<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
Brown & Sharpe Manufacturing Company
------------------------------------------
(Name of Registrant as Specified In Its
Charter)
----------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:*
4) Proposed maximum aggregate value of transaction:
* Set forth the amount on which the filing is calculated and state how it
was determined.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount previously paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
Notes:
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
PRECISION PARK
200 FRENCHTOWN ROAD
NORTH KINGSTOWN, RHODE ISLAND 02852
August , 1994
Dear Stockholders,
You are cordially invited to attend a Special Meeting of the Stockholders of
Brown & Sharpe Manufacturing Company, to be held on September 28, 1994, at
10:00 a.m. at the executive offices of Brown & Sharpe, Precision Park, 200
Frenchtown Road, North Kingstown, Rhode Island.
At the Special Meeting, you will be asked to consider and vote on a proposal
(the "Proposal") to approve the issuance of shares of Class A Common Stock,
$1.00 par value, of Brown & Sharpe pursuant to the terms of (i) an acquisition
agreement, as amended, between Brown & Sharpe and Finmeccanica S.p.A., an
Italian corporation, dated as of June 10, 1994, and (ii) a shareholders
agreement to be entered into between Brown & Sharpe and Finmeccanica at the
closing under the acquisition agreement. The acquisition agreement provides
that Brown & Sharpe will acquire from Finmeccanica all of the issued and
outstanding capital stock of DEA S.p.A., an Italian corporation conducting
Finmeccanica's metrology business, in exchange for the issuance to
Finmeccanica of 3,450,000 shares of Class A Common Stock plus such additional
number of shares of Class A Common Stock, if any, as may be required pursuant
to a post-closing purchase price adjustment provided for in the acquisition
agreement. The shareholders agreement will provide Finmeccanica with certain
preemptive rights with respect to subsequent issuances of equity securities by
Brown & Sharpe, and provides for limitations on Finmeccanica's percentage
ownership of shares of Brown & Sharpe stock. In connection with the
acquisition, Brown & Sharpe will enter into several proposed new financing
arrangements, most of which are contingent on consummation of the acquisition
of DEA, to repay certain existing indebtedness and to meet Brown & Sharpe's
liquidity needs following the acquisition. The terms of the acquisition
agreement, the shareholders agreement and the proposed new financing
arrangements are described in detail in the attached Proxy Statement.
The Board of Directors of Brown & Sharpe has unanimously concluded that the
acquisition transaction is in the best interests of Brown & Sharpe
stockholders and recommends that you vote to approve the issuance of shares of
Class A Common Stock described above. In making this recommendation, the Board
of Directors relied on a number of factors, including an opinion of Wertheim
Schroder & Co. Incorporated to the effect that the consideration to be paid by
Brown & Sharpe in the acquisition is fair to the common stockholders of Brown
& Sharpe from a financial point of view.
Brown & Sharpe believes that the proposed combination with DEA is Brown &
Sharpe's best course of action and that to let the DEA acquisition opportunity
(and the opportunity to accomplish the related new financing program that is
contingent on the consummation of the DEA acquisition) slip by would not be in
the best interest of Brown & Sharpe and its shareholders, given Brown &
Sharpe's need for additional permanent equity capital and its need to
refinance and strengthen its borrowing structure.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE PROPOSAL.
To ensure that your shares are represented at this meeting, please complete,
sign, date and return the enclosed proxy in the enclosed postage paid
envelope, whether or not you plan to attend the meeting. If you attend the
meeting and express a desire to vote in person, your proxy will not be used.
Sincerely yours,
Henry D. Sharpe, Jr.
Chairman of the Board
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE SPECIAL MEETING, PLEASE
COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED
ENVELOPE.
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
PRECISION PARK
200 FRENCHTOWN ROAD
NORTH KINGSTOWN, RHODE ISLAND 02852
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 28, 1994
A Special Meeting of Stockholders of Brown & Sharpe Manufacturing Company
("Brown & Sharpe") will be held at the executive offices of Brown & Sharpe at
Precision Park, 200 Frenchtown Road, North Kingstown, Rhode Island, on
September 28, 1994 at 10 a.m., for the following purpose:
To consider and vote on a proposal to approve the issuance of shares of
Class A Common Stock, $1.00 par value, of Brown & Sharpe (the "Class A
Common Stock") pursuant to the terms of (i) an acquisition agreement
between Brown & Sharpe and Finmeccanica S.p.A., an Italian corporation
("Finmeccanica"), dated as of June 10, 1994, as amended (the "DEA
Acquisition Agreement"), and (ii) a shareholders agreement to be entered
into between Brown & Sharpe and Finmeccanica (the "Shareholders Agreement")
at the closing under the DEA Acquisition Agreement.
Pursuant to Delaware law and the by-laws of the Company, no other business may
come before the Special Meeting.
The DEA Acquisition Agreement provides that Brown & Sharpe will acquire from
Finmeccanica all of the issued and outstanding capital stock of DEA S.p.A., an
Italian corporation conducting Finmeccanica's metrology business (the "DEA
Acquisition"), in exchange for the issuance to Finmeccanica of 3,450,000 shares
of Class A Common Stock plus such additional number of shares of Class A Common
Stock, if any, as may be required pursuant to a post-closing purchase price
adjustment provided for in the DEA Acquisition Agreement. The Shareholders
Agreement provides Finmeccanica with certain preemptive rights with respect to
subsequent issuances of equity securities by Brown & Sharpe, and provides for
limitations on Finmeccanica's percentage ownership of shares of Brown & Sharpe
stock. In connection with the DEA Acquisition, Brown & Sharpe will enter into
several proposed new financing arrangements, most of which are contingent on
the consummation of the DEA Acquisition, to repay certain existing indebtedness
and to meet Brown & Sharpe's liquidity needs following the DEA Acquisition. The
terms of the DEA Acquisition Agreement, the Shareholders Agreement and the
proposed new financing arrangements are described in the Proxy Statement.
The Board of Directors has fixed the close of business on August 26, 1994 as
the record date for the Special Meeting to determine the stockholders entitled
to notice of and to vote at the meeting and any adjournments thereof.
By Order of the Board of Directors
James W. Hayes, III
Secretary
North Kingstown, Rhode Island
August , 1994
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE SPECIAL MEETING, PLEASE
COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED
ENVELOPE.
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
----------------
PROXY STATEMENT
----------------
SPECIAL MEETING OF STOCKHOLDERS
OF BROWN & SHARPE MANUFACTURING COMPANY
TO BE HELD SEPTEMBER 28, 1994
This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of Brown & Sharpe Manufacturing
Company ("Brown & Sharpe") for use at the Special Meeting of Stockholders of
Brown & Sharpe to be held on September 28, 1994, and at any and all
adjournments or postponements thereof (collectively, the "Special Meeting").
This Proxy Statement is being sent to stockholders of Brown & Sharpe on or
about August , 1994.
At the meeting, stockholders of record on August 26, 1994 will consider and
vote on a proposal to approve the issuance of shares of Class A Common Stock,
$1.00 par value, of Brown & Sharpe (the "Class A Common Stock") pursuant to
the terms of (i) an acquisition agreement, as amended, between Brown & Sharpe
and Finmeccanica S.p.A., an Italian corporation ("Finmeccanica"), dated as of
June 10, 1994 (the "DEA Acquisition Agreement"), and (ii) a shareholders
agreement to be entered into between Brown & Sharpe and Finmeccanica (the
"Shareholders Agreement") at the closing under the DEA Acquisition Agreement.
The DEA Acquisition Agreement provides that Brown & Sharpe will acquire from
Finmeccanica all of the issued and outstanding capital stock of DEA S.p.A., an
Italian corporation conducting Finmeccanica's metrology business (the "DEA
Acquisition"), in exchange for the issuance to Finmeccanica of 3,450,000
shares of Class A Common Stock plus such additional number of shares of Class
A Common Stock, if any, as may be required pursuant to a post-closing purchase
price adjustment provided for in the DEA Acquisition Agreement. The
Shareholders Agreement provides Finmeccanica with certain preemptive rights
with respect to subsequent issuances of equity securities of Brown & Sharpe,
and provides for limitations on Finmeccanica's percentage ownership of shares
of Brown & Sharpe stock. In connection with the DEA Acquisition, Brown &
Sharpe will enter into proposed new financing arrangements, most of which are
contingent on the consummation of the DEA Acquisition, to repay certain
existing indebtedness and to meet Brown & Sharpe's liquidity needs following
the DEA Acquisition. The terms of the DEA Acquisition Agreement, the
Shareholders' Agreement and the proposed new financing arrangements are
described in detail in this Proxy Statement. See "The DEA Acquisition" and
"New Financing."
----------------
AUGUST , 1994
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
----------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY..................................................................... 1
General................................................................... 1
Brown & Sharpe Manufacturing Company...................................... 1
DEA....................................................................... 2
The Special Meeting....................................................... 2
The DEA Acquisition....................................................... 3
The New Financing......................................................... 4
Recommendation of Brown & Sharpe's Board of Directors..................... 5
Fairness Opinion.......................................................... 5
Risk Factors.............................................................. 5
SUMMARY PRO FORMA COMBINED FINANCIAL DATA .................................. 6
BROWN & SHARPE SUMMARY CONSOLIDATED FINANCIAL DATA.......................... 6
DEA SUMMARY COMBINED FINANCIAL DATA......................................... 6
EQUITY OWNERSHIP OF THE COMBINED COMPANY.................................... 7
RISK FACTORS................................................................ 8
Risks Related to 1994 Strategic Acquisitions.............................. 8
Lack of Liquidity......................................................... 8
Increase in Indebtedness.................................................. 9
Risks Relating to the New Financing....................................... 9
Historical Losses......................................................... 9
Opinion of DEA Auditors................................................... 10
Foreign Operations........................................................ 10
Cyclical Nature of the Metrology Industry................................. 10
Competition............................................................... 11
Control of the Combined Company........................................... 11
PRO FORMA COMBINED FINANCIAL STATEMENTS..................................... 12
THE SPECIAL MEETING......................................................... 19
Record Date; Quorum; Vote Required........................................ 19
Proxy Card................................................................ 19
Expenses.................................................................. 20
THE DEA ACQUISITION......................................................... 21
Background and Reasons for the DEA Acquisition............................ 21
Recommendation of the Board of Directors.................................. 22
Fairness Opinion.......................................................... 23
Terms of the DEA Acquisition Agreement.................................... 24
Terms of the Shareholders Agreement....................................... 26
Transactions with Affiliates.............................................. 27
No Appraisal Rights....................................................... 27
Accounting Treatment...................................................... 27
Federal Tax Consequences.................................................. 27
NEW FINANCING............................................................... 28
General................................................................... 28
North Kingstown Mortgage.................................................. 29
Three-Year Guaranteed Term Loan........................................... 29
Revolving Credit Facility................................................. 30
Existing Mortgage Loans................................................... 30
DEA Long-Term Debt........................................................ 30
Foreign Lines of Credit................................................... 31
Possible Senior Note Offering............................................. 31
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
STOCK INFORMATION.......................................................... 32
Dividends................................................................ 33
DEA...................................................................... 33
BROWN & SHARPE MANUFACTURING COMPANY....................................... 34
General.................................................................. 34
Dimensional Metrology Industry........................................... 34
Metrology Business Strategy.............................................. 36
MS Division.............................................................. 36
PMI Division............................................................. 37
CM Division.............................................................. 38
Foreign Operations....................................................... 38
Engineering and Product Development...................................... 38
Raw Materials and Sources of Supply...................................... 39
Patents, Licenses, Trademarks and Proprietary Information................ 39
Properties............................................................... 40
Employees................................................................ 40
Competition.............................................................. 41
Litigation............................................................... 42
BROWN & SHARPE SELECTED CONSOLIDATED FINANCIAL DATA........................ 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BROWN & SHARPE.............................................. 47
Results of Operations.................................................... 47
Liquidity and Capital Resources.......................................... 51
Foreign Operations....................................................... 53
Effects of Roch Acquisition and DEA Acquisition.......................... 54
DEA S.p.A.................................................................. 57
General.................................................................. 57
Foreign Operations....................................................... 57
Engineering and Product Development...................................... 57
Properties............................................................... 58
Employees................................................................ 58
Competition.............................................................. 59
Environmental............................................................ 59
DEA SELECTED COMBINED FINANCIAL DATA....................................... 60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF DEA......................................................... 61
Results of Operations.................................................... 61
Liquidity and Capital Resources.......................................... 64
PRINCIPAL STOCKHOLDERS..................................................... 66
AVAILABLE INFORMATION...................................................... 68
SHAREHOLDER PROPOSALS...................................................... 68
EXHIBIT A--Consolidated Financial Statements of Brown & Sharpe Manufactur-
ing Company............................................................... A-1
EXHIBIT B--Combined Financial Statements of DEA S.p.A. .................... B-1
EXHIBIT C--Financial Statements of Ets. Pierre Roch S.A. .................. C-1
EXHIBIT D--Financial Statements of Mauser Prazisions-Messmittel GmbH....... D-1
EXHIBIT E--Fairness Opinion................................................ E-1
EXHIBIT F--DEA Acquisition Agreement....................................... F-1
</TABLE>
ii
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the detailed information and financial
statements contained or incorporated by reference herein and in the exhibits
hereto. As used in this Proxy Statement, the term "Brown & Sharpe" refers to
Brown & Sharpe Manufacturing Company and (unless the context otherwise
requires) its consolidated subsidiaries before giving effect to its acquisition
(the "DEA Acquisition") of DEA S.p.A., the term "DEA" refers to DEA S.p.A. and
(unless the context otherwise requires) its consolidated subsidiaries before
giving effect to the DEA Acquisition, and the term the "Combined Company"
refers to Brown & Sharpe Manufacturing Company and (unless the context
otherwise requires) its consolidated subsidiaries (including DEA) after giving
effect to the DEA Acquisition. Unless otherwise noted, in this Proxy Statement
Italian Lire, French Franc and German Mark amounts have been translated into
U.S. dollars using convenience translation exchange rates of L1,586, FF5.81 and
DM1.67 to $1.00, respectively.
GENERAL
This Proxy Statement relates to the issuance by Brown & Sharpe to
Finmeccanica of 3,450,000 shares of Class A Common Stock (subject to a post-
closing purchase price adjustment) in exchange for all the issued and
outstanding capital stock of DEA, and the possible future issuance of Class A
Common Stock to Finmeccanica pursuant to its preemptive rights under the
Shareholders Agreement. DEA, which had 1993 sales of approximately $112
million, produces and sells coordinate measuring machines ("CMMs") under the
DEA (R) brand name. DEA's primary products are large gantry CMMs used
principally in the automotive and aerospace industries, and sheet metal gauging
systems used principally in automotive body production lines. A large number of
DEA's CMM products are complementary to those of Brown & Sharpe, which focus on
medium and small CMMs and the most highly accurate larger CMMs. Management
believes that after the DEA Acquisition, the Combined Company will be able to
offer a broader line of CMM products than any of its competitors. In addition,
the combination of DEA's business with Brown & Sharpe's Measuring Systems
Division business is expected to result in substantial cost savings through the
elimination of duplicative administrative, sales and manufacturing personnel
and facilities, duplicative marketing expenses such as advertising and trade
shows, and some duplicative design engineering activities and personnel. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Brown & Sharpe--Effects of Roch Acquisition and DEA Acquisition."
The DEA Acquisition will be effected pursuant to the DEA Acquisition
Agreement and the related agreements entered into at the closing of the DEA
Acquisition, including the Shareholders Agreement. The Shareholders Agreement
provides Finmeccanica with certain preemptive rights with respect to subsequent
issuances of equity securities by the Combined Company, and provides for
limitations on Finmeccanica's percentage ownership of shares of the Combined
Company's stock.
In connection with the DEA Acquisition, Brown & Sharpe will enter into
proposed new financing arrangements, most of which are contingent on the
consummation of the DEA Acquisition to repay certain existing indebtedness and
to meet Brown & Sharpe's liquidity needs following the DEA Acquisition. The
terms of the DEA Acquisition Agreement, the Shareholders' Agreement and the
proposed new financing arrangements are described in detail in this Proxy
Statement.
