994. The remaining increase resulted primarily from customer orders of DEA products of $111.7 million and $28.7 million for 1995 and 1994, respectively, and orders of Roch and MPM products of $12.9 million and $8.4 million for 1995 and 1994, respectively, and an effect of increased orders of about $11.1 million as a result of strengthening of certain European currencies against the U.S. dollar in 1994. PMI orders increased in the United States and in Europe. Backlog at December 31, 1995 decreased slightly to $59.0 million as compared with $61.0 million at year end 1994. Net Sales. Net sales in 1995 were $320.9 million, an increase of $115.9 million or 56.5% from the prior year. The increase resulted primarily from sales of DEA products and services in 1995 and 1994 of $107.1 million and $37.6 million, respectively, sales of Roch and MPM products in 1995 and 1994 of $12.7 million and $7.8 million, respectively, and an effect of increased sales of about $12.1 million as a result of strengthening of certain European currencies against the U.S. dollar in 1995. Excluding DEA, MS Group 1995 net sales were 13.0% above 1994, due to increased European sales. Net sales of PMI products increased from the prior year primarily due to the success of new products being introduced in the marketplace during the last three years. Gross Profit. Gross profit margin increased to 30.9% in 1995 compared with 30.3% in 1994. This increase is primarily due to improved margins of the PMI Division offset by slightly reduced margins of the MS Group. Selling, General and Administrative Expense. Selling, general and administrative expense ("SG&A") was $87.2 million or 27.2% of net sales compared to $63.7 million or 31.1% of net sales in 1994. In 1995 and 1994, exclusive of DEA, SG&A was 27.9% and 32.8% of sales. The reductions in SG&A as a percentage of net sales is largely due to consolidation savings at both B&S and DEA that were planned and achieved as a result of the merging of DEA into the B&S coordinate measuring machine business (together the "MS Group"). SG&A in 1995 decreased $0.9 million due to a revaluation of a 1994 foreign denominated liability that was incorrectly recorded at historical, rather than current, foreign exchange rate in the Company's previously issued consolidated financial statements. Restructuring Charges. Restructuring charges amounting to $0.3 million and $4.2 million in 1995 and 1994, respectively, were due principally to Company employee severance incurred both because of Brown & Sharpe sales offices closings associated with integrating Brown & Sharpe's existing operations with those of DEA and a restructuring at the Tesa subsidiary. In addition, $1.8 million of restructuring costs, principally severance, in 1994 arose from consolidations upon the acquisition of Roch in France. Operating Profit (Loss). Brown & Sharpe generated an operating income of $11.6 million in 1995 compared to an operating loss of $5.6 million in 1994. Excluding restructuring charges and inventory writedowns, 1994 operating profit was $2.3 million. In the United States, operating profit for 1995 totaled $0.5 million compared to an operating profit of $1.3 million in 1994. The lower operating profit in the U.S. in 1995 was substantially due to the increased cost of European sourced PMI products resulting from unfavorable foreign currency exchange rates. Foreign operations generated operating profit of $11.1 million in 1995 compared to an operating loss of $8 million in 1994. The improvement in operating earnings occurred because of the significantly improved financial performance of the Company's Tesa subsidiary in Switzerland, which is the headquarters of the PMI Division, the inclusion in 1995 of a full years' profitability of the DEA S.p.A. and Roch S.A. subsidiaries where sales are concentrated in Europe, and the reduction in restructuring charges incurred. In addition, as a result of the adjustments to the preliminary 1994 DEA acquisition purchase price accounting estimates, net income for 1995 increased approximately $350. Interest Expense. Interest expense totaled $9.1 million in 1995 compared to $6.6 million in 1994. Average borrowings in 1995 increased to approximately $100 million compared with average borrowings of $81 million in 1994, which resulted in increased interest expense in 1995. The increase in average outstanding balances has 16 occurred since the addition of the DEA operations in September 1994 and is the result of additional working capital requirements arising from increased sales and the payment of costs associated with restructuring and achieving the acquisition consolidation savings. Income Tax Provision. The Company has recorded a deferred tax asset for deductible temporary differences that exist related to its U.S. operations. This deferred tax asset has been recorded based on the existence of sufficient taxable income in the carryback period and the reversal of existing taxable temporary differences. For further information concerning the provision for income taxes, as well as information regarding differences between effective tax rates and statutory rates, see Note 4 of the Notes to Consolidated Financial Statements. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 25, 1993 Orders. Orders totaled $209.9 million in 1994, an increase of $54.0 million, or 34.6%, from the prior year. Adjusted to exclude orders of businesses acquired in 1994 and sold in 1993, orders in 1994 increased $15.8 million or 10.1% compared to 1993. The remaining increase of $28.7 million resulted primarily from customer orders of DEA products since its acquisition on September 28, 1994, $8.4 million for orders of Roch and MPM products since their acquisition on March 24, 1994, and an effect of increased orders of about $3.0 million as a result of strengthening of certain European currencies against the U.S. dollar in 1994. Also, the machine tool spare parts and rebuild operations, sold near the end of the first quarter of 1993, represented $1.9 million of orders in 1993. CM equipment machine orders increased in 1994 from the canning industry, and PMI orders increased, primarily from its European distributors. MS orders were higher in 1994 than in 1993. Backlog at December 31, 1994 increased to $61.0 million, including $26.4 million from the purchase of DEA and $1.7 million from the purchase of Roch and MPM, as compared with $26.1 million at year end 1993. Net Sales. Net sales in 1994 were $205.0 million, an increase of $48.0 million or 30.6% from the prior year. The increase resulted primarily from sales of DEA products and services since its acquisition of $37.6 million, sales of Roch and MPM products of $7.8 million, and an effect of increased sales of about $3.3 million as a result of strengthening of certain European currencies against the U.S. dollar in 1994. Also, $1.9 million of sales in 1993 were attributable to machine tool spare parts and rebuild operations sold in early 1993. Excluding the effect of these items, sales increased $1.2 million, or 0.8%, from 1993. Excluding DEA, MS 1994 net sales were 2.9% below 1993, largely as a result of entering 1993 with a larger backlog than at the beginning of 1994. In 1994, increasing U.S. orders have been received for larger value, larger size machines which are not generally included in sales until subsequent quarters due to required lead times. Net sales of PMI and CM products increased from the prior year primarily due to the resolution of the financial difficulties of a German distributor, which had depressed net sales in 1993. Gross Profit. Gross profit margin increased to 30.3% in 1994 compared to 29.4% in 1993. Excluding DEA, gross profit declined to 29.1% in 1994. The Company's gross profit includes benefits from the liquidation of LIFO inventories of $0.6 million and $0.7 million in 1994 and 1993, respectively. During 1994, the Company recorded inventory write-downs amounting to $3.7 million, almost totally at European operations, compared to $0.3 million reduction of inventory reserves in 1993. Selling, General and Administrative Expense. Selling, general and administrative expense ("SG&A") was $63.7 million or 31.1% of net sales compared to $45.3 million or 28.9% of net sales in 1993. In 1994, exclusive of DEA SG&A of $9.9 million, SG&A was 32.8% of sales. The increase in 1994 was generally due to special items including an extra week of expenses in fiscal 1994 or about $1 million compared to 1993, the receipt of U.S. litigation proceeds in 1993 of about $.5 million, the addition of Roch and MPM SG&A costs since acquisition in late March 1994 of about $2.2 million, and the recording in the second quarter of 1994 of a provision increasing the allowance for uncollectible accounts receivable by about $.6 million for collection uncertainties arising from one prior year sale to a single customer. SG&A also increased during the fourth quarter of 1994 because of increased use of consultants, relocation, and other costs arising as a result of the DEA and 17 Roch acquisitions. SG&A in 1994 and 1993 includes foreign exchange gains amounting to $1.1 million and $0.2 million, respectively. Restructuring Charges. Restructuring charges amounted to $4.2 million in 1994 ($1.0 million and $3.2 million in the third and fourth quarters, respectively), principally Brown & Sharpe employee severance and Brown & Sharpe sales offices closing costs of $2.4 million associated with integrating Brown & Sharpe's existing operations with those of DEA, acquired on September 28, 1994, and $1.8 million of such costs arising from the acquisition of Roch in France on March 24, 1994. Operating Profit (Loss). Brown & Sharpe generated an operating loss of $5.6 million in 1994 compared to an operating profit of $0.9 million in 1993. Excluding restructuring charges and inventory writedowns, 1994 operating profit was $2.3 million. DEA generated an operating profit of $3.6 million in the fourth quarter of 1994 subsequent to its acquisition. In the United States, operating profit for 1994 totaled $1.3 million compared to an operating profit of $5.2 million in 1993. The lower operating profit in the U.S. in 1994 was substantially due to the increased cost of European purchased goods resulting from unfavorable foreign currency exchange rates and the additional week of selling, general and administrative expense in 1994, the 53rd week, as well as due to the other reasons discussed above. Brown & Sharpe believes that its normal sales pattern would not generally result in proportionate increases in net sales in a fifty three week year as compared to a fifty two week year. Foreign operations generated a loss of $6.9 million in 1994 compared to an operating loss of $4.3 million in 1993. Excluding restructuring charges and inventory writedowns, foreign operations generated a loss of $0.7 million in 1994. Interest Expense. Interest expense totaled $6.6 million in 1994 compared to $5.1 million in 1993. This increase reflects a $19.8 million increase in the average annual balance of borrowings, primarily the $16.8 million of debt on the balance sheets of the companies acquired in 1994, with a slight decrease in the average effective interest rate in 1994. Other Income, Net. 1994 other income decreased because 1993 other income included a one-time gain of $2 million resulting from the sale of certain small business operations. Income Tax Provision. The Company has recorded a deferred tax asset for deductible temporary differences that exist related to its U.S. operations. This deferred tax asset has been recorded based on the existence of sufficient taxable income in the carryback period and the reversal of existing taxable temporary differences. For information concerning the provision for income taxes, see Note 4 of the Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES In recent years, Brown & Sharpe has met its liquidity needs, including capital expenditures, working capital needs, and the funding of operating losses, through cash generated from operations, sale proceeds of discontinued businesses, borrowings under secured and unsecured lines of credit and certain "New Financing" that included two three year term loans toalling $25 million "Term Loans", and $8.5 million U.S, mortgage, a renewable secured guaranteed three-year revolving credit facility, "The Facility". The Facility was provided by a commercial lender and entered into in June 1993 at $15 million and increased in September 1994 to $25 million through September 1997 with automatic annual renewal thereafter, subject to termination provisions in the agreement. Amounts outstanding under Brown & Sharpe's lines of credit excluding The Facility are generally payable on demand, and certain of the lines extended to Brown & Sharpe's foreign subsidiaries are secured by other assets. The Facility provides for demand borrowings up to an amount based on a percentage of eligible domestic accounts receivable and finished inventory, is secured by substantially all domestic assets (including the stock of domestic subsidiaries and 65% of the stock of certain foreign subsidiaries), and requires maintenance of a minimum current ratio, a maximum ratio of debt to adjusted net worth, minimum adjusted net worth and 18 minimum working capital, all as defined. At December 31, 1995, Brown & Sharpe had total borrowings of $28.1 million under the lines of credit and The Facility compared to total maximum availability at that date of $74.1 million under the lines of credit and The Facility. Certain of the domestic and foreign lines of credit provide availability of borrowing capacity and funds only to the degree of availability of certain kinds of eligible receivables and inventories (only in the case of the domestic lines of credit). At December 31, 1995, $17.6 million of the total lines of credit were restricted to foreign eligible receivables and also to certain foreign countries, of which $16.5 million was available at that date. Management believes that the availability of borrowings, under the financing arrangements described above, and the two Swiss mortgages described below, together with the current planned levels of cash flow from operations and cash on hand, will be sufficient to meet operational cash requirements expenditures during 1996. However, levels of growth during 1995, described above, which has continued during early 1996, has increased working capital requirements and therefore borrowing needs and had an adverse impact on liquidity. As a result, management has temporarily restricted planned capital expenditures and funding for other projects considered necessary for achieving planned cost reductions and growth. In addition, $12.1 million of Swiss mortgages mature on June 30, 1996, and two three-year term loans, totaling $25 million, mature in September 1997. Commitments for $10 million have been received for the refinancing of the Swiss mortgages, although negotiations are required with regard to half that amount to make them acceptable to the Company. Although the ultimate conclusion of these negotiations is uncertain, management is confident that the refinancing of the remaining portion will be successful. While the Company's current total credit lines remain adequate, those available in the U.S. remain inadequate to cure a capital structure problem inherited in the DEA acquisition which has adverse tax consequences. In order to alleviate the current short term funding limitations, and to meet increased working capital requirements, management has entered negotiations with a number of U.S. based banks and financial institutions to secure $15 million "bridge financing". Management is optimistic that the bridge financing will be successful. However, there can be no assurance that the additional financing can be obtained on acceptable terms. Management also has commenced preparations for refinancing of the Company during late 1996 to achieve a more flexible capital structure. The desired refinancing would include a new equity offering, new term debt, and multi-currency bank revolving credit lines. However, there can be no assurance that the desired elements of the refiancing can be obtained on terms that are acceptable to the Company. Cash Flow. Net income of $1.9 million in 1995, increased by depreciation and other non-cash items of $13.3 million, provided cash of $15.2 million was offset by the net increase in working capital of $15.3 million which together resulted in operations using $75 thousand of cash. In 1995, investment transactions used cash of $10.4 million, of which capital expenditures, net of dispositions, were $10.0 million, as compared with depreciation of $9.0 million in 1995. Cash provided from financing transactions was $6.9 million in 1995 compared to $15.8 million in 1994. This largely resulted from borrowing on The Facility in the U.S. Working Capital. Working capital was $87.6 million at the end of 1995 compared to $102.9 million at the end of 1994. This reduction resulted largely from the increased borrowing on The Facility in the U.S. and two long term mortgage in Switzerland becoming current in 1995. Inventories remained the same at $88.6 million at December 31, 1995. Accounts receivable increased to $113.6 million at December 31, 1995, an increase of $5.4 million from year end 1994. Also, total debt increased $9.5 million to a total of $102.1 million at December 31, 1995 as compared to $92.6 million outstanding at December 31, 1994 primarily due to increased borrowing to fund working capital and capital additions, and also due to the impact of foreign currency exchange rate changes on the U.S. dollar value of foreign currency denominated debt. Capital Expenditures. Brown & Sharpe's capital expenditures net of disposal proceeds were approximately $10.0 million in 1995 compared to $5.5 million in 1994. Management estimates that annual on going capital expenditures of approximately $10 million are required for appropriate levels of tooling new products, improving product and service quality, expansion of the distribution network, and support of the 19 operations of the combined Company. Planned capital expenditures in 1996 will include an aggregate of approximately $3.8 million for the construction of a new facility in Telford, England to both replace an existing facility for which the lease expires and is non-renewable, and consolidate the operations now conducted in three other facilities. Committments for mortgage plus term financing for 100% of the amount of the expenditures for this facility are in place. PROSPECTIVE INFORMATION This section, as well as other portions of this document and the Annual Letter to the Shareholders from the Chairman and Chief Executive Officer, include certain forward-looking statements about the Company's business and new products, sales, expenditures and cost savings, effective tax rate and operating and capital requirements and refinancings. In addition, forward- looking statements may be included in various other Company documents to be issued in the future and in various oral statements by Company representatives to security analysts and investors from time to time. Any such statements are subject to risks that could cause the actual results or needs to vary materially. These risks are discussed