-----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, I3GP5y2ALILNYumNCP2AuAeWffqlS45Ly76VpPDuYMmuUZtOCfppK1DjT3LhZuL+ kEkqsyByzWePtoNy882amw== 0000950109-98-002345.txt : 19980401 0000950109-98-002345.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950109-98-002345 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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-K405 SEC ACT: SEC FILE NUMBER: 001-05881 FILM NUMBER: 98581058 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-K405 1 FORM 10-K405 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 31, 1997 Commission file number 1-5881 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 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. [X] The aggregate market value (as calculated under the rules) of the voting common stock held by non-affiliates of the Registrant was approximately $136,000,000 as of March 13, 1998. There were 12,846,597 Shares of Class A Common Stock and 512,505 Shares of Class B Common Stock, each having a par value of $1.00 per share, outstanding as of March 13, 1998. 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 1, 1998 Annual Meeting incorporated by reference (to the extent specified) in Part III. Portions of the Annual Report for the year ended December 31, 1997 are incorporated by reference into Parts I and II. Page 1 BROWN & SHARPE MANUFACTURING COMPANY INDEX PART I Page ---- Item 1 Business................................................... 3 - 13 General......................................................... 3 Repositioning Initiatives....................................... 3 - 4 Business Strategy............................................... 4 - 5 Metrology Industry.............................................. 5 - 7 MS Group........................................................ 7 - 8 PMI Division.................................................... 8 CM Division..................................................... 8 Sales and Distribution.......................................... 9 Engineering and Product Development............................. 9 Foreign Operations.............................................. 10 Raw Materials and Sources of Supply............................. 10 Patents, Licenses, Trademarks, and Proprietary Information...... 10 Environmental Matters........................................... 10 - 11 Employees....................................................... 11 - 12 Competition..................................................... 12 Backlog......................................................... 12 - 13 Significant Customers........................................... 13 Working Capital................................................. 13 Segment Information............................................. 13 Item 2 Properties................................................. 13 - 14 Item 3 Legal Proceedings.......................................... 14 Item 4A Executive Officers of the Registrant....................... 15 - 16 PART II Item 5 Market for Registrant's Common Stock and Related Stockholder Matters.................................................... 16 Item 6 Selected Financial Data.................................... 16 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 16 Item 8 Financial Statements and Supplementary Data................ 16 Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure................................... 16 PART III Item 10 Directors and Executive Officers of the Registrant......... 17 Item 11 Management Remuneration and Transactions................... 17 Item 12 Security Ownership of Certain Beneficial Owners and Management............................................. 17 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................ 17 - 18 Signatures........................................................... 19 Directors............................................................ 20 Officers............................................................. 20 Investor Information................................................. 20 - 21 Financial Statement Schedules........................................ 22 Exhibit Index........................................................ 23 - 29 Page 2 PART I ------ ITEM 1 - BUSINESS - ----------------- General - ------- The Company, which was founded in 1833, is a leading designer, manufacturer and marketer of metrology products worldwide under numerous internationally recognized brand names. Metrology is the science of the physical measurement of objects using various precision instruments and equipment. The Company's high precision products measure physical dimensions of, and inspect and verify conformance to specifications of, components and products and are used in manufacturing, quality control and product development operations. The Company's product line ranges from hand tools and instruments to customized computer-controlled metrology systems which integrate hardware and software and are augmented by service, training and aftermarket support. The Company markets its metrology products and services in North America, Europe, Asia, South America and the Middle East. Important end user markets for the Company's products include the automotive, aerospace, industrial machinery, electronics and computer industries, and the Company's customers include Ford Motor Co., Daimler Benz, Toyota, Chrysler, BMW, Boeing Co., Eastman Kodak Co. Inc., International Business Machines Corp., Hewlett-Packard Co., General Electric Co., Caterpillar Inc., United Technologies Corp., Motorola Inc., Phillips, Samsung and Xerox Corp. The Company's operations are conducted through three management units: Measuring Systems, Precision Measuring Instruments and Custom Metrology. . The Measuring Systems Group, which accounted for approximately 69% of the Company's sales in 1997, manufactures and markets a wide range of manual and computer-controlled, high precision CMMs including "in-process" measuring systems under the Brown & Sharpe and DEA brand names. The Company believes it is the worldwide market leader for CMMs as measured by net sales and installed base. The Company believes it has an installed base of over 20,000 CMMs worldwide. . The Precision Measuring Instruments Division, which accounted for approximately 28% of the Company's sales in 1997, manufactures a wide range of mechanical and electronic measuring and inspection tools (including height gauges, calipers, dial indicators, micrometers and gauge blocks) which are marketed under the Brown & Sharpe, Tesa, Etalon, Interapid, Standard Gage, Select Gauge, Mauser, Mercer and Roch brand names through more than 450 distributors and catalog houses worldwide. . The Custom Metrology Division designs and engineers, under the Tesa brand name, specialty products and systems that provide customized solutions for unique measurement or inspection problems primarily utilizing non-contact technology. Technologies and custom applications developed by the CM Division with customer funding have been directly applied to the design of standard products or systems distributed by the MS Group or the PMI Division. Repositioning Initiatives - ------------------------- Over the past several years, the Company has undertaken a series of divestitures, acquisitions and other strategic initiatives which have repositioned the Company from its historical origins as a machine tool manufacturer into a leader in the field of metrology. These repositioning initiatives included: . Divestiture of Non-Core Operations. The divestiture of non-strategic operations, including the machine tool, pump and hydraulics businesses, and Technicomp, Inc. during 1997, which enabled the Company to focus on its core metrology technologies and market distribution strengths. Page 3 . Strategic Metrology Acquisitions. Strategic acquisitions which enabled the Company to increase greatly the breadth of its metrology product offering and the strength of its distribution system. These acquisitions included the 1994 acquisitions of DEA, Roch and certain intellectual property and assets of Metronic Ltd. During 1997, the Company acquired the remaining 50% of its equity investee ASI, which develops measurement software and provides training and services and other aftermarket support to manufacturing industries, and a 50% ownership position in Metroptic Technologies Limited, a joint venture located in Israel developing non-contact sensor technologies. . Rationalization and Consolidation of Operations. Lowering the Company's overhead cost structure by reducing duplicative functions and associated headcount and by consolidating and rationalizing the Company's manufacturing facilities and operations, which enabled the Company to increase productivity and efficiency. . Reorganization Plan. In the fourth quarter of 1997, management implemented a Reorganization Plan ("the Plan") which included business processing reengineering at certain of its European sites, as well as selected product rationalization in preparation for new product introductions. In addition, the MSG's marketing and service organization was also reorganized. The Plan provided for a workforce reduction of approximately 160 persons, primarily in its European operations. The Plan also provided for inventory adjustments and the write-down of fixed assets and certain intangible assets. (See Management's Discussion and Analysis of Financial Condition and Results of Operations.) Business Strategy - ----------------- The Company is implementing its strategy based on the following elements: . Continue Cost Improvements. The Company intends to continue to implement measures designed to reduce its product costs through: (i) standardizing product designs worldwide; (ii) increasing the cost-effectiveness of product designs; (iii) outsourcing components and products; (iv) increasing supplier partnering; and (v) focusing on core manufacturing processes. The Company also intends to streamline its sales, marketing and general and administrative processes in an effort to reduce selling, general and administrative expenses as a percentage of sales. . Develop New Products and End User Markets. The Company's goal is to increase net sales by expanding penetration of served industrial end user markets and by capitalizing on high growth end user markets such as the electronics, computer and medical industries where metrology needs are growing rapidly. To expand in these high growth industries, the Company intends to focus on development of software and emerging non-contact metrology technologies through continued internal development and through strategic acquisitions and technical partnerships (such as the acquisition of certain intellectual property and assets of Metronic Ltd. the 1997 acquisition of a 50% interest in the Metroptic joint venture, and completion of the acquisition of ASI). To expand its penetration of served industrial end user markets, the Company expects to continue the introduction of new metrology systems utilizing both contact and non-contact technologies, and to develop sensors and other sophisticated products that can be imbedded in a variety of manufacturing processes. The Company plans to form technical and commercial alliances with manufacturers of process equipment to provide enhanced combined manufacturing systems utilizing the Company's sensors and other products. . Enhance Existing and Develop New Software. The Company intends to emphasize research and development of software systems and applications designed to meet the evolving metrology needs of its end users. To that end, the Company intends to leverage off its software development team of software and applications engineers and technicians (including engineers of ASI) in the following four areas: (i) metrology software for inspection and verification of Page 4 piece-part integrity and conformance to design specifications; (ii) process control software designed to detect and correct drifts in part tolerances before the manufacturing process produces scrap or improperly configured components; (iii) enhanced management information systems that report statistical and quality information from the manufacturing process; and (iv) new software that will link the Company's CMMs and, therefore, the manufacturing process with computer-aided engineering and manufacturing systems that will provide the means for real-time feedback, analysis and, ultimately, control of manufacturing to design specifications. The Company believes that its existing library of metrology software, together with newly developed software, should enable it to respond to the growing demand in manufacturing for on-line inspection and verification. The Company also believes that its experience with CMM software and manufacturing processes are critical to the successful development of software that is linked with computer aided engineering systems. To meet the needs of this growth market, the Company formed Brown & Sharpe Information Systems, Inc. (BSIS) in 1997. This new subsidiary, with a common Corporate vision, combines all the Company's software development expertise under one roof. The Company's objective is to develop the next generation of open architecture measurement software having more power and ease of use than any product on the market. Incorporating the most accurate metrology algorithms in the world, this new software will work effortlessly with CAD/CAM systems to facilitate the inspection process. It will also provide the user with powerful analysis tools to ensure overall process control. . Leverage Worldwide Distribution Capability. Through the acquisitions of DEA and Roch, Brown & Sharpe has expanded its product lines and strengthened its marketing and distribution capabilities in Europe, South America, the Middle East, India and China. The Company plans to continue to strengthen and expand its worldwide distribution capability, principally by continuing to rationalize its existing distribution network and by opening new demonstration centers and adding direct sales capacity and distributors where cost effective. The Company also intends to capitalize on the strength of its global distribution network by increasing the number of Company-designed and third-party sourced products sold through its distribution channels in an effort to increase gross profit without a corresponding increase in selling, general and administrative expenses. . Increase Aftermarket Sales and Services. The Company intends to increase its focus on higher margin aftermarket sales and services, including calibration and rebuilding of CMMs, software upgrades, and parts sales. The Company believes that the worldwide installed base of CMMs, estimated at over 62,000 (including 20,000 of the Company's CMMs), creates a significant demand for such aftermarket services. The Company believes that the level of customer service it provides, as measured by third-party surveys of its customers, is superior to that of its principal competitors, and expects to further strengthen its customer relationships through enhanced aftermarket support and increased partnering efforts. The Company's sales attributable to aftermarket sales and service in 1997 were estimated to be approximately 27% of MS Group net sales for the same period. Metrology Industry - ------------------ General Metrology products and systems range from hand tools for simple measuring tasks to complex integrated systems of hardware and software that can measure, digitize, inspect and verify manufactured parts and components to exacting specifications. Manufacturers depend upon metrology hardware and software products to monitor consistent product conformance to their exacting specifications, thereby improving the reliability, fit and finish of their products. In addition to these quality and performance benefits, metrology products help manufacturers lower costs by reducing errors, scrap, rework and warranty expense, improving the manufacturing process, lowering throughput time, increasing capacity and reducing work-in-progress inventories. In recent years, manufacturers have accelerated the integration of Page 5 quality control functions directly into the production process by incorporating the use of metrology products on the factory floor. In addition, manufacturers are demanding more precise, capable and flexible metrology systems as their products become smaller, more complex and/or must meet more stringent quality and safety standards. Their exacting product specifications often require measurement to an accuracy of less than one micron (one millionth of a meter or approximately 1/100th of the thickness of a human hair) or, in some special cases, measurement of nanometers (one billionth of a meter or the unit of measurement for the wavelength of light). Increasingly, metrology systems must incorporate a mix of traditional contact and newer non-contact technologies because of reduced part sizes and the great diversity of new materials used in manufactured products. Metrology systems are purchased by customers regardless of their need for additional production capacity because of ever-increasing quality requirements and the need to reduce product costs. Metrology products serve a broad range of measurement requirements. The simplest metrology products include devices such as calipers, dial gauges, micrometers, surface plates and height gauges. These are generally inexpensive hand-held tools that measure in one dimension to within an accuracy of between two (80 millionths of an inch) and 25 microns (1/100th of an inch). Fixed gauges are often more expensive devices that inspect and verify in one to three dimensions to within an accuracy of between one and 25 microns and are typically used where manufacturers need to measure a single, uniform product at a high rate of speed. Fixed gauges tend to make simple, comparative measurements of products in a manufacturing process. CMMs are more sophisticated, complex machines that use a variety of technologies to measure in three dimensions to an accuracy of between 0.5 and 100 microns. These technologies range from advanced probes that physically "contact" the product being measured to highly sophisticated non-contact vision, optical, laser and scanning probes that collect precise data without touching the product being measured. While some CMMs are manually operated, most are now controlled by software systems that not only compare the product to a manufacturer's CAD/CAM models, but also provide the manufacturer with dimensions of the product to be converted into the CAD/CAM model. CMMs are highly flexible machines that can measure different products for a manufacturer without re-tooling or other significant changes as opposed to fixed gauges that may require expensive and time-consuming retooling. The price points of metrology products range from $100 for a caliper to over $1.5 million for a sophisticated CMM such as those used to measure car and truck bodies. Markets Participants in the metrology industry generally compete in one or more of six broad product areas: (i) simple and relatively inexpensive tools that measure in one dimension, such as calipers, dial gauges, micrometers, surface plates and transfer gauges; (ii) digital electronic height gauges of varying accuracies and sizes; (iii) sophisticated special purpose metrology systems including fixed gauges; (iv) general purpose and application-specific CMMs; (v) alternative technologies such as vision tunnels or surface finish and geometry measurement; and (vi) customized metrology solutions to specific metrology problems. The Company competes in all of the foregoing product areas other than fixed gauges and most of the alternative technologies. Sales of simple metrology products and less sophisticated height gauges are driven by price, brand, product innovation, ease of purchase and effectiveness of distribution. Products in this category are generally hand-held or relatively small devices that permit a manufacturer to make measurements in one or occasionally two dimensions. These products are generally inexpensive, providing a cost-effective solution to simple metrology problems where the industrial customer does not need the increased capabilities of fixed gauges, CMMs or certain other sophisticated metrology systems. However, simple metrology products are generally limited in terms of accuracy, flexibility and/or their ability to collect data. Further, they are dependent upon skilled operators. The market for simple metrology products is fragmented, with many regional suppliers. End user markets for these products include most basic