BROWN & SHARPE MANUFACTURING COMPANY
Brown & Sharpe is a leader in the design, manufacture and marketing of
dimensional metrology products worldwide under several internationally
recognized brand names. Brown & Sharpe's products measure the physical
dimensions of objects and are used by a wide variety of industrial companies to
improve product quality by monitoring product conformance to specifications.
Brown & Sharpe's operations are conducted
1
<PAGE>
through three units. The Measuring Systems Division (the "MS Division"), Brown
& Sharpe's largest unit, manufactures and markets a wide range of manual and
computer-controlled, high-precision coordinate measuring machines and measuring
robots ("CMMs"). The Precision Measuring Instruments Division (the "PMI
Division") manufactures and markets a wide range of mechanical and electronic
measuring and inspection tools including micrometers, dial indicators,
calipers, gauge blocks and height gauges. The Custom Metrology Division (the
"CM Division") designs and engineers specialty products and systems to provide
customized solutions for unique measurement or inspection problems. The CM
Division also manufactures and markets probes, factory networks and inspection
stations.
Brown & Sharpe, founded in 1833, has been a leading manufacturer of precision
manufacturing tools and instruments for many years. For most of its history,
Brown & Sharpe was principally known for the manufacture of metal cutting
machine tools. From 1985 to 1993, Brown & Sharpe undertook a series of
acquisitions, divestitures and other actions which transformed what had been
principally a machine tool company into a leader in the field of dimensional
metrology. In June of 1990, Brown & Sharpe acquired the Industrial Metrology
Technology Division and certain related marketing and sales assets of Wild
Leitz GmbH (such division and related assets, "Leitz"), a manufacturer of high
accuracy CMMs headquartered in Germany. In March 1994, Brown & Sharpe acquired
(the "Roch Acquisition") Ets. Pierre Roch S.A., based in France ("Roch"), and
Roch's German affiliate, Mauser Prazisions-Messmittel GmbH ("Mauser"). Roch
manufactures and, together with Mauser, markets mechanical and electronic
measuring and inspection tools. For the year ended December 31, 1993, Roch had
an operating loss of $1.0 million and total assets at December 31, 1993 of $7.4
million. For the year ended December 31, 1993, Mauser had an operating loss of
$1.3 million and total assets at December 31, 1993 of $.5 million. In addition
to its metrology operations, Brown & Sharpe also conducts a small education
quality training products business. Brown & Sharpe's principal executive
offices are located at Precision Park, 200 Frenchtown Road, North Kingstown,
Rhode Island 02852 and its telephone number is (401) 886-2000.
DEA
DEA is a wholly owned subsidiary of Finmeccanica, and is a major competitor
of Brown & Sharpe in the production and sale of CMMs in the dimensional
metrology market. DEA is a worldwide leader in the manufacturing and marketing
of CMMs and related accessories, software and services, with 1993 net sales and
operating profit of approximately $112.4 million and $5.4 million, respectively
and total assets at June 30, 1994 of $106.8 million. DEA derives over half of
its revenues from medium-to-large vertical and horizontal-arm CMMs used
principally in the automotive and aerospace industries and also derives a
significant portion of its revenues through the sale of upgrades, enhancements,
replacement parts and services. Products sold under the DEA (R) name are
manufactured in Turin, Italy, and distributed in Europe, the United States,
South America, the Middle East, India and China. DEA's principal executive
offices are located at Corso Torino, 70-10024 Moncalieri (TO), Italy.
THE SPECIAL MEETING
Time; Place; Purpose. The Special Meeting of stockholders of Brown & Sharpe
is scheduled to be held on September 28, 1994, at 10:00 a.m. at the executive
offices of Brown & Sharpe, Precision Park, 200 Frenchtown Road, North
Kingstown, Rhode Island. At the Special Meeting, stockholders will be asked to
consider and vote on a proposal to approve the issuance to Finmeccanica of
shares of Class A Common Stock pursuant to the terms of (i) the DEA Acquisition
Agreement, and (ii) the Shareholders Agreement. The DEA Acquisition Agreement
provides that Brown & Sharpe will acquire all of the issued and outstanding
capital stock of DEA from Finmeccanica in exchange for the issuance to
Finmeccanica of 3,450,000 shares of Class A Common Stock plus such additional
number of shares of Class A Common Stock, if any, as may be required pursuant
to a post-closing purchase price adjustment provided for in the DEA Acquisition
Agreement. The Shareholders Agreement provides Finmeccanica with certain
preemptive rights with respect to subsequent issuances of equity securities by
the Combined Company, and provides for limitations on Finmeccanica's percentage
ownership of shares of the Combined Company's stock.
2
<PAGE>
Record Date; Vote Required. The close of business on August 26, 1994 is the
record date for determining the holders of record of the Class A Common Stock
and Brown & Sharpe's Class B Common Stock, $1.00 par value (the "Class B Common
Stock"), entitled to notice of and to vote at the Special Meeting and any
adjournments thereof. On the record date, there were shares of Class A Common
Stock and shares of Class B Common Stock outstanding. Each share of Class A
Common Stock is entitled to one vote and each share of Class B Common Stock is
entitled to ten votes and the Class A Common Stock and the Class B Common Stock
will vote together as a single class. Brown & Sharpe's Board of Directors is
soliciting proxies because stockholder approval of the issuance of shares of
Class A Common Stock pursuant to the DEA Acquisition Agreement and the
Shareholders Agreement is required by the rules of the New York Stock Exchange
(the "NYSE"). Neither Brown & Sharpe's certificate of incorporation nor its by-
laws require stockholder approval of the issuance of shares of Class A Common
Stock pursuant to the DEA Acquisition Agreement and the Shareholders Agreement.
Pursuant to NYSE requirements, the affirmative vote of the holders of shares of
Class A Common Stock and Class B Common Stock representing a majority of the
votes cast on the proposal, provided that the total votes cast on the proposal
represents over 50% of the voting power of all shares of Class A Common Stock
and Class B Common Stock entitled to vote on the proposal, is necessary to
approve the issuance of the shares of Class A Common Stock pursuant to terms of
the DEA Acquisition Agreement and the Shareholders Agreement. As of the record
date for the Special Meeting, the officers and directors of Brown & Sharpe (as
a group) were entitled to vote 678,219 shares of Class A Common Stock and
165,657 shares of Class B Common Stock, constituting approximately 17.2% of the
votes entitled to be cast on the proposal to issue the shares of Class A Common
Stock pursuant to the terms of the DEA Acquisition Agreement and the
Shareholders Agreement. See "Principal Stockholders." All of such persons have
indicated that they intend to vote their shares in favor of the proposal to
issue the shares of Class A Common Stock pursuant to the terms of the DEA
Acquisition Agreement and the Shareholders Agreement.
In addition shares of Class A Common Stock and shares of Class B
Common Stock are held for the employee benefit plan participants under various
employee benefit plans maintained by Brown & Sharpe and its subsidiaries.
THE DEA ACQUISITION
Terms. Brown & Sharpe has agreed to purchase all of the issued and
outstanding capital stock of DEA from Finmeccanica for a purchase price of
3,450,000 shares of Class A Common Stock (subject to post-closing adjustment),
and the assumption of an estimated $13.8 million of DEA's existing
indebtedness. See "The DEA Acquisition--Terms of the DEA Acquisition
Agreement." After the DEA Acquisition, Finmeccanica will hold approximately
42.5% of the outstanding Class A Common Stock of the Combined Company,
constituting 39.9% of the outstanding common stock (including both Class A and
Class B Common Stock) of the Combined Company and 25.5% of the combined voting
power of the Combined Company's outstanding common stock. See "Risk Factors--
Control of the Combined Company."
Conditions; Waiver and Modification; Termination. In addition to the approval
by Brown & Sharpe's stockholders of the issuance of shares of Class A Common
Stock, there are other conditions to the obligations of the parties to
consummate the DEA Acquisition, including a condition that Brown & Sharpe have
completed financing arrangements sufficient to meet the working capital
requirements of the Combined Company on terms deemed appropriate by Brown &
Sharpe. See "New Financing." Any of the conditions to the parties' obligations
to close may be waived or modified by the party entitled to the benefit of the
condition. In addition, the DEA Acquisition Agreement may be terminated at any
time with the consent of both Brown & Sharpe and Finmeccanica.
Effective Date. It is contemplated that the DEA Acquisition will take place
as soon as practicable after the approval by the stockholders of Brown & Sharpe
of the issuance of the shares of Class A Common Stock
3
<PAGE>
pursuant to the terms of the DEA Acquisition Agreement and the Shareholders
Agreement and the satisfaction or waiver of the various closing conditions. It
is presently contemplated that the effective date of the DEA Acquisition will
be on or about September 28, 1994.
Shareholders Agreement. In connection with the DEA Acquisition, Finmeccanica
will enter into a Shareholders Agreement which will provide Finmeccanica with
certain preemptive rights with respect to subsequent issuances of equity
securities by the Combined Company, and which will provide for limitations on
Finmeccanica's percentage ownership of shares of the Combined Company's common
stock.
THE NEW FINANCING
As indicated above, the completion of the DEA Acquisition is contingent on
Brown & Sharpe having completed financing arrangements sufficient to meet the
working capital requirements of the Combined Company on terms deemed acceptable
by Brown & Sharpe. Brown & Sharpe has secured commitment letters or is in
discussions with respect to a combination of long-term and short-term financing
arrangements from several sources. These anticipated financing arrangements
include a $8.5 million mortgage secured by Brown & Sharpe's facility in North
Kingstown, Rhode Island (the "North Kingstown Mortgage"), a $25 million three-
year term loan (the "Three-Year Guaranteed Term Loan") to be guaranteed by
Finmeccanica, and a $25 million, three-year revolving credit facility providing
for borrowings based on and secured by substantially all the Combined Company's
domestic inventory and accounts receivable (the "Revolving Credit Facility"
and, together with the North Kingstown Mortgage and the Three-Year Guaranteed
Term Loan, the "New Financing"). In addition, Brown & Sharpe expects the
Combined Company will maintain approximately $25.4 million of its existing
$45.9 million of existing demand lines of credit (such existing demand lines,
the "Brown & Sharpe Lines of Credit") as well as all existing long-term debt of
$35.6 million and approximately $7.5 million of DEA's existing demand lines of
credit (such demand lines of credit, the "DEA Lines of Credit") in addition to
$6.5 million of existing DEA long-term debt. Brown & Sharpe believes that the
New Financing, together with the at least $32.9 million in Brown & Sharpe Lines
of Credit and DEA Lines of Credit expected to be maintained by the Combined
Company, will appropriately restructure existing indebtedness and provide for
sufficient liquidity to enable the Combined Company to fund the restructuring
of its operations and make desired capital expenditures for at least three
years from the date of the DEA Acquisition.
Brown & Sharpe has entered into a commitment letter with respect to the North
Kingstown Mortgage. Brown & Sharpe has also received commitment letters from
two Italian banks to provide together the Three-Year Guaranteed Term Loan, and
has received a written commitment from Finmeccanica to enter into a credit
support agreement providing for Finmeccanica's unconditional guarantee of the
Combined Company's obligations under the Term Loan. Closing under these
commitment letters is subject to customary conditions. In addition, closing
under the Three-Year Guaranteed Term Loan is subject to consummation of the DEA
Acquisition and the Finmeccanica guarantee.
Brown & Sharpe is currently in discussions with a number of lending
institutions with respect to the Revolving Credit Facility, and has received a
commitment letter from one such lender with respect to the Revolving Credit
Facility. Brown & Sharpe expects closing under the Revolving Credit Facility
will be subject to customary conditions, and to the consummation of the DEA
Acquisition and the balance of the New Financing.
Brown & Sharpe has received letters of assurance from four of the banks under
the existing DEA Lines of Credit with respect to their maintenance of such
lines for the Combined Company. In addition, Brown & Sharpe is in discussions
with several other banks currently providing DEA Lines of Credit, and expects
that the total availability to the Combined Company under the DEA Lines of
Credit will be at least $7.5 million, a portion of which may be based on a
receivables borrowing base (or similar provisions) or consist of overdraft
facilities or performance bond availability.
4
<PAGE>
The proceeds of the North Kingstown Mortgage and the Three-Year Guaranteed
Term Loan will be used to repay a portion of existing borrowings under the
Brown & Sharpe Lines of Credit and the DEA Lines of Credit. In addition, all
outstanding borrowings under Brown & Sharpe's existing secured $15 million
domestic credit facility (the "Foothill Facility") will be repaid.
Long-term debt of the Combined Company is expected to total approximately
$75.6 million (as of an assumed September 30, 1994 closing date), consisting of
the New Financing, approximately $19.6 million of existing Brown & Sharpe
mortgage loans (the "Mortgage Loans") secured by certain foreign facilities,
existing $16.0 million of convertible debentures and L10.1 billion ($6.5
million) of existing DEA long-term debt subsidized by the Italian government.
Short-term borrowing availability of the Combined Company is expected to be
at least $57.9 million (as of an assumed September 30, 1994 closing date),
including $25 million under the Revolving Credit Facility (subject to the
borrowing base), approximately $25.4 million under Brown & Sharpe Lines of
Credit and at least $7.5 million under DEA Lines of Credit. Brown & Sharpe
expects that of this availability, immediately following the DEA Acquisition
the Combined Company will have approximately $10.6 million in outstanding
short-term borrowings (including the current maturities of long-term debt) and
unused availability of approximately $47.3 million.
RECOMMENDATION OF BROWN & SHARPE'S BOARD OF DIRECTORS
As part of its strategy to improve its financial strength and competitiveness
and to return to profitability, Brown & Sharpe is seeking to expand and
strengthen its market presence in the worldwide dimensional metrology market.
DEA is a major competitor of Brown & Sharpe's CMM business in a number of
countries and is a worldwide leader in the manufacturing and marketing of CMMs
and related accessories, software and services. Brown & Sharpe believes that it
will realize significant product and distribution synergies and cost savings by
combining the DEA business with its existing CMM business. In addition to these
operational benefits, Brown & Sharpe will improve its capital structure by
issuing the shares of Class A Common Stock in the DEA Acquisition and adding
$40.0 million of new long-term debt in the New Financing and the DEA
Acquisition thereby lengthening the maturity of Brown & Sharpe's debt
structure.
The Board of Directors has unanimously approved the DEA Acquisition and the
DEA Acquisition Agreement as being fair to and in the best interests of the
stockholders of Brown & Sharpe and recommends that the stockholders vote for
the issuance of the shares of Class A Common Stock to Finmeccanica pursuant to
the DEA Acquisition Agreement and the Shareholders Agreement. In evaluating the
DEA Acquisition, the Board of Directors considered numerous factors, including
the opinion of Wertheim Schroder described below. See "The DEA Acquisition--
Recommendation of the Board of Directors." The Board of Directors has also
unanimously approved the New Financing, most of which is contingent on the
consummation of the DEA Acquisition.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE PROPOSAL.
FAIRNESS OPINION
Wertheim Schroder has delivered its written opinion to the Board of Directors
to the effect that from a financial point of the view the consideration to be
paid by Brown & Sharpe in the DEA Acquisition is fair to the common
stockholders of Brown & Sharpe. A copy of this opinion (as confirmed), which
sets forth the assumptions made, matters considered and limits of this review,
is attached to this Proxy Statement as Exhibit E, and should be read in its
entirety.
RISK FACTORS
Brown & Sharpe faces a number of risks with regard to its business and
financial condition whether or not the DEA Acquisition is completed.
Stockholders should carefully consider the factors set forth under "Risk
Factors" as well as the other information set forth in this Proxy Statement.