below in "Risk Factors" in this document. RISK FACTORS Risks Related to 1994 Strategic Acquisitions. The Company expects that its profitability in the foreseeable future, and accordingly its ability to fund necessary capital expenditures, increased working capital requirements, and service its debt obligations as well as its ability at some time in the future to resume dividend payments, will depend in large part on its success in integrating the operations of DEA, Roch and Mauser with Brown & Sharpe's pre- existing operations and realizing anticipated cost savings on a long-term profitable basis. The combined net sales of DEA, Roch and Mauser prior to the acquisition in 1994 were approximately 78% of Brown & Sharpe's 1993 net sales. The Company's plan for integrating the operations of DEA into the MS Group and Roch and Mauser into the PMI Division anticipated cost savings (before one-time implementation cash costs) of $8.3 million to be realized within the first twelve months of combined operations. These savings were substantially achieved on time. The Company expects to realize total annualized savings of nearly $14 million after 24 months of combined operations through various actions, further reductions in selling and administrative expenses, rationalization of European manufacturing facilities and reductions in associated manufacturing overhead costs. The Company expects to have spent a total of approximately $12.4 million from acquisition date through the completion of the integration process for severance and other one-time cash costs in eliminating duplicative operations and taking other planned measures intended to produce these savings. Due to the inherent risks in integrating the separate operations of the Company, in particular operations located in different countries and that in the aggregate are large in relation to Brown & Sharpe pre-existing operations, there can be no assurance that the Company will realize the full amount of anticipated cost savings or realize the savings on the contemplated timetable, or that as a result of its decentralized management structure or other factors, the Company will not experience unanticipated one- time or ongoing costs or difficulties in implementing the integration of DEA, Roch and Mauser into Brown & Sharpe. In addition, there can be no assurance that net sales will not be adversely affected by planned cost cutting measures, possible discontinuance of certain similar products, customers' desires to maintain alternative sources of supply or for other reasons. Risks Related to Liquidity. At December 31, 1995, Brown & Sharpe had unrestricted cash (and cash equivalents) of $6.3 million, and unused availability under its borrowing arrangements of $37.2 million, $16.5 million of which is dependent on the availability, only partially satisfied at year- end 1995, of certain kinds and amounts of eligible receivables. However, because of issues regarding the potential tax impact of the DEA Group capital structure resulting from the DEA acquisition, availability of adequate borrowing capacity in the US to cure the DEA capital structure problem, and the maturation of certain foreign mortgages in June 1996 and the $25 million three year term loans in the US in September 1997, refinancing of the Company during 1996 on a "bridge" basis and then more permanently in 1996 or 1997 must be accomplished. Brown & Sharpe also will 20 require positive cash generated by operations and the realization of additional anticipated cost savings from the further integration of DEA, Roch and Mauser in order to meet its anticipated cash needs (including one-time costs involved in integrating DEA, Roch and Mauser. As noted above, there can be no assurance that the Company will be able to complete the refinancing of the $12.1 million of Swiss mortgages, the U.S. $15 million "bridge" financing or the entire refinancing of the Company's debt structure during the projected lat 1996 time frame. Risks Related to Indebtedness. The Company has significant debt service obligations. As of December 31, 1995, Brown & Sharpe had total outstanding indebtedness and total shareowners' equity of $102.1 million and $85.9 million, respectively. The Company's indebtedness and debt to capital ratio could have important consequences to stockholders, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other corporate purposes may be impaired, (ii) a substantial portion of the Company's cash flow from operations will be used to pay principal and interest on its indebtedness, thereby reducing the funds available to the Company for its operations, future business opportunities and resumption at some future date of payment of dividends, (iii) the Company's borrowings under the rates of interest, which could result in higher interest expense in the event of an increase in market interest rates, (iv) the Facility contains financial and other restrictive covenants which could limit the Company's operating and financial flexibility and, if violated, would result in an event of default which, if not cured or waived, could preclude the Company's access to credit under such facility or otherwise have a material adverse effect on the Company, (v) the three-year Term Loans, the Facility and certain Swiss mortgage loans expire by their terms in 1996 and 1997, requiring the Company to seek refinancing of this debt at that time or before and (vi) as a result, the Company may be more vulnerable to general economic and industry downturns. Risks Related to Historical Losses. Brown & Sharpe had losses from continuing operations of approximately $2.9 million, $8.0 million, $2.4 million and $14.3 million in fiscal 1991, 1992, 1993, and 1994, respectively, before the 1995 profit of $1.9 million. In addition, DEA had operating losses of $10 million and $4.6 million in 1991 and 1992, respectively, an operating profit of $5.5 million in 1993, and an operating loss of $1.2 million in the first half of 1994. In 1990, Brown & Sharpe acquired Leitz. In the year prior to the acquisition, Leitz's net sales were approximately 21% of Brown & Sharpe's net sales in that year. While Leitz has strategic value to Brown & Sharpe, Leitz has produced operating losses in each year since its acquisition. Brown & Sharpe believes that these losses have resulted from the severe, prolonged recession in Europe that began a year after the acquisition and severe competitive pricing pressure which together have resulted in gross margin erosion for Leitz's products and revenues below expected levels, and from unexpected difficulties and additional expenses in integrating Leitz with Brown & Sharpe's other CMM operations. These difficulties were heightened by the fact that the Leitz business acquired by Brown & Sharpe did not have a complete freestanding operating and management structure or its own dedicated facilities. Risks Related to Foreign Operations. As of December 31, 1995, approximately 74% of Brown & Sharpe's assets were located outside the United States (based on book values) as were the customers for 65% of its net sales. Foreign operations are subject to special risks that can materially affect the sales, profits, cash flows, and financial position of the Company, including taxes on distributions and payments, currency exchange rate fluctuations, inflation, minimum capital requirements, and exchange controls. Risks Related to Cyclical Nature of the Metrology Industry. The market for Brown & Sharpe's and DEA's products is subject to general economic conditions and, more specifically, to the level of capital spending by industrial companies, especially those in the primary end markets for Brown & Sharpe's and DEA's products. Management believes that in recent years, the total world market for dimensional metrology products declined. Although the recession has subsided, the dimensional metrology industry continues to be impacted by overcapacity in the industry and reduced demand by the capital goods sector for dimensional metrology products. 21 Risks Related to Competition. Brown & Sharpe's and DEA's business is subject to direct and indirect competition from a considerable number of both domestic and foreign firms, a number of which are part of entities which are larger in overall size than Brown & Sharpe and DEA. In addition, the dimensional metrology market has suffered from overcapacity, which, together with reduced demand for capital goods, has resulted in intense competitive pricing pressure and performance competition that have reduced margins throughout the industry. Risks Related to Control of the Company. The Company's common stock is divided into two classes, the Class A Common Stock and the Class B Common Stock. Shares of Class A Common Stock are entitled to one vote per share. Shares of Class B Common Stock are entitled to ten votes per share, except as otherwise provided by law or in Brown & Sharpe's certificate of incorporation or by-laws. The Class A Common Stock and the Class B Common Stock vote together as a single class on all matters, except that the Class A Common Stock, voting alone, elects one director each year, and except as otherwise required by law. No dividend may be declared on shares of Class B Common Stock unless a dividend at least equal in amount is declared on shares of Class A Common Stock. Various members of the Sharpe family, including Henry D. Sharpe, Jr. and Henry D. Sharpe, III (each of whom is a director of the Company), hold approximately 483,966 shares of Class A Common Stock and approximately 161,320 shares of Class B Common Stock, representing approximately 7.5% of the outstanding aggregate equity in the Company and approximately 15.5% of the combined voting power of the Company's outstanding common stock, and Finmeccanica holds 3,450,000 shares of Class A Common Stock, representing approximately 39.9% of the outstanding aggregate equity of the Company and approximately 25.5% of the combined voting power of the Company's outstanding common stock. Finmeccanica has the right to designate three nominees for election to the Company's Board of Directors. Pursuant to certain preemptive rights provided to Finmeccanica in connection with the DEA acquisition in September 1994, so long as Finmeccanica owns at least 862,500 shares of the Company's Class A Common Stock, with certain exceptions, the Company may not issue any shares of its Class A Common Stock, or equity securities exercisable, exchangeable or convertible into shares of Class A Common Stock ("Derivative Securities") to any third party without first offering to Finmeccanica the right to purchase that percentage of such newly issued securities such that Finmeccanica's percentage ownership of the Company's common stock on a fully diluted basis remains constant. After receiving notice of the proposed issuance, Finmeccanica will have 30 days to exercise its preemptive rights, and the closing under such exercise will occur within 20 days of such 30-day period. The existing holders of Class A Common Stock do not have any preemptive rights. If the Company issues Class A Common Stock or Derivative Securities while Finmeccanica's preemptive rights are in effect, Finmeccanica would, subject to certain exceptions, retain its percentage ownership of Brown & Sharpe common stock, while the equity interests of the Company's existing holders of Class A Common Stock would be diluted. ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS PAGE NUMBER ----------------------------- ----------- Report of Independent Auditors--Ernst & Young LLP.................. 23 Report of Independent Auditors--Coopers & Lybrand L.L.P............ 24 Consolidated Statements of Operations for the Years Ended December 31, 1995 and 1994 and December 25, 1993........................... 25 Consolidated Balance Sheets at December 31, 1995 and 1994.......... 26 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995 and 1994 and December 25, 1993........................... 27 Consolidated Statements of Shareowners' Equity for the Years Ended December 31, 1995 and 1994 and December 25, 1993.................. 28 Notes to Consolidated Financial Statements......................... 29-41
22 REPORT OF INDEPENDENT AUDITORS To the Shareowners and Directors of Brown & Sharpe Manufacturing Company: We have audited the accompanying consolidated balance sheet of Brown & Sharpe Manufacturing Company as of December 31, 1995, and the related consolidated statements of operations, shareowners' equity, and cash flows for the year then ended. Our audit also included the related financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Brown & Sharpe Manufacturing Company at December 31, 1995, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Providence, Rhode Island February 14, 1996 23 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareowners and Directors of Brown & Sharpe Manufacturing Company: We have audited the consolidated financial statements and the financial statement schedule of Brown & Sharpe Manufacturing Company listed in Item 14 of this Form 10-K for the years ended December 31, 1994 and December 25, 1993. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above presents fairly, in all material respects, the consolidated financial position of Brown & Sharpe Manufacturing Company as of December 31, 1994 and December 25, 1993, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Boston, Massachusetts March 29, 1995 24 BROWN & SHARPE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND DECEMBER 25, 1993 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1994 1993 -------- -------- -------- Net sales........................................ $320,899 $205,000 $157,035 Cost of goods sold............................... 221,729 142,776 110,841 Selling, general and administrative expense...... 87,217 63,664 45,317 Restructuring expense............................ 336 4,169 -- -------- -------- -------- Operating profit (loss)........................ 11,617 (5,609) 877 Interest expense................................. 9,129 6,575 5,100 Other income, net................................ 135 249 2,607 -------- -------- -------- Income (loss) before income taxes.............. 2,623 (11,935) (1,616) Income tax provision............................. 697 2,400 800 -------- -------- -------- Net income (loss)................................ $ 1,926 $(14,335) $ (2,416) ======== ======== ======== Primary and fully diluted income (loss) per com- mon share....................................... $ .22 $ (2.37) $ (.49) ======== ======== ========
The accompanying notes are an integral part of the financial statements. 25 BROWN & SHARPE MANUFACTURING COMPANY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1994 -------- -------- ASSETS Current Assets: Cash and cash equivalents................................ $ 6,262 $ 6,676 Accounts receivable, net of allowances for doubtful accounts of $3,030 and $3,103........................... 113,579 108,234 Inventories.............................................. 88,558 88,639 Deferred income taxes.................................... 3,322 2,000 Prepaid expenses and other current assets................ 5,436 5,981 -------- -------- Total current assets................................. 217,157 211,530 Property, plant and equipment: Land..................................................... 7,141 6,858 Buildings and improvements............................... 37,447 33,124 Machinery and equipment.................................. 95,482 85,583 -------- -------- 140,070 125,565 Less--accumulated depreciation........................... 87,183 80,210 -------- -------- 52,887 45,355 Goodwill, net.............................................. 11,529 1,875 Other assets............................................... 13,827 13,514 -------- -------- $295,400 $272,274 ======== ======== LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities: Notes payable and current installments of long-term debt.................................................... $ 45,229 $ 22,398 Accounts payable......................................... 44,936 36,896 Accrued expenses and income taxes........................ 39,423 49,353 -------- -------- Total current liabilities............................ 129,588 108,647 Long-term debt............................................. 56,839 70,215 Other long-term liabilities................................ 6,310 -- Deferred income taxes...................................... 2,765 1,737 Unfunded accrued pension cost.............................. 5,823 5,035 Termination indemnities.................................... 8,218 7,715 Shareowners' Equity: Preferred stock, $1 par value; authorized 1,000,000 shares; none issued..................................... -- -- Common stock: Class A, par value $1; authorized 15,000,000 shares; issued 8,195,795 in 1995 and 8,122,086 shares in 1994.................................................. 8,196 8,122 Class B, par value $1; authorized 2,000,000 shares; issued 522,575 in 1995 and 534,821 shares in 1994..... 523 535 Additional paid in capital................................. 66,863 66,412 (Deficit) earnings employed in the business................ (8,032) (9,958) Cumulative foreign currency translation adjustment......... 18,926 14,530 Treasury stock; 23,592 shares in 1995 and 7,492 shares in 1994, at cost............................................. (270) (151) Unearned compensation...................................... (349) (565) -------- -------- Total shareowners' equity............................ 85,857 78,925 -------- -------- $295,400 $272,274 ======== ========
The accompanying notes are an integral part of the financial statements. 26 BROWN & SHARPE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND DECEMBER 25, 1993 (DOLLARS IN THOUSANDS)
1995 1994 1993 -------- -------- ------- Cash Provided by (Used in) Operations: Net Income (Loss)............................... $ 1,926 $(14,335) $(2,416) Adjustment for Noncash Items: Depreciation and amortization................. 11,010 6,743 6,355 Pension credits and charges................... 1,369 212 269 Deferred income taxes......................... 376 (1,900) 500 Gain on sale of operations.................... -- -- (2,182) Termination indemnities....................... 331 -- -- Deferred compensation......................... 216 213 55 Changes in Working Capital: Accounts receivable........................... (4,324) (15,912) (8,204) Inventories................................... (7,389) 7,103 957 Prepaid expenses and other current assets..... 1,208 1,001 323 Accounts payable and accrued expenses......... (4,798) 6,693 (1,455) -------- -------- ------- Net Cash (Used in) Operations............... (75) (10,182) (5,798) -------- -------- ------- Investment Transactions: Capital expenditures............................ (12,054) (8,929) (4,399) Proceeds from dispositions...................... 2,096 3,456 599 Proceeds from sale of operations................ -- -- 8,700 Cash equivalent pledged......................... -- 6,078 (6,078) Other investing activities...................... (445) (1,988) (563) -------- -------- ------- Net Cash (Used in) Investment Transactions.. (10,403) (1,383) (1,741) -------- -------- ------- Financing Transactions: Increase (decrease) in short-term debt.......... 10,915 (16,420) 5,810 Proceeds from issuance of long-term debt........ -- 33,500 -- Principal payments of long-term debt............ (3,444) (1,661) (1,000) Other financing transactions.................... (600) 353 -- -------- -------- ------- Net Cash Provided by Financing Transac- tions...................................... 6,871 15,772 4,810 -------- -------- ------- Effect of Exchange Rate Changes on Cash........... 3,193 375 183 -------- -------- ------- Cash and Cash Equivalents: Increase (decrease) during the year............. (414) 4,582 (2,546) Beginning balance............................... 6,676 2,094 4,640 -------- -------- ------- Ending balance.................................. $ 6,262 $ 6,676 $ 2,094 ======== ======== ======= Supplementary Cash Flow Information: Interest paid................................... $ 8,004 $ 6,223 $ 4,942 ======== ======== ======= Taxes paid...................................... $ 2,598 $ 1,496 $ 1,158 ======== ======== =======