industries, including the automotive, construction, industrial machinery, appliance and farm equipment industries. Sales of fixed gauges have traditionally been driven by manufacturers' needs for one, two or three dimensional metrology on the factory floor. Products in this category, typically more expensive than Page 6 simple metrology products, compete directly with CMMs regarding inspection and verification of manufactured parts. Fixed gauge systems are frequently a more expensive investment than comparable CMM systems, but for the specific purpose intended, may be less expensive over the long run. Fixed gauges can range from simple one dimensional tools to semiand fully-automatic three dimensional factory floor systems that quickly compare production parts to "master parts." However, because these gauge systems are "fixed," they are inherently inflexible. The fixed gauge must be reworked or a new gauge designed and built every time manufacturers make dimensional changes in the part being measured. The trend of the industry is away from fixed gauges and toward flexible gauges because of the need to make costly changes to fixed gauges when the part they measure changes. Sales of CMMs and more sophisticated height gauges are driven by manufacturers' needs for high accuracy, flexibility, speed and information. Products in this category, while typically more expensive than simple metrology products and some fixed gauges, are generally more versatile machines that can measure, digitize, inspect and verify diverse manufactured parts. The accelerating use of more sophisticated software has played an important role in the evolution of CMMs in response to the marketplace. Improved software and linkage to CAD/CAM and network technologies enable CMMs both to compensate automatically for the position of the piece to be measured, eliminating the need for the time consuming manual positioning necessary with less advanced metrology products, such as surface plate gauges, and also to relay information to the manufacturer's CAD/CAM model to facilitate production process adjustments. Although CMM-type software can be added to on-machine gauging 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. Presently, CMMs are installed at sites ranging from highly controlled laboratory sites to hostile, factory floor industrial settings, and can measure objects ranging in size from a semiconductor chip to an aircraft exterior, and can provide accuracies with tolerances of 0.5 to 100 microns. CMMs can achieve this through contact or non-contact probing methods, depending upon the manufacturer's needs. The market for CMMs is dominated by five competitors, including the Company. Sales of customized metrology products are driven by specific needs in specific industries and, in Brown & Sharpe's case, tend to focus on emerging metrology technologies. Generally, custom metrology challenges arise where existing metrology products and systems cannot adequately address a narrow yet important manufacturing task. This product category requires research, development and innovation and often includes the development of new applications for optical, laser and scanning sensor probes. MS Group - -------- The MS Group, the largest of Brown & Sharpe's three units, accounted for approximately 69% of Brown & Sharpe's sales in 1997. The MS Group is headquartered in North Kingstown, Rhode Island and manufactures and markets CMMs. MS Group products sold under the Brown & Sharpe name are manufactured at the Company's North Kingstown facility, and MS Group products sold under the DEA name are manufactured in Turin, Italy. The primary end user markets for the Company's CMM products include the automotive (including automotive suppliers), heavy transport, aerospace, electronics, computer, industrial machinery and medical 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 systems. The smallest machines can measure in a volume up to 16x14x12 inches and are priced at approximately $10 thousand, while the larger, high speed, high accuracy CMMs with integrated software systems can cost over $1.5 million. The MS Group also provides laser scanning and optically based measuring machinery from microscopes to vision systems. The Company believes that its "user-friendly" CMM application software gives it a competitive advantage in the marketplace for CMMs. These proprietary software products provide the MS Group's customers with an understandable, icon-based inspection analysis capability, graphical user interfaces and outputs, and the capability to network with manufacturing systems. The MS Group also provides its Page 7 customers with special software and systems that integrate the MS Group's products with the customer's host information and communications network. In addition to sales of CMMs, the MS Group provides aftermarket sales and service, including calibration and rebuilding of CMMs, software upgrades and parts sales, for Brown & Sharpe CMMs and competing CMMs. The Company's sales attributable to aftermarket sales and services in 1997 were estimated to be approximately 27% of MS Group sales for the same period. 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. PMI Division products accounted for approximately 28% of Brown & Sharpe's sales in 1997. The PMI Division's products have broader applications and lower unit list prices (with a range of $100 to approximately $13 thousand) than the prices of the MS Group's products. These tools and instruments 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. Some PMI Division products also include systems and application software for measuring and statistical process control. The Company believes that the primary end user markets for the products of Brown & Sharpe's PMI Division are the automotive, aerospace, metal processing and defense industries, although Brown & Sharpe's PMI Division 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 Luneville, France. The Company also purchases components and products from third parties located in various countries. CM Division - ----------- The CM Division is an engineering division headquartered in Telford, England. The CM Division designs and engineers specialty products primarily utilizing non-contact technologies and systems to provide customized solutions for unique customer measurement or inspection problems generally with customer funding. Recent examples of CM Division products include a system for measuring the thickness and shape of the metal top of a beverage can and the depth and contour of the groove scored around the can's pop-up tab, so that the manufacturer could ensure the consistency with which the can could be opened without rupture by the end user, and an automatic multi-sensor (laser scanning, laser ranging, optical and tactile) system to measure, inspect and verify the ceramic substrates on which semiconductors are placed. The CM Division also manufactures laser interferometers, measuring sensors and factory networks, contact and optical measuring machines and fixtures aimed at specific niche markets. In 1997, the Company formed a joint venture company to develop the next generation of non-contact sensing technologies and products. This company, Metroptic Technologies Limited, is headquartered in Israel. Products using the new sensors will be designed and manufactured initially at the Company's Custom Metrology facility in Telford, England and sold under the Brown & Sharpe brand name. Currently, Metroptic is working on sensors designed for inspection of turbine engine blades and electronic components - two growth markets for measurement and inspection. This sensor technology is also scaleable for use in the measurement of complex contours in the aerospace and automotive industries. Prices for CM Division products range from approximately $20 thousand to $1.0 million. The primary end user markets for the custom-designed products of the CM Division are package and can manufacturing, oil drilling, standards laboratories, semiconductors, aerospace and defense. 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. The Company believes that the CM Division provides it with cost-effective access to emerging applications and technologies as the technologies and custom applications developed by the CM Division with customer funding have been directly applied to the design of standard products or systems distributed by the MS Group or the PMI Division. Page 8 Sales and Distribution - ---------------------- The MS Group distributes its products primarily through a 120-person worldwide sales force directly to U.S. and European customers, and utilizes a network of independent agents and distributors to cover the Pacific Rim, South American and African markets. The typical MS Group sales process involves lengthy, technical, one-on-one discussions between the salesperson or the distributor/sales agent and customer and is often part of a competitive bid process. As an important part of its marketing and distribution strategy, Brown & Sharpe provides in-depth training to its customers at 31 support and demonstration centers located throughout the United States, Europe and Asia. The Company's direct sales force also provides the Company with important opportunities to cross-sell the products of its PMI and CM Divisions. In contrast to the MS Group, the PMI Division generally distributes its products through international import companies, regional distributors and catalog houses throughout the world. As of December 31, 1997, the PMI Division utilized in excess of 450 distributors located in over 60 countries to market its products. The Company believes that the PMI Division's established distribution network provides it with a competitive advantage and intends to capitalize on this network to increase sales of internally developed and third-party products. The CM Division primarily designs and manufactures products and services in response to specific customer inquiries. The CM Division maintains a staff of approximately 15 sales/project engineers to respond to customer inquiries, and, upon receipt of an order, to develop tailored solutions and manage projects to completion. The CM Division typically targets sales to end user markets with a small number of participants in which the Company has little or no competition. As a result, the Company believes that the CM Division benefits from comparatively lower selling expenses. The Company has no single customer which accounts for 10% or more of its consolidated net sales; however, several well recognized major automotive manufacturers (without regard to their suppliers) account for a significant portion of the Company's net sales. The loss of a few of these major customers would have a substantial effect upon the Company. 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. When it is more cost-effective to do so, Brown & Sharpe purchases product designs or portions of product designs from engineering subcontractors or acquires rights to 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 sales in 1997 from the sale of products that it introduced after 1993. Brown & Sharpe has introduced at least one major new product every year since 1987. The Company's current design and engineering focus is the continued integration of the DEA and Roch technologies with Brown & Sharpe's previously existing technologies, software development and non-contact metrology products. In 1997, Brown & Sharpe invested $15.5 million, or 4.8% of its net sales during that period in product design and manufacturing engineering. In 1995 and 1996, Brown & Sharpe expended $15.8 million and $13.9 million, respectively, for product design, development, refinement and manufacturing engineering. Page 9 Foreign Operations - ------------------ Brown & Sharpe manufactures and sells substantial amounts of its metrology products in foreign countries. As of December 31, 1997, approximately 62.8% (based on book values) of the Company's assets, 60.1% of the Company's sales (based on customer location) and 70.3% of its employees were located outside the United States. The Company's manufacturing operations are located in Italy, Switzerland, Germany, England and France, as well as in the United States, and Brown & Sharpe's products are sold in over 60 countries worldwide. The Company's cost of sales for products manufactured and assembled in certain foreign locations has been adversely impacted, as compared with some of its competitors, by the appreciation of the respective local currencies of such locations relative to the U.S. dollar. Nevertheless, the Company believes that the geographic diversity of its end user markets helps to mitigate the adverse effects of the cyclicality of the metrology industry, as an economic downturn in any of the Company's geographic end user markets may be offset by relatively healthy conditions in others. Raw Materials and Sources of Supply - ----------------------------------- Brown & Sharpe purchases raw materials, supplies and other components from a variety of suppliers, and considers its sources of supply to be adequate. At times, the Company depends upon various sole sources of supply for certain components used by the Company (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. In addition, the Company currently purchases substantially all of its externally sourced low to medium accuracy electronic touch trigger sensor probes and heads from a publicly held United Kingdom company which is the dominant supplier of such sensor probes to CMM manufacturers. No alternative supplier for this class of electronic sensor probes, which are a key component of substantially all of the Company's lower accuracy CMMs, is currently available and developing an alternative source for the probes and heads could take more than a year. 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. The Company has established a corporate function to direct its world-wide efforts to standardize product designs throughout its operations and coordinate and direct its outsourcing efforts. Patents, Licenses, Trademarks, and Proprietary Information - ---------------------------------------------------------- The Company's business is not significantly affected by or dependent upon the procurement or maintenance of patents covering the Company's products. Nevertheless, the Company pursues, where appropriate, patent protection for inventions, developments and improvements relating to its products both in the United States and abroad. In addition, the Company relies on a combination of copyrights, trade secret law and contracts to protect its proprietary information (principally related to its software and software development). Despite these precautions, it may be possible to copy or otherwise obtain and use the Company's proprietary information without authorization. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. Brown & Sharpe and its subsidiaries own, or have the right to use, a number of trademarks which they believe are valuable in promoting the sale of certain of their principal products. The Company and its subsidiaries have registered, or have applied to register, the trademarks owned by them in the United States and in some foreign countries. In addition, the Company uses the Mauser brand name under royalty-free license agreements entered into in connection with the Company's acquisition of these product lines. The license expires in 1999. The Company believes it will be able to negotiate satisfactory extensions of this license prior to its expiration and/or that the failure to renew this license would not have a material adverse effect on the Company. 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 Page 10 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 13, "Contingencies" of Notes to Consolidated Financial Statements in Item 8 of this Annual Report. Employees - --------- At December 31, 1997, Brown & Sharpe had 2,409 employees, (as compared with 2,383 at December 31, 1996), including approximately 1,693 employees located outside the United States. Brown & Sharpe considers 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 648 of Brown & Sharpe's employees located at sites in the United States, Italy, Switzerland, England, and France are covered by collective bargaining agreements which expire at various times between December 31, 1997 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. See Note 13, "Contingencies" of Notes to Consolidated Financial Statements in Item 8 of this Annual Report. Page 11 The following table sets forth the location of Brown & Sharpe's employees as of December 31, 1997: Country Employees (1) ------- ------------- France .............................................. 207 Germany ............................................. 262 Italy ............................................... 460 Japan ............................................... 25 Spain ............................................... 16 Switzerland ......................................... 317 United Kingdom ...................................... 396 United States ....................................... 716 ------ TOTAL................................................ 2,409 ====== - ---------------- (1) Part-time employees are included on a full-time equivalent basis. During 1997, 71 employees were added as a result of acquiring Automation Software, Inc. Competition - ----------- The Company's MS Group currently has four principal direct domestic and foreign competitors, some of which are owned by entities that have greater financial and other resources than the Company. The MS Group also faces indirect competition from other types of metrology firms such as manufacturers of fixed gauging systems. The primary industries to which the MS Group sells its products are characterized by a relatively small number of large participants with significant purchasing power. In addition, the MS Group generally sells its products through a competitive bid process in which at least one and frequently several of the Company's competitors have submitted competing bids. As a result, the Company experiences severe pricing competition in connection with sales by its MS Group which can have an adverse impact on the Company's net sales and margins. During periods when the metrology industry suffers from over capacity, downward pricing pressure experienced by the MS Group is likely to be more intense and the Company's margins may be more severely impacted. In addition, certain of the Company's competitors that have access to greater financial resources may be able to withstand such pricing pressure more effectively than the Company. The MS Group competes with 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 market for the PMI Division's products is fragmented and the PMI Division competes with a large number of competitors, including the market leader in this area, primarily on the basis of the strength of its third party distribution network, price and product innovation. New competitors from emerging industrialized countries with lower cost products than the Company's represent a significant competitive challenge to the Company. As a result, the PMI Division's continued success and profitability will be dependent on its ability to continue to develop cost-effective and innovative products. The primary competitors of the PMI Division are Mitutoyo, L.S. Starrett Co. and Federal Products Co. (Inc.), a subsidiary of Esterline Technologies Corporation. To date, the CM Division has sold its custom solutions to markets in which there is little or no effective competition in custom metrology systems. However, in certain niche markets where the Company does not generally sell, Marposs S.p.A., an Italian company, provides custom metrology products. Backlog - ------- The Company's backlog of product orders was approximately $60 million at year-end 1997, compared to approximately $51 million and $59 million at year-end 1996 and 1995, respectively. Page 12 All of the orders included in the Company's year-end 1997 backlog were requested to be filled and completed within one year and are, subject to possible customer cancellation, expected to be completed in 1998. 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 (without regard to their suppliers) account for a significant portion of the Company's net sales. The loss of a few of these major customers 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 approximately $113.2 million at year-end 1997 compared to approximately $108.0 million at year-end 1996. 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 - ------------------- (Dollars in thousands) 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. Refer to "Financial Information by Business Segment and Geographic Area" included on Page F-24 of the Company's 1997 Annual Report, filed as an exhibit hereto, which is incorporated by reference. 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 348,000 (1) Poughkeepsie, New York Owned Manufacturing 58,000 Wixom, Michigan Leased Sales and Administration 37,600 Italy Grugliasco Leased Assembly 107,000 (2) Moncalleri Leased Manufacturing 70,000 (2) 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 (2)