5
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 25, 1993(1) JULY 2, 1994(1)
-------------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Net sales................................. $279,742 $127,794
Gross profit.............................. 92,294 42,217
Operating profit.......................... 14,241 1,857
Net income (loss)......................... 8,924 (1,218)
Net income (loss) per share............... $ 1.08 $ (.14)
BALANCE SHEET DATA (AT PERIOD END):
Working capital........................... $114,322
Total assets.............................. 258,950
Total debt................................ 84,094
Shareowners' equity....................... 84,979
OTHER DATA:
Depreciation and amortization(3).......... $ 9,233 $ 4,110
Pro forma interest expense................ 5,625 2,778
</TABLE>
BROWN & SHARPE SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
----------------------------------------------- ----------------
DEC. 30, DEC. 29, DEC. 28, DEC. 26, DEC. 25, JUNE 26, JULY 2,
1989 1990 1991(2) 1992(2) 1993(2) 1993(2) 1994
-------- -------- -------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $142,044 $176,703 $175,847 $160,695 $157,035 $79,961 $79,811
Gross profit............ 46,169 40,882 56,366 44,412 46,194 24,792 24,474
Operating profit (loss). 8,271 (12,089) (306) (8,097) 720 1,869 (1,397)
Income (loss) from
continuing operations.. 5,953 (12,237) (2,901) (7,984) (2,416) 1,443 (4,242)
Net income (loss) per
share.................. $ 1.30 $ (2.67) $ (0.87) $ (1.63) $ (0.49) $ .29 $ (.83)
OTHER DATA:
Number of employees..... 1,674 1,889 2,011 1,872 1,656 1,552 1,506
Net sales per employee.. $ 84.9 $ 93.5 $ 87.4 $ 85.8 $ 94.8 n/a n/a
</TABLE>
DEA SUMMARY COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------------------------------- --------------------------------
DEC. 31, DEC. 31, DEC. 31, DEC. 31, JUNE 30, JUNE 30, JUNE 30,
1991 1992 1993 1993 1993 1994 1994
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS; LIRE IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... L117,662 L124,749 L178,297 $112,419 L79,387 L71,494 $45,078
Gross profit............ 24,101 28,429 63,934 40,311 30,803 24,946 15,729
Operating profit (loss). (16,928) (7,713) 8,657 5,458 (627) (1,874) (1,182)
OTHER DATA:
Number of employees..... 982 802 690 690 720(4) 697(4) 697(4)
Net sales per employee.. L 119.8 L 155.5 L 258.4 $ 162.9 n/a n/a n/a
</TABLE>
- --------
(1) The pro forma income statement data and other data assume that the Roch
Acquisition, the DEA Acquisition and the New Financing (including the
entering into of the Revolving Credit Facility, but no borrowings
thereunder) and the application of the net proceeds therefrom occurred on
December 27, 1992, and the pro forma balance sheet data assume that the DEA
Acquisition and the New Financing (including the entering into of the
Revolving Credit Facility, but no borrowings thereunder) and the
application of the net proceeds therefrom occurred on July 2, 1994. See
"Pro Forma Combined Financial Statements."
(2) Restated to reflect the change in accounting for large machinery
construction contracts for Brown & Sharpe's European operation. See Note 2
of Notes to Consolidated Financial Statements of Brown & Sharpe.
(3) Depreciation and amortization includes amortization of excess of fair value
over cost of assets acquired.
(4) Number of employees is as of March 31, 1993 and 1994 as subsequent data is
not available.
6
<PAGE>
EQUITY OWNERSHIP OF THE COMBINED COMPANY
<TABLE>
<CAPTION>
BROWN &
SHARPE DEA
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Net sales for fiscal 1993(1)............................. $157,035 $112,419
Net income (loss) for fiscal 1993(1)..................... (2,416) 2,664(2)
Total assets at fiscal 1993 year-end(1).................. 165,871 117,691
Shareowners equity at fiscal 1993 year-end(1)............ 63,520 62,528(3)
Percentage of common equity of the Combined Company to be
held by
existing stockholders(4)................................ 60.1% 39.9%
Percentage of voting power of the Combined Company to be
held by
existing stockholders(4)................................ 74.5% 25.5%
</TABLE>
- --------
(1) Brown & Sharpe's 1993 fiscal year ended on December 25, 1993 and DEA's 1993
fiscal year ended on December 31, 1993.
(2) Adjusted to eliminate interest paid on DEA borrowings required to be
assumed, discharged, cancelled or waived by Finmeccanica by the Closing in
connection with the DEA Acquisition.
(3) Adjusted to eliminate approximately $ million principal amount of DEA
borrowings required to be assumed, discharged, cancelled or waived by
Finmeccanica by the Closing in connection with the DEA Acquisition.
(4) Reflects ownership of Class A Common Stock and Class B Common Stock
following the DEA Acquisition by, in the case of Brown & Sharpe, the
existing stockholders of Brown & Sharpe, and, in the case of DEA, its
existing stockholder, Finmeccanica.
7
<PAGE>
RISK FACTORS
RISKS RELATED TO 1994 STRATEGIC ACQUISITIONS
Brown & Sharpe expects that the Combined Company's profitability in the
foreseeable future, and accordingly its ability to fund necessary capital
expenditures and service its debt obligations as well as its ability at some
time in the future to resume dividend payments will depend in large part on its
success in integrating the operations of DEA, Roch and Mauser with Brown &
Sharpe's existing operations and realizing anticipated cost savings. The
combined net sales of DEA, Roch and Mauser in 1993 were approximately 78% of
Brown & Sharpe's net sales in that year.
Brown & Sharpe's plan for integrating the operations of DEA into the MS Group
and Roch and Mauser into the PMI Division anticipates cost savings (before one-
time implementation cash costs) of $8.3 million to be realized within the first
twelve months of combined operations. Brown & Sharpe expects the Combined
Company to achieve these savings primarily by eliminating duplicative
administrative and sales personnel and facilities, duplicative marketing
expenses such as advertising and trade shows and some redundant design
engineering activities, including personnel. Brown & Sharpe expects the
Combined Company to realize total annualized savings of nearly $14 million
after 24 months of combined operations through these actions, further
reductions in selling and administrative expenses, rationalization of European
manufacturing facilities and reductions in associated manufacturing overhead
costs. Brown & Sharpe expects the Combined Company to spend approximately $12.4
million for severance and other one-time cash costs in eliminating duplicative
operations and taking other planned measures intended to produce these savings.
The above estimates of anticipated cost savings differ from the cost savings
included in the Pro Forma Combined Financial Statements, which are limited to
cost savings to be realized from actions commenced within the first 12 months
of combined operations and which do not use the assumption in Note 1 that
savings from measures to be commenced within the first three months of combined
operations are reflected as if such measures were commenced and are effective
at the beginning of the period. See "Notes to Pro Forma Combined Financial
Statements."
Each of Brown & Sharpe's three operating units has worldwide management and
operating responsibility for certain product and market groups. The daily
operating functions and decisions, including matters such as budgeting,
accounting and cash management, are managed by the general managers of Brown &
Sharpe's MS Group, PMI Division and CM Division, subject to oversight by Fred
M. Stuber, President and Chief Executive Officer, and Charles A. Junkunc, Vice
President and Chief Financial Officer. Upon consummation of the DEA Acquisition
the Combined Company will have significant manufacturing, engineering, sales
and administrative facilities at 20 locations in seven countries, and will
continue to operate with a decentralized and geographically dispersed
management structure.
Due to the inherent risks in integrating the separate operations of DEA, Roch
and Mauser, in particular operations located in different countries and that in
the aggregate are large in relation to Brown & Sharpe, there can be no
assurance that the Combined Company will realize the full amount of anticipated
cost savings or realize the savings on the contemplated timetable, or that as a
result of its decentralized management structure or other factors the Combined
Company will not experience unanticipated one-time or ongoing costs or
difficulties in implementing the integration of DEA, Roch and Mauser into Brown
& Sharpe. In addition, there can be no assurance that following these
acquisitions the Combined Company's net sales will not be adversely affected by
planned cost cutting measures, possible discontinuance of certain similar
products, customers' desires to maintain alternative sources of supply or for
other reasons. Further, there can be no assurance that following these
acquisitions the Combined Company's management and organizational structure
will be adequate to manage a business that is substantially larger than Brown &
Sharpe now is. See "The DEA Acquisition," "Pro Forma Consolidated Financial
Statements," and "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Brown & Sharpe--Effects of Roch Acquisition and
DEA Acquisition."
LACK OF LIQUIDITY
At July 2, 1994, Brown & Sharpe had unrestricted cash (and cash equivalents)
of $2.3 million, and unused availability under its borrowing arrangements of
$9.9 million. If Brown & Sharpe does not complete
8
<PAGE>
the DEA Acquisition, Brown & Sharpe expects that the North Kingstown Mortgage
combined with available cash and borrowings would be adequate to meet Brown &
Sharpe's anticipated cash needs through the end of 1994. In order to meet its
cash needs for subsequent periods, however, Brown & Sharpe would have to seek
alternative forms of financing, which financing may or may not be available to
it on terms acceptable to Brown & Sharpe. The completion of the DEA
Acquisition and the Three-Year Guaranteed Term Loan and the Revolving Credit
Facility will provide Brown & Sharpe with additional equity and debt
financing, thereby immediately improving its liquidity position and
lengthening the maturity of its debt structure, and should improve Brown &
Sharpe's prospects for returning to profitability. However, Brown & Sharpe
will require positive cash generated by operations and the realization of
anticipated cost savings from the integration of DEA, Roch and Mauser in order
to meet its anticipated cash needs (including one-time costs involved in
integrating DEA, Roch and Mauser). See "Management's Discussion and Analysis
of Financial Conditions and Results of Operations of Brown & Sharpe--Liquidity
and Capital Resources."
INCREASE IN INDEBTEDNESS
The Combined Company will have significant debt service obligations after
completion of the New Financing and the DEA Acquisition. At July 2, 1994,
Brown & Sharpe had total outstanding indebtedness and total shareowner's
equity of $72.7 million and $61.7 million, respectively. On a pro forma basis,
assuming that the DEA Acquisition and the New Financing and the application of
net proceeds therefrom had occurred on July 2, 1994, the Combined Company
would have had total outstanding indebtedness and total shareowners' equity of
approximately $84.1 million and $85.0 million, respectively.
The Combined Company's indebtedness could have important consequences to
stockholders, including the following: (i) the Combined Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions or other corporate purposes may be impaired, (ii) a
substantial portion of the Combined Company's cash flow from operations will
be used to pay principal and interest on its indebtedness, thereby reducing
the funds available to the Company for its operations, future business
opportunities and resumption at some future date of payment of dividends,
(iii) the Combined Company's borrowings under the Revolving Credit Facility,
Three-Year Guaranteed Term Loans and demand lines of credit will be at
floating rates of interest, which could result in higher interest expense in
the event of an increase in market interest rates, (iv) the Revolving Credit
Facility will contain financial and other restrictive covenants which could
limit the Combined Company's operating and financial flexibility and, if
violated, would result in an event of default which, if not cured or waived,
could preclude the Combined Company's access to credit under such facility or
otherwise have a material adverse effect on the Combined Company, (v) the
Three-Year Guaranteed Term Loan, the Revolving Credit Facility and certain
Brown & Sharpe foreign mortgage loans expire by their terms in 1997, requiring
the Combined Company to seek refinancing of its debt at that time and (vi) the
Combined Company may be more vulnerable to general economic and industry
downturns. See "New Financing."
RISKS RELATING TO THE NEW FINANCING
Although Brown & Sharpe has obtained written commitments for all portions of
the New Financing, until definitive agreements are executed, there can be no
assurance that the New Financing will be completed or will be completed on
terms as favorable as those currently contemplated by Brown & Sharpe. If Brown
and Sharpe is unable to complete the New Financing on terms acceptable to
Brown & Sharpe, it will seek alternative forms of refinancing of the Combined
Company's indebtedness, including a public offering of senior notes, which
financing may or may not be available to it. A refinancing satisfactory to
Brown & Sharpe is a condition to closing of the DEA Acquisition. See "New
Financing."
HISTORICAL LOSSES
Brown & Sharpe had losses from continuing operations of approximately $2.9
million, $8.0 million, $2.4 million and $4.2 million in fiscal 1991, 1992,
1993 and the first six months of 1994, respectively. Brown & Sharpe expects to
report a net loss for the third quarter of 1994. See "Management's Discussion
and Analysis
9
<PAGE>
of Financial Condition and Results of Operations of Brown & Sharpe--Results of
Operations." In addition, DEA had operating losses of L16.9 billion, and L7.7
billion, respectively, an operating profit of L8.7 billion ($5.5 million) in
1993, and an operating loss of L1.9 billion ($1.2 million) in the first half of
1994.
In 1990, Brown & Sharpe acquired Leitz. In the year prior to the acquisition,
Leitz's net sales were approximately 21% of Brown & Sharpe's net sales in that
year. While Leitz has strategic value to Brown & Sharpe, Leitz has produced
operating losses in each year since its acquisition. Brown & Sharpe believes
that these losses have resulted from the severe, prolonged recession in Europe
that began a year after the acquisition and severe competitive pricing pressure
which together have resulted in gross margin erosion for Leitz's products and
revenues below expected levels, and from unexpected difficulties and additional
expenses in integrating Leitz with Brown & Sharpe's other CMM operations. These
difficulties were heightened by the fact that the Leitz business acquired by
Brown & Sharpe did not have a complete freestanding operating and management
structure or its own complete facilities.
OPINION OF DEA AUDITORS
The opinion of DEA's auditors includes a paragraph which indicates that there
is substantial doubt about DEA's ability to continue as a going concern without
the continued financial support of Finmeccanica. Management's plans with
respect to these matters are discussed in Note 19 to the Combined Financial
Statements of DEA which indicates that the ability of DEA to operate as a going
concern in the future will be dependent on the support of its owners and a
return to profitable operation. DEA's liabilities prior to the DEA Acquisition
include in excess of $80 million of debt owed to third parties and short-term
loans with affiliates. Although DEA generated a significant operating profit in
1993, the interest cost associated with this debt resulted in a substantial net
loss for that year. The borrowings of DEA will be substantially reduced in the
DEA Acquisition through the assumption, discharge, cancellation or waiver by
Finmeccanica of approximately $65-$70 million of existing debt of DEA. As a
result, immediately prior to the closing under the DEA Acquisition DEA's
indebtedness for borrowed money is estimated to total $13.8 million. See "The
DEA Acquisition--Terms of the DEA Acquisition Agreement."
FOREIGN OPERATIONS
As of July 2, 1994, approximately 73% of Brown & Sharpe's assets were located
outside the United States (based on book values). For fiscal 1993,
approximately 54% of Brown & Sharpe's net sales were to customers located
outside the United States. As of July 2, 1994, after giving effect to the DEA
Acquisition, approximately 76% of the Combined Company's assets were located
outside the United States (based on historical book values). For fiscal 1993,
on a pro forma basis after giving effect to the DEA Acquisition and the Roch
Acquisition, approximately 62% of the Combined Company's net sales were to
customers 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 Combined Company, including taxes on distributions
and payments, currency exchange rate fluctuations, inflation, minimum capital
requirements and exchange controls. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Brown & Sharpe,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of DEA," "Brown & Sharpe--Foreign Operations," "Brown & Sharpe--
Properties," "Brown & Sharpe--Litigation," "DEA S.p.A.--General," Note 14 to
Consolidated Financial Statements of Brown & Sharpe and Note 2 to Combined
Financial Statements of DEA.
CYCLICAL NATURE OF THE METROLOGY INDUSTRY
As capital goods suppliers, the market for Brown & Sharpe's and DEA's
products is subject to general economic conditions and, more specifically, to
the level of capital spending by industrial companies, especially those in the
primary end markets for Brown & Sharpe's and DEA's products. Management
believes that in recent years, the total world market for dimensional metrology
products declined significantly. Although the recession has subsided in the
United States, Brown & Sharpe and DEA still face weaker economic conditions
10
<PAGE>
in Europe, especially in Germany, and Japan. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Brown & Sharpe"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations of DEA."
COMPETITION
Brown & Sharpe's and DEA's business is subject to direct and indirect
competition from a considerable number of both domestic and foreign firms, a
number of which are part of entities which are larger in overall size than
Brown & Sharpe and DEA. In addition, the dimensional metrology market has
suffered from overcapacity, which, together with reduced demand for capital
goods, has resulted in intense competitive pricing pressure and performance
competition that have reduced margins throughout the industry. See "Brown &
Sharpe Manufacturing Company--Competition" and "DEA S.p.A.--Competition."