The accompanying notes are an integral part of the financial statements. 27 BROWN & SHARPE MANUFACTURING COMPANY CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND DECEMBER 25, 1993 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(DEFICIT) CUMULATIVE COMMON EARNINGS FOREIGN STOCK ADDITIONAL EMPLOYED CURRENCY $1 PAR PAID IN IN THE TRANSLATION TREASURY UNEARNED VALUE CAPITAL BUSINESS ADJUSTMENT STOCK COMPENSATION ------ ---------- --------- ----------- -------- ------------ Balance--December 26, 1992................... $4,979 $45,710 $ 6,894 $10,260 $(336) $(833) Net Loss................ -- -- (2,416) -- -- -- Treasury Stock Transac- tions.................. -- -- (101) -- 12 -- Restricted Stock Awards................. 1 -- -- -- 161 55 Foreign currency trans- lation adjustment...... -- -- -- (866) -- -- ------ ------- -------- ------- ----- ----- Balance--December 25, 1993................... 4,980 45,710 4,377 9,394 (163) (778) ------ ------- -------- ------- ----- ----- Net Loss................ -- -- (14,335) -- -- -- Acquisitions............ 3,625 20,413 -- -- -- -- Treasury Stock Transac- tions.................. -- -- -- -- 12 -- Restricted Stock Awards................. 10 (8) -- -- -- 213 ESOP Contribution....... 42 297 -- -- -- -- Foreign currency trans- lation adjustment...... -- -- -- 5,136 -- -- ------ ------- -------- ------- ----- ----- Balance--December 31, 1994................... 8,657 66,412 (9,958) 14,530 (151) (565) ------ ------- -------- ------- ----- ----- Net Income.............. -- -- 1,926 -- -- -- Treasury Stock Transac- tions.................. -- -- -- -- (119) -- Restricted Stock Awards................. -- 153 -- -- -- 216 ESOP Contribution....... 62 298 -- -- -- -- Foreign currency trans- lation adjustment...... -- -- -- 4,396 -- -- ------ ------- -------- ------- ----- ----- Balance--December 31, 1995................... $8,719 $66,863 $ (8,032) $18,926 $(270) $(349) ====== ======= ======== ======= ===== =====
The accompanying notes are an integral part of the financial statements. 28 BROWN & SHARPE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. SIGNIFICANT ACCOUNTING POLICIES Business Brown & Sharpe Manufacturing Company is a multinational manufacturer of dimensional metrology products, which include manual and computer-controlled, high precision machines; mechanical and electronic measuring and inspection tools; and specialty products and systems. The principal markets for its products are North America, Europe, Asia, South America, and the Middle East. The primary end markets for its products are the automotive, aerospace, and industrial machinery industries. Basis of Presentation The consolidated financial statements include the accounts of the Company and all subsidiaries. Intercompany transactions have been eliminated from the consolidated financial statements. Investments in 20% to 50% part-owned affiliates are accounted for on the equity method. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's fiscal year ended on the last day of the calendar year in 1995 and 1994 and the last Saturday in December for 1993. Results for 1995 and 1993 include 52 weeks, while 1994 had 53 weeks. Inventory Valuation Inventories are stated at the lower of cost or market. Cost is determined on a last-in, first-out (LIFO) basis for all domestic inventories in 1995 (40% of cost in 1994) and principally on a first-in, first-out (FIFO) basis for inventories outside the United States. Provision is made to reduce slow-moving and obsolete inventories to net realizable values. Current FIFO cost exceeds the LIFO value of inventories by approximately $12,293 and $12,473 at December 31, 1995 and 1994, respectively. Year-end inventories valued under the LIFO method were $16,081 in 1995 and $7,231 in 1994. During 1994 and 1993, quantities for certain segments of the LIFO inventories were reduced. The reductions resulted in liquidation of LIFO quantities carried at lower costs prevailing in prior years compared with the cost of current purchases, the effect of which decreased net loss by $631 ($.10 per share) and $749 ($.15 per share) in 1994 and 1993, respectively. The composition of inventory at year-end was as follows:
1995 1994 ------- ------- Parts, raw materials and supplies......................... $39,857 $42,665 Work in progress.......................................... 15,906 17,069 Finished goods............................................ 32,795 28,905 ------- ------- $88,558 $88,639 ======= =======
Property, Plant and Equipment Property, plant, and equipment are carried at cost and are being depreciated principally on a straight-line basis over the estimated useful lives of the assets which generally range from 20 to 40 years for buildings and improvements and from 3 to 12 years for machinery and equipment. Depreciation expense was $8,980, $6,442, 29 BROWN & SHARPE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) and $5,862 in 1995, 1994, and 1993, respectively. Repair and maintenance costs are charged against income while renewals and betterments are capitalized as additions to the related assets. Retirements, sales, and disposals of assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any resulting gain or loss reflected in income. At December 31, 1995, land and buildings with a book value of $19,973 were pledged as collateral for mortgage loans of $26,800. Goodwill Goodwill, which is net of accumulated amortization of $771 in 1995 and $154 in 1994, is being amortized on a straight-line basis over periods ranging from 7 to 20 years. Other Assets Other assets consisted of the following:
1995 1994 ------- ------- Prepaid pension............................................ $ 4,673 $ 5,106 Equity investments......................................... 2,492 1,956 Other...................................................... 6,662 6,452 ------- ------- $13,827 $13,514 ======= =======
Revenue Recognition The Company records revenue upon shipment other than for long-term contracts, upon rendering of service for installation and training, and ratably over the contract period for service contracts. Sales under long-term contracts are recorded using the percentage of completion method, wherein costs and estimated gross margin are recorded as sales during the period the work is being performed. Estimated gross margin is based on the total contract sales value and the most recent estimate of total costs. When the current contract estimate indicates a loss, a provision is made for the total anticipated loss. Foreign Currency Assets and liabilities of those subsidiaries located outside the United States whose cash flows are primarily in local currencies are translated at year-end exchange rates and, income and expense items are translated at average monthly rates. Translation gains and losses are accounted for in a separate shareowners' equity account "Cumulative foreign currency translation adjustment." There were no forward exchange contracts outstanding at December 31, 1995 and 1994. Transaction gains were recorded in 1995, 1994, and 1993 of $601, $1,064, and $157, respectively. Transaction gains in 1995 includes an adjustment, which increased the gain, amounting to $640 ($.07 per share), after taxes, relating to a revaluation of a 1994 foreign denominated liability that was incorrectly recorded at historical, rather than current, foreign exchange rate in the Company's consolidated financial statements issued in prior years. Prior year financial statements were not restated due to the immaterial effect on the previously-issued financial statements. Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high credit quality financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the 30 BROWN & SHARPE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Company's large number of customers and their dispersion across many different industries and countries worldwide. At December 31, 1995, the Company had no significant concentrations of credit risk. Stock Incentive Plans The Company accounts for its stock compensation arrangements under the provisions of APB 25, "Accounting for Stock Issued to Employees", and intends to continue to do so. Postretirement and Postemployment Benefits The Company does not provide postretirement or postemployment benefits as contemplated by SFAS 106 and SFAS 112, respectively, and accordingly these statements have no impact upon the Company's financial position or results of operations. Income Taxes The Company provides for income taxes under the provisions of SFAS No. 109 "Accounting for Income Taxes". SFAS No. 109 requires an asset and liability based approach in accounting for income taxes. Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences of revenue and expense items for financial statement and income tax purposes. Valuation allowances are provided against assets which are not likely to be realized. Federal income taxes are not provided on the unremitted earnings of foreign subsidiaries since it has been the practice and is the intention of the Company to continue to reinvest these earnings in the business outside the United States. Net Income (Loss) Per Share Net income per share is computed based on the weighted average number of shares of common stock and common stock equivalents outstanding during each year, while net loss per share is based only on the weighted average number of shares of common stock. Common stock equivalents are additional shares which may be issued upon the exercise of dilutive stock options using the average market price of the Company's common stock during the year for primary earnings per share and market price at the end of the year for fully diluted earnings per share. Conversion of the convertible subordinated debentures (see Note 6) was not assumed in the 1995 computation of fully diluted net income (loss) per share because such conversion was antidilutive. Shares used to compute net income (loss) per share were 8,772,748 in 1995, 6,057,090 in 1994, and 4,969,543 in 1993. Cash and Cash Equivalents Cash and cash equivalents are comprised of cash on hand, deposits in banks, and short-term marketable securities with a maturity at acquisition of three months or less. Recently Issued Accounting Pronouncements The Company has not yet adopted Statement of Financial Accounting Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which is effective for the Company's 1996 fiscal year. The Company does not anticipate that the Statement will have a material effect on the statement of operations or financial position upon adoption. Reclassifications Certain amounts reported in 1994 and 1993 have been reclassified to conform with the 1995 presentation. 31 BROWN & SHARPE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. ACQUISITIONS DEA Brown & Sharpe Manufacturing Company, together with its subsidiary Brown & Sharpe International Capital Corporation, acquired on September 28, 1994, the stock of DEA S.p.A., an Italian corporation, and its related metrology business from Finmeccanica S.p.A., an Italian corporation, for 3,450,000 shares of Class A common stock with a market value amounting to $22,856. In addition, the Company incurred professional accounting, legal, and other costs of $2,301 in conjunction with the acquisition which have been accounted for as part of the purchase price. The acquisition has been accounted for as a purchase. Accordingly, the Company's consolidated balance sheet at October 1, 1994 included the assets and liabilities of DEA S.p.A. and its subsidiaries. The Company's consolidated statements of operations and cash flows includes the results of operation of DEA S.p.A. and its subsidiaries commencing October 2, 1994. The DEA purchase agreement provided for a post-closing adjustment to the purchase price based upon the final valuation of the acquired assets and assumed liabilities which occurred in 1995. No such adjustment was made. However, differences in final valuation calculations resulted in a settlement whereby Finmeccanica S.p.A. waived lease payments of approximately $1,000 for a DEA facility leased from Finmeccanica. (See Note 12.) Because DEA was acquired late in 1994 and was a complex worldwide operation that required a comprehensive review of asset values and liabilities and a significant part of the study had to take into consideration the integration of DEA into the Measuring Systems Group, the final assessment of asset values, restructuring the manufacturing and marketing organization, and making other necessary changes was not completed until the third quarter of 1995. The determination of the final fair values resulted in adjustments consisting of changes from initially determined values as of September 28, 1994 amounting to an increase in goodwill; property, plant and equipment; deferred income taxes; and other assets amounting to $10,360, $4,142, $1,800, and $1,044, respectively, and a decrease in inventory and accounts receivable amounting to $12,582 and $1,175, respectively. Adjustments to other balance sheet amounts were individually not significant. As a result of the adjustments to the preliminary 1994 estimates, net income for 1995 increased approximately $350 ($.04 per share). Roch Brown & Sharpe Manufacturing Company through its subsidiary Brown & Sharpe International Capital Corporation purchased, on March 24, 1994, the stock of the French company Ets. Pierre Roch S.A. ("Roch") and its German affiliate, Mauser Prazisions--Messmittel GmbH ("Mauser"). The business is headquartered in Luneville, France which is its sole manufacturing site. The German operation is a sales office. These operations were purchased from Diehl GmbH & Co. of Nurnberg, Germany ("Diehl"). The purchase price was 175,000 shares of Brown & Sharpe Class A Common Stock, subject to certain post closing adjustments and the right to receive an additional 50,000 shares of such stock in the event the Company's Class A Common Stock attains a market price of $15 or more per share for a total of 30 days or more during any twelve month period within the five years following the purchase. The purchase price was determined through negotiation by the parties subject to adjustment based on specified closing balance sheet changes. The final purchase price adjustment has not yet been made. Negotiations to finalize the amount of the adjustment are expected to be complete by June of 1996. The acquisition has been accounted for by the purchase method of accounting, and accordingly, the purchase price has been allocated to assets acquired and liabilities assumed based on an estimate of their fair values at the date of acquisition. 32 BROWN & SHARPE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Proforma Combined (Unaudited) The Company's unaudited Pro Forma combined results of operations for the years ended December 31, 1994 and December 25, 1993 assuming the acquisition of DEA and Roch occurred at the beginning of 1993, are as follows:
1994 1993 -------- -------- Net sales............................................... $272,847 $279,742 Net income (loss)....................................... $(11,441) $ 8,924 Primary and fully diluted net income (loss) per common share.................................................. $ (1.89) $ 1.08
3. RESTRUCTURING CHARGES Results of operations for 1995 include restructuring charges of $336 ($.03 per share) compared with 1994 which include charges of $4,169 ($.69 per share). These charges consist principally of Brown & Sharpe employee severance and Brown & Sharpe sales offices closing costs of $336 and $2,348 for 1995 and 1994, respectively, associated with integrating Brown & Sharpe's existing operations with those of DEA mainly outside the U.S. Other cash costs of integrating DEA were incurred but were accounted for as part of the purchase price accounting of the acquisition. Also, costs of $1,821 were recorded for 1994 severance of 38 employees and property, plant, and equipment and inventory write-offs due to a plant closing in Switzerland arising from the acquisition of Roch, which is discussed in Note 2. Of these costs, $420 was paid in 1994 and $3,202 in 1995. The balance $547 represents non-cash costs. 4. INCOME TAXES Income (loss) before income taxes consisted of the following:
1995 1994 1993 ------- -------- ------- Domestic......................................... $(4,850) $ (1,338) $ 1,394 Foreign.......................................... 7,473 (10,597) (3,010) ------- -------- ------- Income (loss) before income taxes................ $ 2,623 $(11,935) $(1,616) ======= ======== =======
The following table reconciles the income tax provision (benefit) at the U.S. statutory rate to that in the financial statements:
1995 1994 1993 ----- ------- ----- Taxes computed at 34%................................ $ 892 $(4,058) $(491) Goodwill amortization................................ 158 -- -- Additional tax on foreign income..................... 113 1,459 -- Alternative minimum and state taxes.................. 31 250 200 Net operating losses and other losses................ (636) 4,749 1,091 Other (net).......................................... 139 -- -- ----- ------- ----- Income tax provision................................. $ 697 $ 2,400 $ 800 ===== ======= =====
33 BROWN & SHARPE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The income tax provision (benefit) consisted of the following:
1995 1994 1993 ------ ------- ------ Current: Federal........................................... $ (996) $ 3,250 $ 500 State............................................. 31 250 300 Foreign........................................... 1,286 800 500 ------ ------- ------ 321 4,300 1,300 Deferred: Federal........................................... 996 (1,000) -- Foreign........................................... (620) (900) (500) ------ ------- ------ 376 (1,900) (500) ------ ------- ------ Income tax provision................................ $ 697 $ 2,400 $ 800 ====== ======= ======
Provision has not been made for U.S. taxes on $39,000 of cumulative undistributed earnings of foreign subsidiaries as those earnings are intended to be permanently reinvested. The components of the Company's deferred tax assets and liabilities as of December 31, 1995 and 1994 are as follows:
1995 1994 ------- ------- Deferred tax assets: Inventory reserves.......................................... $ 8,553 $ 2,429 Warranty expense............................................ 928 400 Provision for doubtful accounts............................. 226 300 Depreciation................................................ 1,722 3,044 Tax credit and loss carryforwards........................... 46,293 37,600 Other....................................................... 4,827 404 ------- ------- Gross deferred assets..................................... 62,549 44,177 Less valuation allowance.................................... 53,590 38,100 ------- ------- Deferred tax asset........................................ $ 8,959 $ 6,077 ======= ======= Deferred tax liabilities: Pension expense............................................. $ 1,542 $ 1,542 Inventory reserves.......................................... 1,665 1,196 Depreciation................................................ 2,288 2,752 Other....................................................... 2,907 324 ------- ------- Deferred tax liability.................................... $ 8,402 $ 5,814 ======= =======
A valuation allowance has been established due to the uncertainty of realizing certain tax credit and loss carryforwards and a portion of the other deferred tax assets. The valuation allowance has been increased by $15,490 during 1995. The recognition of any future tax benefits resulting from the elimination of $21,300 of the valuation allowance will reduce any goodwill remaining at the time of such elimination. For income tax purposes, the Company has operating loss and capital loss carryforwards of $2,000 and $3,500, respectively, in the U.K. and net operating loss carryforwards of $26,700, $38,500, $5,000, and $22,700, 34 BROWN & SHARPE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) respectively in Switzerland, Germany, France, and Italy. The Swiss, French, and Italian carryforwards expire between 1996 and 2001. There is no time limit for the U.K. and German carryforwards. The Company's domestic income tax return for the 1993 fiscal year is under examination by the Internal Revenue Service. The Company believes it has made adequate provision for assessments (if any) which may arise as a result of this audit. 5. SHORT-TERM BORROWINGS Outstanding short-term borrowings were $28,061 at December 31, 1995 and $19,193 at December 31, 1994. Substantially all domestic assets of the Company are pledged as collateral. Certain borrowing agreements contain covenants which, among other things, require the Company to maintain certain financial ratios and restricts the payment of dividends. Amounts outstanding under Brown & Sharpe's lines of credit, excluding the Facility, are generally payable on demand, and certain of the lines extended to Brown & Sharpe's foreign subsidiaries are secured by other assets. The Facility provides for demand borrowings based on a percentage of eligible domestic accounts receivable and finished and certain other inventory and, is secured by substantially all domestic assets. At December 31, 1995, Brown & Sharpe had borrowings of $28.1 million under all short term lines of credit compared to total availability at that date of $74.1 million under the lines of credit. Certain of the domestic and foreign lines of credit provide availability of borrowing capacity and funds only to the degree of availability of certain kinds of eligible receivables. At December 31, 1995, $17.6 million of the total lines of credit were restricted to foreign eligible receivables and also to certain foreign countries, of which $16.5 million was available for future use. No compensating balances were required at December 31, 1995 and 1994. A credit line of $3,261 in the U.K. is collateralized by the assets in that country, and the Company has also guaranteed borrowings up to $776. The weighted average interest rates on short-term borrowings were 7.7% and 7.3% in 1995 and 1994, respectively. 6. LONG-TERM DEBT Long-term debt consisted of the following:
1995 1994 ------- ------- 9-1/4% convertible subordinated debentures due December, 2005...................................................... $14,000 $15,000 Mortgages at rates ranging from 7.75% to 8.75%............. 26,800 27,619 Notes payable, due September 28, 1997 with quarterly inter- est of Libor plus .60%................................................. 25,000 25,000 Notes payable, due various dates with interest rates ranging from 2.1% to 12.39%............................... 8,207 5,801 ------- ------- 74,007 73,420 Less: current installments................................. 17,168 3,205 ------- ------- Total long-term debt....................................... $56,839 $70,215 ======= =======
The 9-1/4% subordinated debentures are convertible, at the option of the holders, into common shares at $26.25 per share subject to antidilution provisions. The Company, through a sinking fund, is required to provide for retirement of $1,000 in principal amount annually with the final $5,000 payable at maturity. At December 31, 1995, 533,333 shares of Class A Common Stock were reserved for conversion of these debentures. Annual maturities of long- term debt are as follows: 1996--$17,168, 1997--$30,888; 1998--$3,359; 1999--$8,493; 2000--$2,351; and $11,748 thereafter. Interest rates on long- term debt average approximately 9% in 1995. 35 BROWN & SHARPE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The $25,000 notes payable are guaranteed by Finmeccanica in connection with the acquisition of DEA. In return, the Company's reimbursement obligation is secured by a guarantee by DEA pursuant to an agreement between DEA and Finmeccanica. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company values the financial instruments as required by Statement of Financial Accounting Standards No. 107. The carrying amounts of cash and cash equivalents, short-term debt, and long-term variable-rate debt approximates fair value. The fair value of the Company's 9 1/4% subordinated debentures approximates $14,000 based on the quoted market prices. 8. CONTINGENCIES On April 7, 1995, the U.S. Court of Appeals for the District of Columbia Circuit rendered a decision on the second appeal by the International Association of Machinists and Aerospace Workers (the "IAM") of a supplemental decision and order of the National Labor Relations Board ("NLRB") reaffirming an April 1986 decision of the NLRB dismissing reinstated unfair labor practice charges brought against the Company by the IAM in September 1982. These charges arose out of a strike which began at the Company's Rhode Island operations in October 1981. Although the NLRB has previously upheld dismissal of the reinstated unfair labor practice charges, the Appeals Court in its latest decision has stated that the NLRB failed to articulate and apply a judicially acceptable standard to determine whether certain evidence offered, and characterized by the IAM as being newly discovered, was material and of sufficient nature to justify tolling the statute of limitations so as to permit the filing of the reinstated unfair labor practice charges. Based on the foregoing, the Court vacated the judgment of the NLRB favorable to the Company and has remanded the case back to the NLRB for further proceedings to determine these evidentiary issues and their effect on the application of the statute of limitations to the reinstated unfair labor practice charges. The Court has directed that should the NLRB rule against the Company on the evidentiary issues presented for consideration then it must proceed to determine the merits of the reinstated unfair labor practice charges. Management of the Company and its counsel believe the NLRB will not determine that the case should proceed to a hearing on its merits and that a finding of ultimate liability against the Company in this matter continues to be remote. The Company is involved in a lawsuit which arose out of an environmental proceeding in which the United States Environmental Protection Agency ("EPA") identified Brown & Sharpe as a potentially responsible party ("PRP") at a waste disposal site (the "Site") in Rhode Island listed on the EPA's National Priority List for clean-up and future monitoring remedial action under the Superfund legislation. While the Company's proportionate share of the total waste contributed to the Site was minimal in volume and toxicity, the EPA nevertheless issued an Administrative Order against the Company and other PRP's to clean up the Site. Subsequently, the Company was permitted by the EPA to settle its liability at such Site in exchange for releases from the EPA and the State of Rhode Island and contribution protection from claims of any third parties who may have liability at the Site. On January 2, 1991, a group of non-settling major PRP's at the Site brought suit in the Federal District Court in Rhode Island against all of the settling parties, including the Company, to recover a portion of their past and anticipated future costs of performing the clean-up remedy. The Court entered a summary judgment in favor of the Company and other settling parties on October 30, 1992. The non- settling group of major PRP's appealed that ruling and have subsequently brought suit against the EPA seeking to have the settlements of the de minimis settling parties set aside. The Company is vigorously defending this lawsuit and believes that the release and contribution protection obtained from the EPA in connection with settlement of its liability at the Site will ultimately bar the cost-recovery claim. On March 1, 1995, the Company received a notice from the State of New York asserting a claim against it, along with a group of approximately ten other companies, to recover costs incurred by the New York State 36 BROWN & SHARPE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Department of Environmental Conservation to clean up a waste disposal site in Poughkeepsie, NY. The State has alleged that the Company's former subsidiary, Standard Gage Company, Poughkeepsie, NY, which was merged with and into the Company, contributed hazardous waste to the site for disposal and that the Company is a potentially responsible party as the surviving corporation to the merger. The total claim asserted by the State against all parties is approximately $500, and it has expressed a willingness to settle its claim with all PRP's receiving the notice. The Company is continuing to investigate the basis for this claim and estimates that any potential loss it might incur as a result of any involvement or settlement at this site would not be material. The Company is also involved in several product liability claims and lawsuits which are incidental to the conduct of its business, the potential liability for which is adequately covered by insurance or reserves established for such contingencies. The Company is contesting or defending these claims and suits and management believes that the ultimate liability, if any, resulting from these matters will not have a material effect on the Company's financial position. 9. INCENTIVE AND RETIREMENT PLANS Stock Incentive Plans Under the provisions of the Company's 1989 Equity Incentive Plan (the "`89 Plan"), as amended on May 3, 1995 to increase by 500,000 the number of shares authorized for delivery in connection with awards, a variety of stock and stock based incentive awards, including stock options and restricted and unrestricted stock, are available to be granted to eligible key employees of the Company and its subsidiaries. The `89 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. During 1995, there were no awards of restricted stock, and during 1994, a total of 10,000 shares of restricted Class A common stock utilizing newly issued shares were made under the `89 Plan. Since the inception of the `89 Plan, 102,300 restricted Class A shares have been awarded net of forfeitures. The awards of restricted stock vest over a five year period with 25% of the award vesting at the end of the 2nd and 3rd years and 50% at the end of the 5th year with the unvested shares being subject to forfeiture if the recipient's employment is terminated. Unearned compensation in the amount of $349 is being amortized to expense over the forfeiture lapsing period for these awards of restricted stock. In 1995 and 1994, options to purchase a total of 528,000 and 145,000 shares, respectively, during ten year periods of Class A common stock were granted at exercise prices between $6.50 and $10.75 per share. The options granted in 1995 become exerciseable either with respect to 50% of the award after 2 years and 25% after 3 and 4 years from the date of the award or 50% of the award after 2 years and 50% after 3 years from the date of the award. The options granted in 1994 were exerciseable at any time after the date of the awards. The exercise price for shares covered by options awarded under the `89 Plan is 100% of the market value on the date such options are granted. The aggregate amount of shares of Class A common stock, including options, which may be awarded under the `89 Plan is 875,000 shares and the amount of shares of Class A common stock including forfeitures remaining available for issuance under the `89 Plan in connection with future awards is 124,700 shares. No further options or other awards may be granted under the Company's Amended 1973 Stock Option Plan (the "`73 Plan"). The exercise price for shares of Class A common stock covered by outstanding options under the `73 Plan is 100% of the market value on the dates such options were granted. Options granted under the `73 Plan became exerciseable one year after the date of grant and expire at the end of ten years. On December 31, 1995, options for 17,997 shares of Class A common stock were outstanding and exerciseable at prices between $12.94 and $17.86. Option activity under both the `89 Plan and `73 Plan during the past three years is summarized as follows: 37 BROWN & SHARPE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SHARES PRICE RANGE ------- ---------------- Outstanding December 26, 1992..................... 145,192 $10.25 to $17.86 Forfeited or canceled........................... (21,666) $10.78 to $12.13 ------- Outstanding December 25, 1993..................... 123,526 $10.25 to $17.86 Granted......................................... 145,000 $ 6.50 Forfeited or canceled........................... (50,529) $12.47 to $13.10 ------- Outstanding December 31, 1994..................... 217,997 $ 6.50 to $17.86 Granted......................................... 528,000 $ 6.75 to $10.75 Forfeited or canceled........................... (80,000) $ 6.50 to $16.38 ------- Outstanding December 31, 1995..................... 665,997 $ 6.50 to $17.86 =======
Profit Incentive Plan Under the provisions of the Company's Amended Profit Incentive Plan as originally approved in 1979, awards of cash and supplemental awards of restricted shares of restricted common stock valued at 100% of market on the date of grant vesting ratably over a five year period and subject to forfeiture conditions, could be made as bonuses to certain management employees. Following an amendment of the Plan in 1994, the Plan feature providing for awards of stock was eliminated resulting in the Plan being a cash only bonus Plan. Plan awards provisions under the Plan in the amounts of $1,157, $310, and $601 were made in 1995, 1994, and 1993, respectively, and there were no awards of stock made in 1995, 1994 or 1993. Long-Term Deferred Cash Incentive Plan In February 1996, the Board of Directors approved "The Brown & Sharpe Key Employee Long-Term Deferred (unfunded) Cash Incentive Plan" (the "LTIP"), which was effective for 1995. The LTIP provides for deferred cash payments upon retirement or termination of employment, subject to vesting three years after the end of the year for which it is earned. Annual total plan awards are calculated at 6% of adjusted pretax income and shared by the plan participants (currently eight key executives of the Company) pro rata based on annual salary paid. The 1995 consolidated financial statements contain a provision amounting to $200 thousand. Savings Plans Company has 401(K) stock bonus and thrift savings plans for U.S. employees, which include retirement income features consisting of employer contributions and employee tax deferred contributions. Contributions under all plans are invested in professionally managed portfolios and Company stock. The savings plans' expense for 1995, 1994, and 1993 was $941, $793, and $705, respectively. Stock Ownership Plan Under the provisions of the Company's Employee Stock Ownership Plan (ESOP), the Company may make contributions of common stock or cash to purchase common stock from the Company or otherwise, to be held in trust for employees meeting certain eligibility requirements until the employees reach retirement age. The ESOP may also borrow funds to purchase common shares, for which the Company will contribute amounts as necessary to pay down the indebtedness. ESOP expense was $433 in 1995, $360 in 1994, and $327 in 1993. At December 31, 1995, there were no unallocated shares of Class A and B stock held in the ESOP as all shares were allocated to participants' accounts. 38 BROWN & SHARPE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Retirement Plans The Company's subsidiaries have a defined contribution retirement plan covering employees in Switzerland and two defined benefit retirement plans covering employees in the U.K. and Germany, which includes substantially all employees. Retirement plan expense net of pension income for 1995, 1994, and 1993 was $1,369, $1,593, and $1,223, respectively. The defined benefit plans which cover employees in the U.K. and Germany, respectively, provide benefits based on years of service and employee compensation. Retirement costs under both plans are compiled based on the projected unit credit actuarial method. The U.K. plan's actuarial assumptions used settlement rates of 8.0% at the end of 1995 and 9.0% at the end of 1994, a long-term return on assets of 9.0% in 1995, 8.0% in 1994, and 10% in 1993, and annual wage increases of 7.0% at the end of 1995 and 8.0% at the end of 1994. Retirement costs accrued are funded. The German plan's actuarial assumptions used a settlement rate of 7.0% and 7.5% at the end of 1995 and 1994 and an annual wage increase of 4.5% at the end of 1995 and 1994. Retirement costs accrued are not funded. The following items are the components of net periodic pension income for the U.K. plan for the years ended December 31, 1995 and 1994 and December 25, 1993:
1995 1994 1993 ------- ------- ------- Service cost-benefits earned........................ $ 823 $ 797 $ 664 Interest cost on projected benefit obligations...... 1,263 943 743 Return on plan assets, net.......................... (3,049) 1,007 (1,200) Net amortization and deferral....................... 909 (2,948) (345) ------- ------- ------- Net periodic pension income......................... $ (54) $ (201) $ (138) ======= ======= =======
The plan has assets in excess of the accumulated benefit obligations. Plan assets include investments in equity securities, corporate and government debt securities, and cash equivalents. The following table presents a reconciliation of the funded status of the plan at December 31, 1995 and 1994:
1995 1994 -------- -------- Vested and accumulated benefit obligation.................. $(12,012) $(16,311) ======== ======== Projected benefit obligation............................... (15,126) (18,420) Plan assets at fair value.................................. 20,726 31,290 -------- -------- Funded status.............................................. 5,600 12,870 Unrecognized portion of net assets......................... (927) (7,764) -------- -------- Prepaid pension............................................ $ 4,673 $ 5,106 ======== ========
The following items are the components of net periodic pension cost for the unfunded German plan for the years ended December 31, 1995 and 1994 and December 25, 1993:
1995 1994 1993 ------- ------- ---- Service cost-benefits earned............................ $ 107 $ 97 $112 Interest cost on projected benefit obligations.......... 372 316 295 ------- ------- ---- Net periodic pension cost............................... $ 479 $ 413 $407 ======= ======= ==== Vested and accumulated benefit obligation............... $(4,700) $(3,330) ======= ======= Projected benefit obligation............................ $(5,519) $(4,617) Unrecognized net gain................................... (304) (418) ------- ------- Unfunded accrued pension cost........................... $(5,823) $(5,035) ======= =======
39 BROWN & SHARPE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. RESEARCH AND DEVELOPMENT EXPENSE Research and development expense was $10,762, $5,694, and $4,855 in 1995, 1994, and 1993, respectively. 11. OTHER INCOME AND EXPENSE Other income (expense), net includes:
1995 1994 1993 ---- ---- ------ Interest income............................................. $540 $468 $ 266 Gain (loss) on sale of fixed assets......................... (90) (284) 44 Gain on sale of operations.................................. -- -- 2,182 Other income (expense)...................................... (315) 65 115 ---- ---- ------ $135 $249 $2,607 ==== ==== ======
12. RENTAL EXPENSE AND LEASE COMMITMENTS At December 31, 1995, the Company was obligated under operating leases expiring on various dates. Rental expense was $9,767, $4,157, and $3,845 in 1995, 1994, and 1993, respectively. Annual rental commitments under noncancelable leases pertaining principally to buildings and equipment at December 31, 1995 are $6,919, $3,706, $2,200, $1,028, and $858 for the years 1996 through 2000, and aggregate to $4,391 for all years subsequent to 2000. In addition, DEA is the lessee under a lease agreement with the Elsag Bailey Division of Finmeccanica with respect to its principal headquarters facility located in Moncalieri, Italy. The lease expires on December 31, 1997, and the annual rental amount under such lease is approximately $861. (See Note 2.) Expenditures under this lease after DEA's scheduled vacating of the facility in September 1996 has been waived by Finmeccanica as part of the purchase price adjustment settlement. 13. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA Financial Information by Business Segment and Geographic Area as set forth on page 11 in Item 1 of this Annual Report is an integral part of these financial statements. 14. COMMON STOCK Both classes of common stock have equal rights upon liquidation. Class A common stock may not receive less cash dividends per share than Class B common stock, nor may such dividends be less frequent. The Class A common stock has one vote per share. Except as otherwise provided by law, the Class B common stock has ten votes per share, and the Class B common stock is convertible into Class A common stock on a one-for-one basis, and can be transferred in Class B form only to specified transferees, generally members of a shareowner's family and certain others affiliated with a shareowner. During 1995 and 1994, 12,246 shares and 12,783 shares, respectively, were converted from Class B to Class A common stock. During 1995, 16,100 shares were put into the treasury from a forfeiture of restricted stock award. In 1994, 584 treasury shares were allocated for use as restricted stock awards, and 584 treasury shares were issued under a Directors' deferred compensation plan. 40 BROWN & SHARPE MANUFACTURING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) 15. PREFERRED STOCK PURCHASE RIGHTS On March 23, 1988, the Company distributed a dividend of one purchase right for each outstanding share of common stock. Until the occurrence of specified events, the rights are represented by the associated common stock certificates. Following the distribution of the Class B common stock on June 10, 1988, and until the occurrence of specified events, each certificate representing a share of Class A or Class B common stock also represents three- quarters of a right. Each right entitles the shareowner to buy from the Company one-hundredth of a share of Series A Participating Preferred Stock at an exercise price of $55 per right. The rights become exerciseable ten days after a party acquires 20% of the Company's common stock. The rights, which are subject to adjustment, may be redeemed by the Company at a price of $.03 per right at any time prior to the fifteenth day after a person acquires 20% of the Company's common stock. The rights expire on March 23, 1998. In the event the Company is involved in certain business combination transactions with a 20% shareowner, each right will entitle its holder (other than a 20% shareowner) to purchase, at the right's then exercise price, an equity interest in the acquiring person having a market value of two times the exercise price. In the event a 20% shareholder engages in certain other transactions with the Company or (pursuant to a February, 1989 amendment) any person becomes a 20% shareowner, each right will entitle its holder (other than a 20% shareowner) to purchase, at the right's then exercise price, shares of Class A common stock having a market value of two times the exercise price. Prior to the DEA acquisition and entering into the Shareholders Agreement between the Company and Finmeccanica, the Company amended the Rights Agreement between it and the First National Bank of Boston dated March 9, 1988 pursuant to authority reserved in such agreement to exclude Finmeccanica from the definition of an "Acquiring Person" under the Rights Agreement so long as it does not own shares of Class A Stock other than those acquired in connection with the DEA acquisition and as provided in the Shareholders Agreement. 16. COMMITMENT At December 31, 1995, the Company had entered into a commitment to construct a building in Telford, England. This building, which is to be completed in 1996, will increase the capacity of its Custom Metrology Division. The building is estimated to cost approximately $3,800. 17. QUARTERLY DATA (UNAUDITED)
1995 -------------------------------------- 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. -------- -------- -------- -------- Net sales.............................. $74,095 $80,967 $76,945 $ 88,892 Gross profit........................... 23,184 23,704 22,682 29,600 Net income (loss)...................... (1,455) 1,045 220 2,116 Earnings (loss) per common share....... $ (.17) $ .12 $ .03 $ .24 1994 -------------------------------------- 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. -------- -------- -------- -------- Net sales.............................. $36,659 $43,152 $39,641 $ 85,548 Gross profit........................... 10,719 13,755 11,031 26,719 Net income (loss)...................... (2,874) (1,368) (4,615) (5,478) Earnings (loss) per common share....... $ (.57) $ (.26) $ (.86) $ (.63)
The aggregate effect of 1995 year-end adjustments was to increase fourth quarter net income by $940 ($.11 per share), after taxes, which, primarily, resulted from an adjustment to inventory valuation allowances that were necessary to record inventory at locations outside the United States at FIFO cost. In addition, as discussed in greater detail in Note 1, the 1995 fourth quarter also includes an adjustment amounting to $640 ($.07 per share), after taxes, relating to a revaluation of 1994 foreign denominated liabilities. 41 BROWN & SHARPE MANUFACTURING COMPANY ITEM 9--DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors Refer to "INFORMATION WITH RESPECT TO NOMINEES AND OTHER DIRECTORS CONTINUING IN OFFICE" in the Company's definitive Proxy Statement for the May 2, 1996 Annual Meeting which is incorporated herein by reference. Executive Officers Refer to Item 4A of this Annual Report on Form 10-K for information regarding Executive Officers. ITEM 11--MANAGEMENT REMUNERATION AND TRANSACTIONS Refer to "EXECUTIVE COMPENSATION" in the Company's definitive Proxy Statement for the May 2, 1996 Annual Meeting which is incorporated herein by reference. ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Refer to "Principal Shareholders" and "STOCK OWNERSHIP OF DIRECTORS AND OFFICERS" in the Company's definitive Proxy Statement for the May 2, 1996 Annual Meeting which are incorporated herein by reference. ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Refer to "CERTAIN RELATIONSHIPS" in the Company's definitive Proxy Statement for the May 2, 1996 Annual Meeting which is incorporated herein by reference. PART IV ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Financial Statements filed in Item 8 of this Annual Report Consolidated Statements of Operations for the Years Ended December 31, 1995 and 1994 and December 25, 1993 Consolidated Balance Sheets at December 31, 1995 and 1994 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995 and 1994 and December 25, 1993 Consolidated Statements of Shareowners' Equity for the Years Ended December 31, 1995 and 1994 and December 25, 1993 Notes to Consolidated Financial Statements 42 BROWN & SHARPE MANUFACTURING COMPANY Financial Statement Schedule Schedule II--Valuation and Qualifying Accounts Statements and Schedules Omitted Individual financial statements of the Registrant's subsidiaries are omitted because the Registrant is primarily an operating Company and all subsidiaries included in the consolidated financial statements are wholly-owned subsidiaries. Schedules other than those listed above are omitted because they are not required, are not applicable, or the information is included in the financial statements. Exhibits Exhibits have been filed separately with the Securities and Exchange Commission in connection with this Annual Report on Form 10-K or have been incorporated into the report by reference. A list briefly describing such Exhibits has been enclosed in this Annual Report. Reports on Form 8-K On April 4, 1995, Brown & Sharpe filed a Current Report on Form 8-K under Item 4 reporting the March 30, 1995 appointment of Ernst & Young LLP as the Company's independent auditors. 43 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Brown & Sharpe Manufacturing Company (Registrant) /s/ Charles A. Junkunc Date: March 26, 1996 By: _________________________________ CHARLES A. JUNKUNCVICE PRESIDENT AND CHIEF FINANCIAL OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE /s/ Henry D. Sharpe, Jr. Chairman of the March 26, 1996 - ------------------------------------- Board and Director HENRY D. SHARPE, JR. /s/ Frank T. Curtin President, Chief March 26, 1996 - ------------------------------------- Executive Officer FRANK T. CURTIN (Principal Executive Officer) and Director /s/ Paul R. Tregurtha Director March 26, 1996 - ------------------------------------- PAUL R. TREGURTHA /s/ Henry D. Sharpe, III Director March 26, 1996 - ------------------------------------- HENRY D. SHARPE, III /s/ Vincenzo Cannatelli Director March 26, 1996 - ------------------------------------- VINCENZO CANNATELLI /s/ Alfred J. Corso Controller March 26, 1996 - ------------------------------------- (Principal ALFRED J. CORSO Accounting Officer) 44 SIGNATURE TITLE DATE /s/ Howard K. Fuguet Director March 26, 1996 - ------------------------------------- HOWARD K. FUGUET /s/ John M. Nelson Director March 26, 1996 - ------------------------------------- JOHN M. NELSON /s/ Russell A. Boss Director March 26, 1996 - ------------------------------------- RUSSELL A. BOSS /s/ Enrico Albareto Director March 26, 1996 - ------------------------------------- ENRICO ALBARETO /s/ Alberto de Benedictis Director March 26, 1996 - ------------------------------------- ALBERTO DE BENEDICTIS /s/ Charles A. Junkunc Vice President and March 26, 1996 - ------------------------------------- Chief Financial CHARLES A. JUNKUNC Officer (Principal Financial Officer) 45 DIRECTORS Enrico Albareto, Chief Executive Officer, Elsag Bailey, Division of Finmeccanica S.p.A. Russell A. Boss, Director and President & Chief Executive Officer, A. T. Cross Company Vincenzo Cannatelli, Managing Director and Chief Executive Officer, Elsag Bailey Process Automation N.V. Alberto de Benedictis, Senior Vice President, Corporate Development, Finmeccanica S.p.A. Howard K. Fuguet, Partner, in the law firm of Ropes & Gray John M. Nelson, Chairman & Chief Executive Officer, Wyman-Gordon Company Henry D. Sharpe, Jr., Chairman of the Board, Brown & Sharpe Manufacturing Company Henry D. Sharpe, III, Co-founder & Technical Director, Design Lab, Inc. Frank T. Curtin, President & Chief Executive Officer, Brown & Sharpe Manufacturing Company Paul R. Tregurtha, Chairman of the Board and Chief Executive Officer, Mormac Marine Group, Inc. OFFICERS Henry D. Sharpe, Jr., Chairman of the Board Frank T. Curtin, President & Chief Executive Officer Charles A. Junkunc, Vice President & Chief Financial Officer Antonio Aparicio, Vice President & General Manager--Precision Measuring Instruments Dr. John Cooke, Vice President & General Manager--Custom Metrology Richard F. Paolino, Vice President & General Manager--Measuring Systems, Commercial Operations Richard D. Batting, Vice President & General Manager--Measuring Systems U.S.A. Andrew Barclay, Vice President Karl J. Lenz, Vice President John L. Eppich, Treasurer James W. Hayes, III, Secretary & Corporate Counsel Alfred J. Corso, Controller INVESTOR INFORMATION ANNUAL MEETING: The Annual Meeting of Stockholders will be held May 2, 1996 at 10:00 a.m. at the Corporate Offices. CORPORATE OFFICES: Precision Park, 200 Frenchtown Road, North Kingstown, RI 02852; Telephone (401) 886-2000. FORM 10-K REPORT: A copy of the Company's Annual Report as filed with the Securities and Exchange Commission is available upon request to the Secretary. STOCK LISTING: New York Stock Exchange; Symbol BNS TRUSTEE AND REGISTRAR FOR THE 9 1/4% CONVERTIBLE SUBORDINATED DEBENTURES: First Trust New York, 100 Wall Street, Suite 1600, New York, NY 10015 TRANSFER AGENT AND REGISTRAR COMMON STOCK: Bank of Boston, c/o Boston EquiServe, L.P., Mail-Stop 45-02-64, P.O. Box 644, Boston, MA 06114 46 BROWN & SHARPE MANUFACTURING COMPANY SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
FOREIGN BALANCE AT CHARGED TO CURRENCY BALANCE AT BEGINNING COSTS AND DEDUCTIONS TRANSLATION END OF YEAR ENDED OF PERIOD EXPENSES (2) (1) PERIOD - ---------- ---------- ---------- ---------- ----------- ---------- DECEMBER 31, 1995 Allowance for doubtful accounts............... $3,103 $2,124 $2,330 $133 $3,030 DECEMBER 31, 1994 Allowance for doubtful accounts............... $1,320 $2,833 $1,117 $ 67 $3,103 DECEMBER 25, 1993 Allowance for doubtful accounts............... $1,452 $ 264 $ 358 $(38) $1,320
- -------- (1) Adjustment resulting from translating allowance for doubtful accounts of foreign subsidiaries at year-end exchange rates. (2) Write-offs of uncollectible accounts. 47
NUMBER EXHIBIT INDEX ------ ------------- 3.1 Joint Agreement of Merger between Brown & Sharpe Manufacturing Company, incorporated in Rhode Island, and Brown & Sharpe Manufacturing Company, the surviving corporation incorporated in Delaware, filed as the only Exhibit to Form 8-K for the month of January, 1969, and such is hereby incorporated by reference. 3.2 Amendment to Certificate of Incorporation, dated April 27, 1979, filed as Exhibit 13 to Form 10-K for the period ending December 29, 1979, and such is hereby incorporated by reference. 3.3 Amendment to Certificate of Incorporation, Dated April 25, 1980, filed as Exhibit 3.1 to Form 10-Q for the period ending June 28, 1980, and such is hereby incorporated by reference. 3.4 Amendment to Certificate of Incorporation dated April 24, 1987. Exhibit 3.7 was filed as Exhibit 10.4 to Form 10-Q for the period ended June 27, 1987, and such is hereby incorporated by reference. 3.5 Amendment to Certificate of Incorporation dated May 6, 1988 filed as Exhibit 1 to Current Report on Form 8-K filed May 9, 1988 and such is hereby incorporated by reference. 3.6 Certificate of Designation filed as Exhibit A to Exhibit 5 of Amendment on Form 8 filed on March 6, 1989, and such is hereby incorporated by reference. 3.7 Amendment to Certificate of Incorporation dated May 2, 1989. Exhibit 3.7 was filed as Exhibit 3.7 to the Form 10-K for the year ended December 30, 1989 and such is hereby incorporated by reference. 3.8 By-laws of Brown & Sharpe Manufacturing Company, as amended through July 29, 1994; previously filed as Exhibit 3.1 to the Form 10-Q for the quarter ended July 2, 1994 and such is hereby incorporated by reference. 3.9 Amendments to By-laws of Brown & Sharpe Manufacturing Company, as of September 28, 1994; previously filed as Exhibit 3 to the Form 10-Q for the quarter ended October 1, 1994 and such is hereby incorporated by reference. 4.1 Indenture dated October 1, 1980 (including form of debenture) between the Company and Morgan Guaranty Trust Company of New York as Trustee relating to 9 1/4% convertible subordinated debentures due December 15, 2005, filed as Exhibit 2 to Form 8-A dated October 8, 1980 and such is hereby incorporated by reference. The Registrant hereby agrees to furnish to the Commission upon request copies of any long-term debt instruments not filed herewith because the securities authorized under any such instrument do not exceed ten percent of total assets of the Registrant and its Consolidated Subsidiaries. +10.1 (Intentionally omitted) +10.2 Amended 1973 Stock Option Plan, as amended through March 9, 1988. Exhibit 10.2 was filed as Exhibit 10.2 to the Form 10-K for the year ended December 31, 1988, and is hereby incorporated herein by reference. +10.3 Amendment dated December 29, 1990 to the Brown & Sharpe Amended 1973 Stock Option Plan. Exhibit 10.3 was filed as Exhibit 10.3 to the Form 10-K for the year ended December 29, 1990 and such is herein incorporated by reference. +10.4 Amendment No. 4 of the Restated Brown & Sharpe Employee Stock Ownership and Profit Participation Plan and Trust Agreement, as amended through December 21, 1990. Exhibit 10.4 was filed as Exhibit 10.4 to the Form 10-K for the year ended December 29, 1990; and is hereby incorporated herein by reference. 10.5 (Intentionally omitted) 10.6 (Intentionally omitted) +10.7 Deferred Stock Equivalent Unit Contract dated December 31, 1982 between Brown & Sharpe Manufacturing Company and Donald A. Gaudion. Exhibit 10.7 was filed as Exhibit 10.24 to Form 10-K for the period ended December 25, 1982, and such is hereby incorporated by reference.