Page 13
Owned/ Approximate Location Leased Principal Use Square Footage -------- ------ ------------- -------------- United Kingdom St. Albans Owned Manufacturing and Sales 36,000 Telford Leased Manufacturing, Engineering, Sales, and Administration 32,000 Leicester Owned Manufacturing 14,000 Torpoint Leased Manufacturing, Sales, and Administration 5,000 (2) France Luneville Leased Manufacturing, Engineering, and Sales 77,100 (2) Villebon Leased Sales 18,000 (2) Spain Barcelona Leased Sales 16,000 (2)
- ------------------- (1) Excludes approximately 412,000 square feet leased to unrelated parties. (2) The leases in Grugliasco, Ludwigsburg, Torpoint, Luneville, Villebon and Barcelona expire on December 31, 2002, September 30, 2003, August 18, 2001, March 23, 2003, October 20, 2001, and July 31, 1998, respectively. 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 - --------------------------- Other Environmental Matters - ---------------------------- The nature of the Company's current operations are not significantly affected by environmental laws, rules and regulations. However, because the Company and its subsidiaries and predecessors have conducted heavy manufacturing operations in the past, sometimes at facilities which have been divested or sold and often in locations at which or adjacent to which, other industrial operations were conducted, from time to time the Company is subject to environmental claims. As with any such operations that involve the use, generation, and management of hazardous materials, it is possible that practices, including practices that were deemed acceptable by regulatory authorities in the past, may have created conditions which could give rise to liability under current or future environmental laws. Because the law in this area is developing rapidly, including in many European countries, and such environmental laws are subject to amendment and widely varying degrees of enforcement, the Company may be subject to, and cannot predict with any certainty the nature and amount of, potential environmental liability related to these operations or locations that it may face in the future. Litigation - ----------- Refer to Note 13 "Contingencies" of Notes to Consolidated Financial Statements in Item 8 of this Annual Report. Page 14 ITEM 4A - EXECUTIVE OFFICERS OF THE REGISTRANT - ---------------------------------------------- The following table summarizes information regarding Executive Officers of the Company as of March 13, 1998: Name Age Positions Held During the Last Five Years - ----- --- ----------------------------------------- Frank T. Curtin 63 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 55 Vice President & Chief Financial Officer since May 1, 1992; previously self-employed consultant since November 1990. Antonio Aparicio 47 Vice President & General Manager - Precision Measuring Instruments since September 1991; previously Marketing Director - Precision Measuring Instruments. Marcus Burton 39 Vice President & General Manager - Custom Metrology Division since January 1997; previously Director of Strategic Planning - Brown & Sharpe Manufacturing Co. since July 1995; Managing Director - Thomas Mercer Ltd. (a subsidiary) since June 1992; Special Projects Manager - Thomas Mercer Ltd. since October 1990. Philip James 56 Group Vice President - Measuring Systems since September 1997; previously Executive Vice President - International, Ingersoll Milling Machine Company since November 1993; previously Vice President and General Manager - Production Machinery Division, Ingersoll Milling Machine Company, since November 1989. Edward D. DiLuigi 51 Vice President and General Manager - Measuring Systems U.S.A. since June 1997; previously General Manager, UNC Airwork, Aircraft Engine Services Division since July 1995; previously Vice President of Operations, UNC Airwork since August 1992. Brian Gaunt 59 Vice President and General Manager - Brown & Sharpe DEA S.p.A. since February 1998; previously Group Chief Executive, Automotive Products Group Limited since 1995; previously Chief Executive -Clutch Division BBA PLC since 1991. John Cooke 61 Vice President & Chief Technical Officer since January 1997; previously Vice President & General Manager - Custom Metrology since 1992. James W. Cooper 52 Vice President - Procurement since August 1996; previously Vice President - Purchasing of Delco Remy America, an automotive supplier, since March 1995. From 1981 to march 1995, Mr. Cooper was Vice President - Materials Management of Simpson Industries, an automotive supplier. Page 15 Name Age Positions Held During the Last Five Years - ---- --- ----------------------------------------- Christopher J. Garcia 41 Vice President - Software Product Development since January 1998; previously Vice President - Marketing since November 1996; previously Vice President Business Development since January 1991; Vice President - Research and Development of Valisys Corporation since June 1994; previously Vice President - Marketing of Valisys Corporation since June 1990. Alfred J. Corso 61 Controller and Principal Accounting Officer since June 1, 1995; previously Partner with Ernst & Young LLP. 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. PART II ------- ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER - ----------------------------------------------------------------------- MATTERS ------- Refer to "Common Stock Market Prices and Dividends" included on Page F-28 of the Company's 1997 Annual Report, filed as an exhibit hereto, which is incorporated by reference. ITEM 6 - SELECTED FINANCIAL DATA - -------------------------------- Refer to "Selected Financial Data" on Page F-2 of the Company's 1997 Annual Report, filed as an exhibit hereto, which is incorporated herein by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - --------------------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Refer to "Management Discussion and Analysis of Financial Condition and Results of Operations" on Pages F-3 through F-9 of the Company's 1997 Annual Report, filed as an exhibit hereto, which is incorporated herein by reference. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- Refer to Consolidated Financial Statements and Report of Independent Auditors on Pages F-10 through F-27 of the Company's 1997 Annual Report, filed as an exhibit hereto, which are incorporated herein by reference. Quarterly results of operations on Page F-26 of the Company's 1997 Annual Report, filed as an exhibit hereto, which is incorporated herein by reference. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - --------------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None. Page 16 PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ Refer to "Information With Respect to Nominees and Other Directors Continuing in Office" on Pages 2 and 3 in the Company's definitive Proxy Statement for the May 1, 1998 Annual Meeting which is incorporated herein by reference. ITEM 11 - MANAGEMENT REMUNERATION AND TRANSACTIONS - -------------------------------------------------- Refer to "Executive Compensation" on Page 12 in the Company's Definitive Proxy Statement for the May 1, 1998 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" on Pages 5-8 in the Company's Definitive Proxy Statement for the May 1, 1998 Annual Meeting which are incorporated herein by reference. PART IV ------- ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- (a) (1) and (2) List of Financial Statements and Financial Statement Schedules The following consolidated financial statements of Brown & Sharpe Manufacturing Co., Inc. and subsidiaries, included in the annual report of the registrant to its shareholders for the year ended December 31, 1997, are incorporated by reference in Item 8: Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Operations - December 31, 1997, 1996, and 1995 Consolidated Statements of Shareowners' Equity - Year ended December 31, 1997, 1996, and 1995 Consolidated Statements of Cash Flows - Year ended December 31, 1997, 1996, and 1995 Notes to Consolidated Financial Statements - December 31, 1997 The following consolidated financial statement schedule of Brown & Sharpe Manufacturing Co., Inc. and subsidiaries is included in Item 14(d): Schedule II Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) The response to this portion of Item 14 is submitted as a separate section of this report. (b) No reports on Form 8-K were filed during 1997 Page 17 (c) Exhibits - The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules - The response to this portion of Item 14 is submitted as a separate section of this report. Page 18 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) Date: March 30, 1998 By: /s/ Charles A. Junkunc --------------------------- ----------------------------------- Charles A. Junkunc Vice 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. /s/ Frank T. Curtin 3/30/98 /s/ Howard K. Fuguet 3/30/98 - ---------------------------------------------- ------------------------------- Frank T. Curtin Date Howard K. Fuguet Date President, Chief Executive Officer Director (Principal Executive Officer) Chairman of the Board, and Director /s/ J. Robert Held 3/30/98 /s/ John M. Nelson 3/30/98 - ---------------------------------------------- ------------------------------- J. Robert Held Date John M. Nelson Date Director Director /s/ Paul R. Tregurtha 3/30/98 /s/ Russell A. Boss 3/30/98 - ---------------------------------------------- ------------------------------- Paul R. Tregurtha Date Russell A. Boss Date Director Director /s/ Henry D. Sharpe, III 3/30/98 /s/ Roger E. Levien 3/30/98 - ---------------------------------------------- ------------------------------- Henry D. Sharpe, III Date Roger E. Levien Date Director Director /s/ Harry A. Hammerly 3/30/98 /s/ Charles A. Junkunc 3/30/98 - ---------------------------------------------- ------------------------------- Harry A. Hammerly Date Charles A. Junkunc Date Director Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Alfred J. Corso 3/30/98 - ---------------------------------------------- Alfred J. Corso Date Controller (Principal Accounting Officer) Page 19 DIRECTORS - --------- Russell A. Boss, Director and President & Chief Executive Officer, A. T. Cross Company Frank T. Curtin, President & Chief Executive Officer, Brown & Sharpe Manufacturing Company Howard K. Fuguet, Partner, in the law firm of Ropes & Gray Harry A. Hammerly, Former Executive Vice President, 3M Company J. Robert Held, Consultant, Former President and Chief Executive Officer of Chipcom Corporation Roger E. Levien, Vice President, Strategy and Innovation, Xerox Corporation John M. Nelson, Chairman & Chief Executive Officer, Wyman-Gordon Company Henry D. Sharpe, III, Co-founder & Technical Director, Design Lab, Inc. Paul R. Tregurtha, Chairman of the Board and Chief Executive Officer, Mormac Marine Group, Inc. OFFICERS - -------- Frank T. Curtin, President, Chief Executive Officer, and Chairman of the Board Charles A. Junkunc, Vice President & Chief Financial Officer Antonio Aparicio, Vice President & General Manager - Precision Measuring Instruments Marcus Burton, Vice President & General Manager - Custom Metrology Phil James, Group Vice President - Measuring Systems Edward D. DiLuigi, Vice President & General Manager, Measuring Systems - U.S.A. Brian Gaunt, Vice President & Managing Director - Brown & Sharpe - DEA S.p.A. C. John Cooke, Vice President & Chief Technical Officer James W. Cooper, Vice President - Procurement Christopher J. Garcia, Vice President - Software Product Development James W. Hayes, III, Secretary & Corporate Counsel Alfred J. Corso, Controller INVESTOR INFORMATION - -------------------- Annual Meeting: The Annual Meeting of Stockholders will be held May 1, 1998 at 10:00a.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. Page 20 Stock Listing: New York Stock Exchange; Symbol BNS 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 02012-0644. They also can be reached on the internet at the following address http://www.equiserve.com. Page 21 BROWN & SHARPE MANUFACTURING COMPANY Schedule II - Valuation and Qualifying Accounts ----------------------------------------------- (dollars in thousands)
Balance at Charged to Foreign Balance at Beginning Costs and Currency End of Year Ended of Period Expenses Deductions Translation Period - ---------- --------- -------- ---------- ----------- ------ (2) (1) December 31, 1997 - ----------------- Allowance for doubtful accounts $ 3,226 $ 1,874 $ 1,358 $(286) $ 3,456 December 31, 1996 - ----------------- Allowance for doubtful accounts $ 3,030 $ 941 $ 761 $ 16 $ 3,226 December 31, 1995 - ----------------- Allowance for doubtful accounts $ 3,103 $ 2,124 $ 2,330 $ 133 $ 3,030
(1) Adjustment resulting from translating allowance for doubtful accounts of foreign subsidiaries at year-end exchange rates. (2) Write-offs of uncollectible accounts. Page 22 Exhibit Index ------------- Number ------ 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 26, 1989, filed as Exhibit 13 to Form 10-K for the period ending December 29, 1989, 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 26, 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 (Intentionally omitted) +10.1 (Intentionally omitted) +10.2 Amended 1983 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 1983 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) Page 23 10.6 (Intentionally omitted) +10.7 (Intentionally omitted) +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 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. Page 24 +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 10.26, 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 (Intentionally omitted) +10.27 Deferred Stock Equivalent Unit Contract dated November 30, 1989 between Brown & Sharpe Manufacturing Company and Herbert A. Beyer. Exhibit 10.26 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 (Intentionally omitted) +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 10.26 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 (Intentionally omitted) +10.34 (Intentionally omitted) +10.35 (Intentionally omitted) +10.36 (Intentionally omitted) +10.37 (Intentionally omitted) Page 25 +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. 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. Page 26 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 (Intentionally omitted) 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. 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. 10.69 Amendment dated July 28, 1995 to Employment/Severance Agreement dated March 14, 1988 between Brown & Sharpe Manufacturing Company and Richard F. Paolino. 10.70 (Intentionally omitted) 10.71 Employment Agreement with Robert D. Batting dated September 26, 1995. Page 27 10.72 Employment Agreement with C. John Cooke dated November 26, 1991. 10.73 Employment Agreement with Antonio Aparicio dated October 17, 1995. 10.74 (Intentionally omitted) 10.75 Employment Agreement with James W. Cooper dated July 17, 1996, as amended July 24, 1996 and August 1, 1996. 10.76 Amendment to Employment Agreement with Frank T. Curtin dated as of January 1, 1996. Exhibits 10.69 through 10.76 were filed as Exhibits 10.69 through 10.76, respectively, to the Form S-1 dated October 9, 1996, and are hereby incorporated by reference. 10.77 (Intentionally omitted) 10.78 Indemnity Agreement with James W. Cooper dated August 19, 1996. 10.79 Indemnity Agreement with Harry A. Hammerly dated October 25, 1996. 10.80 Indemnity Agreement with John Robert Held dated October 25, 1996. 10.81 Indemnity Agreement with Roger E. Levien dated October 25, 1996. 10.82 Indemnity Agreement with Christopher J. Garcia dated January 1, 1998. 10.83 Indemnity Agreement with Marcus Burton dated January 1, 1998. 10.84 Employment Agreement dated May 29, 1997 with Edward D. DiLuigi. 10.85 Employment Agreement dated August 18, 1997 with Philip James. Exhibits 10.84 and 10.85 were filed as Exhibits 10.84 through 10.85, respectively, to the Form 10-Q for the quarter ended September 30, 1997, and are hereby incorporated by reference. +*10.86 Indemnity Agreement with Edward D. DiLuigi dated June 16, 1997. +*10.87 Indemnity Agreement with Philip James dated September 8, 1997. +*10.88 Indemnity Agreement with Brian Gaunt dated February 13, 1998. +*10.89 Supplemental Executive Retirement Plan dated February 13, 1998. 10.90 Rights Agreement dated as of February 13, 1998 ("Rights Agreement") between the Company and BankBoston N.A., as Rights Agent, filed as Exhibit 1 to Report on Form 8-K dated March 5, 1998, which is hereby incorporated by reference. 10.91 Form of Certificate of Designation with respect to the Series B Participating Preferred Stock, par value $1.00 per share, of the Company (filed as Exhibit A to the Rights Agreement, filed as Exhibit A to Report on Form 8-K dated March 5, 1998), which is hereby incorporated by reference. *11. Computation of Per Share Data for the Three Years Ended December 31, 1997. Page 28 *13. 1997 Annual Report to Shareowners, filed for information of the Commission except for those portion thereof which are expressly incorporated by reference in this report. 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. *23. Consent of Independent Auditors - Ernst & Young LLP. 27.1 Financial Data Schedule for Fiscal Year ended December 31, 1997. 27.2 Restated Financial Data Schedule for Nine Months ended September 30, 1997. 27.3 Restated Financial Data Schedule for Six Months ended June 30, 1997. 27.4 Restated Financial Data Schedule for Three Months ended March 31, 1997. 27.5 Restated Financial Data Schedule for Fiscal Year ended December 31, 1996. 27.6 Restated Financial Data Schedule for Nine Months ended September 30, 1996. 27.7 Restated Financial Data Schedule for Six Months ended June 30, 1996. 27.8 Restated Financial Data Schedule for Three Months ended March 31, 1997. 27.9 Restated Financial Data Schedule for Fiscal Year ended December 31, 1995. 27.10 Restated Financial Data Schedule for Fiscal Year ended December 31, 1994. * These current year Exhibits are located in Exhibit number sequence beneath the attached blue paper. + This identifies management contracts or compensatory plans. Page 29 EX-10.86 2 INDEMNITY AGREEMENT WITH EDWARD D. DILUIGI EXHIBIT 10.86 INDEMNITY AGREEMENT --------------------- THIS AGREEMENT, made and entered into on and as of this 16th day of June, 1997, (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 Edward D. DiLuigi (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: Edward D. DiLuigi c/o Brown & Sharpe Manufacturing Company Precision Park 200 Frenchtown Road North Kingstown, RI 02852-1700 (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: By: ----------------------- ----------------------- Secretary Frank T. Curtin Chairman of the Board President & Chief Executive Officer Indemnitee --------------------------- Edward D. DiLuigi EX-10.87 3 INDEMNITY AGREEMENT WITH PHILIP JAMES EXHIBIT 10.87 INDEMNITY AGREEMENT --------------------- THIS AGREEMENT, made and entered into on and as of this 8th day of September, 1997, (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 Philip James (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: Philip James c/o Brown & Sharpe Manufacturing Company Precision Park 200 Frenchtown Road North Kingstown, RI 02852 (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: By: ----------------------- ----------------------- Secretary Frank T. Curtin Chairman of the Board President & Chief Executive Officer Indemnitee --------------------------- Philip James EX-10.88 4 INDEMNITY AGREEMENT WITH BRIAN GAUNT EXHIBIT 10.88 INDEMNITY AGREEMENT --------------------- THIS AGREEMENT, made and entered into on and as of this 13th day of February, 1998, (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 Brian Gaunt (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: Brian Gaunt DEA - Brown & Sharpe S.p.A. Strada del Portone 113 10095 Grugliasco - TO Italy (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: By: ----------------------- ----------------------- Secretary Frank T. Curtin Chairman of the Board President & Chief Executive Officer Indemnitee --------------------------- Brian Gaunt EX-10.89 5 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EXHIBIT 10.89 BROWN & SHARPE MANUFACTURING COMPANY Supplemental Executive Retirement Plan --------------------------------------- (February 13, 1998) 1. Purpose and Nature of Plan. This Plan is intended to provide -------------------------- supplemental retirement benefits to certain key employees and former employees of Brown & Sharpe Manufacturing Company (the "Company"). The Plan is not intended to be a tax-qualified plan. Although the Company reserves the right to establish a so-called grantor trust or another funding medium or investment vehicle to provide for the payment of benefits hereunder, nothing in the Plan will be construed to create a trust or to obligate the Company or any other person to segregate a fund, purchase an insurance contract, or in any other way currently to fund the future payment of any benefits hereunder, nor will anything herein be construed to give any employee or any other person rights to any specific assets of the Company or of any other person. 