CONTROL OF THE COMBINED COMPANY
Brown & Sharpe's common stock is divided into two classes, the Class A Common
Stock and the Class B Common Stock. Shares of Class A Common Stock are entitled
to one vote per share. Shares of Class B Common Stock are entitled to ten votes
per share, except as otherwise provided by law or in Brown & Sharpe's
certificate of incorporation or by-laws. The Class A Common Stock and the Class
B Common Stock vote together as a single class on all matters, except that the
Class A Common Stock, voting alone, elects one director each year, and except
as otherwise required by law. No dividend may be declared on shares of Class B
Common Stock unless a dividend at least equal in amount is declared on shares
of Class A Common Stock. Immediately after the DEA Acquisition (prior to the
post-closing adjustment, if any, for the DEA Acquisition purchase price),
various members of the Sharpe family, including Henry D. Sharpe, Jr. and Henry
D. Sharpe, III (each of whom is a director of the Company), will hold 483,966
shares of Class A Common Stock and 161,320 shares of Class B Common Stock,
representing approximately 7.5% of the outstanding aggregate equity in the
Combined Company and approximately 15.5% of the combined voting power of the
Combined Company's outstanding common stock, and Finmeccanica will hold
3,450,000 shares of Class A Common Stock, representing approximately 39.9% of
the outstanding aggregate equity of the Combined Company and approximately
25.5% of the combined voting power of the Combined Company's outstanding common
stock. Upon consummation of the DEA Acquisition, Finmeccanica will have the
right to designate three nominees for election to the Combined Company's Board
of Directors (which will be increased from seven to ten directors). See "The
DEA Acquisition--Terms of the Shareholders Agreement" and "Principal
Stockholders."
Pursuant to certain preemptive rights provided to Finmeccanica under the
Stockholders Agreement, so long as Finmeccanica owns at least 862,500 shares of
the Combined Company's Class A Common Stock, with certain exceptions, the
Combined Company may not issue any shares of its Class A Common Stock, or
equity securities exercisable, exchangeable or convertible into shares of Class
A Common Stock ("Derivative Securities") to any third party without first
offering to Finmeccanica the right to purchase that percentage of such newly
issued securities such that Finmeccanica's percentage ownership of the Combined
Company's common stock on a fully diluted basis (as defined in the Shareholders
Agreement) remains constant. After receiving notice of the proposed issuance,
Finmeccanica will have 30 days to exercise its preemptive rights, and the
closing under such exercise will occur within 20 days of such 30-day period.
The existing holders of Class A Common Stock do not have any preemptive rights.
If Brown & Sharpe issues Class A Common Stock or Derivative Securities while
Finmeccanica's preemptive rights are in effect, Finmeccanica would, subject to
certain exceptions, retain its percentage ownership of Brown & Sharpe common
stock, while the equity interests of Brown & Sharpe's existing holders of Class
A Common Stock would be diluted. See "The DEA Acquisition--Terms of the
Shareholders Agreement."
11
<PAGE>
PRO FORMA COMBINED FINANCIAL STATEMENTS
The following Pro Forma Combined Financial Statements are unaudited and are
based on the Consolidated Financial Statements of Brown & Sharpe, the Combined
Financial Statements of DEA, the Financial Statements of Roch and the
Financial Statements of Mauser, each included elsewhere in this Proxy
Statement. The Pro Forma Combined Financial Statements should be read in
conjunction with such historical financial statements and the related notes
thereto, and the other information pertaining to Brown & Sharpe, DEA, Roch and
Mauser included elsewhere in this Proxy Statement.
The unaudited Pro Forma Combined Statements of Income (Loss) for the year
ended December 25, 1993 and for the six months ended July 2, 1994 have been
adjusted to give effect to the Roch Acquisition, the DEA Acquisition and the
New Financing (and the application of the proceeds therefrom) as if such
transactions had occurred on December 27, 1992. The unaudited Pro Forma
Combined Balance Sheet at July 2, 1994 has been adjusted to give effect to the
DEA Acquisition and the New Financing (and the application of the proceeds
therefrom) as if such transactions had occurred on that date. The pro forma
adjustments are based upon available information and certain assumptions that
management of Brown & Sharpe believes are reasonable and that are described in
the notes to the Pro Forma Combined Financial Statements. The Pro Forma
Combined Financial Statements do not purport to represent what the Combined
Company's financial position or results of operations would actually have been
if the transactions had occurred on the dates specified or to project the
Combined Company's financial position or results of operations for any future
period.
PRO FORMA COMBINED STATEMENT OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED JULY 2, 1994
<TABLE>
<CAPTION>
PRO FORMA
----------------------
BROWN &
SHARPE DEA ROCH MAUSER ADJUSTMENTS COMBINED
------- ------- ------ ------ ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............... $79,811 $45,078 $2,713 $ 710 $ (518)(a) $127,794
Cost of goods sold...... 55,337 29,349 1,461 518 (1,088)(b) 85,577
Selling, general and ad-
ministrative expense... 25,871 15,494 1,411 370 (3,894)(c) 39,252
Depreciation and amorti-
zation(1).............. -- 1,417 145 1 (433)(d) 1,130
Amortization of excess
of fair value over cost
of assets acquired..... -- -- -- -- (22)(e) (22)
------- ------- ------ ------ ------ --------
Operating profit
(loss)................ (1,397) (1,182) (304) (179) 4,919 1,857
Interest expense........ (2,723) (3,415) (108) -- 3,468 (f) (2,778)
Other income (expense),
net.................... 178 (188) 9 1,498 (1,494)(g) 3
------- ------- ------ ------ ------ --------
Income (loss) before
income taxes.......... (3,942) (4,785) (403) 1,319 6,893 (918)
Income tax provision.... 300 -- -- -- -- 300
------- ------- ------ ------ ------ --------
Net income (loss)...... $(4,242) $(4,785) $ (403) $1,319 $6,893 $ (1,218)
======= ======= ====== ====== ====== ========
Net income (loss) per
share................. $ (.83) $ (.14)(h)
======= ========
OTHER DATA:
Depreciation and amorti-
zation(2).............. 2,884 1,417 260 4 (455) 4,110
Capital expenditures.... 1,363 640 -- -- -- 2,003
</TABLE>
- --------
(1) Brown & Sharpe includes depreciation and amortization in cost of sales or
selling, general and administrative expense, depending on the nature of
the use of the asset involved. Mauser includes depreciation in selling,
general and administrative expense.
(2) Pro forma depreciation and amortization includes amortization of excess of
fair value over cost of assets acquired.
(3) Roch and Mauser results are for the first three months of 1994 as they
were acquired at the end of that period. Their operations are included in
Brown & Sharpe's results since acquisition.
See Accompanying Notes to Pro Forma Combined Financial Statements.
12
<PAGE>
PRO FORMA COMBINED STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 25, 1993
<TABLE>
<CAPTION>
PRO FORMA
-----------------------
BROWN &
SHARPE DEA ROCH MAUSER ADJUSTMENTS COMBINED
-------- -------- ------- ------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............... $157,035 $112,419 $ 9,868 $ 2,634 $(2,214) (a) $279,742
Cost of goods sold...... 110,841 72,108 5,639 2,214 (3,354) (b) 187,448
Selling, general and ad-
ministrative expense... 45,474 30,747 5,233 1,157 (7,788) (c) 74,823
Depreciation and amorti-
zation(1) ............. -- 3,588 34 605 (1,471) (d) 2,756
Restructuring costs..... -- 518 -- -- -- 518
Amortization of excess
of fair value over cost
of assets acquired..... -- -- -- -- (44) (e) (44)
-------- -------- ------- ------- ------- --------
Operating profit
(loss)................ 720 5,458 (1,038) (1,342) 10,443 14,241
Interest expense........ (5,100) (6,253) (447) (55) 6,230 (f) (5,625)
Other income (expense),
net.................... 2,764 (1,639) (27) 10 -- 1,108
-------- -------- ------- ------- ------- --------
Income (loss) before
income taxes.......... (1,616) (2,434) (1,512) (1,387) 16,673 9,724
Income tax provision.... 800 -- -- -- -- 800
-------- -------- ------- ------- ------- --------
Net income (loss) ..... $ (2,416) $ (2,434) $(1,512) $(1,387) $16,673 $ 8,924
======== ======== ======= ======= ======= ========
Net income (loss) per
share................. $ (0.49) $ 1.08 (h)
======== ========
OTHER DATA:
Depreciation and amorti-
zation(2).............. 6,355 3,532 238 623 (1,515) 9,233
Capital expenditures.... 4,399 1,965 287 28 160 6,839
</TABLE>
- --------
(1) Brown & Sharpe includes depreciation and amortization in cost of sales or
selling, general and administrative expense, depending on the nature of
the use of the asset involved. Mauser includes depreciation in selling,
general and administrative expense.
(2) Pro forma depreciation and amortization includes amortization of excess of
fair value over cost of assets required.
See Accompanying Notes to Pro Forma Combined Financial Statements.
13
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
AT JULY 2, 1994
<TABLE>
<CAPTION>
PRO FORMA
------------------------
BROWN &
SHARPE DEA ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........ $ 2,283 $ 4,844 $ (2,679)(i) $ 4,448
Restricted cash.................. 6,147 -- (6,147)(i) --
Accounts receivable, net of al-
lowances for doubtful accounts.. 42,724 45,359 (1,500)(j) 86,583
Inventories...................... 59,844 41,813 (5,068)(k) 96,589
Prepaid expenses and other cur-
rent assets..................... 4,233 6,144 -- 10,377
-------- -------- -------- ---------
Total current assets........... 115,231 98,160 (15,394) 197,997
PROPERTY, PLANT AND EQUIPMENT:
Land............................. 6,679 50 (50)(m) 6,679
Buildings and improvements....... 34,052 2,078 (2,078)(m) 34,052
Machinery and equipment.......... 86,082 25,332 (25,332)(m) 86,082
-------- -------- -------- ---------
126,813 27,460 (27,460) 126,813
Less-accumulated depreciation.... 81,114 22,027 (22,027)(m) 81,114
-------- -------- -------- ---------
45,699 5,433 (5,433) 45,699
OTHER ASSETS:
Debt financing costs............. -- -- 2,108 (l) 2,108
Other............................ 13,146 3,191 (3,191)(n) 13,146
-------- -------- -------- ---------
$174,076 $106,784 $(21,910) $ 258,950
======== ======== ======== =========
LIABILITIES AND SHAREOWNERS' EQ-
UITY
CURRENT LIABILITIES:
Notes payable and current in-
stallments of long-term debt.... $ 38,859 $ 24,054 $(52,032)(o) $ 10,881
Accounts payable................. 12,351 14,868 -- 27,219
DEA debt......................... -- 52,653 (52,653)(p) --
Accrued expenses and income tax-
es.............................. 20,754 13,228 13,701 (q) 47,683
-------- -------- -------- ---------
Total current liabilities...... 71,964 104,803 (90,984) 85,783
Long-term debt.................... 33,806 3,625 35,782 (r) 73,213
Deferred income taxes............. 1,891 -- -- 1,891
Termination indemnities........... -- 7,920 -- 7,920
Unfunded accrued pension cost..... 4,724 -- -- 4,724
Excess of fair value over cost of
assets acquired.................. -- -- 440 (s) 440
SHAREOWNERS' EQUITY:
Preferred stock, $1 par value;
authorized 1,000,000 shares,
none issued..................... -- -- --
Common stock:
Class A, $1 par value; autho-
rized 15,000,000 shares, is-
sued 4,659,444 and pro forma
8,101,368..................... 4,659 -- 3,450 (t) 8,109
Class B, $1 par value; autho-
rized 2,000,000 shares, issued
544,463....................... 541 -- -- 541
Additional paid in capital....... 46,999 -- 19,838 (t) 66,837
Earnings employed in the busi-
ness............................ 135 -- -- 135
Cumulative foreign currency
translation adjustment.......... 10,176 -- -- 10,176
Treasury stock; 7,492 shares at
cost............................ (151) -- -- (151)
Unearned compensation............ (668) -- -- (668)
DEA equity (deficit)............. -- (9,564) 9,564 (u) --
-------- -------- -------- ---------
Total shareowners' equity...... 61,691 (9,564) 32,852 84,979
-------- -------- -------- ---------
$174,076 $106,784 $ 21,910 $ 258,950
======== ======== ======== =========
</TABLE>
See Accompanying Notes to Pro Forma Combined Financial Statements
14
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The pro forma combined financial statements have been prepared assuming that
the purchase price for the DEA Acquisition will consist of 3,450,000 shares of
Class A Common Stock, having an aggregate value of $23,288 based on the August
16, 1994 closing price of $6.75 per share. The DEA Acquisition Agreement
provides that this purchase price will be subject to a post-closing adjustment
based on a comparison of adjusted net asset value (as defined in the DEA
Acquisition Agreement) of DEA as of June 30, 1993 and the adjusted net asset
value of DEA as of July 31, 1994 (the "Pricing Date") (as defined and
calculated in accordance with a formula in the DEA Acquisition Agreement) and
after taking into account the reduction of net assets as of the Pricing Date
by virtue of the non-recourse factoring of a mutually agreed amount of
receivables of DEA prior to the Pricing Date (and after reflecting an
additional adjustment relating to any difference between the estimated Pricing
Date amount of indebtedness of DEA to be discharged by Finmeccanica and the
actual amount, as finally determined, of such indebtedness as of the Pricing
Date). See "The DEA Acquisition--Terms of the DEA Acquisition Agreement."
The assumed purchase price has been allocated as follows:
<TABLE>
<S> <C>
Cash............................................................... $ 497
Accounts receivable, net of allowances for doubtful accounts....... 43,859
Inventories........................................................ 36,745
Prepaid expenses and other current assets.......................... 6,144
Notes payable and current installments of long-term debt........... (6,464)
Accounts payable................................................... (14,868)
Accrued expenses and income taxes.................................. (26,929)
Long-term debt..................................................... (7,336)
Termination indemnities............................................ (7,920)
Excess of fair value over cost of assets acquired.................. (440)
--------
TOTAL............................................................ $ 23,288
========
</TABLE>
The allocation of purchase price to cash reflects DEA's expected cash level
as of the closing under the DEA Acquisition Agreement. The pro forma combined
income statements are unaudited and present a combination of the historical
net sales of Brown & Sharpe, DEA, Roch and Mauser (after elimination of
intercompany sales), and do not reflect possible increases in net sales that
may arise from synergies related to the combination, or possible decreases in
net sales as a result of planned cost cutting measures, possible
discontinuance of certain similar products, customers' desires to maintain
alternative sources of supply or for other reasons.
For consistency of presentation with the historical information appearing
elsewhere in this Proxy Statement, the historical information and related pro
forma adjustments for DEA, Roch and Mauser appearing in the pro forma combined
financial statements have been translated using the convenience translation
exchange rates of L1,586, FF5.81 and DM1.67 to $1.00, respectively. These
convenience translation exchange rates are not materially different from the
average exchange rates during the period of L1,563, FF5.67 and DM1.66 to
$1.00, respectively, for 1993, and L1,634, FF5.72 and DM1.68 to $1.00,
respectively, for the first six months of 1994.
The pro forma combined income statements reflect the effects of planned cost
savings as follows: for the year ended December 25, 1993, savings anticipated
from measures to be commenced within the first three months following the
applicable acquisition are reflected as if such measures were commenced and
are effective at the beginning of the period presented; savings anticipated
from measures to be commenced in months 4 through 12 following the applicable
acquisition are reflected in the full year period in amounts equal to a
fraction of the amounts that would be realized if the measures were commenced
and were effective at the
15
<PAGE>
beginning of the year, such fraction being equal to the fraction of the year
remaining after the date by which the measures will be commenced (i.e., the
anticipated cost savings attributable to an action to be taken by the end of
the ninth month would be reflected in an amount equal to one-fourth of the
amount that would be realized if such action were commenced and were effective
at the beginning of the year); savings from measures to be commenced in months
4 through 12 following the applicable acquisition are reflected in the pro
forma income statement for the six months ended July 2, 1994 in amounts equal
to one-half the amounts that would be reflected in the pro forma income
statement for the year ended. The pro forma combined income statements do not
reflect additional savings anticipated to be realized from further cost savings
measures planned to be commenced after 12 months following the applicable
acquisition. The estimates of anticipated cost savings included in the pro
forma combined financial statements differ from the cost savings included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Brown & Sharpe--Effects of Roch Acquisition and DEA Acquisition,"
which are not limited to cost savings to be realized from actions commenced
within the first 12 months of combined operations and which do not use the
assumption in this Note 1 that savings from measures to be commenced within the
first three months of combined operations are reflected as if such measures
were commenced and are effective at the beginning of the period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Brown & Sharpe--Effects of Roch Acquisition and DEA Acquisition."