48
NUMBER EXHIBIT INDEX ------ ------------- +10.8 (Intentionally omitted) +10.9 The Brown & Sharpe Savings and Retirement Plan for Management Employees dated October 7, 1987. 10.10 The Brown & Sharpe Savings and Retirement Plan dated October 7, 1987. +10.11 Amendment and Restatement of the Brown & Sharpe Employee Stock Ownership and Profit Participation Plan and Trust Agreement dated October 7, 1987. Exhibits 10.9 through 10.11 were filed as Exhibits 10.2 through 10.4 respectively, to Form 10-Q for the period ended September 26, 1987 and such are hereby incorporated by reference. 10.12 Preferred Stock Rights Agreement dated as of March 9, 1988, between the Company and The First National Bank of Boston, as Rights Agent. Exhibit 10.12 was filed as Exhibits 1-4 to the Registration Statement on Form 8-A filed on April 28, 1988, and is hereby incorporated herein by reference. 10.13 Amendment No. 1, dated as of May 2, 1988, to Preferred Stock Rights Agreement. Exhibit 10.13 was filed as Exhibit 5 to Amendment No. 1 on Form 8, filed on March 6, 1989, to the Registration Statement on Form 8-A filed on April 28, 1988, and is hereby incorporated herein by reference. 10.14 Amendment No. 2, dated as of February 24, 1989, to Preferred Stock Rights Agreement. Exhibit 10.14 was filed as Exhibit 6 to Amendment No. 1 on Form 8, filed on March 6, 1989, to the Registration Statement on Form 8-A filed on April 28, 1988, and is hereby incorporated herein by reference. +10.15 Amendment dated February 23, 1989 to The Brown & Sharpe Savings and Retirement Plan for Management Employees. +10.16 Amendment No. 2, dated October 19, 1988, to The Brown & Sharpe Savings and Retirement Plan for Management Employees. +10.17 Amendment No. 3, dated February 23, 1989, to The Brown & Sharpe Savings and Retirement Plan for Management Employees. 10.18 Amendment dated February 23, 1989 to The Brown & Sharpe Savings and Retirement Plan. 10.19 Amendment No. 2, dated October 19, 1988, to The Brown & Sharpe Savings and Retirement Plan. 10.20 Amendment No. 3, dated February 23, 1989, to The Brown & Sharpe Savings and Retirement Plan. +10.21 Amendment dated February 23, 1989, to the Restated Brown & Sharpe Employee Stock Ownership and Profit Participation Plan and Trust Agreement. +10.22 Amendment No. 2, dated October 19, 1988 to the Restated Brown & Sharpe Employee Stock Ownership and Profit Participation Plan and Trust Agreement. +10.23 Amendment No. 3, dated February 23, 1989 to the Restated Brown & Sharpe Employee Stock Ownership and Profit Participation Plan and Trust Agreement. Exhibits 10.15 through 10.23 were filed as Exhibits 10.19 through 10.27, respectively, to the Form 10-K for the year ended December 31, 1988, and are hereby incorporated herein by reference. +10.24 Amended 1989 Equity Incentive Plan as amended through February 21, 1992. Exhibit 10.24 was filed as Exhibit 10.24 to the Form 10-K for the year ended December 28, 1991 and such is hereby incorporated by reference. +10.25 Deferred Stock Equivalent Unit Contract dated September 3, 1987 between Brown & Sharpe Manufacturing Company and Paul R. Tregurtha. Exhibit 10.25 was filed as Exhibit 10.24 to the Form 10-K for the year ended December 30, 1989 and such is herein incorporated by reference. +10.26 Form of amendment dated April 30, 1991 to Deferred Stock Equivalent Unit Contract dated September 3, 1987 between Brown & Sharpe Manufacturing Company and Paul R. Tregurtha. Exhibit 10.26 was filed as Exhibit 10.26 to the Form 10-K for the year ended December 28, 1991 and such is hereby incorporated by reference.
49
NUMBER EXHIBIT INDEX ------ ------------- +10.27 Deferred Stock Equivalent Unit Contract dated November 30, 1989 between Brown & Sharpe Manufacturing Company and Herbert A. Beyer. Exhibit 10.27 was filed as Exhibit 10.25 to the Form 10-K for the year ended December 30, 1989 and such is hereby incorporated by reference. +10.28 Form of amendment dated April 30, 1991 to Deferred Stock Equivalent Unit Contract Dated November 30, 1989 between Brown & Sharpe Manufacturing Company and Herbert A. Beyer. Exhibit 10.28 was filed as Exhibit 10.28 to the Form 10-K for the year ended December 28, 1991 and such is hereby incorporated by reference. +10.29 Amendment No. 4, dated October 20, 1989, to Brown & Sharpe Savings and Retirement Plan for Management Employees. Exhibit 10.29 was filed as Exhibit 10.26 to the Form 10-K for the year ended December 30, 1989 and such is hereby incorporated by reference. 10.30 Amendment No. 4, dated October 30, 1989, to Brown & Sharpe Savings and Retirement Plan. Exhibit 10.30 was filed as Exhibit 10.27 to the Form 10-K for the year ended December 30, 1989 and such is hereby incorporated by reference. 10.31 Amendment No. 5, dated September 7, 1990, of the Brown & Sharpe Savings and Retirement Plan. Exhibit 10.31 was filed as Exhibit 10.30 to the Form 10-K for the year ended December 29, 1990 and such is hereby incorporated by reference. +10.32 Amendment No. 5, dated September 7, 1990, of the Brown & Sharpe Savings and Retirement Plan for Management Employees. Exhibit 10.32 was filed as Exhibit 10.31 to the Form 10-K for the year ended December 29, 1990 and such is hereby incorporated by reference. 10.33 The acquisition agreement pertaining to the acquisition of Wild Leitz Messtechnik GmbH and The Marketing and Sales Assets of the IMT Division of LEICA plc by Brown & Sharpe Manufacturing Company, dated June 29, 1990, was filed as Exhibit 10.1 to Form 10-Q for the period ended June 30, 1990 and is hereby incorporated herein by reference. +10.34 (Intentionally omitted) +10.35 (Intentionally omitted) +10.36 Employment/severance agreement dated March 14, 1988 between Brown & Sharpe Manufacturing Company and Richard F. Paolino. +10.37 (Intentionally omitted) Exhibits 10.34 through 10.37 were filed as Exhibits 10.34 through 10.37, respectively, to the Form 10-K for the year ended December 28, 1991, and are hereby incorporated by reference. +10.38 The sales agreement pertaining to the sale of GageTalker Corporation to P. Eric Berg by Brown & Sharpe Manufacturing Company dated January, 1992. Exhibit 10.38 was filed as Exhibit 10.38 to the Form 10-K for the year ended December 28, 1991 and is hereby incorporated by reference. +10.39 (Intentionally omitted) +10.40 Amendment No. 5 of the Restated Brown & Sharpe Employee Stock Ownership and Profit Participation Plan and Trust Agreement, as amended through March 23, 1991. +10.41 Employment/Severance Agreement dated April 23, 1992 between Brown & Sharpe Manufacturing Company and Charles A. Junkunc. +10.42 Amendment dated July 24, 1992 to Employment/Severance Agreement dated April 23, 1992 between Brown & Sharpe Manufacturing Company and Charles A. Junkunc. +10.43 Amendment dated November 11, 1992 to 1989 Equity Incentive Plan as amended through November 6, 1992. Exhibits 10.38 through 10.43 were filed as Exhibits 10.38 through 10.43, respectively, to the Form 10-K for the year ended December 26, 1992, and are hereby incorporated by reference.
50
NUMBER EXHIBIT INDEX ------ ------------- 10.44 The Share Purchase and Transfer agreement dated March 24, 1994 by and between Diehl GmbH & Co. and Brown & Sharpe Manufacturing Company was filed as Exhibit (c) to Form 8-K filed as of May 13, 1994, and is hereby incorporated by reference. 10.45 The Acquisition Agreement pertaining to the acquisition of DEA dated as of June 10, 1994 between Brown & Sharpe Manufacturing Company and Finmeccanica S.p.A. 10.46 The Form of Shareholders Agreement to be entered into between Brown & Sharpe Manufacturing Company and Finmeccanica, S.p.A. 10.47 Amendment No. 3, dated June 16, 1994, to Rights Agreement, dated March 9, 1988 between Brown & Sharpe Manufacturing Company and the First National Bank of Boston, as Rights Agent. Exhibits 10.45 through 10.47 were filed as Exhibits 1 through 3, respectively, to the Form 8-K filed as of June 24, 1994, and are hereby incorporated by reference. 10.48 Definitive acquisition Agreement providing for the combination of the DEA metrology business of Finmeccanica (the "DEA Group") with the Brown & Sharpe Measuring Systems Division dated as of June 10, 1994 between Brown & Sharpe Manufacturing Company and Finmeccanica S.p.A., was filed as Exhibit 1 to Form 8-K dated June 24, 1994, and is hereby incorporated by reference. 10.49 Amendment No. 1 dated July 31, 1994, to Acquisition Agreement, amending certain debt provisions of the agreement was filed as Exhibit 10.1.1 to Form 10-Q/A for the quarter ended July 2, 1994 and is hereby incorporated by reference. 10.50 Letter Agreement of Henry D. Sharpe, Jr. dated September 28, 1994 entered into pursuant to the DEA Acquisition Agreement (was filed as Exhibit No. 3 to Report on Form 8-K as of September 28, 1994), filed October 13, 1994 is hereby incorporated by reference. 10.51 Amendment No. 6, dated November 10, 1994, to Brown & Sharpe Savings and Retirement Plan for Management Employees. 10.52 Amendment No. 6, dated November 10, 1994, to Brown & Sharpe Savings and Retirement Plan. 10.53 Amended Profit Incentive Plan, as amended through February 14, 1994. 10.54 Restated Supplemental Executive Retirement Plan dated January 23, 1995, filed as Exhibit 10.54 to Form 10-Q for the quarter ended March 31, 1995, and is hereby incorporated by reference. 10.55 Amendment to the Equity Incentive Plan as of February 15, 1995, filed as Exhibit 10.55 to Form 10-Q for the quarter ended March 31, 1995, and is hereby incorporated by reference. 10.56 Amendment No. 1 dated May 31, 1995 to the Brown & Sharpe Savings and Retirement Plan for Management Employees. (1994 Restatement) 10.57 Amendment No. 2 dated May 31, 1995 to the Brown & Sharpe Savings and Retirement Plan for Management Employees. (1994 Restatement) 10.58 Amendment No. 1 dated May 31, 1995 to the Brown & Sharpe Savings and Retirement Plan. (1994 Restatement) 10.59 Severance termination agreement for Fred Stuber dated May 3, 1995. 10.60 Employment Agreement with Frank T. Curtin dated May 17, 1995. Exhibits 10.56 through 10.60 were filed as Exhibits 10.56 through 10.60, respectively, to the Form 10-Q for the quarter ended June 30, 1995, and are hereby incorporated by reference. 10.61 Indemnity Agreement with Frank T. Curtin dated May 3, 1995. 10.62 Indemnity Agreement with Alfred J. Corso dated May 3, 1995. 10.63 Indemnity Agreement with Enrico Albareto dated October 28, 1994. 10.64 Indemnity Agreement with Alberto de Benedictis dated October 28, 1994.
51
NUMBER EXHIBIT INDEX ------ ------------- 10.65 Indemnity Agreement with Vincenzo Cannatelli dated October 28, 1994. Exhibits 10.61 through 10.65 were filed as Exhibits 10.61 through 10.65, respectively, to the Form 10-Q for the quarter ended September 30, 1995, and are hereby incorporated by reference. *10.66 Indemnity Agreement with Robert D. Batting dated October 5, 1995. *10.67 Letter Agreement with Finmeccanica dated December 18, 1995 concerning Purchase Price Adjustment *10.68 The Brown & Sharpe Key Employee Long-Term Deferred Cash Incentive Plans dated February 23, 1996 effective January 1, 1995 *11. Computation of Per Share Data for the Three Years Ended December 31, 1995. 18. Letter of Coopers & Lybrand, independent accountants, regarding preferability of change in accounting principles to conform worldwide use of percent-of-completion basis accounting for long-term large machinery construction contracts of the European operations, filed as Exhibit 18 to Form 10-Q for the quarter ended April 2, 1994, and is hereby incorporated by reference. *22. Subsidiaries of the Registrant. *24. Consent of Independent Auditors--Ernst & Young LLP. *24. Consent of Independent Auditors--Coopers & Lybrand L.L.P.