2. Meaning of Terms. Except as may otherwise be clearly indicated by ---------------- the context, for purposes of the Plan the following terms shall have the following meanings: . "Administrator" has the meaning given it in Section 3. . "Board" means the Board of Directors of the Company. . "Change in Control" means a change in control of the Company as defined in Exhibit A. . "Code" means the Internal Revenue Code of 1986, as from time to time amended. . "Committee" means the Compensation and Nominating Committee of the Board. . "Company" means Brown & Sharpe Manufacturing Company and any successor to all or a major portion of its business or assets. . "Eligible Employee" means an individual who (i) is employed by the Company or a subsidiary of the Company, (ii) is a U.S. citizen or resident, (iii) is individually designated (or is a member of a classification of persons designated) by the Committee as eligible to participate in the Plan, and (iv) satisfies the requirements of the following sentence. No person shall be eligible to participate in the Plan unless he or she (A) is the Chief Executive Officer of the Company, or (B) reports directly to the Chief Executive Officer of the Company, or (C) in the case of a division or group general manager, reports directly to an individual described in (B), or (D) reports directly to an individual described in (B) or (C). . "ESOP" means the Brown & Sharpe Employee Stock Ownership Plan as from time to time in effect. . "Investment Alternative" means any of the mutual funds or other market-based investments, including common stock of the Company, designated from time to time by the Committee as notional investment options for that portion of a Participant's Plan account attributable to credits under Section 5. The Committee may at any time and from time to time change the Investment Alternatives available under the Plan, including as to amounts already accrued or deferred hereunder. . "Investment Date" means the date fixed by the Committee for initiating the use of Investment Alternatives to adjust the balances of Section 5 Accounts. . "Non-Directed Account" has the meaning given it in Section 7. . "Nondiscretionary Fund" means, from and after the Investment Date, the investment fund or funds designated by the Committee as the measure of notional investment return for the Non-Directed Account. It is anticipated that upon and after the establishment of a "rabbi trust" or similar fund permissible under Section 1, the Nondiscretionary Fund shall consist of the investments of that portion of the assets of such trust or fund accumulated to help meet the Company's obligations hereunder with respect to the Non-Directed Account. . "Plan" means the Brown & Sharpe Manufacturing Company Supplemental Executive Retirement Plan as set forth herein, together with any and all amendments hereto. . "Participant" means an Eligible Employee who participates in deferrals under the Plan or for whom one or more accounts are maintained under the Plan. . "Salary" has the same meaning as the term "Salary" under the Savings Plan, determined without regard to the limitations described in Section 401(a)(17) of the Code and any corresponding limitation language in the Savings Plan and without regard to any deferrals hereunder. . "Savings Plan" means the Brown & Sharpe Savings and Retirement Plan for Management Employees as from time to time in effect. . "Section 5 Account" has the meaning given it in Section 7. . "Subject Rate" means, for any period prior to the Investment Date, the rate credited for that year with respect to amounts invested in the Guaranteed Interest Fund within the Savings Plan; provided, that if for any period the Guaranteed Interest Fund (or a comparable fund investing in guaranteed interest contracts) shall no longer be maintained within the Savings Plan, the Subject Rate shall be the prime rate as in effect at Rhode Island Hospital Trust National Bank; and further provided, that the Committee may at any time prior to the beginning of a year fix a Subject Rate for such year different than the rate determined in accordance with the foregoing. 3. Administration. The Plan shall be administered by the Committee, -------------- which shall serve as "plan administrator" for purposes of ERISA, and by such person or persons, if any, as the Committee may appoint to assist it in such administration (the Committee and such persons being hereinafter referred to as the "Administrator"). The Administrator shall have the discretionary authority to construe the Plan, determine all questions relating to eligibility for or the amount of benefits payable under the Plan, prescribe such forms and procedures as it or they deem necessary or appropriate for the administration of the Plan, and generally to determine all matters pertaining to the administration of the Plan. The Committee's determination in any such matter shall be final and binding on all parties. If any person claims any benefit hereunder, the Administrator 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 Administrator 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 Committee, which request may include a request to review pertinent documents and to submit issues and comments in writing. The Committee shall render a decision on the appeal within 60 days (or, if special circumstances require an extension of the 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. 4. Participation. Each Eligible Employee shall be notified of his or ------------- her eligibility to participate in the Plan as soon as practicable after designation by the Committee. In order to elect deferrals under the Plan, a Participant must enter into an agreement with the Company, in such form as the Administrator shall approve or prescribe, providing for deferral of future Salary in accordance with the rules set forth in Section 5 below. Any Participant with amounts deferred under the Plan (or his or her surviving beneficiary, in the event of the Participant's death), shall remain a Participant until all amounts credited to his or her account have been paid out, or until the termination of the Plan if earlier. 5. Deferral Elections. For any year commencing on or after January 1, ------------------ 1988 a Participant may elect to defer any number of whole percentage points between 1 and 50 (or such other percentage limit, if any, as the Administrator may specify for such year) of his or her Salary payable in such year (including bonuses that may be attributable in part to services in prior periods). The Participant may also elect that, in the event the aggregate of elective contributions to the Savings Plan for his or her benefit for such year are prospectively reduced by the plan administrator under the Savings Plan on account of the nondiscrimination requirements of section 401(k) of the Code or the limitations of sections 402(g) or 415 of the Code (including the corresponding provisions of the Savings Plan), an amount equal to such reduction shall be automatically deferred hereunder rather than paid currently to the Participant. Each election hereunder shall be made in writing prior to the commencement of the year of reference and shall be effective beginning with the first pay period in such year, except that a person who becomes an Eligible Employee prior to December 1 of a given year may elect to participate hereunder for the remainder of such year by submitting a properly executed election within thirty (30) days of becoming eligible to participate, such election to take effect with the first pay period following the receipt of such election by the Company. An election once made hereunder shall continue in force from year to year unless revoked or altered as to Salary to be earned in a subsequent year. 6. Additional Credits. For each year in which an Eligible Employee ------------------ is a participant in either the Savings Plan or the ESOP, or both, there shall be credited to the Eligible Employee's account hereunder an amount equal to the excess, if any, of (a) over (b), where (a) is the aggregate for such year of all Company contributions, other than elective contributions under the Savings Plan but including allocations from the ESOP supplemental suspense account (such ESOP allocations to be valued for purposes of this paragraph in the same manner as for purposes of determining "annual additions" under paragraph (b) below), that would have been allocated to the Eligible Employee's accounts under the Savings Plan or the ESOP but for the limitations of section 415 or section 401(a)(17) of the Code and the corresponding limitation language of those plans, and (b) is the aggregate of the "annual additions" (as defined in section 415(c) of the Code) actually made to or allocated under the Savings Plan and the ESOP for such year for the benefit of the Eligible Employee, other than elective contributions for his or her benefit for such year under the Savings Plan. 7. Accounts. For each Participant there shall be maintained hereunder -------- memorandum accounts to which shall be credited amounts deferred under Section 5 and any other credits made under the Plan (including credits, if any, under Section 6). Amounts deferred under Section 5 shall be allocated to accounts as of the end of the calendar quarter in which the corresponding Salary, if paid in cash, would have been paid. Amounts credited under Section 6 or Section 9 shall be allocated as of the end of the year or at such other time or times as the Administrator may determine. From and after the Investment Date there shall be separate accounting for amounts described in Section 5 and related notional investment experience (the "Section 5 Account") and other balances under the Plan (the "Non-Directed Account"). Effective as of the Investment Date, each Participant's Section 5 Account, if any, adjusted for interest at the Subject Rate through the immediately preceding day, shall be treated (solely for purposes of the Plan) as having been invested in such Investment Alternative or Investment Alternatives as the Participant shall have selected from among those made available under the Plan, or in the absence of such a Participant selection in such Investment Alternative or Alternatives as the Administrator may determine. Each Participant with a Section 5 Account shall be entitled thereafter, by written notice to the Company, to reallocate the notional investment of such Account (as the same may be adjusted for additional credits, distributions, or notional investment experience under this paragraph) among the Investment Alternative or Alternatives made available under the Plan, any such change to take effect as of the beginning of the calendar quarter (i.e., January 1, April 1, July 1 or October 1) next following receipt by the Company of such change notice. All Participant selections of or changes in notional investments under this paragraph shall be made by written notice delivered to the Company. The Administrator may prescribe such additional rules and procedures for the notional investment of Section 5 Accounts as it deems advisable. As of the end of each calendar quarter (i.e., March 31, June 30, September 30 and December 31) and as of the Investment Date there shall be allocated to each Non-Directed Account notional interest at an annual rate equal to the Subject Rate. Thereafter, each Non-Directed Account shall be adjusted for notional investment experience as though invested (as of the Investment Date) in the Nondiscretionary Fund. A Participant's account or accounts shall continue to be maintained and adjusted for notional interest or other notional investment experience until distributed in full. 8. Distribution. Subject to such restrictions and limitations as the ------------ Administrator may impose, benefits under the Plan shall be distributed as follows. In connection with his or her initial participation in the Plan (or by March 31, 1998, if later), each Participant shall elect, in such manner and form as the Administrator may determine and separately as to the Participant's Section 5 Account and vested Non-Directed Account under the Plan, how such Accounts (as the same may accumulate and be adjusted in the future) shall be paid from among the following options: (a) A lump sum payment within 20 days of termination of employment. (b) Three annual installments, the first such installment (equal to one-third of the Participant's vested Account) being paid within 20 days of termination of employment, the second installment (equal to one-half of the vested Account remaining after the first installment, as adjusted for notional investment experience) being paid on the first anniversary of the termination of employment, and the third and final installment (equal to the entirety of the vested Account remaining after the first and second installments, as adjusted for notional investment experience) being paid on the second anniversary of the termination of employment. (c) A single life annuity, payable monthly for the Participant's life commencing with the first day of the month coinciding with or next following the Participant's termination of employment and ending with the month of the Participant's death, that is the actuarial equivalent of the Participant's vested Account hereunder at termination of employment determined by the Administrator using the actuarial assumptions set forth in Exhibit B. (d) A 50% joint and survivor annuity (that is actuarially equivalent to the Participant's vested Account hereunder at termination of employment determined by the Administrator using the actuarial assumptions set forth in Exhibit B) providing monthly payments to the Participant commencing with the first day of the month coinciding with or next following the Participant's termination of employment, with 50% of such monthly amount being paid thereafter to the person to whom the Participant was married at the date annuity payments to the Participant commenced or to such other person as the Participant may designate with the consent of the Administrator (the "contingent annuitant"), provided the contingent annuitant survives the Eligible Employee, with the last such payment being made for the month in which the contingent annuitant dies. A Participant who has made an initial election as described above may change such election by delivering a notice of such change, in such form and manner as the Administrator may determine, to the Administrator not later than December 31 of the second calendar year preceding the calendar year in which termination of employment occurs. Any change in form of payment with respect to a Participant's Section 5 Account or vested Non-Directed Account, as the case may be, upon becoming effective shall apply to the entirety of such Account, including future accumulations, if any, unless later changed again in accordance with this Section. If a Participant's employment terminates prior to January 1 of the second year following the year in which he or she has made a change in election described above, his or her vested Accounts, if any, shall be distributed in accordance with the most recent distribution elections applicable to such Accounts. In the absence of an effective election with respect to a Participant's Section 5 Account or vested Non-Directed Account, as the case may be, the entirety of such vested Account, if any, shall be distributed in accordance with the election, if any, in effect with respect to the remainder of the Participant's vested interest in the Plan, and in the absence of any such election in three annual installments as described at (b) above. Notwithstanding the foregoing, the distribution alternatives described at (c) and (d) above shall not be available with respect to any Account if the totality of the Participant's vested Accounts at termination of employment have a balance of $50,000 or less. In the event any Participant has made an otherwise effective election to have his or her Section 5 Account or vested Non-Directed Account distributed under an alternative described at (c) or (d) above, but the totality of the Participant's vested Accounts at termination of employment have a balance of $50,000 or less, distribution shall be made in three annual installments as described at (b) above. If a Participant effectively elects the form of distribution described in (b) above and dies or becomes disabled (as determined by the Administrator) during the installment distribution period, the Administrator may provide for immediate payment of the remaining balance in the Participant's Account. Notwithstanding the foregoing, the Company prior to a Change in Control may defer distributions hereunder (but not beyond a Change in Control) to the extent it determines that the distributable amount, if not deferred, would (together with other compensation paid to the Eligible Employee) result in amounts that are not deductible to the Company by reason of Section 162(m) of the Code. Any distributable amount deferred under the preceding sentence shall continue to earn notional interest at the Subject Rate pursuant to Section 7 above until actually paid. 9. Additional Accounts. In addition to credits under Section 5 or ------------------- Section 6 above, the Committee in its sole discretion may provide for discretionary credits hereunder with respect to any employee or former employee of the Company who is designated by the Committee, whether or not such employee is otherwise designated an Eligible Employee with rights of participation under the Plan. Any credits under this Section 9 shall be allocated to the Participant's Non-Directed Account and, if there are other amounts allocated to such Account, shall be separately accounted for as a sub-account of such Account. The Committee may impose such vesting rules as it may determine on an individual's right to receive a distribution in respect of any amounts described in this Section. Subject to such vesting rules, the balance of any account maintained under this Section 9 shall be distributed at such time or times and in such manner as the Committee shall determine, subject, however, to the provisions of Section 15 below. 10. Death. In the event a Participant hereunder should die prior to ----- complete distribution of his or her accounts, the remaining balance of such accounts shall be distributed as soon as practicable thereafter in a lump-sum payment to the Participant's designated beneficiary or beneficiaries. A Participant may at any time specify or add a beneficiary, or revoke an existing beneficiary designation, by notice in writing delivered to the Secretary of the Company. If the Participant dies without a beneficiary designation in effect, the death benefit payable hereunder shall be paid to the Participant's estate. 11. No Assignment. No Participant and no beneficiary of a Participant ------------- shall have any right to assign or otherwise alienate the right to receive payments hereunder, in whole or in part. 12. Taxes. All distributions from the Plan shall be subject to, and ----- reduced by, applicable tax withholding. To the extent amounts deferred under the Plan are determined by the Company to be subject to FICA or Medicare tax at time of deferral or at any later time prior to distribution, the Company in its discretion may withhold the required taxes from other amounts payable to the Eligible Employee or may require the Eligible Employee to pay the required taxes by separate check; but if the required taxes are not so paid or withheld, the Eligible Employee's account balance hereunder shall be appropriately reduced. 