The pro forma combined income statements do not include certain costs,
primarily professional fees incurred in connection with the DEA Acquisition and
severance and other costs to be incurred in connection with anticipated
elimination of personnel, closure of facilities and other cost savings measures
following the Roch Acquisition and the DEA Acquisition. Brown & Sharpe
estimates that these costs will approximate $13,545, of which approximately
$1,999 will be reflected as restructuring expense in 1994, $11,546 will be
charged against reserves established in the allocations of purchase price
associated with these acquisitions and $160 will be incurred with respect to
capital spending associated with facilities consolidation.
2. PRO FORMA ADJUSTMENTS
The pro forma financial statements reflect the following:
a) Adjustment to eliminate intercompany sales made by Roch to Mauser were
$518 for the six months ended July 2, 1994 and $2,214 for the year 1993.
b) Adjustment to reflect decreased design engineering as a result of expected
reductions in personnel of $532 for the six months ended July 2, 1994 and
$1,065 for the year 1993, decreased purchasing costs of the combined operations
of $38 for the six months ended July 2, 1994 and $75 for the year 1993, and the
elimination of intercompany purchases of Mauser from Roch of $518 for the six
months ended July 2, 1994 and $2,214 for the year 1993. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Brown & Sharpe--Effects of Roch Acquisition and DEA Acquisition."
c) Adjustment to reflect expected decreased administrative, sales and
distribution expenses resulting from reductions in North American and European
administrative, sales and distribution personnel of $2,668 for the six months
ended July 2, 1994 and $5,336 for the year ended December 25, 1993 and closing
of overlapping facilities of $1,226 for the six months ended July 2, 1994 and
$2,452 for the year ended December 25, 1993. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Brown & Sharpe--
Effects of Roch Acquisition and DEA Acquisition."
d) Adjustment to reflect an elimination of depreciation of fixed assets and
goodwill related to the write-down of DEA assets in accordance with the
purchase method of accounting, and the amortization of debt issuance costs over
four years. The adjustment for the year ended December 25, 1993 is as follows:
<TABLE>
<S> <C>
Depreciation of assets.............................................. $ 790
Amortization of goodwill ($588 in 1994)............................. 1,193
Amortization of estimated expenses of the debt issuance costs
($2,108) .......................................................... (512)
------
$1,471
======
</TABLE>
This adjustment approximated $433 for the six months ended July 2, 1994.
16
<PAGE>
e) Adjustment to reflect the amortization of the excess of fair value of
DEA's assets over Brown & Sharpe's assumed cost to acquire such assets. The
excess of fair value of $440 will be amortized over a ten-year period. Note 1
f) Adjustment to reflect the decrease in interest expense resulting from the
completion of the New Financing, the assumption, discharge or waiver by
Finmeccanica of $66,532 principal amount of DEA debt in connection with the DEA
Acquisition and the repayment of certain Brown & Sharpe and DEA debt with the
proceeds of the New Financing, in each case based on amounts outstanding and
interest rates in effect at the beginning of the period, calculated as follows:
The adjustment for interest for the year ended December 25, 1993, is
calculated as follows:
<TABLE>
<S> <C>
Interest on $8,500 North Kingstown Mortgage at 8.75%................ $ 744
Interest on $25,000 Three-Year Guaranteed Term Loan at 4.24%........ 1,060
Interest on $16,000 debentures at 9.25%............................. 1,480
Interest on $19,629 Mortgage Loans at 6.69% to 10.00%............... 1,558
Interest on $6,464 DEA long-term debt at 8.79%...................... 568
Interest on $2,967 Brown & Sharpe Lines of Credit at 7.00% to 8.13%. 215
-------
5,625
Actual expense recorded............................................. 11,855
-------
$ 6,230
=======
</TABLE>
Interest has been calculated for the pro forma combined financial statements
assuming no borrowings are made under the $25 Million Revolving Credit Facility
that is part of the New Financing.
This adjustment was $3,468 for the six months ended July 2, 1994.
g) Adjustment to eliminate nonrecurring income from debt forgiveness by
Diehl, the former owner of Mauser.
h) Adjusted to reflect the pro forma adjustments to income discussed above
and the issuance of 175,000 shares of Class A Common Stock in the Roch
Acquisition and the issuance of 3,450,000 shares of Class A Common Stock in the
DEA Acquisition, assuming in each case that no additional shares are issued in
a post-closing purchase price adjustment.
i) Adjustment to eliminate DEA cash retained by Finmeccanica and to reflect
the receipt of the gross proceeds of the New Financing and the application
thereof as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross proceeds from North Kingstown Mortgage...................... $ 8,500
Gross proceeds from Three-Year Guaranteed Term Loan............... 25,000
Repayment of existing Brown & Sharpe debt at July 2, 1994......... (28,535)
Repayment of existing DEA debt at July 2, 1994.................... (7,336)
Prepayment penalties.............................................. (150)
Estimated expenses of New Financing............................... (1,958)
Reclassification of restricted cash............................... 6,147
Cash withdrawal by Finmeccanica................................... (4,347)
--------
$ (2,679)
========
</TABLE>
Brown & Sharpe has been required to maintain restricted cash balances to
support certain of its foreign lines of credit. At July 2, 1994, the required
restricted cash balances totaled $6,147. These amounts will cease to be
restricted upon repayment of the lines of credit. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Brown &
Sharpe--Liquidity and Capital Resources."
17
<PAGE>
j) Adjustment to record DEA receivables at estimated fair value in accordance
with the purchase method of accounting.
k) Adjustment to record DEA inventories at estimated fair value in accordance
with the purchase method of accounting.
l) Adjustment to record estimated expenses of the debt financing. Debt
financing expenses will be amortized over four years.
m) Adjustment to property, plant and equipment of DEA to reflect the
allocation of the excess of fair value over the cost of the assets acquired in
accordance with the purchase method of accounting.
n) Adjustment to eliminate intercompany goodwill of DEA of $1,200 and
allocate $1,991 excess of the fair value over the cost of DEA assets acquired
to non-current assets in accordance with the purchase method of accounting.
o) Adjustment to reflect the short-term portion of the issuance of the new
Brown & Sharpe long-term debt, eliminate the third party short-term debt of DEA
assumed or discharged or refinanced by Finmeccanica in connection with the DEA
Acquisition, and repayment with the proceeds of the New Financing of the short-
term debt of Brown & Sharpe and the remaining third party short-term debt of
DEA, as follows:
<TABLE>
<S> <C>
Gross proceeds from new debt...................................... $ 557
Short-term debt of DEA assumed or discharged by Finmeccanica...... (13,879)
Short-term debt of DEA refinanced with long-term debt............. (2,839)
Repayment of short-term debt of Brown & Sharpe with new debt pro-
ceeds............................................................ (28,535)
Repayment of short-term debt of DEA with new debt proceeds........ (7,336)
--------
$(52,032)
========
</TABLE>
p) Adjustment to eliminate DEA borrowings from Finmeccanica in the principal
amount of $52,653 cancelled or waived by Finmeccanica in connection with the
DEA Acquisition.
q) Adjustment to increase DEA's reserve for warranty expense by $2,604 to
estimated fair value in accordance with the purchase method of accounting and
the accrual of restructuring and acquisition costs (primarily consisting of
professional fees) related to the DEA Acquisition of $9,757 and $1,340,
respectively.
r) Adjustment to reflect issuance of the new Brown & Sharpe long-term debt
and to increase the long-term debt of DEA to conform to the amount of DEA long-
term debt to be outstanding at closing in accordance with the terms of the DEA
Acquisition Agreement.
<TABLE>
<S> <C>
Gross proceeds from new debt ....................................... $32,943
Short-term debt of DEA refinanced with long-term debt............... 2,839
-------
$35,782
=======
</TABLE>
s) Adjustment to record the excess of the fair value over the cost of the DEA
assets acquired in accordance with the purchase method of accounting.
t) Adjustment to reflect the issuance of 3,450,000 shares of Brown & Sharpe
Class A Common Stock in connection with the DEA Acquisition.
u) Adjustment to eliminate DEA equity (deficit) in connection with the DEA
Acquisition in accordance with the purchase method of accounting.
18
<PAGE>
THE SPECIAL MEETING
This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of Brown & Sharpe for use at the
Special Meeting of Stockholders to be held on September 28, 1994. The purpose
of the Special Meeting is to consider and vote on a proposal to approve the
issuance of shares of Class A Common Stock of Brown & Sharpe pursuant to the
terms of (i) the DEA Acquisition Agreement and (ii) the Shareholders Agreement.
The DEA Acquisition Agreement provides that Brown & Sharpe will acquire all of
the issued and outstanding capital stock of DEA from Finmeccanica in exchange
for the issuance to Finmeccanica of 3,450,000 shares of Class A Common Stock
plus such additional number of shares of Class A Common Stock, if any, as may
be required pursuant to a post-closing purchase price adjustment provided for
in the DEA Acquisition Agreement. See "The DEA Acquisition Agreement." The
Shareholders Agreement provides Finmeccanica with certain preemptive rights
with respect to subsequent issuances of equity securities by the Combined
Company, and provides for limitations on Finmeccanica's percentage ownership of
shares of the Combined Company's stock. See "The DEA Acquisition--Terms of the
Shareholders Agreement." Pursuant to Delaware law and the by-laws of Brown &
Sharpe, no business other than the approval of the issuance of the shares of
Class A Common Stock pursuant to the DEA Acquisition Agreement and the
Shareholders Agreement may be brought before the Special Meeting.
RECORD DATE; QUORUM; VOTE REQUIRED
Only holders of record of Brown & Sharpe's Class A Common Stock and Class B
Common Stock as of the close of business on August 26, 1994 will be entitled to
vote at the Special Meeting. At such date, there were shares of Class A
Common Stock and shares of Class B Common Stock outstanding, held by
approximately and holders of record, respectively. Holders of record of
Class A Common Stock on the record date are entitled to one vote per share and
holders of record of Class B Common Stock on the record date are entitled to
ten votes per share on any matter which may properly come before the Special
Meeting. The affirmative vote of the holders of shares of Class A Common Stock
and Class B Common Stock, voting together as a single class, representing a
majority of the votes cast on the proposal, provided that the total votes cast
on the proposal represents over 50% of the voting power of all shares of Class
A Common Stock and Class B Stock entitled to vote on the proposal, is necessary
to approve the issuance of the shares of Class A Common Stock pursuant to terms
of the DEA Acquisition Agreement and the Shareholders Agreement.
PROXY CARD
Accompanying this Proxy Statement is a proxy card which should be completed,
dated, signed and returned by each stockholder before the Special Meeting to
ensure that the stockholder's shares will be voted at the Special Meeting.
Shares represented by a properly executed proxy will be voted in accordance
with the instructions indicated on such proxy. IF NO INSTRUCTIONS ARE INDICATED
ON A PROXY, SHARES REPRESENTED BY SUCH PROXY WILL BE VOTED IN FAVOR OF THE
PROPOSAL TO APPROVE THE ISSUANCE OF THE SHARES OF CLASS A COMMON STOCK PURSUANT
TO THE TERMS OF THE DEA ACQUISITION AGREEMENT AND THE SHAREHOLDERS AGREEMENT. A
stockholder giving Brown & Sharpe a proxy has the power to revoke the proxy at
any time prior to its use by filing with the Secretary of Brown & Sharpe a
written revocation of the proxy or a duly executed proxy bearing a later date
or by personally attending and voting at the Special Meeting.
Votes cast by proxy or in person at the Special Meeting will be counted by
persons appointed by Brown & Sharpe to act as Inspectors of Election for the
meeting. The Inspectors of Election will count the total number of votes cast
"for" approval of the proposal to issue shares of Class A Common Stock for
purposes of determining whether sufficient affirmative votes have been cast.
The Inspectors of Election will count shares represented by proxies that
reflect abstentions and "broker non-votes" (i.e. shares represented at the
Special Meeting held by brokers or nominees as to which (i) instructions have
not been received from the beneficial owners or persons entitled to vote and
(ii) the broker or nominee does not have discretionary voting power)
19
<PAGE>
only as shares that are present and entitled to vote on the matter for purposes
of determining the presence of a quorum, but neither abstentions nor broker
non-votes will have any effect on the outcome of voting on the matter.
EXPENSES
Brown & Sharpe will bear the expense of the proxy solicitation. Brown &
Sharpe has retained D.F. King & Co, Inc., 77 Water Street, New York, New York
10005 to aid in the solicitation of proxies for a fee not to exceed $5,000 plus
reasonable out-of-pocket expenses which total fee plus expenses is expected to
be approximately $12,000. The Board of Directors may ask some of the directors,
officers and regular employees of Brown & Sharpe to solicit proxies by
telephone or otherwise for no compensation therefor other than their regular
compensation. Brown & Sharpe has asked brokers and other custodians, nominees
and fiduciaries to forward proxy solicitation material to the beneficial owners
of shares held of record by such persons and will reimburse out-of-pocket
expenses incurred in forwarding such material.
20
<PAGE>
THE DEA ACQUISITION
BACKGROUND AND REASONS FOR THE DEA ACQUISITION
As part of Brown & Sharpe's strategy to improve its financial strength and
competitiveness and to return to profitability, it is seeking to expand and
strengthen its market presence in the worldwide dimensional metrology market.
DEA is a major competitor of Brown & Sharpe's CMM business in a number of
countries and is a worldwide leader in the manufacturing and marketing of CMMs
and related accessories, software and services. Brown & Sharpe believes that
DEA's large vertical and horizontal CMM products, as well as DEA's
complementary distribution capabilities in certain areas, including certain
countries in Europe, South America and the Middle East, and in India and China,
complement and strengthen Brown & Sharpe's CMM product line and distribution
network. In addition, Brown & Sharpe expects that its plan to integrate DEA,
Roch and Mauser will result in the realization of significant cost savings
primarily from the elimination of duplicative sales, distribution and design
engineering expenses. Brown & Sharpe intends to manufacture and market CMM
products under the Brown & Sharpe (R), Leitz (R) and DEA (R) brand names.
In addition to the strategic operational benefits that Brown & Sharpe seeks
to gain from the DEA Acquisition, and the cost savings which Brown & Sharpe
believes that the Combined Company will realize, Brown & Sharpe also will
improve its capital position by issuing shares of Brown & Sharpe stock in the
DEA Acquisition.
Serious discussions between Brown & Sharpe, Wertheim Schroder & Co.
Incorporated ("Wertheim Schroder"), Brown & Sharpe's investment banker for the
DEA Acquisition, and Finmeccanica regarding the DEA Acquisition began in the
summer of 1992 at numerous meetings held over several months in Paris, New
York, Rhode Island and Turin, Italy. Brown & Sharpe, Wertheim Schroder and
Finmeccanica negotiated the broad outline of the DEA Acquisition, conducted
preliminary due diligence reviews, and discussed legal and regulatory matters
from the fall of 1992 to May 1993. On May 3, 1993, Brown & Sharpe and
Finmeccanica executed and delivered a non-binding Letter of Intent which
contained a broad summary of certain terms of the DEA Acquisition, including
the purchase price. The parties then made required filings under the Hart-
Scott-Rodino Antitrust Improvements Act (the "H-S-R Act"), and the statutory
waiting period expired in August, 1993. The parties re-filed under the H-S-R
Act in July, 1994, and the statutory waiting period expired by early
termination on August 4, 1994.
Brown & Sharpe prepared a draft of the DEA Acquisition Agreement in October
1993 and the parties, together with Wertheim Schroder, began negotiations
regarding the terms of the definitive DEA Acquisition Agreement with
Finmeccanica. However, negotiations and due diligence activities regarding the
DEA Acquisition were largely suspended in late 1993 due to lack of significant
progress. Brown & Sharpe and Finmeccanica resumed negotiations and due
diligence activities in February 1994. Representatives of Brown & Sharpe and
Finmeccanica, along with their respective counsel and Wertheim Schroder,
negotiated the final terms of the DEA Acquisition Agreement and the
Shareholders Agreement at various meetings and by numerous telephone and
telecopy discussions from February 1994 until the DEA Acquisition Agreement was
signed. A negotiating session was held in New York on June 6, 1994 and June 7,
1994 and the DEA Acquisition Agreement dated as of June 10, 1994 was executed
and delivered on June 24, 1994.