- -------- *These current year Exhibits are located in Exhibit number sequence. +This identifies management contracts or compensatory plans. 52 EX-10.66 2 INDEMNITY AGREEMENT EXHIBIT 10.66 INDEMNITY AGREEMENT ------------------- THIS AGREEMENT, made and entered into on and as of this 5th day of October, 1995, (the "Agreement"), is by and between Brown & Sharpe Manufacturing Company, a Delaware corporation, (the "Company," which term shall include any one or more of its subsidiaries where appropriate), and Robert D. Batting (the "Indemnitee"): RECITALS WHEREAS, highly competent persons are becoming more reluctant to serve publicly-held corporations as directors or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation; and, WHEREAS, the current impracticability of obtaining adequate insurance and the uncertainties relating to indemnification have increased the difficulty of attracting and retaining such persons; and, WHEREAS, the Board of Directors of the Company (the "Board") has determined that the difficulty in attracting and retaining such persons is detrimental to the best interests of the Company's shareholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future; and, WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified; and, WHEREAS, Indemnitee is willing to serve, continue to serve and/or to take on additional service for or on behalf of the Company on the condition that he be so indemnified; NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows: 1. Services by Indemnitee. Indemnitee agrees to serve or continue to ---------------------- serve as an officer of the Company. This Agreement shall not impose any obligation on the Indemnitee or the Company to continue the Indemnitee's position with the Company beyond any period otherwise applicable. 2. General. The Company shall indemnify and shall advance Expenses ------- (as hereinafter defined) to Indemnitee as provided in this Agreement and to the fullest extent permitted by law. 3. Proceedings Other Than Proceedings by or in the Right of the ------------------------------------------------------------ Company. Indemnitee shall be entitled to the rights of indemnification ------- provided in this Section 3 if, by reason of his Corporate Status, (as hereinafter defined), he is, or is threatened to be made, a party to any threatened, pending, or completed Proceeding (as hereinafter defined), other than a Proceeding by or in the right of the Company. Pursuant to this Section 3, Indemnitee shall be indemnified against expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. 4. Proceedings by or in the Right of the Company. Indemnitee shall --------------------------------------------- be entitled to the rights of indemnification provided in this Section 4, if, by reason of his Corporate Status, he is, or is threatened to be made, a party to any threatened, pending or completed Proceeding brought by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section, Indemnitee shall be indemnified against Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. Notwithstanding the foregoing, no indemnification against such Expenses shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company if such indemnification is not permitted by Delaware law; provided, however, that indemnification against Expenses shall nevertheless be made by the Company in such event to the extent that the Court of Chancery of the State of Delaware, or the court in which such Proceeding shall have been brought or is pending, shall determine. 5. Indemnification for Expenses of a Party who is Wholly or Partly --------------------------------------------------------------- Successful. Notwithstanding any other provision of this Agreement, to the ---------- extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal or withdrawal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. 6. Advance of Expenses. The Company shall advance all reasonable ------------------- Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding within twenty days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. 7. Procedure for Determination of Entitlement to Indemnification. ------------------------------------------------------------- (a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to Section 7(a) hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case: (i) if a Change in Control (as hereinafter defined) shall have occurred, by Independent Counsel (as hereinafter defined) in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee (unless Indemnitee shall request that such determination be made by the Board of Directors or the shareholders, in which case the determination shall be made in the manner provided below in clauses (ii) or (iii); (ii) if a Change of Control shall not have occurred, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), or (B) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee or (C) by the shareholders of the Company; or (iii) as provided in Section 8(b) of this Agreement; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs of expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating shall be borne by the Company (irrespective of the determination), and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (c) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 7(b) of this Agreement, the Independent Counsel shall be selected as provided in this Section 7(c). If a Change of Control shall not have occurred, the Independent Counsel shall be selected by the Board of Directors, and the Company shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change of Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may within 7 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection. Such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section 13 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is made, the Independent Counsel so selected may not serve as Independent Counsel unless and until a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 7(a) hereof, no Independent Counsel shall have been selected or if selected, shall have been objected to, in accordance with this Section 7(c), either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the Court or by such other person as the Court shall designate, and the person with respect to whom an objection is favorably resolved or the person so appointed shall act as Independent Counsel under Section 7(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 7(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 7(c), regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 9(a)(iii) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). 8. Presumptions and Effect of Certain Proceedings. ---------------------------------------------- (a) If a Change of Control shall have occurred in making a determination with respect to entitlement to indemnification hereunder, the person, persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 7(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. (b) If the person, persons or entity empowered or selected under Section 7 of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made such determination within 60 days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made, and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 60-day period may be extended for a reasonable time, not to exceed an additional 30 days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating thereto; and provided, further, that the foregoing provisions of this Section 8(b) shall not apply (i) if the determination of entitlement to indemnification is to be made by the shareholders pursuant to Section 7(b) of this Agreement and if (A) within 15 days after receipt by the Company of the request for such determination the Board of Directors has resolved to submit such determination to the shareholders for their consideration at an annual meeting thereof to be held within 75 days after such receipt and such determination is made thereat, (B) a special meeting of shareholders is called within 15 days after such receipt for the purpose of making such determination, such meeting is held for such purpose within 60 days after having been so called and such determination is made thereat, or (ii) if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 7(b) of this Agreement. (c) The termination of any Proceeding or of any claim, issue or matter therein by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise ---- ---------- expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. 9. Remedies of Indemnitee. ---------------------- (a) In the event that (i) a determination is made pursuant to Section 7 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 6 of this Agreement, (iii) the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 7(b) of this Agreement and such determination shall not have been made and delivered in a written opinion within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 5 of this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 8 of this Agreement, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 9(a). The Company shall not oppose Indemnitee's right to seek any such adjudication or award in arbitration. (b) In the event that a determination shall have been made pursuant to Section 7 of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 9 shall be conducted in all respects as a de novo trial, or -- ---- arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. If a Change of Control shall have occurred in any judicial proceeding or arbitration commenced pursuant to this Section 9, the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. (c) If a determination shall have been made or deemed to have been made pursuant to Section 7 or 8 of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 9, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. (d) The Company shall be precluded from asserting in any judicial proceedings or arbitration commenced pursuant to this Section 9 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. (e) In the event that Indemnitee, pursuant to this Section 9, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expenses (of the types described in the definition of Expenses in Section 13 of this Agreement) actually and reasonably incurred by him in such judicial adjudication or arbitration, but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated. 10. Security. To the extent requested by the Indemnitee and approved -------- by the Board, the Company may at any time and from time to time provide security to the Indemnitee for the Company's obligations hereunder through an irrevocable bank line of credit, funded trust, or other collateral. Any such security, once provided to the Indemnitee, may not be revoked or released without the prior written consent of Indemnitee. 11. Non-Exclusivity; Duration of Agreement, Insurance; Subrogation. -------------------------------------------------------------- (a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Company's certificate of incorporation or by-laws, any other agreement, a vote of shareholders or a resolution of directors, or otherwise. This Agreement shall continue until and terminate upon the later of: (a) 10 years after the date that Indemnitee shall have ceased to serve as a director or officer of the Company or fiduciary of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise on which Indemnitee served at the request of the Company; or (b) the final termination of all pending Proceedings in respect of which Indemnitee is granted rights of indemnification or advancement of expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 9 of this Agreement relating thereto. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors and officers of the Company or fiduciaries of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director or officer under such policy or policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee who shall execute all papers required and take all action necessary to secure such rights including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. 12. Severability. If any provision or provisions of this Agreement ------------ shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 13. Exception to Right of Indemnification or Advancement of Expenses. ---------------------------------------------------------------- Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification or advancement of Expenses under this Agreement with respect to any Proceeding, or any claim therein, brought or made by him against the Company. 14. Definitions. For purposes of this Agreement: ----------- (a) "Change in Control" means a change in control of the Company of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934 (the "Act"), whether or not the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (ii) the Company is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. (b) "Corporate Status" describes the status of a person who is or was or has agreed to become a director of the Company, or is or was an officer or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Company. (c) "Disinterested Directors" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (d) "Expenses" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend or investigating a Proceeding. (e) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party, or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. (f) "Proceeding" includes any action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative, arising on or after the date of this Agreement (and regardless of when the Indemnitee's act or failure to act occurred), except one initiated by an Indemnitee pursuant to Section 9 of this Agreement to enforce his rights under this Agreement. 15. Headings. The headings of the paragraphs of this Agreement are -------- inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. 16. Modification and Waiver. This Agreement may be amended from time ----------------------- to time to reflect changes in Delaware law or for other reasons. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 17. Notice by Indemnitee. Indemnitee agrees promptly to notify the -------------------- Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder, provided, however, that the failure to give any such notice shall not disqualify the Indemnitee from indemnification hereunder. 18. Notices. All notices, requests, demands and other communications ------- hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to Indemnitee, to: Robert D. Batting 87 Meadow Road Orchard Park, NY 14127 (b) If to the Company, to: Secretary Brown & Sharpe Manufacturing Company Precision Park 200 Frenchtown Road North Kingstown, RI 02852-1700 or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be. 19. Governing Law. The parties agree that this Agreement shall be ------------- governed by and construed and enforced in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. Attest: Brown & Sharpe Manufacturing Company By: /s/ James W. Hayes, III By: /s/ Henry D. Sharpe, Jr. ----------------------- ------------------------ Secretary Henry D. Sharpe, Jr. Chairman of the Board Indemnitee /s/ Robert D. Batting --------------------- Robert D. Batting EX-10.67 3 LETTER AGREEMENT WITH FINMECCANICA EXHIBIT 10.67 December 18, 1995 Elsag Bailey Division of Finmeccanica S.p.A. Via G. Puccini 2 Genova 16154 Italy Att: Paolo Caron Re: Purchase Price Adjustment ------------------------- Dear Paolo: Reference is made to the Acquisition Agreement dated as of June 10, 1994 between Brown & Sharpe Manufacturing Company ("Brown & Sharpe") and Finmeccanica S.p.A. ("Finmeccanica") as amended to date (the "Acquisition Agreement"). Capitalized terms used herein not otherwise defined shall have the meanings set forth in the Acquisition Agreement. We write to you to confirm our agreement regarding the amount of the Purchase Price Adjustment provided under Section 1.4 of the Acquisition Agreement. Brown & Sharpe and Finmeccanica hereby agree to rescind all previous submissions made to the other under Section 1.4 of the Acquisition Agreement containing forms of any Pricing Financial Statements including any reports or certificates prepared or submitted by their respective accounts. Instead of proceeding under Section 1.4 of the Agreement with the review of the Pricing Balance Sheet by a third party accounting firm, this will confirm that a Purchase Price Adjustment shall be payable to Brown & Sharpe by Finmeccanica in the amount of Lire 2,100 million, provided that such Lire 2,100 million amount may be reduced as provided below if the Premises (as defined below) are vacated after June 30, 1996. The amount of the Purchase Price Adjustment shall not bear interest. Payment of such Purchase Price Adjustment shall be satisfied by Finmeccanica foregoing receipt of amounts otherwise required to be paid in the future to it by DEA S.p.A. as set forth in the paragraph immediately below. Finmeccanica agrees that the rent ("canone di locazione") payable by DEA S.p.A. ("DEA") with respect to Building No. 1 at Corso Torino 70, Moncalieri, Italy (the "Premises") under the Lease Agreement between DEA and Finmeccanica S.p.A. dated December 24, 1991 (the "Lease Agreement"), as adjusted for inflation pursuant to Article 3 of the Lease Agreement, in respect of the period commencing on July 1, 1996 and ending on December 31, 1997 shall be reduced by an amount equal to Lire 2,100 million (the "Rent Waiver Amount"), subject to the provision of the next sentence. In the event that DEA for any reason vacates the Premises after June 30, 1996, the Rent Waiver Amount shall be reduced by an amount equal to the portion of rent due (calculated on a daily basis) for the period from July 1, 1996 to the effective date the Premises are vacated. Finmeccanica hereby consents to DEA's terminating the lease at any time on or after June 30, 1996 without any obligation to make payments other than the payments required if DEA had continued to occupy the premises on and after June 30, 1996, which payments are then to be reduced as provided above in this letter agreement. The terms and provisions of the Acquisition, except as expressly amended hereby, and any agreements entered into at the Closing shall remain in full force and effect. Each party expressly reserves the right to claim for breach of any covenant, agreement, representation or warranty made by any party in the Acquisition Agreement other than under Section 1.4 thereof (except for a claim related to 1.4(b), which may continue to be made) and seek indemnification in accordance with the provisions of Section 8 of the Acquisition Agreement, except to the extent otherwise explicitly settled as provided in this letter. This letter agreement is made for the sole purpose of settling certain matters disputed by the parties. The execution of this letter does not constitute an admission of liability of any of the parties in respect of such matters, and shall not be asserted as an admission or as evidence of liability, except that each party shall be required to fulfill its obligations under this letter. This letter contains the entire understanding between Brown & Sharpe and Finmeccanica with respect to those disputes between them resolved herein. To confirm that the foregoing accurately and completely sets forth the terms of our agreement, please sign two copies of this letter and return one to the undersigned, whereupon this shall become a binding agreement between Brown & Sharpe and Finmeccanica and shall constitute an amendment of the Acquisition Agreement. Sincerely yours, BROWN & SHARPE MANUFACTURING COMPANY By: /s/ C. A. Junkunc -------------------------- C. A. Junkunc Vice President and Chief Financial Officer ACCEPTED: FINMECCANICA S.p.A. (through its Elsag Bailey Division) By: /s/ Paolo Caron ----------------------- Title: EX-10.68 4 THE BROWN AND SHARPE KEY EMPLOYEE EXHIBIT 10.68 Brown & Sharpe Manufacturing Company Key Employees' Long-Term Deferred Cash Incentive Plan ----------------------------------------------------- 1. Purpose The purpose of the Brown & Sharpe Long-Term Deferred Cash Incentive Plan (the "Plan") is to promote the long term success of Brown & Sharpe (the "Company") and its shareholders by providing long-term incentive compensation to key employees of the Company. 