13. Amendment; Termination. The Committee or the Board may terminate ---------------------- and the Board may at any time and from time to time amend the Plan; provided, that no such amendment to the definition of "Change in Control" shall be effective as to any Participant without his or her consent; further provided, that no amendment or termination following a Change in Control shall affect the rights of Participants to an immediate payment of amounts deferred or credited under the Plan prior to the Change in Control; and further provided, that accounts maintained under the Plan shall continue to be adjusted for notional interest or other notional earnings until distributed in full. If the Committee in its sole discretion should at any time deem it necessary to preserve the qualification of the plan under Title I of the Employee Retirement Income Security Act of 1974, as amended, as a plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, it may terminate the Plan solely as to those Participants whose continued participation in the Plan would or, in the determination of the Committee, might cause the Plan to fail to be so qualified. Upon termination of the Plan as to any individual, no further deferrals or credit under Section 5 or 6 shall be made in respect of such individual, and the Committee in its sole discretion may elect to accelerate the payment of any or all of such individual's remaining benefits under the Plan. 14. No Employment Rights. Nothing in this Plan shall be construed as -------------------- giving any person rights to be employed or remain employed by the Company or to receive any remuneration from the Company, except payment of deferrals and credits as described above. Nothing in this Plan shall be construed as obligating the Company in any way to maintain either the Savings Plan or the ESOP. By participating in the Plan, each Eligible Employee affirms and acknowledges the Company's absolute right, subject only to the limitations of law, to make such changes in the Saving Plan and the ESOP as the Company may from time to time see fit, or to terminate one or both of those plans if it so chooses. 15. Acceleration Upon Change in Control. In the event of a Change in ----------------------------------- Control, all amounts theretofore deferred or credited under the Plan shall become immediately due and payable and shall be distributed in a lump sum not later than by the 60th day following the Change in Control. 16. Governing law. The Plan shall be construed under the laws of the ------------- State of Delaware. Exhibit A Change in Control --------------------- A "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 Securities Exchange Act of 1934, as amended (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), 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, of securities of the Company representing 30% 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 30% 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. Exhibit B Actuarial Assumptions --------------------- Interest rate: 7.5% Mortality: 1983 Group Annuity Mortality Table (male rates) EX-11 6 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. 31, 1997 1996 1995 ---- ---- ---- Basic Average shares outstanding 13,257 9,670 8,773 --------- --------- -------- Total 13,257 9,670 8,773 ========= ========= ======== Net (loss) income $ (10,530) $ 7,805 $ 1,926 ========= ========= ======== Per share amount $ (0.79) $ 0.81 $ 0.22 ========= ========= ======== Diluted Average shares outstanding 13,257 9,670 8,773 Net effect of dilutive stock options -- based on the treasury stock method using the year-end market price, if higher than average market price 134 266 143 --------- ---------- --------- Total 13,391 9,936 8,916 ========= ========== ========= Net (loss) income $ (10,530) $ 7,805 $ 1,926 ========= ========= ======== Per share amount $ (0.79) $ 0.79 $ 0.22 ========= ========= ========
EX-13 7 ANNUAL REPORT EXHIBIT 13 FINANCIAL SECTION - -------------------------------------------------------------------------------- Brown & Sharpe Manufacturing Company
CONTENTS Selected Financial Data............................................... F-2 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... F-3 Consolidated Statements of Operations................................. F-10 Consolidated Balance Sheets........................................... F-11 Consolidated Statements of Cash Flows................................. F-12 Consolidated Statements of Shareowners' Equity........................ F-13 Notes to Consolidated Financial Statements............................ F-14 Report of Independent Auditors........................................ F-27 Common Stock Market Prices and Dividends.............................. F-28
F-1 SELECTED FINANCIAL DATA
(dollars in thousands, except per share data, number of shareowners, and employees) 1997 1996 1995 1994 1993 OPERATIONS FOR THE YEAR: Sales $322,513 $344,877 $328,031 $209,369 $159,518 Operating (loss) profit $ (3,644) $ 16,588 $ 11,064 $ (6,049) $ 604 Percent (1.1)% 4.8% 3.4% (2.9)% 0.4% Net (loss) income $(10,530) $ 7,805 $ 1,926 $(14,335) $ (2,416) Average shares outstanding (thousands) 13,257 9,670 8,773 6,057 4,969 Per common share: Basic $ (0.79) $ 0.81 $ 0.22 $ (2.37) $ (0.49) Diluted $ (0.79) $ 0.79 $ 0.22 $ (2.37) $ (0.49) AT YEAR-END: Backlog $ 60,000 $ 51,000 $ 59,000 $ 61,000 $ 26,000 Assets $300,074 $314,448 $295,400 $272,274 $165,871 Current ratio 2.2:1 1.93:1 1.59:1 1.95:1 1.73:1 Long-term debt, including current maturity $ 76,062 $ 68,497 $ 74,007 $ 73,420 $ 34,357 Total notes payable and long-term debt $ 76,062 $ 69,206 $102,068 $ 92,613 $ 64,500 Equity $116,498 $140,400 $ 85,857 $ 78,925 $ 63,520 Per share $ 8.74 $ 10.63 $ 9.85 $ 9.12 $ 12.78 Long-term debt ratio .395 .328 .463 .482 .351 Shareowners of record 1,943 2,104 4,400 4,100 4,900 Employees 2,409 2,383 2,373 2,370 1,543
(1) The 1997 operating loss includes a $16,220 restructuring charge. See Note 2 to the Consolidated Financial Statements for additional information. In addition to the restructuring charge, the 1997 net loss includes a $1,346 loss arising from the sale of the Company's wholly-owned subsidiary, Technicomp, Inc., and a $1,224 gain resulting from an exchange of shares of common stock, which were held for investment. (2) The consolidated financial data for the periods from 1997 to 1994 include the results of operations and year-end data of DEA and Roch acquisitions. (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. (4) 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. F-2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview In the fourth quarter of 1997, management implemented a Reorganization Plan ("the Plan") which included business processing reengineering at certain of its European sites, as well as selected product rationalization in preparation for new product introductions. In addition, the Measuring Systems Division's marketing and service organization was also reorganized. The Plan provided for a workforce reduction of approximately 160 persons, primarily in its European operations. The Plan also provided for inventory adjustments and the write-down of fixed assets and certain intangible assets. Management expects, based on its analysis, that the Plan will generate approximately $5.0 million in pretax savings in 1998, increasing to $9.0 million annually thereafter. Restructuring expenses were recorded in the fourth quarter of 1997, due to the Plan, amounting to $16.2 million ($1.22 per share), of which $5.4 million was recorded in cost of goods sold with the balance recorded as a separate restructuring charge line item as part of operating profit. $7.3 million of the $16.2 million charge will require cash outlays in 1998, while the balance reflects asset write-downs. Also during 1997, the Company disposed of certain non-strategic assets. In the third quarter of 1997, the Company disposed of its wholly-owned subsidiary, Technicomp, Inc., and recognized a loss of $1.3 million ($0.10 per share). Technicomp was in the business of providing video training materials to the manufacturing and services industries. During the fourth quarter of 1997, the Company exchanged its shares of common stock held for investment in an unrelated business for shares of common stock of a publicly traded company, which resulted in a gain of $1.2 million ($0.09 per share). These shares were in turn sold early in 1998 for an amount approximating the carrying value at December 31, 1997. Excluding the effect of the restructuring expenses totaling $16.2 million and the disposal of the two non-strategic assets discussed above, which resulted in a net loss of $0.1 million, the 1997 results of operations would have resulted in net income of $5.8 million ($0.44 per share). See Footnote 2 to the Consolidated Financial Statements for further information regarding the restructuring and other reorganization activities. The Company currently operates entirely in the metrology industry through three management units: the MS Division, which manufactures and markets manual and computer-controlled, high precision CMMs and accounted for approximately 69% of the Company's sales in 1997; the PMI Division, which manufactures mechanical and electronic measuring and inspection tools and accounted for approximately 28% of the Company's sales in 1997; and the CM Division, which designs and engineers specialty metrology products and systems primarily utilizing non- contact technologies and accounted for approximately 3% of the Company's sales in 1997. MS Division sales include revenue from aftermarket sales and service for CMMs which the Company estimates, during 1997, comprised approximately 27% of total MS Division sales. Approximately 60% of the Company's sales in 1997 were located outside the United States (based on customer location). FORWARD LOOKING STATEMENTS This "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as other portions of this document contains forward looking statements concerning the Company's operations, economic performance and financial condition. Such statements are subject to various risks and uncertainties, including those set forth in "Risk Factors," and actual performance could differ materially from that currently anticipated by the Company. In addition, this "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Annual Report. F-3 RESULTS OF OPERATIONS Sales. Sales for 1997 were $322.5 million compared with 1996 sales of $344.9 million, which is 6.5% below the 1996 level. The continuing strength of the U.S. dollar caused $18.2 million of the $22.4 million decrease in 1997, because foreign denominated sales, when translated to U.S. Dollars using lower exchange rates, resulted in lower U.S. Dollar value sales for 1997 compared with 1996 sales. When 1997 sales are translated at 1996 exchange rates, such 1997 sales amount to $340.7 million. The $4.2 million sales decrease, determined by comparing 1997 and 1996 sales at the same exchange rate levels, was caused by a $2.9 million and $2.6 million decrease in the MS and CM Divisions' sales, respectively, offset by a $1.3 million increase in PMI Division sales. The $2.9 million decrease for the MS Division was due to a decrease in machine sales of approximately $7.0 million offset by an increase of approximately $4.1 million in service and software related revenue. The increase in service and software revenue was due, primarily, to the inclusion of the sales of Automation Software, Incorporated ("ASI") in the consolidated results of operations beginning in August 1997, after the Company acquired the remaining 50% interest in ASI in July 1997 (See Note 2 for further information). The $7.0 million decrease in the MS Division machine sales was due to decreased unit sales in 1997, which were partially offset by increased unit selling prices. A substantial portion of the reduced unit sales was due to problems and delays with certain product introductions in early 1997 that impacted sales for much of 1997. Sales for the CM Division decreased $2.6 million due to lower volume of sales of can gauging machines. Offsetting decreased sales in MS and CM were increased sales in PMI amounting to $1.3 million. The increased PMI sales resulted from several new product offerings as well as additional sales in new market areas. Sales increased $16.9 million to $344.9 million in 1996 from $328.0 million in 1995. Foreign currency exchange rate fluctuations caused a decrease in sales of $4.9 million during 1996 as compared to an increase of $12.1 million in 1995. Excluding these foreign currency effects, sales for 1996 increased 6.6%, or $21.8 million, over 1995. The MS Group was responsible for approximately $19.8 million of the $21.8 million increase and the PMI and CM Divisions were responsible for the remaining $2.0 million. The improvement in MS Group sales was due to increased sales of more fully configured CMMs with higher sales prices, along with an increase in unit volumes of lower priced CMMs. New products and service revenue also contributed to the increase. The increase in PMI Division sales was attributable to the U.S. catalog and distribution business. (Loss) Earnings. The Company incurred a $10.5 million net loss in 1997. As discussed above, the 1997 net loss included $16.2 million of restructuring expenses, as well as $0.1 million loss due to the disposition of certain non-strategic assets. Excluding the effect of the restructuring expenses and non-strategic asset disposition, 1997 would have realized $5.8 million of net income, which compares with $7.8 million in 1996. The Company incurred a $3.6 million operating loss in 1997, which included $16.2 million of restructuring expenses discussed above. Excluding the effect of the restructuring charge, 1997 operating profit would have been $12.6 million which is $4.0 million below the 1996 operating profit of $16.6 million. The gross margin for 1997 was $103.7 million, which included $5.3 million of the $16.2 million restructuring expenses. The $5.3 million charge was a result of adjustments for inventory levels that exceed expected requirements resulting from the Company's Reorganization Plan discussed above. When the $5.3 million inventory adjustment is excluded from cost of goods sold, the 1997 gross margin is $109.0 million, which is 33.8% of 1997 sales. This compares with a 1996 gross margin of $118.6 million, which was 34.4% of 1996 sales. The $9.6 million decrease in 1997 gross margin is due, in part, to the use of lower 1997 foreign exchange translation rates than in 1996, arising from the stronger U.S. Dollar, which amounted to approximately $2.2 million. The remaining $7.4 million decrease is due to lower gross margins amounting to $7.8 million and $1.2 million for the MS and CM Divisions, respectively, offset by an increased margin of $1.6 million for the PMI Division. The reduced margin for the MS Division was due to lower overhead absorption for certain more highly configured CMMs produced by the Company's European F-4 operations, as well as increased costs for certain of its new products introduced early in 1997. The lower gross margin for the CM Division was due to unabsorbed overhead costs arising from reduced shipments. The $1.6 million improvement in the PMI Division gross margins was primarily due to sales in the United States of products produced outside of the United States where Dollar denominated costs were lower in 1997 than in 1996, due to weaker European currencies. Selling, general, and administrative expenses ("SG&A") in 1997 were $5.6 million lower than 1996. After excluding the effect of the lower foreign exchange rates in 1997, which amounted to $4.7 million, SG&A expenses in 1997 were slightly lower than 1996. Interest expense in 1997 was $1.9 million lower than 1996 due to reduced level of borrowings in 1997, and other income in 1997 was $0.6 million higher than 1996 due, primarily, to increased interest income of $0.5 million generated on average cash balances that were higher in 1997 than in 1996. Results in 1997 included a $1.6 million tax provision, although the Company incurred a pretax loss of $9.0 million, because nearly all of the restructuring expenses and loss on non-strategic asset dispositions receive no tax benefits. There were no tax benefits for these special charges because most of the charges are in tax jurisdictions with net operating loss carryforwards that, together with circumstances specific to our entities there, prohibit recognition of the benefits under generally accepted accounting principles. At the same time, the Company has provided tax for income earned in certain jurisdictions which have no available net operating losses. After adjusting for the restructuring expenses and the non-strategic asset disposition, the 1997 effective tax rate was 21.1%. In 1996 the Company was able to utilize substantially more net operating losses to reduce its 1996 tax provision, which resulted in a lower effective tax rate in 1996. See Note 2 to the Consolidated Financial Statements for further information. 1996 net income amounted to $7.8 million, which compared with 1995 net income of $1.9 million. The 1996 operating profit of $16.6 million was $5.5 million higher than 1995. The improved operating profit was due to increased sales volume and its positive impact on overhead absorption and gross margins, as well as a better product mix. The stronger 1996 gross margin resulted from improved gross margins for the MS Division arising from increased unit volumes of more fully configured higher price CMMs offset only partially by increased unit volumes of lower priced CMMs. The gross margin improvement of the MS Division was offset partially by decreased gross margins in the PMI and CM Divisions of 4.5% and 4.1%, respectively. PMI's lower gross margin was due to less absorption of fixed costs as the division reduced its inventory level and production requirements and incurred some start up costs for new products. CM's lower gross margin was due to unfavorable volume variances. SG&A decreased $2.0 million in 1996 from 1995 levels. There was a $1.8 million loss from foreign currency transactions in 1996, which compared with a $0.6 million gain in 1995, and agents' commissions increased $0.6 million in 1996 from the 1995 level of $7.7 million. These increased 1996 costs were offset by reductions in certain duplicative distribution, management and administrative functions in the MS and PMI Divisions. Interest expense decreased $0.8 million in 1996 compared with 1995 amounts due to decreased average borrowings in 1996. The decrease in borrowings in 1996 occurred after an equity offering in October 1996. The effective tax for 1996 was significantly lower than the 1995 effective tax rate because of a $4.7 million reduction in 1996 of a previously recorded deferred income tax valuation allowance, which resulted in a lower effective tax rate in 1996. LIQUIDITY AND CAPITAL RESOURCES Over the last several years, prior to the 1996 equity offering, the Company has funded its working capital, capital expenditure, research and development and other cash needs from operating cash flows, sales proceeds from discontinued businesses, borrowings under short-term credit facilities, and an aggregate of $33.5 million of term and mortgage indebtedness incurred in 1994. In October 1996, the Company completed a $48.0 million public equity offering of 4.4 million new shares of common stock. In November 1997, the final phase of the planned restructuring of the Company's balance sheet was completed when the Company entered into two financing arrangements to refinance certain existing debt obligations of about $45.0 million and provide additional financing for future needs of the Company. One of the borrowings was a $50.0 million private placement of senior F-5 notes with a 10 year maturity and an interest rate of 7.29%. The other arrangement was a $30.0 million three year syndicated multi-currency revolving credit facility with four banks. 