The total number of shares of Brown & Sharpe stock to be issued to
Finmeccanica and the amount of debt permitted to be retained by DEA on the
closing date of the DEA Acquisition remained substantially the same as provided
for in the Letter of Intent. Certain other terms of the DEA Acquisition
Agreement are less favorable to Brown & Sharpe and certain terms are more
favorable to Brown & Sharpe than the terms originally proposed in the Letter of
Intent.
From the summer of 1992 through June 1994, the Brown & Sharpe Board of
Directors held more than 13 regular and special meetings (including special
conference telephone meetings) to discuss the DEA Acquisition, the Letter of
Intent, and subsequently the terms of the DEA Acquisition Agreement and the
Shareholders Agreement, and to explore the advantages and disadvantages of the
DEA Acquisition in light
21
<PAGE>
of various relevant factors, including Brown & Sharpe's 1993 and first quarter
1994 operating performance, financial condition, cash requirements, financing
options, business prospects and alternatives.
Extensive presentations by Wertheim Schroder regarding the DEA Acquisition
were made to the Board on March 12, 1993, April 29, 1993 and June 2, 1994. The
DEA Acquisition was discussed at Board meetings held throughout 1993. Meetings
to discuss the DEA Acquisition in 1994 were held at Brown & Sharpe on February
22, 1994, April 22, 1994, April 29, 1994 and June 2, 1994 and by conference
telephone on April 11 and 12, 1994 and May 20 and 25, 1994. Representatives of
Wertheim Schroder, counsel to Brown & Sharpe (Howard K. Fuguet of Ropes &
Gray, counsel to Brown & Sharpe, is also a Director of Brown & Sharpe) and
invited officers of Brown & Sharpe, including the President (also a Director),
the Chief Financial Officer, the Vice President and General Manager of the MS
Division, the Controller, the Treasurer, Secretary and Corporate Counsel were
present for portions of certain Board meetings.
On June 2, 1994, the Board discussed the negotiations of the terms of the
proposed DEA Acquisition Agreement and the Shareholders Agreement, a proposed
$75 million senior note offering, Brown & Sharpe's 1994 operations and the
business plan for integrating the DEA CMM business with the Brown & Sharpe MS
Division, Brown & Sharpe's liquidity and financial position and other related
matters. In addition, at this meeting Wertheim Schroder made a further
presentation to the Board regarding the proposed senior note offering, for
which Wertheim Schroder would act as underwriter, and the fairness to the
stockholders of Brown & Sharpe from a financial point of view of the
consideration to be paid by Brown & Sharpe in the DEA Acquisition. The Board
then voted, by unanimous vote of all the Directors, including three who were
present by telephone conference call, to approve the DEA Acquisition and the
terms of the DEA Acquisition Agreement (a copy of a draft of which had been
sent to the Directors) as outlined to the Board and authorized the execution
and delivery on behalf of Brown & Sharpe of the DEA Acquisition Agreement and
the Shareholders Agreement in or substantially in the forms so presented and
outlined, with such changes as may be approved by the Chairman of the Board,
President or the Vice President and Chief Financial Officer, with the advice
of counsel, and with the assistance of Wertheim Schroder.
Following the signing of the DEA Acquisition Agreement, Finmeccanica
proposed a less expensive alternative to completing the proposed senior note
offering. The Finmeccanica proposal as set out in a Finmeccanica commitment
letter to Brown & Sharpe consists of a Finmeccanica guarantee of the Combined
Company's $25 million Three-Year Guaranteed Term Loan, for which guarantee the
Combined Company will pay Finmeccanica a one-time fee of $800,000.
On July 29, 1994, the Board discussed proposals for the New Financing and
determined that Brown & Sharpe should proceed with negotiations for the New
Financing rather than complete the proposed senior note offering and on August
, 1994, the Board approved the New Financing. See "New Financing."
RECOMMENDATION OF THE BOARD OF DIRECTORS
By the unanimous vote at a meeting of the Board of Directors on June 2,
1994, the Board of Directors approved the DEA Acquisition and approved the DEA
Acquisition Agreement and the Shareholders Agreement, with such changes as
approved by the President or Vice President and Chief Financial Officer, as
being in the best interests of Brown & Sharpe and Brown & Sharpe's
stockholders.
In reaching its conclusions, the Board of Directors considered a number of
factors, including the following: (i) the strategic and operational advantages
to be gained by Brown & Sharpe by entering into the DEA Acquisition, including
DEA's complementary CMM product line strengths and distribution strengths in
various geographic areas; (ii) the current liquidity position of Brown &
Sharpe; (iii) the current capital position of Brown & Sharpe related to the
need for additional equity to improve its capital position; (iv) the
desirability of refinancing certain Brown & Sharpe long-term and short-term
indebtedness through the proposed Senior Note offering or other alternative
financing; (v) the audited 1993 results and unaudited first quarter 1994
results of DEA and an update on the results of management's due diligence on
the DEA
22
<PAGE>
business; (vi) the recent operating results of Brown & Sharpe and internal
operating forecasts for Brown & Sharpe; (vii) other information as to the
substantially greater profitability of the Brown & Sharpe business in the
United States in recent years as compared with Europe and the rest of the world
where losses have been recorded for several years,; (viii) the willingness of
Henry D. Sharpe, Jr. to enter into a voting agreement with respect to the
election of Finmeccanica representatives as directors of Brown & Sharpe; (ix)
the recommendation of management, specifically the recommendation of the
President, Vice President and Chief Financial Officer and Vice President and
General Manager of the MS Division, that Brown & Sharpe enter into the DEA
Acquisition Agreement and Shareholders Agreement and execute management's plan
to implement the integration of the DEA CMM business with that of the MS
Division, including the plan to achieve cost savings through such integration;
(x) the history of the negotiations with Finmeccanica since the Letter of
Intent in 1993 and the competitive implications of alternative strategies to
the DEA Acquisition; (xi) legal advice and accounting advice as to certain
aspects of the DEA Acquisition Agreement, including the conditions to the
closing of the DEA Acquisition; (xii) the protections afforded by the
Shareholders Agreement; (xiii) the opportunity to acquire DEA, a significant
worldwide CMM company, during a period of recession for most European countries
in what has been a cyclical industry; and (xiv) the advice of Wertheim Schroder
as to the financial valuation and currency exchange aspects of the DEA
Acquisition, and the opinion of Wertheim Schroder that, based upon the
considerations and subject to the assumptions and limitations set forth in such
opinion, from a financial point of view, the consideration to be paid by Brown
& Sharpe in the DEA Acquisition is fair to the common shareholders of Brown &
Sharpe. See "--Fairness Opinion." In addition, the board of directors
considered the cost savings that Brown & Sharpe management expects to receive
from the integration of DEA into Brown & Sharpe.
As of the record date for the Special Meeting, the officers and directors of
Brown & Sharpe (as a group) were entitled to vote 678,219 shares of Class A
Common Stock and 165,657 shares of Class B Common Stock, constituting
approximately 17.2% of the votes entitled to be cast on the proposal to approve
the issuance the shares of Class A Common Stock pursuant to the terms of the
DEA Acquisition Agreement and the Shareholders Agreement. See "Principal
Stockholders." All of such persons have indicated that they intend to vote
their shares in favor of the proposal to issue the shares of Class A Common
Stock pursuant to the terms of the DEA Acquisition Agreement and the
Shareholders Agreement.
FAIRNESS OPINION
Wertheim Schroder has delivered its written opinion to the Brown & Sharpe
Board of Directors to the effect that the consideration to be paid by Brown &
Sharpe in the DEA Acquisition is fair to the common stockholders of Brown &
Sharpe from a financial point of view as of June 2, 1994, and Wertheim Schroder
has confirmed such opinion as of June 15, 1994. A copy of the opinion of
Wertheim Schroder as confirmed as of June 15, 1994 is attached hereto as
Exhibit E. Brown & Sharpe stockholders should read this opinion in its entirety
for the assumptions made, matters considered and procedures followed by
Wertheim Schroder. In rendering its opinion, Wertheim Schroder relied upon the
accuracy and completeness of all information supplied or otherwise made
available to it by Finmeccanica and DEA, and Wertheim Schroder did not
independently verify such information, undertake an independent appraisal of
the assets or liabilities (contingent or otherwise) of DEA and was not
furnished with any such appraisals. No limitations were imposed by Brown &
Sharpe's Board of Directors upon Wertheim Schroder with respect to the
investigations made or procedures followed by Wertheim Schroder in rendering
its opinion.
In connection with its opinion, Wertheim Schroder, among other things:
(i) reviewed the Letter of Intent dated May 3, 1993 between Brown &
Sharpe and Finmeccanica;
(ii) reviewed the Acquisition Agreement and the Shareholders Agreement;
(iii) reviewed DEA's Audited Combined Financial Statements for the fiscal
years ended December 31, 1990 through December 31, 1993; the Unaudited
Combined Financial Statements for the quarters ended March 31, 1993 and
March 31, 1994; and the Audited Combined Financial Statements for the six
months ended June 30, 1993;
23
<PAGE>
(iv) reviewed and discussed with the management of DEA, certain financial
information prepared by the management of DEA, including the internally
prepared 1994 budget;
(v) compared the results of operations of DEA with those of certain
companies which it deemed to be reasonably comparable to DEA;
(vi) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(vii) participated in discussions and due diligence sessions with
representatives of Brown & Sharpe, Finmeccanica and DEA;
(viii) reviewed DEA's financial statements, financial controls and
financial reporting systems with DEA's auditors;
(ix) discussed the market position of DEA and its major competitors with
some customers of DEA and Brown & Sharpe; and
(x) performed such other analysis and reviewed and analyzed such other
information as it deemed appropriate.
The Board of Directors of Brown & Sharpe selected Wertheim Schroder as its
financial advisor because Wertheim Schroder is a nationally recognized
investment banking firm with substantial experience with companies engaged in
the general manufacturing business sector in which Brown & Sharpe operates and
with substantial experience in international transactions similar to the DEA
Acquisition. As part of its investment banking business, Wertheim Schroder is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions. Pursuant to a , 1992 retainer
agreement between Brown & Sharpe and Wertheim Schroder, commencing .
Wertheim Schroder receives an annual retainer of $100,000 plus expenses,
payable quarterly. Brown & Sharpe has agreed to pay Wertheim Schroder a fee of
$300,000 plus expenses as compensation for the fairness opinion and a fee of
$550,000 (less previously paid retainer fees) for financial advisory services
relating to the DEA Acquisition. In addition, Brown & Sharpe has agreed to
reimburse Wertheim Schroder for its reasonable out-of-pocket expenses
(including reasonable counsel fees) and to indemnify Wertheim Schroder against
certain liabilities and expenses in connection with its engagement.
It had been contemplated that Brown & Sharpe and Wertheim Schroder would
enter into an underwriting agreement with respect to a proposed $75 million
offering of Senior Notes (the "Senior Notes") whereby, subject to certain
conditions, Wertheim Schroder would agree to purchase from Brown & Sharpe all
of the Senior Notes and to sell the Senior Notes to the public simultaneously
with the effectiveness of the DEA Acquisition. As part of the proposed
underwriting agreement, Wertheim Schroder would have received a customary
underwriter's fee. Brown & Sharpe has filed a Registration Statement with the
Securities and Exchange Commission for the proposed offering of Senior Notes.
However, Brown & Sharpe has decided to use the alternative New Financing
instead of the originally proposed offering of Senior Notes, therefore the
parties will not enter into the above-described underwriting agreement.
Wertheim Schroder advised Brown & Sharpe in negotiations with Finmeccanica and
the lenders providing the Three-Year Guaranteed Term Loan. No fee will be paid
to Wertheim Schroder related to the New Financing or the proposed offering of
Senior Notes, but out-of-pocket expenses related to this effort, estimated to
be about $175,000 for Wertheim Schroder's legal counsel, travel, etc., will be
reimbursed by Brown & Sharpe.
TERMS OF THE DEA ACQUISITION AGREEMENT
The following description of the DEA Acquisition Agreement is only a summary
and does not purport to be complete and is qualified in its entirety by
reference to the full text of the DEA Acquisition Agreement, a copy of which is
included as Exhibit F to this Proxy Statement and hereby incorporated by
reference herein.
The DEA Acquisition Agreement provides that the purchase price for the DEA
Acquisition consists of 3,450,000 shares of Brown & Sharpe's Class A Common
Stock. Prior to the closing, Finmeccanica will assume
24
<PAGE>
or discharge all indebtedness for borrowed money of DEA other than an amount
of indebtedness net of cash in excess of L0.8 billion, to remain outstanding
on the closing, which amount is determined as of July 31, 1994 (the "Pricing
Date") pursuant to a formula in the DEA Acquisition Agreement. Brown & Sharpe
estimates that approximately $13.8 million aggregate principal amount of DEA
indebtedness will remain outstanding at the closing. The purchase price is
subject to a post-closing adjustment based on a comparison of adjusted net
asset value (as defined in the DEA Acquisition Agreement) of DEA as of June
30, 1993 and adjusted net asset value of DEA as of the Pricing Date (as
defined and calculated in accordance with a formula in the DEA Acquisition
Agreement) and after taking into account the reduction of net assets as of the
Pricing Date by virtue of the non-recourse factoring of a mutually agreed
amount of receivables of DEA prior to the Pricing Date (and after reflecting
an additional adjustment relating to any difference between the estimated
Pricing Date amount of indebtedness of DEA to be discharged by Finmeccanica
and the actual amount, as finally determined, of such indebtedness as of the
Pricing Date). If the post-closing adjustment indicates an increase or a
decrease in the purchase price, then either the Combined Company will issue to
Finmeccanica an additional number of shares of Class A Common Stock with a
value equal to such positive difference or Finmeccanica will make a cash
payment to the Combined Company, equal to such negative difference. However,
if such positive or negative difference is less than $500,000, no adjustment
will be made. The amount of any purchase price adjustment will be conclusively
determined, subsequent to the closing date of the DEA Acquisition, based upon
the specified calculations and the audited combined balance sheet as of the
Pricing Date of DEA and its subsidiaries as determined under the procedures
set forth in the DEA Acquisition Agreement.
Noncompetition. The DEA Acquisition Agreement provides that for a period of
five years after the closing date of the DEA Acquisition, neither Finmeccanica
nor any of its affiliates will directly or indirectly acquire more than a 20%
ownership interest in any business, venture or activity which competes with
the metrology business relating to CMMs (including parts and accessories)
being conducted or proposed to be conducted by DEA at the closing date of the
DEA Acquisition or relating to metrology products performing functions similar
to those of the products manufactured and sold by DEA. These noncompetition
provisions will terminate if Brown & Sharpe no longer owns a greater than 50%
ownership interest in DEA. Finmeccanica will not be in breach of the
noncompetition provision of the DEA Acquisition Agreement if it or any of its
affiliates acquires or invests in any company which includes among its
business operations the manufacture and sale of metrology products performing
functions similar to those of the products manufactured and sold by DEA to the
extent that sales of such products constitute only an immaterial portion of
the total revenues of the acquired business. In the DEA Acquisition Agreement,
Finmeccanica represents to Brown & Sharpe that it has no present intention of
acquiring any such company.
The DEA Acquisition Agreement also provides that for a period of three years
after the closing date of the DEA Acquisition Finmeccanica will not, without
the prior written consent of Brown & Sharpe, employ any person who is an
employee of Brown & Sharpe (including DEA and its subsidiaries) or any
subsidiary, group or division of Brown & Sharpe (including DEA and its
subsidiaries) unless such person has been terminated by DEA or its
subsidiaries.
The Effective Date. It is currently anticipated that the DEA Acquisition
will be effected as soon as possible after the Special Meeting.
Conditions to the Closing of the DEA Acquisition; Termination. The
obligations of Brown & Sharpe and Finmeccanica to effect the DEA Acquisition
are subject to various conditions (each of which can be waived by the party
affected by such waiver), including: (1) the approval by Brown & Sharpe's
stockholders of the issuance of the shares of Class A Common Stock required
pursuant to the terms of the DEA Acquisition Agreement and the Shareholders'
Agreement; (2) that Brown & Sharpe complete a refinancing of the Combined
Company's indebtedness on terms deemed acceptable to Brown & Sharpe; and (3)
the approval of all federal, national, state, local and foreign governmental
agencies or authorities that are necessary in connection with the consummation
of the DEA Acquisition. All federal and state approvals including early
termination of the statutory waiting period under the H-S-R Act, that are
necessary in connection with the DEA Acquisition have been obtained as of the
date of this Proxy Statement.