2. Term The Plan is effective as of January 1, 1995 and will remain in effect until terminated by the Company's Board of Directors (the "Board"). 3. Plan Administration The Plan is administered by the Salary Committee of the Board (the "Committee"). The Committee has full and exclusive power to interpret the Plan in its discretion and to adopt such rules, regulations, and guidelines for carrying out the Plan as it may deem necessary. 4. Eligibility The Committee shall designate those key employees of the Company or its subsidiaries who will participate in the Plan ("Participants") with respect to such fiscal year's performance. Participants for any fiscal year may include additional employees and may not include employees who had been Participants in prior fiscal years. Employment by a subsidiary shall be deemed to be employment by the Company for purposes of this Plan. 5. Bonus Pool; Award Credits; Accounts A. With respect to each fiscal year, commencing with the 1995 fiscal year, a bonus pool (the "Bonus Pool") shall be established in an amount equal to 6% of the Company's adjusted pre-tax profit (as defined on Schedule A) for such fiscal year. B. Each Participant employed on December 31 of such year shall become, subject to D below and Section 10, entitled to an award credit (an "Award Credit") equal to (i) the amount of the Bonus Pool for such year multiplied by (ii) a fraction, the numerator of which is the Participant's base salary actually paid in respect of such year and the denominator of which is the aggregate base salaries actually paid in respect of such year of all Participants employed on December 31 of such year. In the case of a participant whose salary is paid in non-U.S. currency, "base salary" shall be determined in U.S. dollars at average rates (as defined on Schedule A) during the year. B. Each Award Credit shall, as soon as practicable after it is determined and effective as of the January 1 immediately following the fiscal year to which the Award Credit relates, be credited to a memorandum account (an "Account" maintained under the Plan to reflect the Company's unfunded deferred compensation obligation to the Participant under the terms of the Plan. The Account shall, until paid, be credited with interest at a rate equal to the 12 month average of the Merrill Lynch Government Master Treasury Bond Index (Ten Plus Years) commencing with the January 1 referred to above. D. (i) Subject to subparagraph (ii) below, a Participant shall become vested in that portion of his or her Account attributable to an Award Credit (and any interest thereon) upon the earliest to occur of (a) the date of the Participant's death or disability (as determined by the Committee) while an employee of the Company, (b) the date of a participant's retirement from the Company at or after age 65, or (c) the third anniversary of the close of the fiscal year to which the Award Credit relates, provided the Participant has been continuously employed by the Company through and including such anniversary date. (ii) A Participant shall forfeit his or her Account (vested and unvested) if he or she is terminated for cause at any time. "Termination for cause" shall mean termination on account of intentional commission of theft, embezzlement, or other serious and substantial crimes against the Company, intentional wrongful engagement of competitive activity with respect to the Company, or intentional wrongful commission of material acts in clear and direct contravention of instructions from the Board or the Chief Executive Officer. (iii) Notwithstanding clause (i), but subject to the over-riding provisions of clause (ii) above, in the event of a change in control of the Company (as defined on Schedule B), all Participants employed by the Company immediately prior to such change in control shall have a fully vested and nonforfeitable interest in their Accounts as of the date immediately preceding the change in control. E. Except as otherwise provided by the Committee, in the event that a Participant forfeits all or a portion of his or her account, the amount of such forfeiture shall be added to the Bonus Pool for the fiscal year that includes the date of forfeiture. 6. Payment of Accounts Unless the Participant irrevocably elects at least one calendar year prior to his or her termination of employment to defer distribution of his or her account, distribution of such Account shall be made as follows: 1/3 of the Account shall be paid within 20 days following a Participant's termination of employment, 1/3 of the Account shall be paid on the first anniversary of such termination of employment, and 1/3 of the Account shall be paid on the second anniversary of such termination of employment. Any amounts that are the subject of a deferred distribution agreement shall be paid as agreed to by the Participant and the Company at the time of deferral. In the event of a Participant's death or disability (as determined by the Committee) during the distribution period, the Committee may provide for immediate payment of the remaining balance in the Participant's Account. Payment shall be conditional on a Participant's compliance with the covenant not to compete described in Section 7 below. A Participant shall execute all documents as the Committee may deem appropriate or necessary, including without limitation such documents as may be appropriate to evidence the covenant not to compete, before any distributions will be made from his or her Account. Notwithstanding the foregoing, the Committee may defer payment of all or a portion of a Participant's Account beyond the scheduled payment dates if in the judgment of the Committee such deferral is necessary to avoid disallowance of a deduction under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Amounts, if any, deferred pursuant to the preceding sentence shall be paid or commence to be paid not later than the date Code Section 162(m) would no longer limit the deductibility of such payment, as reasonably determined by the Committee. 7. Covenant Not to Compete The Participant agrees that until two years after the Participant's employment with the Company and its affiliates terminates, the Participant shall not, without the prior written consent of the Committee, directly or indirectly, whether as owner, partner, principal, investor, consultant, agent, employee, co-venturer, or otherwise compete with any business of the Company or any of its affiliates within the United States and any other country in which the Company and its affiliates are engaged in business at the date of termination of employment, or undertake any planning for any business competitive with the Company or any of its affiliates in the United States and such other countries. To the extent any portion of this Section 7 is determined by a court of competent jurisdiction to be invalid or unenforceable, this Section 7 shall be reformed so as to avoid such illegality and unenforceability and the resulting provisions shall be fully enforceable. 8. Assignment The Company's obligations under the Plan shall be binding upon its successors and assigns. Awards and rights to benefits under the Plan may not be assigned, alienated, sold or otherwise transferred by the Participant other than by will or the laws of descent and distribution. A Participant shall file with the Company the names of the beneficiaries to receive amounts, if any, remaining in his or her Account at the time of the Participant's death. 9. Withholding Taxes The Company will have the right to deduct withholding taxes from any payments made pursuant to the Plan, or make such other provisions as it deems necessary or appropriate to satisfy its obligations for withholding federal, state or local income, employment, excise or other taxes of the United States or other applicable foreign jurisdiction (including without limitation satisfying withholding obligations from a participant's base salary) as a result of Plan awards or as a result of other payments or benefits, not under the Plan, to a Participant. 10. Amendment and Modification The Board may terminate the Plan at any time and may amend the Plan at any time and from time to time with or without retroactive effect, including without limitation amendments that change the form or timing of distributions or amendments that accelerate the vesting of all or a portion of a Participant's Account; provided, that no such amendment shall, without the consent of the affected Participant, reduce the balance (vested and unvested) of any Participant's Account below what it was immediately prior to the amendment. Without limiting the foregoing, the Committee shall have power to make such adjustments in the definition of adjusted pre-tax profit as it deems equitable to carry out the purposes of the Plan. Any decision of the Committee shall be final and binding on all parties. The Committee may also, in its discretion, alter the form or timing of, or otherwise modify the terms of, an Account distribution. If it determines such action to be necessary to preserve or reinstate the Plan's status as a "top hat" plan under Sections 201(a)(2), 301(a)(3), or 401(a)(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"), or to ensure effective tax deferral under the Plan, the Committee may at any time exclude any individual from participation in the Plan or may make such other changes in the deferral or distribution rules hereunder as are reasonably determined by the Committee to be necessary to accomplish such result or results. 11. No Contract of Employment By participating in the Plan, each Participant expressly acknowledges and agrees that (i) nothing in the Plan or in its operation, including deferrals hereunder, limits the right of the Company to terminate the employment of the Participant at any time, with or without cause, and that (ii) neither the Participant nor his nor her beneficiaries will claim lost compensation or associated tax benefits related to discontinuance of participation in the Plan as damages or as a measure of damages in connection with any termination of employment. 12. Plan to be Unfunded, Etc. The Plan is intended to be a "pension plan" (within the meaning of Section 3(2) of ERISA) that is unfunded for ERISA and tax purposes and that qualifies for the exemptions described in ERISA sections 201(a)(2), 301(a)(3), and 401(a)(1). The Committee shall be the "plan administrator" of the Plan and shall have discretion to construe its terms and determine each participant's eligibility for awards or distributions hereunder. If any person claims any benefit hereunder, the Committee shall make and communicate its decision with respect to the claim within 90 days from the date the claim was received. Where special circumstances require additional time for processing the claim, the ninety-day response period may be extended by the plan administrator to 180 days. If the Committee does not render a written determination prior to the expiration of such 90- day (or 180-day) period, the claim will be deemed denied. If a claim hereunder is denied, the claimant may, within 60 days of such denial, appeal the denial by written request for review delivered to the Board or its designate, which request may include a request to review pertinent documents and to submit issues and comments in writing. The Board or its designate shall render a decision on the appeal within 60 days (or, if special circumstances require an extension of time for processing, 120 days) after receipt of the request for review; but if no written decision is rendered within such period(s), the appeal will be deemed denied. Nothing in this Section or in Section 5 shall be construed as prohibiting the Company from establishing and maintaining a "rabbi trust" or similar trust or account in connection with the Plan, so long as the maintenance and funding of such a trust or account does not jeopardize the unfunded status of the Plan under ERISA or effective tax deferral under the Code. 13. Governing Law The Plan shall be construed under the laws of the State of Delaware. Schedule A "Adjusted Pretax Profit" shall mean the product of (i) Profit Before Tax for the Current Fiscal Year and (ii) the ratio of The Weighted Average Outstanding Shares (1995) to The Weighted Average Outstanding Shares for the Current Fiscal Year where: "Current Fiscal Year" means the fiscal year on which an Award Credit is based; "The Weighted Average Outstanding Shares" means the year's weighted average number of the Company's common shares including, without limitation, Class A common stock and Class B common stock determined by the definitions and methods specified in APB No. 15 and as reported in Exhibit 11 of the Company's 10-K for the Current Fiscal Year. "The Weighted Average Outstanding Shares (1995)" shall be 8,715,212 shares, as adjusted from time to time for all stock splits, stock dividends and similar transactions; "Profit Before Tax" means the Company's consolidated net profit before income taxes, computed taking into account all expenses and charges except (a) the Current Fiscal Year's expense for the Plan and (b) gains and losses that result from extraordinary transactions or events, mergers, consolidations, acquisitions and dispositions, or other extraordinary or unusual transactions or events, if it is determined by the Committee that an adjustment in respect of such transaction or event is appropriate to avoid distortion in the operation of the Plan; and "Average Rates" shall mean the average of the local currency conversion rates to U.S. dollars at the end of each month for which the Participant is employed and paid his base salary rate as published by the Company's Treasurer's Office per the Company's Accounting Procedure 3.1 dated July 1995. Schedule B "Change in Control" shall be deemed to have occurred if: (a) any "person" as such term is used in Sections 13(d) and 14(d) of the 1934 Act (other than (i) the Company; (ii) any subsidiary of the Company; (iii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or of any subsidiary of the Company; or (iv) any company owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of Stock of the Company), who is or becomes the "beneficial owner" (as defined in Section 13(d) of the 1934 Act), together with all Affiliates and Associates (as such terms are used in Rule 12b-2 of the General Rules and Regulations under the 1934 Act) of such person, directly or indirectly, or securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities; or (b) the shareholders of the Company approve a merger or consolidation of the Company with any other company, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 65% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (with the exception given and the method of determining "beneficial ownership" used in clause (a) of this definition) acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (c) during any period of two consecutive years (not including any period prior to the execution of the Plan), individuals who, at the beginning of such period, constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (b), or (d) of this definition) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved cease for any reason to constitute at least a majority thereof; or (d) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. EX-11 5 COMPUTATION OF PER SHARE DATA EXHIBIT 11 BROWN & SHARPE MANUFACTURING COMPANY ------------------------------------ STATEMENT REGARDING COMPUTATION OF PER SHARE DATA* ------------------------------------------------- (dollars in thousands, except per share data)
Dec. 31, Dec. 31, Dec. 25, 1995 1994 1993 -------- --------- --------- Primary Average shares outstanding 8,715 6,057 4,969 Net effect of dilutive stock options -- based on the treasury stock method using average market price 58 - - ------ -------- ------- Total 8,773 6,057 4,969 ====== ======== ======= Net income (loss) $1,926 $(14,335) $(2,416) ====== ======== ======= Per share amount $ .22 $ (2.37) $ (.49) ====== ======== ======= Fully Diluted Average shares outstanding 8,715 6,057 4,969 Net effect of dilutive stock options -- based on the treasury stock method using the year-end market price, if higher than average market price 143 - - Assumed conversion of 9-1/4% convertible subordinated debentures * * * ------ -------- ------- Total 8,858 6,057 4,969 ====== ======== ======= Net income (loss) $1,926 $(14,335) $(2,416) ====== ======== ======= Per share amount $ .22 $ (2.37) $ (.49) ====== ======== =======
* Conversion of the 9-1/4% convertible subordinated debentures is not assumed in the computation because its effect is anti-dilutive. EX-22 6 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 22 BROWN & SHARPE MANUFACTURING COMPANY ------------------------------------ SUBSIDIARIES OF THE REGISTRANT ------------------------------ Subsidiaries of the Registrant as of December 31, 1995 are as follows:
Percentage of Jurisdiction Voting Power of Owned by the Name of Subsidiary Incorporation Registrant - ----------------------------------------------- -------------- -------------- Borel & Dunner, Inc. Michigan 100% Technicomp Inc. Delaware 100% Roch - Brown & Sharpe S.A. France 100% Mauser Prazisions Messmittel GmbH Germany 100% DEA - Brown & Sharpe S.p.A. ** and its subsidiaries: Italy 100% DEA - Brown & Sharpe S.A. Spain 100% DEA - Brown & Sharpe S.A. France 100% DEA - Brown & Sharpe KK Japan 100% Brown & Sharpe International Capital Corporation and its subsidiaries: Delaware 100% Leitz - Brown & Sharpe Messtechnik G.m.b.H. Germany 100% Tesa - Brown & Sharpe S.A. and its subsidiaries: Switzerland 100% P. Roch, S.a.R.L. Switzerland 100% Tesa - Brown & Sharpe S.A. France 100% Tesa - Brown & Sharpe KK Japan 100% Brown & Sharpe Group Ltd.* and its subsidiaries: United Kingdom 100% White Lodge Financial Limited United Kingdom 100% Brown & Sharpe Ltd. United Kingdom 100% Mercer - Brown & Sharpe Ltd. United Kingdom 100%
* Owned 71.3% by Brown & Sharpe International Capital Corporation and 28.7% by Tesa, S.A. ** Owned 85.0% by Brown & Sharpe Manufacturing Company and 15.0% by Brown & Sharpe International Capital Corporation. EX-24 7 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 24 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the registration statements (Form S-8 Nos. 2-33676, 2-56821, 2-60398, 2-77219, 2-77575, 2-83637, 2- 97935, 33-17831, 33-23601, 33-23603, 33-30927, and 33-54496) pertaining to employee benefit plans of Brown & Sharpe Manufacturing Company of our report dated February 14,1996, with respect to the consolidated financial statements and schedule of Brown & Sharpe Manufacturing Company included in the Annual Report (Form 10-K) for the year ended December 31, 1995. ERNST & YOUNG LLP Providence, Rhode Island March 22, 1996 EXHIBIT 24 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Brown & Sharpe Manufacturing Company on Form S-8 (File Nos. 2-33676, 2- 56821, 2-60398, 2-77219, 2-77575, 2-83637, 2-97935, 33-17831, 33-23601, 33- 23603, 33-30927, and 33-54496) of our report dated March 29, 1995, on our audits of the consolidated financial statements and financial statement schedule of Brown & Sharpe Manufacturing Company as of December 31, 1994 and December 25, 1993, and for the years then ended, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Boston, Massachusetts March 27, 1996 EX-27 8 FDS
5 1,000 12-MOS DEC-31-1995 DEC-31-1994 DEC-31-1995 6,262 0 116,609 (3,030) 88,558 217,157 140,070 87,183 295,400 129,588 13,000 0 0 8,719 77,138 295,400 320,899 320,899 221,729 221,729 87,553 0 9,129 2,623 697 1,926 0 0 0 1,926 0.22 0.22
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