65% of the shares of certain of the Company's foreign subsidiaries are pledged as security under the 1997 financings. $11.7 million of the private placement was used to repay a bridge loan incurred two months earlier to pay a portion of the $25.0 million notes payable due September 28, 1997, the balance of which was paid with internally generated funds. $13.0 million of the private placement was used to retire the 9 1/4% convertible subordinated debentures, and the remaining balance is cash available for payment of the $6.8 million mortgage when it matures in 1999 and to fund certain of the Company's development plans and for other general corporate purposes. As of December 31, 1997, the Company has not borrowed any amount under the revolving credit facility described above. At December 31, 1997, the Company's outstanding indebtedness was $76.1 million (including the current portion) of long-term debt. There was no short-term debt outstanding at December 31, 1997. The Company's cash and cash equivalents at December 31, 1997 were $20.5 million. At December 31, 1997, the annual maturities of the Company's long-term debt were $4.0 million, $9.0 million, $3.8 million, $12.1 million and $7.8 million for 1998, 1999, 2000, 2001 and 2002, respectively, and $39.4 million thereafter. Management believes that the two 1997 financing arrangements and the 1996 public equity offering and the further additional borrowing capacity the offering allows along with the available existing short- and long-term borrowings, cash on hand and future cash flow from operations will be sufficient to meet foreseeable cash requirements of the Company for the next three to four years. Significant acquisitions or strategic partnerings could, however, increase the Company's capital requirements, and in such event the Company might seek to raise additional debt or equity. Cash Flow. Net cash provided by operations in 1997 was $17.4 million, as compared to net cash provided by operations of $7.8 million in 1996. For the year ended December 31, 1997, net loss of $10.5 million decreased by depreciation and other non-cash items of $31.7 million was partially offset by increases in working capital of $3.8 million. For the year ended December 31, 1996, net income of $7.8 million, increased by depreciation and other non-cash items of $12.3 million was partially offset by increases in working capital of $12.3 million. Net cash used in investment transactions in 1997 was $23.1 million as compared to net cash used in investment transactions during 1996 of $13.1 million. During 1997, investment transactions included capital expenditures of $9.6 million. The Company also invested $3.0 million to acquire the remaining 50% of its equity investee, ASI, and used other funds to acquire a 50% ownership position in Metroptic Technology Limited, a sensor technology development company, as well as certain other assets. During 1996, investment transactions included capital expenditures of $11.6 million. Cash provided by financing transactions was $7.6 million during 1997 compared with $16.1 million for the same period in 1996. Financing transactions during 1997 consisted of a decrease of $0.7 million in short-term borrowings, proceeds from long-term debt of $27.8 million offset by principal payments of long-term debt of $18.3 million. Financing transactions during 1996 consisted of $48.0 million of funds arising from the equity offering described above, a $33.1 million decrease in short-term borrowings, a $3.8 million increase of long-term debt to finance the new CM facility in Telford, England, and the repayment of $5.2 million of long-term debt. Working Capital. Working capital of $113.2 million at December 31, 1997 increased from $108.0 million at December 31, 1996 principally due to the decrease in short-term debt partially offset by the reduction of inventories and receivables. Inventories decreased to $73.4 million at December 31, 1997, a decrease of $4.2 million from the end of 1996, and accounts receivable decreased $12.6 million from December 31, 1996 primarily due to reduced sales level and the translation effect on the account balances of lower foreign currency exchange rates. In addition, total short- and long-term borrowing of $76.1 million at December 31, 1997 compared to $69.2 million at December 31, 1996. F-6 Product Design and Manufacturing Engineering. The Company invested $15.5 million, or 4.8% of sales, $13.9 million, or 4.0% of sales, and $15.8 million, or 4.8% of sales, in 1997, 1996 and 1995, respectively, for product design and manufacturing engineering. RISK FACTORS COMPETITION The Company's MS Group currently has four principal direct domestic and foreign competitors, some of which are owned by entities that have greater financial and other resources than the Company. The MS Group also faces indirect competition from other types of metrology firms such as manufacturers of fixed gauging systems. The primary industries to which the MS Group sells its products are characterized by a relatively small number of large participants with significant purchasing power. In addition, the MS Group generally sells its products through a competitive bid process in which at least one and frequently several of the Company's competitors submit competing bids. As a result, the Company experiences significant pricing competition in connection with sales by its MS Group which can have an adverse impact on the Company's sales and margins. During periods when the metrology industry suffers from over capacity, downward pricing pressure experienced by the MS Group is likely to be more intense and the Company's margins may be more severely impacted. In addition, certain of the Company's competitors have access to greater financial resources and may be able to withstand such pricing pressure more effectively than the Company. Accordingly, there can be no assurance that the MS Group will be able to continue to compete effectively against existing competitors or new competitors, especially during periods of over capacity. The market for the PMI Division's products is fragmented and the PMI Division competes with a large number of competitors, including the market leader in this area, primarily on the basis of the strength of its third-party distribution network, price and product innovation. New competitors from emerging industrialized countries with lower production costs than the Company's represent a significant competitive challenge to the Company. As a result, the PMI Division's continued success and profitability will be dependent on its ability to continue to develop cost-effective sourcing and innovative products. CYCLICALITY OF END USER MARKETS The primary end user markets for the Company's products, which include the aerospace, heavy transport and automotive (including automotive suppliers) industries, experience cyclicality in connection with recessionary periods. As a consequence, the price of and margins for the Company's products have been and are likely to continue to be adversely impacted by decreases in capital spending by such end user markets during recessionary periods. In addition, because the PMI Division sells primarily through distributors, the PMI Division is likely to experience significant declines in sales volumes during recessionary periods because catalog houses and distributors typically reduce purchases of the Company's products at the onset of such recessionary periods even more than the decline in their end user markets' demands would dictate, in order to reduce their inventories. There can be no assurance that the Company will be able to operate profitably during any recessionary downturn. FOREIGN OPERATIONS As of December 31, 1997, approximately 62.8% (based on book values) of the Company's assets, 60.1% of the Company's sales (based on customer location) and 70.3% of its employees were located outside the United States. 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 or deemed distributions to the Company or any U.S. subsidiary, currency exchange rate fluctuations, inflation, maintenance of minimum capital requirements, import and export controls, exchange controls and social (labor) programs. F-7 In addition, the wide-spread geographic locations of the Company's facilities and operations make it more difficult for the Company to coordinate its financial and operating reporting and oversee its operations and employees. In response to these difficulties, the Company has taken various personnel and procedural actions to improve its reporting and operating procedures. While the Company believes that these actions have resulted in satisfactory financial and operational reporting and oversight for its present business, additional system revisions may be needed if the Company should experience a further increase in the number of foreign facilities. RESTRUCTURING PLAN Although the Restructuring Plan is expected to generate approximately $5.0 million in pretax savings for the year 1998, (with the savings starting primarily in the fourth quarter), increasing to an expected $9.0 million savings thereafter, there can be no assurance that these levels of savings will be reached, or reached on this timetable. DEPENDENCE ON KEY SUPPLIER The Company currently purchases the vast majority of its externally sourced low to medium accuracy electronic touch trigger sensor probes and heads from a publicly held United Kingdom company (the "Supplier") which is the dominant supplier of such sensor probes to CMM manufacturers. No alternative supplier for this class of electronic sensor probes, which are a key component of substantially all of the Company's lower accuracy CMMs, is currently available and developing an alternative source for the probes and heads could take more than a year. Although adequate supplies of such probes and heads for at least several months is potentially available from current inventories of the Company and its customers, any reductions or interruptions in supply or material increases in the price of electronic sensor probes purchased from the Supplier could cause the Company to suffer disruptions in the operation of its business or incur higher than expected costs, which could have a material adverse effect on the Company. TECHNOLOGY As the size of some components measured by metrology products decreases and the required speed and precision of such measurements increases, the Company's products may become obsolete unless the Company develops more sophisticated software and metrology systems. Although the Company's strategy is to focus research and development in the area of software development and non-contact technologies, there can be no assurance that the Company will be successful in competing against new technologies or competitors, some of whom may not now participate in the metrology industry. DEPENDENCE ON LIMITED NUMBER OF KEY PERSONNEL The success of the Company is dependent to a significant extent upon the continuing services of a limited number of key executives of the senior management team. Loss of the services of one or more of these senior executives could have a material adverse effect on the Company. YEAR 2000 The Company is in the process of reviewing its Year 2000 product compliance policy to ensure that its products are Year 2000 compliant. During 1997, the Company modified its software, which is included in many of its products, so that the software has no inherent date dependencies. The Company is in the process of assessing how it will address older products sold prior to 1997 that may be affected by Year 2000 requirements. The Company has completed an assessment of its computer systems and software purchased from vendors, which support the Company's management information systems, for Year 2000 compliance and has developed action plans for the Company. By the end of 1998, the Company expects that its internal reporting systems will be able to function with respect to dates in the year 2000 and thereafter. The Company expects to incur internal staff costs, which they believe are immaterial, as well as consulting and other expenses related to enhancements F-8 necessary to prepare the systems for the Year 2000. Consulting fees and other expenses to resolve the Year 2000 problem are expected to be less than $0.5 million. EUROPEAN MONETARY UNION Beginning on January 1, 1999, a new currency (the Euro) will be created. All companies in the yet-to-be determined participating European countries will conduct transactions in either the Euro or one of the national currencies until June 30, 2002. Beginning July 1, 2002, the national currencies in the participating countries will cease to exist and all transactions will be settled in the Euro. In 1998, there will be an official designation of which European countries will become members of the European Monetary Union ("EMU"). More than 60% of the Company's product is produced or sourced in Europe. The Company has significant sales and a number of business operations in the countries invited to participate in the EMU. The Company must be able to transact and account for business in the Euro as well as the various national currencies during the three and one half year transition period, and thereafter, exclusively in the Euro, or potentially lose business or risk violating contractual arrangements. Although it is expected that some translation software programs to make the change to the Euro will be necessary, management believes that it has the necessary systems and business processes to deal with the new currency during the three and one half year transition period. The Company is undertaking a multi-functional project to manage the changeover to the Euro with a completion date for the project of January 2000. F-9 CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1997, 1996, and 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995 --------- -------- -------- Sales $322,513 $344,877 $328,031 Cost of goods sold (Note 2) 218,842 226,235 212,733 Research and development expense 9,180 9,125 8,996 Selling, general and administrative expense 87,288 92,929 94,902 Restructuring charge (Note 2) 10,847 - 336 -------- -------- -------- Operating (loss) profit (3,644) 16,588 11,064 Interest expense 6,380 8,280 9,129 Other income, net 1,044 462 688 -------- -------- -------- (Loss) income before income taxes (8,980) 8,770 2,623 Income tax provision 1,550 965 697 -------- -------- -------- Net (loss) income $(10,530) $ 7,805 $ 1,926 ======== ======== ======== Net (loss) income per common share (Note 1): Basic $ (0.79) $ 0.81 $ 0.22 ======== ======== ======== Diluted $ (0.79) $ 0.79 $ 0.22 ======== ======== ========
The accompanying notes are an integral part of the financial statements. F-10 CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 20,458 $ 20,158 Accounts receivable, net of allowances for doubtful accounts of $3,456 and $3,226 106,072 118,685 Inventories 73,430 77,572 Deferred income taxes 1,274 2,217 Prepaid expenses and other current assets 5,176 5,585 -------- -------- Total current assets 206,410 224,217 Property, plant and equipment: Land 6,627 7,094 Buildings and improvements 41,211 41,840 Machinery and equipment 85,405 90,337 -------- -------- 133,243 139,271 Less-accumulated depreciation 82,470 84,865 -------- -------- 50,773 54,406 Goodwill, net 9,211 10,806 Other assets (Note 7) 33,680 25,019 -------- -------- $300,074 $314,448 ======== ======== LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Notes payable and current installments of long-term debt $ 3,995 $ 32,481 Accounts payable 44,532 45,507 Accrued expenses and income taxes 44,699 38,217 -------- -------- Total current liabilities 93,226 116,205 Long-term debt (Note 8) 72,067 36,725 Long-term liabilities (Note 9) 18,283 21,118 Commitments and Contingencies (Notes 6 and 13) Shareowners' Equity: Preferred stock, $1 par value; authorized 1,000,000 shares; none issued - - Common stock: Class A, par value $1; authorized 30,000,000 shares; issued 12,821,867 shares in 1997 and 12,689,234 in 1996 12,822 12,689 Class B, par value $1; authorized 2,000,000 shares; issued 513,065 shares in 1997 and 517,604 in 1996 513 518 Additional paid-in capital 111,772 110,737 (Deficit) earnings employed in the business (10,757) (227) Cumulative foreign currency translation adjustment 2,603 17,175 Treasury stock; 42,592 shares in 1997 and 1996, at cost (455) (455) Unearned compensation - (37) -------- -------- Total shareowners' equity 116,498 140,400 -------- -------- $300,074 $314,448 ======== ========
The accompanying notes are an integral part of the financial statements. F-11 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997, 1996, and 1995 (DOLLARS IN THOUSANDS)
1997 1996 1995 --------- --------- --------- Cash Provided By (Used In) Operations: Net (Loss) Income $(10,530) $ 7,805 $ 1,926 Adjustment for Noncash Items: Provision for restructuring 16,220 - - Depreciation and amortization 12,346 9,957 11,010 Pension credits and charges 959 1,609 1,369 Deferred income taxes 1,283 (208) 376 Termination indemnities 865 590 331 Deferred compensation 37 312 216 Changes in Working Capital: (Increase) decrease in accounts receivable 4,643 (7,121) (4,324) (Increase) decrease in inventories (10,181) (4,019) (7,389) (Increase) decrease in prepaid expenses and other current assets 982 (224) 1,208 Increase (decrease) in accounts payable and accrued expenses 761 (914) (4,798) -------- -------- -------- Net Cash Provided by (Used in) Operations 17,385 7,787 (75) INVESTMENT TRANSACTIONS: Acquisition of equity investee, net of cash acquired (Note 2) (3,000) - - Capital expenditures (9,559) (11,632) (12,054) Proceeds from dispositions - 785 2,096 Other investing activities (10,503) (2,273) (445) -------- -------- -------- Net Cash Used in Investment Transactions (23,062) (13,120) (10,403) Financing Transactions: Increase (decrease) in short-term debt (709) (33,082) 10,915 Proceeds from issuance of long-term debt 27,810 3,811 - Principal payments of long-term debt (18,260) (5,144) (3,444) Issuance of common stock - 47,968 - Other financing transactions (1,211) 2,533 (600) -------- -------- -------- Net Cash Provided by Financing Transactions 7,630 16,086 6,871 Effect Of Exchange Rate Changes on Cash (1,653) 3,143 3,193 -------- -------- -------- CASH AND CASH EQUIVALENTS: Increase (decrease) during the year 300 13,896 (414) Beginning balance 20,158 6,262 6,676 -------- -------- -------- Ending balance $ 20,458 $ 20,158 $ 6,262 ======== ======== ======== Supplementary Cash Flow Information: Interest paid $ 4,887 $ 8,222 $ 8,004 ======== ======== ======== Taxes paid $ 1,241 $ 579 $ 2,598 ======== ======== ========
The accompanying notes are an integral part of the financial statements. F-12 CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY For the Years Ended December 31, 1997, 1996, and 1995 (DOLLARS IN THOUSANDS)
(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 31, 1994 $ 8,657 $ 66,412 $ (9,958) $ 14,530 $ (151) $ (565) Net Income - - 1,926 - - - Treasury Stock Transactions - - - - (119) - Restricted Stock Transactions - 153 - - - 216 ESOP Contribution 62 298 - - - - Foreign Currency Translation Adjustment - - - 4,396 - - ------- -------- -------- -------- -------- -------- Balance December 31, 1995 8,719 66,863 (8,032) 18,926 (270) (349) ------- -------- -------- -------- -------- -------- Net Income - - 7,805 - - - Treasury Stock Transactions - - - - (185) - Restricted Stock Transactions - (187) - - - 312 ESOP Contribution 44 385 - - - - Stock Options Exercised 20 132 - - - - Issuance of Common Stock 4,424 43,544 - - - - Foreign Currency Translation Adjustment - - - (1,751) - - ------- -------- -------- -------- -------- -------- Balance December 31, 1996 13,207 110,737 (227) 17,175 (455) (37) ------- -------- -------- -------- -------- -------- Net Loss - - (10,530) - - - Restricted Stock Transactions - - - - - 37 ESOP Contribution 32 416 - - - - Stock Options Exercised 96 619 - - - - Foreign Currency Translation Adjustment - - - (14,572) - - ------- -------- -------- -------- -------- -------- Balance December 31, 1997 $13,335 $111,772 $(10,757) $ 2,603 $ (455) $ 0 ======= ======== ======== ======== ======== ========
The accompanying notes are an integral part of the financial statements. F-13 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 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 user markets for its products are the automotive, aerospace, industrial machinery, electronics and computer 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. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined principally on a last-in, first-out (LIFO) basis for all domestic inventories 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 $11,031 and $11,431 at December 31, 1997 and 1996, respectively. Year-end inventories valued under the LIFO method were $17,051 in 1997 and $14,380 in 1996. During 1996, 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 increased net income by $241 in 1996. The composition of inventory at year-end was as follows:
1997 1996 ------- ------- Parts, raw materials and supplies $29,760 $35,897 Work in progress 17,341 17,116 Finished goods 26,329 24,559 ------- ------- $73,430 $77,572 ======= =======
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 $8,864, $7,120, and $8,980 in 1997, 1996, and 1995, 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 F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) accumulated depreciation accounts with any resulting gain or loss reflected in income. At December 31, 1997, land and buildings with a net book value of $22,572 were pledged as collateral for mortgage loans of $21,306. GOODWILL AND OTHER ASSETS Goodwill, which is net of accumulated amortization of $3,500 in 1997 and $1,407 in 1996, is being amortized on a straight-line basis over periods ranging from 7 to 20 years. In 1997, the Company reduced goodwill $700 to reflect a reduction of a deferred tax liability recorded as part of a purchase price adjustment for a business combination occurring in prior years. Other assets consisting of software and software development costs are amortized on a straight-line basis over periods ranging from 3 to 5 years. 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. If 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, 1997 and 1996. Transaction losses of $443 and $1,801 were recorded in 1997 and 1996, respectively, and transaction gains were recorded in 1995 of $601. Transaction gains in 1995 include an adjustment, which increased the gain, amounting to $640 ($0.07 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. 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 which invest primarily in U.S. Government instrumentalities, commercial paper of prime quality, certificates of deposit, and bankers acceptances guaranteed by banks or savings and loan associations which are members of the FDIC. Concentrations of credit risk with respect to trade receivables are limited due to the Company's large number of customers and their dispersion across many different industries and countries worldwide. At December 31, 1997, 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" (see Footnote 3 for further details). F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 (LOSS) INCOME PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share. Statement 128 replaced the calculation of primary and fully - ------------------ diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Weighted average shares used to calculate basic earnings per share for 1997, 1996, and 1995 were 13,256,993, 9,669,923, and 8,772,748, respectively. Weighted average shares and dilutive stock options used to calculate diluted earnings per share for 1997, 1996, and 1995 were 13,256,993, 9,945,998, and 8,772,748, respectively. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. CASH AND CASH EQUIVALENTS AND OTHER INVESTMENTS 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. The fair value of investments available for sale which are classified as other current assets are based on quoted market prices for the investment. The carrying value and fair value of investments available for sale at December 31, 1997 was $1,119 which is classified as an other current asset. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents and long-term fixed rate debt approximates fair value. ADVERTISING COST The Company expenses advertising costs as incurred. Advertising expense for the three years ended December 31, 1997 was $3.2 million, $3.6 million, and $3.8 million, respectively. RECLASSIFICATIONS Certain other amounts reported in 1995 and 1996 have been reclassified to conform with the 1997 presentation. 2. RESTRUCTURING CHARGE AND REORGANIZATION ACTIVITIES During 1997, management entered into several transactions as part of a Reorganization Plan ("The Plan") to restructure and reorganize certain of its key business units. A portion of the strategy included a comprehensive study of its European production and distribution structure in order to gain greater efficiencies in its European operations. Based upon the results of this review, it was decided to reengineer certain distribution processes and manufacturing operations, including outsourcing certain production activities where appropriate, as well as adjusting inventory levels to correspond with the new strategic objectives resulting from the study. F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) As a result of the Plan to restructure its European operations, along with other less significant changes in other parts of the world, in the fourth quarter of 1997, the Company recorded restructuring expenses totalling $16,220 ($1.22 per share). The charge provided for costs associated with involuntary employee termination benefits for approximately 160 employees, write-down of inventory to net realizable value, write-down of impaired fixed assets and certain intangible assets to fair value, and other restructuring costs. The inventory adjustment of $5,373 has been classified in the 1997 results in cost of goods sold. The remainder of the restructuring expenses were recorded as a separate restructuring charge line item also as part of operating profit. The following is an analysis of the restructuring charge and reserves at December 31, 1997. Employee Termination Benefit $ 7,550 Inventory Write-Downs 5,373 Fixed Asset and Intangible Write-Down 1,647 Other 1,650 ------- $16,220 =======
Results of operations for 1995 include restructuring charges of $336 ($0.03 per share) which consist principally of Brown & Sharpe employee severance and Brown & Sharpe sales offices closing costs associated with integrating Brown & Sharpe's existing operations with those of DEA mainly outside the U.S. Management also increased its investment in its 50% owned joint venture, Automation Software, Incorporated ("ASI") acquiring the remaining 50% interest for $3 million. This investment was accounted for using the purchase method of accounting, and the financial statements of ASI were included in the Company's consolidated financial statements beginning July 21, 1997, which was the date of the acquisition of the remaining 50% interest in ASI. The Company had previously accounted for its interest in ASI, prior to July 21, 1997, using the equity method of accounting. Pro forma results of operations for the period before July 21, 1997 were not presented because they are not materially different from the actual results for that period. As a further part of management's reorganization strategy, in the third quarter of 1997, the Company disposed of its investment of its wholly-owned subsidiary, Technicomp, Inc., a loss amounting to $1,346, and, in the fourth quarter of 1997, the Company exchanged shares of common stock held for investment in an unrelated business for shares of common stock of a publicly traded company, which resulted in a gain amounting to $1,224. 3. INCENTIVE AND RETIREMENT PLANS STOCK INCENTIVE PLANS Under the provisions of the Company's 1989 Equity Incentive Plan (the "89 Plan"), as amended on April 25, 1997 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. There were no awards of restricted stock during 1997 and 1996. 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. In 1997 and 1996, options were granted to purchase a total of 406,000 and 70,000 shares, respectively, for ten year option terms of Class A Common Stock granted at exercise prices between $11.88 and $14.125 per share. The majority of options granted in 1997 become exerciseable 50% of the award after 1 year and 50% after year 2 from the date of the award. The options granted in 1996 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 1 year and 50% after year 2 from the date of the award. The exercise price for shares covered by options awarded under the `89 Plan has been 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 1,525,000 shares and the amount of shares of Class A Common Stock including forfeitures F-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) remaining available, at December 31, 1997, for issuance under the `89 Plan in connection with future awards is 409,000 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. At December 31, 1997, there were no options outstanding for the '73 Plan. Option activity under both the `89 Plan and `73 Plan during the past three years is summarized as follows:
1997 1996 1995 -------------------------- -------------------------- -------------------------- Options Weighted-Average Options Weighted-Average Options Weighted-Average (000) Exercise Price (000) Exercise Price (000) Exercise Price Outstanding - beginning of year 714 $ 7.92 666 $ 7.40 218 $8.36 Granted 406 12.58 70 12.68 528 7.25 Exercised (96) 7.43 (21) 7.00 - - Forfeited or canceled (120) 9.54 (1) 13.22 (80) 8.99 ---- ---- ---- Outstanding - end of year 904 $ 9.69 714 $ 7.92 666 $7.40 ==== ==== ==== Exerciseable at end of year 380 $ 7.14 166 $ 7.77 138 $7.99 Weighted-average fair value of options granted during the year $ 4.65 $ 4.62 $2.90
Exercise prices for options outstanding as of December 31, 1997 ranged from $6.50 to $14.125. The weighted-average remaining contractual life of those options is 8.38 years. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997, 1996, and 1995, respectively: risk-free interest rates of 6.0%, 6.2%, and 6.4%; volatility factors of the expected market price of the Company's common stock of 34%, 33%, and 38%; and a weighted-average expected life of the option of 4.25 years. No dividend yield was utilized due to the fact that the Company does not anticipate that it will pay dividends in the foreseeable future. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the F-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
1997 1996 1995 --------- ------ ------ Pro forma net (loss) income $(11,235) $7,278 $1,723 Pro forma (loss) earnings per share: Basic and diluted $ (0.84) $ 0.75 $ 0.20
PROFIT INCENTIVE PLAN Under the provisions of the Company's Amended Profit Incentive Plan as originally approved in 1979, awards of cash could be made as bonuses to certain management employees. Plan awards provisions under the Plan in the amounts of $2,293, $1,682 and $1,157 were made in 1997, 1996, and 1995, respectively, based on performance objectives for the respective year. 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 "LTDCIP"), which was effective for 1995. The LTDCIP 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 (as defined in the plan) and shared by the plan participants (eleven key executives of the Company for 1997) pro rata based on annual salary paid. The 1997, 1996 and 1995 consolidated financial statements contain a provision resulting from this plan amounting to $462, $596, and $200, respectively. SAVINGS PLANS The 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 the three years ended December 31, 1997 was $1,468, $1,335, and $941, 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, in which event the Company would contribute amounts as necessary to pay down the indebtedness. ESOP expense was $510 in 1997, $458 in 1996, and $433 in 1995. At December 31, 1997, there were no unallocated shares of Class A Common Stock and Class B Common Stock held in the ESOP as all shares were allocated to participants' accounts. 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 the three years ended December 31, 1997 was $959, $1,609, and $1,369, respectively. F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 7.0% and 8.0% at the end of 1997 and 1996, respectively, a long-term return on assets of 8.0% in 1997 and 9.0% in 1996 and 1995, respectively, and annual wage increases of 5.5% and 6.5% at the end of 1997 and 1996, respectively. Retirement costs accrued are funded. The German plan's actuarial assumptions used a settlement rate of 7.5% at the end of 1997 and 1996, and an annual wage increase of 4.5% at the end of 1997 and 1996. 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, 1997, 1996, and 1995:
1997 1996 1995 -------- -------- -------- Service cost-benefits earned $ 787 $ 921 $ 823 Interest cost on projected benefit obligations 1,335 1,196 1,263 Return on plan assets, net (3,678) (2,387) (3,049) Net amortization and deferral 1,171 129 909 ------- ------- ------- Net periodic pension income $ (385) $ (141) $ (54) ======= ======= =======
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, 1997 and 1996:
1997 1996 -------- -------- Vested and accumulated benefit obligation $(17,786) $(14,152) ======== ======== Projected benefit obligation $(18,945) $(16,339) Plan assets at fair value 26,437 22,510 -------- -------- Funded status 7,492 6,171 Unrecognized portion of net assets (2,047) (1,336) -------- -------- Prepaid pension $ 5,445 $ 4,835 ======== ========
The following items are the components of net periodic pension cost for the unfunded German plan for the years ended December 31, 1997, 1996, and 1995:
1997 1996 1995 -------- ------- ------- Service cost-benefits earned $ 107 $ 115 $ 107 Interest cost on projected benefit obligations 363 383 372 -------- ------- ------- Net periodic pension cost $ 470 $ 498 $ 479 ======== ======= ======= Vested and accumulated benefit obligation $ (4,548) $(4,759) $(4,700) ======== ======= ======= Projected benefit obligation $ (5,166) $(5,472) $(5,519) Unrecognized net gain (367) (329) (304) -------- ------- ------- Unfunded accrued pension cost $ (5,533) $(5,801) $(5,823) ======== ======= =======
4. INCOME TAXES (Loss) income before income taxes consisted of the following:
1997 1996 1995 -------- ------- ------- Domestic $ 1,757 $(1,323) $(4,850) Foreign (10,737) 10,093 7,473 -------- ------- ------- (Loss) income before income taxes $ (8,980) $ 8,770 $ 2,623 ======== ======= =======
F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table reconciles the income tax provision (benefit) at the U.S. statutory rate to that in the financial statements:
1997 1996 1995 -------- -------- ------- Taxes computed at 34% $(3,053) $ 2,982 $ 892 Goodwill amortization 68 182 158 Additional tax on foreign income 191 676 113 State taxes (net) 123 104 31 Net operating losses and other losses (1,204) (3,143) (636) Restructuring reserve 5,117 - - Other (net) 308 164 139 ------- ------- ------ Income tax provision $ 1,550 $ 965 $ 697 ======= ======= ======
The income tax provision (benefit) consisted of the following:
1997 1996 1995 -------- -------- ------- Current: Federal $ 578 $ 686 $ (996) State 186 157 31 Foreign (497) 330 1,286 ------- ------- ------ 267 1,173 321 Deferred: Federal 960 (495) 996 Foreign 323 287 (620) ------- ------- ------ 1,283 (208) 376 ------- ------- ------ Income tax provision $ 1,550 $ 965 $ 697 ======= ======= ======
Provision has not been made for U.S. taxes on $47,300 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, 1997 and 1996 are as follows:
1997 1996 ------- ------- Deferred tax assets: Inventory reserves $ 4,463 $ 7,656 Warranty expense 789 1,103 Provision for doubtful accounts 574 401 Depreciation 817 999 Tax credit and loss carryforwards 36,377 44,531 Other 3,693 4,049 ------- ------- Gross deferred assets 46,713 58,739 Less valuation allowance 38,204 48,925 ------- ------- Deferred tax asset $ 8,509 $ 9,814 ======= ======= Deferred tax liabilities: Pension expense $ 1,920 $ 1,673 Inventory reserves 1,075 1,276 Depreciation 1,912 2,568 Other 4,329 3,500 ------- ------- Deferred tax liability $ 9,236 $ 9,017 ======= =======
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 decreased by $10,721 during 1997 of which $6,600 was attributable to changes in foreign exchange rates and has been F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) recorded in equity as a component of cumulative foreign currency translation adjustments. The recognition of any future tax benefits resulting from the reduction of $8,207 of the valuation allowance will reduce any goodwill related to the DEA acquisition remaining at the time of such reduction. For income tax purposes, the Company has operating loss and capital loss carryforwards of $2,100 and $1,200, respectively, in the U.K. and net operating loss carryforwards of $9,300, $34,000, $5,600, $3,700, and $22,700, respectively, in Switzerland, Germany, France, Japan, and Italy. The Swiss, French, Japanese, and Italian carryforwards expire between 1998 and 2002. There is no time limit for the U.K. and German carryforwards. During the year, the Internal Revenue Service completed the examination of the Company's domestic income tax returns for the 1993 and 1994 fiscal years. The Company's provision for the assessments which resulted from this examination was adequate. 5. OTHER INCOME AND EXPENSE Other income (expense), net includes:
1997 1996 1995 ----- ----- ----- Interest income $ 928 $ 414 $ 540 Gain (loss) on sale of fixed assets 21 34 (90) Other income 95 14 238 ------ ----- ----- $1,044 $ 462 $ 688 ====== ===== =====
6. RENTAL EXPENSE AND LEASE COMMITMENTS At December 31, 1997, the Company was obligated under operating leases expiring on various dates. Rental expense for the three years ended December 31, 1997 was $6,347, $8,309, and $9,767, respectively. Annual rental commitments under noncancelable leases pertaining principally to buildings and equipment at December 31, 1997 are $6,344, $2,202, $1,533, $845, and $713 for the years 1998 through 2002, and aggregate to $3,379 for all years subsequent to 2002. 7. OTHER ASSETS
1997 1996 ------- ------- Prepaid pension $ 5,445 $ 4,835 Equity investments 4,554 2,562 Demonstration equipment 10,877 10,890 Other 12,804 6,732 ------- ------- $33,680 $25,019 ======= =======
Other assets, which are net of accumulated amortization of $8,836 in 1997 and $6,088 in 1996, are being amortized on a straight-line basis over periods ranging three to twenty years. F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 8. LONG-TERM DEBT Long-term debt consisted of the following:
1997 1996 ------- ------- 7.29% term loan payable in annual installments of $7,143 from November 2001 to November 2006 and final installment of $7,142 in November 2007 $50,000 $ - 9 1/4% convertible subordinated debentures due December 2005 - 13,000 Mortgages at rates ranging from 5.00% to 9.22% 21,306 25,982 Notes payable, due September 28, 1997 with quarterly interest of LIBOR plus 0.60% - 25,000 Notes payable, due various dates with interest rates ranging from 7.72% to 12.39% 4,756 4,515 ------- ------- 76,062 68,497 Less: current installments 3,995 31,772 ------- ------- Total long-term debt $72,067 $36,725 ======= =======
In November 1997, the Company entered into two financing arrangements which were and will be used to refinance certain existing debt obligations and are available to provide additional financing for future needs of the Company. One of the borrowings was a $50,000 private placement of senior notes with a 10 year maturity and an interest rate of 7.29%. The other arrangement was a $30,000 three year syndicated multi-currency revolving credit facility with four banks. 65% of the shares of certain of the Company's foreign subsidiaries is pledged as security under the 1997 financings. $11,700 of the private placement was used to pay a bridge loan used to pay a portion of the $25,000 notes payable due September 28, 1997, the balance of which was paid with internally generated funds. $13,000 of the private placement was used to pay the 9 1/4% convertible subordinated debentures, and the remaining balance is available to pay the $6,800 mortgage when it matures in 1999 and to fund certain of the Company's development plans and for general corporate purposes. As of December 31, 1997, the Company has not used any of the revolving credit facility described above. Annual maturities of long-term debt are as follows: 1998--$3,995; 1999--$9,010; 2000--$3,756; 2001--$12,117; 2002--$7,778; and $39,406 thereafter. Interest rates on long-term debt average approximately 8.10% in 1997. The revolving credit facility and the 7.29% senior notes require the Company to comply with certain covenants, the most restrictive of which is debt to EBITDA ratio. 9. LONG-TERM LIABILITIES Long-term liabilities consisted of the following:
1997 1996 ------- ------- Other long-term liabilities $ 2,270 $ 4,700 Deferred income taxes 2,001 1,420 Unfunded accrued pension cost 5,297 5,801 Termination indemnities 8,715 9,197 ------- ------- $18,283 $21,118 ======= =======
F-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 10. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA Segment Information The Company operates exclusively in the Metrology Business. See Note 1 for a further description of the Company's business. European sales to unaffiliated customers are defined as sales of products that are primarily assembled in a foreign country.