25
<PAGE>
The DEA Acquisition Agreement may be terminated at any time by mutual consent
of Brown & Sharpe and Finmeccanica and by either Brown & Sharpe or Finmeccanica
at any time after October 31, 1994 if the consummation of the DEA Acquisition
has not yet occurred, provided that the DEA Acquisition Agreement may not be
terminated by a party which at such time is in material breach of a provision
in the DEA Acquisition Agreement.
Indemnification. The DEA Acquisition Agreement provides that Brown & Sharpe
and Finmeccanica will, for the periods specified in the DEA Acquisition
Agreement, none of which are shorter than 21 months after the closing of the
DEA Acquisition, indemnify each other against up to $10.0 million (less the
first $500,000) resulting from the inaccuracy of representations and warranties
in the DEA Acquisition Agreement, breach or nonfulfillment of any agreement or
covenant contained in or required to be entered into in connection with the DEA
Acquisition Agreement, and certain environmental and tax claims, if any.
Finmeccanica will also indemnify Brown & Sharpe for the amount by which certain
of the liabilities of DEA exceeds limits provided for in the purchase price
provisions of the DEA Acquisition Agreement.
TERMS OF THE SHAREHOLDERS AGREEMENT
In connection with the DEA Acquisition, Brown & Sharpe and Finmeccanica will
enter into a Shareholders Agreement providing Finmeccanica with certain rights
and obligations with respect to its ownership of shares in the Combined
Company. Finmeccanica will be prohibited from acquiring any shares of the
Combined Company's stock if such acquisition would increase Finmeccanica's
ownership above approximately 40% on a fully-diluted basis (as defined in the
Shareholders Agreement) until December 31, 1998, or earlier upon the happening
of certain specified events. The Shareholders Agreement will provide preemptive
rights to Finmeccanica so long as it owns at least 862,500 shares of the
Combined Company's Class A Common Stock, such that the Combined Company may not
issue any shares of its Class A Common Stock or equity securities exercisable,
exchangeable or convertible into shares of Class A Common Stock ("Derivative
Securities") to any third party, other than certain specified exclusions
(including shares issued on conversion of the Combined Company's 9 1/4%
Convertible Subordinated Debentures due 2005 and up to 400,000 shares issuable
upon the exercise of stock options granted to employees under the Combined
Company's benefit plans), without first offering to Finmeccanica the right to
purchase that percentage of the Combined Company's equity securities such that
Finmeccanica's percentage ownership of the Combined Company's common stock on a
fully diluted basis (as defined in the Shareholders Agreement) remains
constant. In addition, Finmeccanica will not sell any of the Combined Company's
equity securities to any third party until the expiration of two years after
the closing of the DEA Acquisition, and upon the expiration of such two-year
period, may sell securities to a third party only after offering the Combined
Company the opportunity to purchase such shares (other than sales pursuant to a
registered public offering pursuant to Finmeccanica's registration rights and
sales pursuant to Rule 144 under the Securities Act of 1933).
The Shareholders Agreement also provides that the Combined Company will
increase the number of its directors from seven to ten and will use reasonable
best efforts to cause to be elected to the board of directors three nominees
designated by Finmeccanica for respective terms expiring at the 1995, 1996 and
1997 annual meetings of stockholders. At such time as Henry D. Sharpe, Jr.
ceases to be a director of the Combined Company, Finmeccanica will thereafter
be entitled to only a total of two nominees on the board plus a third nominee,
who may not be an employee of Finmeccanica but shall be an experienced
executive or advisor to industrial businesses, selected by Finmeccanica subject
to approval by the board of directors of the Combined Company, that may not be
unreasonably withheld. In any event, Finmeccanica shall be entitled to two
nominees on the board of directors while it owns at least 1,250,000 shares of
the Combined Company's Class A Common Stock and one nominee on the board of
directors while it owns at least 375,000 shares of the Combined Company's Class
A Common Stock. Under the terms of a letter agreement between Henry D. Sharpe,
Jr. and Finmeccanica, Henry D. Sharpe, Jr. will agree to vote all shares of the
Combined Company's stock as to which he has sole voting power in favor of the
Finmeccanica nominees on the Combined Company's board of directors. The
Shareholders Agreement provides that Finmeccanica will vote its shares
26
<PAGE>
of Class A Common Stock in favor of the election as directors of the Combined
Company all the nominees selected by the Combined Company's board of
directors.
TRANSACTIONS WITH AFFILIATES
DEA rents, and the Combined Company will continue to rent, certain buildings
in Italy and Spain from Elsag Bailey, a division of Finmeccanica. The lease
with respect to the Italian property provides for minimum annual rent of L1.3
billion, subject to adjustment for inflation, and expires on December 31,
1997. DEA paid L1.3 billion ($0.8 million) in rent under the lease in the year
ended December 31, 1993. The lease with respect to the Spanish property
provides for an annual rent of Pesetas 30,600,000 ($0.2 million based on the
March 31, 1994 exchange rate) and expires on January 4, 1998. DEA paid L0.1
billion ($0.1 million) in rent under this lease in the year ended December 31,
1993. Management believes that the terms of the leases with respect to the
Italian and Spanish properties have been and will be comparable to those which
would be obtained from unaffiliated parties.
Since the transfer of the assets of the assembly divisions of DEA to Sistemi
di Assemblaggio Robotizzato--SAR S.p.A., a subsidiary of Finmeccanica ("SAR"),
on January 19, 1993, DEA has provided administrative services to SAR on a
basis comparable to that which would be provided to an unaffiliated party. In
the year ended December 25, 1993, SAR paid DEA L0.5 billion ($0.3 million) for
these services. In addition, Franco De Gennaro, Managing Director of DEA, is
employed and paid by Finmeccanica, and DEA reimburses Finmeccanica for the
cost of his services. The Combined Company will continue to provide
administrative services to SAR and will continue to utilize the services of
Mr. De Gennaro after the DEA Acquisition.
NO APPRAISAL RIGHTS
Under Delaware law, shareholders of Brown & Sharpe will not be entitled to
appraisal rights in connection with the DEA Acquisition.
ACCOUNTING TREATMENT
The Combined Company will account for the DEA Acquisition as a purchase
transaction. In a purchase transaction the purchase price, including assumed
liabilities and appropriate reserves, is allocated among the acquired assets
based on estimated fair market values for purposes of recording such assets on
the purchaser's balance sheet. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Brown & Sharpe--Effects of
Roch and DEA Acquisition."
FEDERAL TAX CONSEQUENCES
The DEA Acquisition will not result in any federal income tax consequences
to Brown & Sharpe or its stockholders.
27
<PAGE>
NEW FINANCING
GENERAL
The DEA Acquisition is conditioned on Brown & Sharpe entering into a
refinancing of the Combined Company's indebtedness on terms acceptable to
Brown & Sharpe. In connection with the DEA Acquisition, Brown & Sharpe intends
to enter into the New Financing, consisting of the $8.5 million North
Kingstown Mortgage, the $25 million Three-Year Guaranteed Term Loan and the
$25 million Revolving Credit Facility. In addition, Brown & Sharpe expects
that following consummation of the DEA Acquisition, the Combined Company will
maintain the existing $19.6 million Brown & Sharpe Mortgage Loans, the $16
million convertible debentures and approximately $25.6 million of the existing
Brown & Sharpe Lines of Credit and DEA will maintain $6.5 million of its long-
term debt and at least $7.5 million of the existing DEA Lines of Credit.
Although Brown & Sharpe has received commitments for the New Financing, the
commitments are subject to a number of conditions and there can be no
assurance that the New Financing will become effective or that it will be on
the terms reflected in the commitments. In addition, although Brown & Sharpe
has received letters of assurance from several Italian banks with respect to
the maintenance of $7.5 million of the DEA Lines of Credit, these letters do
not constitute commitments. In any event, all the existing Brown & Sharpe
Lines of Credit and DEA Lines of Credit are due on the demand of the
applicable lender at any time. Brown & Sharpe does not intend to consummate
the DEA Acquisition unless (i) the North Kingstown Mortgage and the Three-Year
Guaranteed Term Loan are consummated prior to or simultaneously with the DEA
Acquisition and (ii) the Revolving Credit Facility and the DEA Lines of Credit
(or other short-term financing arrangements on terms satisfactory to Brown &
Sharpe) are consummated simultaneously with the DEA Acquisition or are
expected by Brown & Sharpe to be consummated shortly following the DEA
Acquisition.
Based on amounts outstanding as of July 2, 1994, the approximately $31.4
million aggregate net proceeds of the North Kingstown Mortgage and the Three-
Year Guaranteed Term Loan (after payment of approximately $2.1 million in
guaranty fees to Finmeccanica, estimated fees and other expenses) will be used
to pay $1.3 million for costs, primarily for professional fees associated with
the DEA Acquisition, and to repay in full $11.4 million in outstanding
borrowings under the Loan and Security Agreement dated as of June 30, 1993
between Foothill Capital Corporation ("Foothill") and Brown & Sharpe (the
"Foothill Facility"), to repay approximately $11.0 million in outstanding
borrowings under Brown & Sharpe's Lines of Credit (net of $6.1 million in
restricted cash balances to support certain of the lines of credit), and to
repay approximately $7.3 million of DEA short-term debt to be outstanding
after the DEA Acquisition. Following consummation of the DEA Acquisition,
available borrowings under the Revolving Credit Facility, the retained portion
of the Brown & Sharpe Lines of Credit and the DEA Lines of Credit are expected
to be used to provide working capital for the Combined Company. Based on
inventory and receivables levels and borrowings outstanding as of July 2,
1994, Brown & Sharpe expects that following consummation of the DEA
Acquisition, the Combined Company will have total borrowings of approximately
$10.6 million under all these short-term facilities, compared to short-term
availability of approximately $57.9 million.
The following table sets forth the actual short-term (excluding current
maturities of long-term debt) and long-term debt (including current
maturities) of Brown & Sharpe and DEA at July 2, 1994 (in the case of DEA,
adjusted to eliminate a pro forma $66.5 million of indebtedness to be waived,
discharged or assumed by Finmeccanica pursuant to the DEA Acquisition
Agreement), and the pro forma short-term and long-term debt of the Combined
Company assuming the DEA Acquisition, New Financing (including the Revolving
Credit Facility but no borrowings thereunder) and the DEA Lines of Credit were
consummated as of such date.
28
<PAGE>
<TABLE>
<CAPTION>
DEBT AT JULY 2, 1994
-------------------------------------------
ACTUAL
----------------------
COMBINED
BROWN & SHARPE DEA(1) ADJUSTMENTS COMPANY
-------------- ------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Foothill Facility.................. $11,446 $ $(11,446) $ --
Revolving Credit Facility.......... -- -- -- --
Brown & Sharpe Lines of Credit..... 25,583 -- (17,089) 8,494
DEA Lines of Credit................ -- 10,175 (10,175) --
------- ------- -------- -------
Total Short-Term Debt............ $37,029 $10,175 $(38,710) $ 8,494
======= ======= ======== =======
Convertible Subordinated Deben-
tures............................. $16,000 -- -- $16,000
North Kingstown Mortgage........... -- -- 8,500 8,500
Three-Year Guaranteed Term Loan.... -- -- 25,000 25,000
Mortgage Loans..................... 19,629 -- -- 19,629
Other.............................. 7 -- -- 7
DEA Long-Term Debt(2).............. -- 3,625 2,839 6,464
------- ------- -------- -------
Total Long-Term Debt............. $35,636 $ 3,625 $ 33,500 $75,600
======= ======= ======== =======
</TABLE>
- --------
(1) Adjusted to eliminate a pro forma $66.5 million of indebtedness to be
waived, discharged or assumed by Finmeccanica pursuant to the DEA
Acquisition Agreement. All DEA amounts are as of June 30, 1994.
(2) Pursuant to the DEA Acquisition Agreement, DEA will have long-term debt of
$6.5 million immediately prior to the DEA Acquisition, reflecting the
incurrence of additional long-term debt subsequent to June 30, 1994.
NORTH KINGSTOWN MORTGAGE
Brown & Sharpe has entered into a commitment letter with Sun Life Assurance
Company of Canada for it to provide the North Kingstown Mortgage. The North
Kingstown Mortgage is subject to customary conditions, including negotiation of
definitive documentation, and is not conditioned on consummation of the DEA
Acquisition. Brown & Sharpe expects that the North Kingstown Mortgage will be
consummated prior to consummation of the DEA Acquisition.
The North Kingstown Mortgage will have a principal amount of $8.5 million,
will mature in five years, will be secured by a first mortgage on Brown &
Sharpe's facility in North Kingstown, Rhode Island, and will bear interest at
an annual rate of 8.75%. Principal and interest will be payable monthly, with
the principal amounts based on a ten-year amortization schedule and with the
balance of the principal due at maturity.
THREE YEAR GUARANTEED TERM LOAN
Brown & Sharpe has received commitment letters from Istituto Bancario San
Paolo di Torino and Banca Commerciale Italiana providing for the Three-Year
Guaranteed Term Loan. These commitments are conditioned on consummation of the
DEA Acquisition and on Finmeccanica providing an unconditional guarantee of
Brown & Sharpe's obligations under the loan, and in addition are subject to
other customary conditions including negotiations of definitive documents.
Brown & Sharpe expects that the Three-Year Guaranteed Term Loan will be
consummated simultaneously with the DEA Acquisition.
The Three-Year Guaranteed Term Loan will have a total principal amount of $25
million (denominated in US dollars), and will bear interest at an expected
floating rate of LIBOR plus .75%. Interest will be payable quarterly, and the
entire principal amount will be due on the third anniversary of the closing. A
one-time facility fee of $62,500 will be paid by Brown & Sharpe. The Three-Year
Guaranteed Term Loan will contain financial covenants to be agreed between
Brown & Sharpe and the lenders, including required minimum tangible net worth,
minimum current ratio and minimum interest coverage ratio.
Finmeccanica has provided Brown & Sharpe with a written commitment letter to
enter into a pre-negotiated credit support agreement pursuant to which
Finmeccanica will issue guarantees in form and
29
<PAGE>
substance satisfactory to Banco de San Paolo and Banca Commerciale Italiana
with respect to the Combined Company's obligations under the Three-Year
Guaranteed Term Loan. Under the commitment letter, Finmeccanica will be paid a
fee of $800,000 upon entering into the credit support agreement. In the event
Finmeccanica is required to pay to the banks any amounts under its guarantee,
upon satisfaction in full of all amounts owed to the banks under the Three-
Year Guaranteed Term Loan Finmeccanica will be entitled to reimbursement from
Brown & Sharpe of all amounts paid by Finmeccanica and up to $25 million of
working capital loans owed to banks by DEA S.p.A. Brown & Sharpe's
reimbursement obligation will be secured by a DEA S.p.A. guaranty and security
interest in DEA S.p.A.'s accounts receivable and inventory.
REVOLVING CREDIT FACILITY
Brown & Sharpe is currently in discussions with a number of lending
institutions with respect to the Revolving Credit Facility, and has received a
commitment letter from one such lender with respect to the Revolving Credit
Facility. Brown & Sharpe expects that the Revolving Credit Facility will be
conditioned on consummation of the DEA Acquisition, the North Kingstown
Mortgage and the Three-Year Guaranteed Term Loan, and will be subject to other
customary conditions. Brown & Sharpe expects that the Revolving Credit
Facility will be consummated simultaneously with, or shortly following, the
DEA Acquisition.