1997 1996 1995 --------- -------- -------- GEOGRAPHIC AREA: Sales to Unaffiliated Customers From: United States $148,037 $132,956 $128,482 Europe 174,476 211,921 199,549 -------- -------- -------- $322,513 $344,877 $328,031 ======== ======== ======== Transfers Between Geographic Areas: From United States $ 7,216 $ 8,066 $ 3,870 From Europe 33,697 34,630 33,713 -------- -------- -------- $ 40,913 $ 42,696 $ 37,583 ======== ======== ======== Operating Profit (Loss): United States $ 4,994 $ 5,237 $ 492 Europe (8,638) 11,351 10,572 -------- -------- -------- $ (3,644) $ 16,588 $ 11,064 ======== ======== ======== Identifiable Assets: United States $ 91,225 $ 78,374 $ 77,726 Europe 188,391 215,916 211,412 Corporate 20,458 20,158 6,262 -------- -------- -------- $300,074 $314,448 $295,400 ======== ======== ========
During 1997, the FASB issued Statement of Financial Accounting Standards Number 131, "Disclosures about Segments of an Enterprise and Related Information". The Company is in the process of evaluating this pronouncement and preliminarily believes that it will be required to report its business in more than one segment. 11. 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 the Certificate of Incorporation and 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 1997 and 1996, 4,539 shares and 4,971 shares, respectively, were converted from Class B Common Stock to Class A Common Stock. During 1996, 19,000 shares were put into the treasury from a reimbursement of expenses that resulted from the 1994 acquisition of the Roch business from Diehl as provided for in the warranty provision of the Acquisition Agreement between the Company and Diehl. The Company has reserved a total of 1,865,101 shares of Class A Common Stock for future issuance under certain benefit and stock incentive plans. 12. PREFERRED STOCK PURCHASE RIGHTS The Company distributed a dividend on March 23, 1988 pursuant to a Shareholder Rights Plan adopted by the Board of Directors on March 9, 1988 of one purchase right for each outstanding share of common stock. Until the F-24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) occurrence of certain specified events, the rights are represented by the associated common stock certificates. Following reclassification of the common stock to Class A Common Stock and distribution of the Class B Common Stock on June 10, 1988, and until the occurrence of certain events, each certificate representing a share of Class A Common Stock 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 exercisable ten days after a person acquires 20% of the Company's common stock. The rights, which are subject to adjustment, are redeemable by the Company at a price of $0.03 per right at any time prior to the fifteenth day after a person acquires 20% of the Company's common stock and 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 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 Company Class A Common Stock having a market value of two times the exercise price. On February 13, 1998, the Board of Directors approved a new Shareholder Rights Plan to replace the Rights Plan expiring on March 23, 1998. Stockholders of record on March 9, 1998 will receive a dividend of one right for each share of Class A and Class B common stock held by them on the record date. Shares of Class A or Class B common stock issued after that date will be issued with one right attaching to each share of such stock. The new Rights Plan operates substantially the same as the Plan expiring March 23, 1998 except that the exercise price of the rights has been set by the Board at $40.00 per right and a majority of the Board may elect to redeem the rights at a redemption price of $.01 per right. The new Rights Plan expires ten years after its effective date or earlier upon a redemption of the rights. 13. CONTINGENCIES Labor Relations The Company is involved in litigation which arose out of a strike by production employees represented by the International Association of Machinists and Aerospace Workers ("IAM") at the Company's Rhode Island operations which began in 1981. After commencement of the strike, the IAM filed charges with the National Labor Relations Board ("NLRB") alleging that the Company engaged in unfair labor practices during contract negotiations and precipitated the strike. On August 28, 1990, the NLRB dismissed the IAM's charges. The IAM appealed this decision to the U.S. Court of Appeals for the District of Columbia Circuit. On November 29, 1991, the Court accepted the legal reasoning advanced by the NLRB and the Company in support of the NLRB's 1990 decision, but ordered the NLRB to further clarify and support its decision. The NLRB reaffirmed its original dismissal of the IAM's charges, and the IAM appealed that decision. On April 7, 1995, the Court vacated the NLRB's earlier decision favorable to the Company and remanded the case to the NLRB for a decision on whether the charges should be dismissed or a trial on the merits should proceed. On August 16, 1996, the NLRB issued a second supplemental decision and order finding in favor of the Company and dismissed the IAM complaint. Following an unsuccessful request for a re- hearing and reconsideration of the NLRB's ruling, the IAM once again appealed the NLRB's decision to the U.S. Court of Appeals. On December 12, 1997, the Court denied the IAM's petition for a review of the NLRB's decision dismissing the charges against the Company. The IAM has informed the Company it intends to appeal the denial of its petition for review by the U.S. Court of Appeals for the District of Columbia to the United States Supreme Court. The Company will continue to defend this case vigorously, and management continues to believe that the possibility of an adverse decision in this matter is remote. If the case were ultimately decided against the Company and the strike converted to an unfair labor practice strike, the Company could be liable for back wages for those striking employees, subject to mitigation for certain statutory offsets, whose strike action is determined to be based on the unfair labor practices. F-25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) ENVIRONMENTAL 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 Department of Environmental Conservation to clean up a waste disposal site in Poughkeepsie, New York. The State has alleged that the Company's former subsidiary, Standard Gage Company, Poughkeepsie, New York, acquired in 1987 and merged with and into the Company in 1991, contributed hazardous waste to the site for disposal and that the Company is a PRP 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 PRPs receiving the notice. The Company is continuing efforts to settle 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. PRODUCT LIABILITY AND OTHER LITIGATION INCIDENTAL TO THE BUSINESS The Company is involved in a number of product liability claims and lawsuits by plaintiffs seeking monetary damages for personal injury which arose out of and were incidental to the sale of products manufactured by the Company in its discontinued metal cutting machine tool and hydraulic businesses and certain other litigation and claims incidental to the conduct of its business. The potential liability of the Company for these claims and suits 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. 14. QUARTERLY DATA (UNAUDITED)
1997 --------------------------------------- 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. -------- -------- -------- --------- Sales $70,802 $78,094 $78,555 $ 95,062 Gross profit 24,545 26,644 25,673 26,809 Net income (loss) 757 1,209 290 (12,786) Earnings (loss) per common share $ 0.06 $ 0.09 $ 0.02 $ (0.96) 1996 -------------------------------------- 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. -------- -------- -------- -------- Sales $76,278 $89,835 $83,791 $ 94,973 Gross profit 26,890 30,070 28,157 33,525 Net income 550 1,854 1,257 4,144 Earnings per common share $ 0.06 $ 0.21 $ 0.14 $ 0.33
The results of operations for the fourth quarter of 1997 include a restructuring charge of $16,220 and a $1,224 gain arising from the exchange of common stock of an unrelated business for common stock of a publicly traded company. See Note 2 for additional information. In the third quarter of 1997, the Company sold its wholly-owned subsidiary, Technicomp, Inc., at a loss of $1,346. The 1997 and 1996 earnings per share amounts were not restated because primary earnings per share and basic earnings per share are the same. F-26 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Directors of Brown & Sharpe Manufacturing Company We have audited the accompanying consolidated balance sheets of Brown & Sharpe Manufacturing Company as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareowners' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 present fairly, in all material respects, the consolidated financial position of Brown & Sharpe Manufacturing Company at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Providence, Rhode Island February 6, 1998, except for Note 12, as to which the date is February 13, 1998 F-27 COMMON STOCK MARKET PRICES AND DIVIDENDS The Class A Common Stock is listed on the New York Stock Exchange with a symbol "BNS". At December 31, 1997, the Company had approximately 1,943 shareowners of record of its Class A Common Stock including shareowners of record of its Class B Common Stock.
Fiscal Year High Low - ------------------ ------ ------ 1997 4TH QUARTER $14.44 $ 9.13 3RD QUARTER 15.00 12.75 2ND QUARTER 15.13 12.13 1ST QUARTER 15.63 12.25 1996 4th Quarter $15.38 $11.50 3rd Quarter 13.63 9.25 2nd Quarter 10.38 9.50 1st Quarter 10.13 8.63
No dividends have been paid by the Company since 1990. Dividend payments have been suspended in order to conserve cash. Also, payment of dividends are currently permitted, but the Company has to meet certain covenants under an existing loan agreement. Dividend payments prior to September 30, 1997 were not permitted due to an existing loan facility. F-28 EX-22 8 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 22 BROWN & SHARPE MANUFACTURING COMPANY --------------------------------------- SUBSIDIARIES OF THE REGISTRANT ------------------------------- Subsidiaries of the Registrant as of December 31, 1997 are as follows:
Percentage of Jurisdiction Voting Power of Owned by the Name of Subsidiary Incorporation Registrant ------------------- --------------- -------------- Borel & Dunner, Inc. Michigan 100% Automation Software 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-23 9 CONSENT OF INDEPENDENT AUDITORS-ERNST & YOUNG LLP EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Brown & Sharpe Manufacturing Company of our report dated February 6, 1998, except for Note 12, as to which the date is February 13, 1998, included in the 1997 Annual Report of Brown & Sharpe Manufacturing Company. Our audits also included the financial statement schedule of Brown & Sharpe Manufacturing Company listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. 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 set forth therein. We also consent to the incorporation by reference in 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 6,1998, except for Note 12, as to which the date is February 13, 1998, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) for the year ended December 31, 1997. ERNST & YOUNG LLP Providence, Rhode Island March 27, 1998 EX-27.1 10 FINANCIAL DATA SCHEDULE 12/31/1994
5 1,000 12-MOS DEC-31-1997 DEC-31-1996 DEC-31-1997 20,458 0 109,528 (3,456) 73,430 6,450 133,243 (82,470) 300,074 93,226 0 0 0 13,335 103,163 300,074 322,513 322,513 218,842 218,842 106,271 0 6,380 (8,980) 1,550 (10,530) 0 0 0 (10,530) (.79) (.79)
EX-27.2 11 RESTATED FINANCIAL DATA SCHEDULE FOR 9/30/1997
5 1,000 9-MOS DEC-31-1997 DEC-31-1996 SEP-30-1997 16,513 0 100,438 (2,144) 79,027 202,944 135,924 84,263 289,274 107,586 12,000 0 0 13,335 114,598 289,274 227,451 227,451 149,198 149,198 70,572 7,681 4,286 2,820 564 2,256 0 0 0 2,256 .17 .17
EX-27.3 12 RESTATED FINANCIAL DATA SCHEDULE FOR 6/30/1997
5 1,000 6-MOS DEC-31-1997 DEC-31-1996 JUN-30-1997 16,525 0 100,656 (2,972) 82,973 202,944 133,409 81,926 290,840 104,581 12,000 0 0 13,303 120,086 290,840 148,896 148,896 96,251 96,251 47,313 4,775 2,933 2,458 492 1,966 0 0 0 1,966 .15 .15
EX-27.4 13 RESTATED FINANCIAL DATA SCHEDULE FOR 3/31/1997
5 1,000 3-MOS DEC-31-1997 DEC-31-1996 MAR-31-1997 23,684 0 103,771 2,839 82,782 213,566 132,067 81,057 296,755 109,273 0 0 0 13,248 119,211 296,755 70,802 70,802 45,770 48,883 19,860 0 1,434 947 190 757 0 0 0 757 .06 .06
EX-27.5 14 RESTATED FINANCIAL DATA SCHEDULE FOR 12/31/1996
5 1,000 12-MOS DEC-31-1996 DEC-31-1995 DEC-31-1996 20,158 0 121,911 (3,226) 77,572 7,802 139,271 84,865 314,448 116,205 0 0 0 13,207 127,193 314,448 344,877 344,877 224,542 224,542 103,747 0 8,280 8,770 965 7,805 0 0 0 7,805 .81 .79
EX-27.6 15 RESTATED FINANCIAL DATA SCHEDULE FOR 9/30/1996
5 1,000 9-MOS DEC-31-1996 DEC-31-1995 SEP-30-1996 5,387 0 125,675 (2,947) 94,398 9,586 141,884 87,796 311,121 155,946 0 0 0 8,763 81,379 311,121 249,904 249,904 171,452 171,452 67,755 0 6,584 4,113 452 3,661 0 0 0 3,661 .41 .41
EX-27.7 16 RESTATED FINANCIAL DATA SCHEDULE FOR 6/30/1996
5 1,000 6-MOS DEC-31-1996 DEC-31-1995 JUN-30-1996 4,226 0 117,426 (3,175) 96,983 224,769 140,546 86,946 302,652 126,924 0 0 0 8,762 76,108 302,652 165,456 165,456 113,693 113,693 44,447 0 4,553 2,932 528 2,404 0 0 0 2,404 .27 .27
EX-27.8 17 RESTATED FINANCIAL DATA SCHEDULE FOR 3/31/1996
5 1,000 3-MOS DEC-31-1996 DEC-31-1995 MAR-31-1996 4,749 0 116,302 (3,197) 97,479 224,148 141,009 87,777 301,988 131,670 13,000 0 0 8,762 76,918 301,988 76,231 76,231 51,676 51,676 21,762 0 2,077 670 120 550 0 0 0 550 0.06 0.06
EX-27.9 18 RESTATED FINANCIAL DATA SCHEDULE FOR 12/31/1995
5 1,000 12-MOS DEC-31-1995 DEC-31-1994 DEC-31-1995 6,262 0 116,609 (3,030) 77,145 8,748 140,070 (87,183) 295,400 129,588 13,000 0 0 8,719 77,138 295,400 328,031 328,031 212,733 212,733 103,546 0 9,129 2,623 697 1,926 0 0 0 1,926 .22 .22
EX-27.10 19 RESTATED FINANCIAL DATA SCHEDULE FOR 12/31/1994
5 1,000 12-MOS DEC-31-1994 DEC-31-1993 DEC-31-1994 6,676 0 111,337 (3,103) 88,639 7,981 125,565 (80,210) 272,274 108,647 14,000 0 0 8,757 70,268 272,274 209,369 209,369 137,082 137,082 77,647 0 6,575 (11,935) 2,400 (14,335) 0 0 0 (14,335) (2.37) (2.37)
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