Under the terms of the commitment letter received to date by Brown & Sharpe,
the Revolving Credit Facility would provide up to $25 million of available
borrowings, subject to a borrowing base of a percentage of eligible domestic
finished goods inventory and a percentage of eligible domestic accounts
receivable. Borrowings are expected to bear interest at floating rates equal
to fixed percentages above the lender's prime rate or LIBOR, and be secured by
substantially all the Combined Company's domestic inventory and domestic
accounts receivable, a second security interest in the North Kingstown
facility and certain equipment utilized there, and a portion of the shares of
certain subsidiaries. The facility would expire in September 1997. If the
Revolving Credit Facility described in the commitment letter had been in
effect on July 2, 1994 and the DEA Acquisition had been consummated on that
date, Brown & Sharpe believes that full maximum amount of borrowings would
have been available to the Combined Company under the Revolving Credit
Facility. Brown & Sharpe believes that the actual Revolving Credit Facility,
whether or not it involves the lender from whom Brown & Sharpe has received
the commitment letter, will be on terms better or substantially similar to
those reflected in the commitment letter.
EXISTING MORTGAGE LOANS
Brown & Sharpe expects that following the DEA Acquisition, the Combined
Company will leave in place Brown & Sharpe's existing Mortgage Loans. As of
July 2, 1994, there were outstanding borrowings under the Mortgage Loans of
$19.6 million, secured by certain Brown & Sharpe facilities in the United
Kingdom, Switzerland and Germany. The Mortgage Loans bear interest at fixed
rates ranging from 6.7% to 8.5% and a weighted average interest rate at July
2, 1994, of approximately 7.8%. The Mortgage Loans mature on dates from June,
1996 to November 2001.
DEA LONG-TERM DEBT
Pursuant to the DEA Acquisition Agreement, immediately following the DEA
Acquisition the Combined Company will have approximately L10.1 billion ($6.5
million) of existing DEA long-term debt [held by an agency of the Italian
government]. This long-term debt bears interest at a weighted average rate of
7.0%, reflecting a subsidy by the Italian government as an incentive to DEA to
invest in research and development. The terms of this debt require DEA to
complete the research and development projects for which the debt was provided
as an incentive. Brown & Sharpe intends that the Combined Company will leave
this long-term debt outstanding following the DEA Acquisition.
30
<PAGE>
FOREIGN LINES OF CREDIT
Brown & Sharpe expects that following the DEA Acquisition, the Combined
Company will leave in place certain of the Brown & Sharpe Lines of Credit
providing for total available borrowings of $32.9 million, of which
approximately $10.6 million is expected to be outstanding immediately following
the DEA Acquisition. The existing Brown & Sharpe Lines of Credit bear interest
at rates ranging from 5.75% to 9.0%, and a weighted average rate at July 2,
1994 of 7.3%. As of July 2, 1994, outstanding borrowings under the Brown &
Sharpe Lines of Credit were $25.6 million. All of the Brown & Sharpe Lines of
Credit are unsecured, and are due on the demand of the applicable bank.
In addition, Brown & Sharpe is in discussions with several foreign banks with
respect to the DEA Lines of Credit, consisting of several existing demand lines
of credit currently utilized by DEA that would be maintained following the DEA
Acquisition. Brown & Sharpe has received letters of assurance from four of
DEA's existing banks with respect to their maintenance of foreign currency
denominated demand lines of credit aggregating $7.5 million, and expects
shortly to receive similar assurances from other banks currently providing DEA
demand lines of credit. Brown & Sharpe expects that the DEA Lines of Credit
will provide total available short-term borrowing availability to the Combined
Company of at least $15.0 million, portions of which may be based on a
receivables borrowing base (or similar provisions) or consist of overdraft
facilities or performance bond availability. The existing DEA demand lines of
credit, for which Brown & Sharpe has received letters of assurance, bear
interest at floating short-term rates. All of the DEA Lines of Credit are
unsecured, and are due on the demand of the applicable bank.
POSSIBLE SENIOR NOTE OFFERING
On June 27, 1994, Brown & Sharpe filed a registration statement under the
Securities Act with respect to the possible public offering by Brown & Sharpe
of $75 million of Senior Notes due 2002. The proceeds of that offering would be
used in lieu of the Three-Year Guaranteed Term Loan and the DEA Lines of
Credit, an in addition would discharge all amounts outstanding under the Brown
& Sharpe Lines of Credit and the Mortgage Notes. Although Brown & Sharpe has
not withdrawn the registration statement, Brown & Sharpe does not currently
intend to pursue or consummate the public offering of Senior Notes. Brown &
Sharpe will withdraw the registration statement upon the consummation of the
New Financing.
31
<PAGE>
STOCK INFORMATION
The following table presents historical per share data for Brown & Sharpe,
pro forma net income (loss) per share data for the Combined Company giving
effect to the Roch, Mauser and DEA Acquisitions and the New Financing and pro
forma shareowners' equity per share for the Combined Company giving effect to
the DEA acquisition and the New Financing. The pro forma per share data for the
Combined Company are not necessarily indicative of what actual results of
operations would have been had the DEA Acquisition and the New Financing
occurred at the beginning of the year, nor do they purport to indicate the
results of future operations of the Combined Company.
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 25, 1993 JULY 2, 1994
------------------------ ------------------------
(PER COMMON SHARE) (PER COMMON SHARE)
COMBINED COMBINED
COMPANY COMPANY
BROWN & SHARPE PRO FORMA BROWN & SHARPE PRO FORMA
-------------- --------- -------------- ---------
<S> <C> <C> <C> <C>
Net income (loss) per share.. $(0.49) $1.08 $ (.83) $(.14)
Dividends.................... -- -- -- --
Shareowners' equity per share
(at end of period).......... $12.78 -- $11.88 $9.82
</TABLE>
The following table presents historical per share data for DEA, historical
per share data for DEA adjusted to eliminate DEA borrowings assumed,
discharged, cancelled or waived by Finmeccanica in connection with the DEA
Acquisition and the equivalent pro forma data for DEA per share acquired by
Brown & Sharpe in the DEA Acquisition.
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1993 JUNE 30, 1994
--------------------------- --------------------------
(PER COMMON SHARE) (PER COMMON SHARE)
PRO FORMA PRO FORMA
DEA EQUIVALENT DEA EQUIVALENT
DEA ADJUSTED DEA(1) DEA ADJUSTED DEA(1)
------ -------- ---------- ----- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) per
share.................. $(0.15) $0.16 $.23 $(.29) $(.12) $(.03)
Dividends............... -- -- -- -- -- --
Shareowners' equity per
share (at end of peri-
od).................... $ (.27) $3.84 -- $(.59) $3.49 $2.08
</TABLE>
- --------
(1) Calculated by multiplying Brown & Sharpe pro forma amounts by the ratio of
the number of Brown & Sharpe shares received (3,450,000) to number of DEA
shares exchanged (16,300,000).
The Class A Common Stock of Brown & Sharpe is listed on the New York Stock
Exchange under the symbol "BNS". At August 26, 1994, Brown & Sharpe had
approximately stockholders of record of its Class A Common Stock and
approximately stockholders of record of its Class B Common Stock. The
quarterly high and low closing sale prices of the Class A Common Stock on the
New York Stock Exchange (the Class B Common Stock is not traded, 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) during fiscal 1992, 1993 and
through July 31, 1994 as presented below.
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
-------------------------------------------------------
DECEMBER 26, 1992 DECEMBER 25, 1993 DECEMBER 23, 1994*
----------------- ----------------- -------------------
HIGH LOW HIGH LOW HIGH LOW
-------- -------- -------- -------- --------- ---------
QUARTER
- -------
<S> <C> <C> <C> <C> <C> <C>
First.................. $ 10.50 $ 8.50 $ 9.38 $ 6.38 $ 8.00 $ 6.25
Second................. 9.50 5.00 9.00 7.63 6.75 5.75
Third.................. 6.38 5.00 8.63 7.38 6.75 6.00
Fourth................. 7.25 5.25 8.63 6.75
</TABLE>
- --------
* Through July 31, 1994
32
<PAGE>
DIVIDENDS
No dividends have been paid by Brown & Sharpe since 1990. Dividend payments
have been suspended in order to conserve cash. Also, payment of dividends is
currently not permitted under an existing loan facility, and is not expected to
be permitted under the New Financing.
DEA
All shares of DEA are owned by Finmeccanica, with the result that there is no
market in which any class of DEA's common equity is traded.
33
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
GENERAL
Brown & Sharpe is a leader in the design, manufacture and marketing of
dimensional metrology products worldwide under several internationally
recognized brand names. Brown & Sharpe's products measure the physical
dimensions of objects and are used by a wide variety of industrial companies to
monitor product conformance to specifications. Manufacturers use Brown &
Sharpe's products to improve product quality and are increasingly integrating
quality control functions, and therefore Brown & Sharpe's products, directly
into the manufacturing process. Brown & Sharpe markets its dimensional
metrology products and services in North America, Europe, Asia, South America
and the Middle East. Primary end markets for Brown & Sharpe's products are the
automotive, aerospace, and industrial machinery industries.
Brown & Sharpe's operations are conducted through three units: Measuring
Systems, Precision Measuring Instruments and Custom Metrology.
. THE MEASURING SYSTEMS DIVISION (the "MS Division"), Brown & Sharpe's largest
unit, manufactures and markets a wide range of manual and computer-
controlled, high-precision CMMs. CMMs measure manufactured products and
their components within exacting dimensional tolerances, thereby enabling
manufacturers to minimize scrap and rework costs, reduce warranty expense
and improve product quality. The MS Division also sells a wide variety of
attachments, accessories and related software and provides aftermarket parts
and services. Its products are sold under the Brown & Sharpe (R) and
Leitz (R) brand names. Brown & Sharpe believes that it is the leader in the
U.S. market for CMM products as measured by net sales. The MS Division will
be renamed the "Measuring Systems Group" after the DEA Acquisition.
. THE PRECISION MEASURING INSTRUMENTS DIVISION (the "PMI Division")
manufactures and markets a wide range of mechanical and electronic measuring
and inspection tools including micrometers, dial indicators, calipers, gauge
blocks and height gauges. PMI Division products are sold under the Brown &
Sharpe (R), Tesa (R), Etalon (R), Interapid (R), Standard Gage (R),
Mauser (R), Mercer (R) and Roch (R) brand names.
. THE CUSTOM METROLOGY DIVISION (the "CM Division") designs and engineers
specialty products and systems to provide customized solutions for unique
measurement or inspection problems, such as applications requiring several
simultaneous measurements or inspection of an entire object in a high volume
production line. The CM Division also manufactures and markets probes,
interfaces and statistical network software and tooling which are purchased
by OEMs for use on their inspection stations. CM Division products are sold
under the Tesa (R) and Mercer (R) brand names.
DIMENSIONAL METROLOGY INDUSTRY
Dimensional metrology products measure and inspect manufactured parts and
components for conformance to specifications. These products include a wide
range of measuring devices such as calipers, micrometers, dial indicators,
fixed gauges, height gauges, measuring microscopes, electronic probes,
customized semiautomatic and automatic measuring devices, optical and laser
measuring devices, robots, coordinate measuring machines and related software.
Prices range from $20 for a caliper to over $3 million for a large gantry CMM.
A customer generally will choose between different dimensional metrology
technologies or products based upon the features, complexity, variety and
throughput of the items to be measured, the degree of accuracy required, and
cost differences between the available metrology products. For example, fixed
gauges are more likely to meet a customer's metrology needs if the items that a
customer must measure are all uniform in size and shape, such as automobile
connecting rods, and results are needed instantly. If, however, a customer
needs to measure a large number of items all having different features from one
another, such as the parts of a prototype automobile engine, a more flexible
measuring device such as a CMM would more likely meet the customer's metrology
needs. As manufactured products and components
34
<PAGE>
become more precise and complex, the flexibility of CMMs should give them an
advantage in certain applications over less flexible dimensional metrology
products such as manual, semi-automatic and fixed gauges.
Although the metrology industry is fragmented for lower-priced products,
Brown & Sharpe believes it is one of only six major worldwide competitors that
manufacture high precision CMMs. CMM products can be grouped into three
categories: small (which can be used to measure a product such as an automobile
carburetor), medium (which can be used to measure an item such as an engine
block) and large (which can be used to measure an item such as the body of a
truck or bus). CMMs were first introduced in the 1950s, but early models were
only capable of two-axis measurement. Over time, CMMs have evolved into
complex, computer assisted or computer driven, multi-axis systems, often with
attachments such as two-axis articulated probe holders, contact and non-contact
sensors of various types, electronic touch trigger probes, continuous scanning
analog probes, marking systems, laser probes and rotary tables. Today, CMMs are
utilized to measure and inspect finished products, mechanical components and
families of parts in many basic industries, including the automotive,
aerospace, construction and farm equipment, industrial machinery, defense,
appliance, computer and electronics, medical equipment and semiconductor
industries. CMM prices range from approximately $12,000 to over $3 million
depending upon accuracy, attachments and size.
The increasing use of more sophisticated software has played an important
role in the evolution of the CMM. Improved software, CAD/CAM and network
technologies enable CMMs to automatically compensate for the position of the
piece to be measured relative to the measuring axes of the machine, eliminating
the need for the time-consuming manual positioning necessary with other
dimensional metrology products. Although CMM-type software can be added to on-
machine gauging, vision systems of various types and a small percentage of
fixed gauges, CMMs are easier to use, more flexible and generally provide more
analytical information than most products using competing technologies.
Manufacturers of component parts, as well as manufacturers of finished
products, are purchasers of CMMs and other dimensional metrology products.
Manufacturers depend upon dimensional metrology products to improve the
reliability, fit and finish of their products and to improve efficiency by
reducing errors, scrap, throughput time and work-in-progress inventories.
Traditionally, customers used either fixed gauges, optical comparators or
calipers, or other hand or bench tools to inspect product conformance to
specifications on the factory floor, while CMMs were used in factory quality
control departments due to the necessity for a controlled environment for
optimum CMM operation. Improved hardware and software technologies have allowed
customers to move CMMs onto the factory floor to facilitate direct integration
of CMM measurement capabilities into the manufacturing process. Because CMMs,
fixed gauges and certain other types of dimensional metrology products can be
configured to accommodate a wide variety of customer specifications for
accuracy, speed, set-up time and physical characteristics of the objects to be
measured, Brown & Sharpe believes these products can effectively meet the
evolving quality control needs of manufacturers.
Despite growth in the dimensional metrology markets in China, India and the
Pacific Rim countries, management believes that in recent years the total world
market for dimensional metrology products has declined significantly in terms
of dollar denominated sales. In the three major world markets, the decline has
been more significant in Europe and Japan than in the United States. Brown &
Sharpe believes that this overall market decline is primarily related to global
economic conditions which have resulted in reduced levels of capital
expenditures by manufacturers in many market segments. In addition, during this
period, revenues from sales of CMMs and other dimensional metrology products
were impacted by vigorous price and performance competition due to overcapacity
in the dimensional metrology industry and reduced demand by the capital goods
sector for dimensional metrology products. However, because of the steady
economic recovery in the United States and the expectation that the European
economies will begin to emerge from recession, Brown & Sharpe believes that the
world market for metrology products should improve during the next few years.
35
<PAGE>
METROLOGY BUSINESS STRATEGY
Brown & Sharpe is implementing a strategy designed to improve its
competitiveness and position itself for improvement in its markets, including
the currently depressed European market. Key elements of this strategy are (i)
expanding its market presence in the metrology industry, including through
acquisition and consolidation opportunities, (ii) reducing product costs
through more cost-effective product design, selective outsourcing and
consolidation of manufacturing processes, (iii) providing "best in class"
customer service and strengthening its worldwide distribution network and (iv)
focusing on technological innovations designed to improve product performance
and the development of new products.
Expanded Market Presence. Through the acquisition of Roch and Mauser,
Brown & Sharpe has expanded, and through the acquisition of DEA Brown &
Sharpe will further expand, its product lines and its marketing and
distribution capabilities in Europe, South America, the Middle East, India
and China. Brown & Sharpe intends to continue to expand and strengthen its
market presence and broaden its product lines by pursuing selected small
acquisition and consolidation opportunities within the dimensional
metrology industry. Brown & Sharpe believes that the dimensional metrology
industry has continuing overcapacity, and that competitors having
complementary product lines and geographic market coverage may continue to
become available for acquisition.
Competitive Costs. Brown & Sharpe intends to continue to increase
production efficiency through more cost-effective product designs and
through other cost reductions. Brown & Sharpe intends to reduce costs by
using the "Design for Manufacturability and Assembly" (DFMA) engineering
principle, which strives to use the fewest parts and the lowest cost
assembly process by examining the production processes at each facility in
order to maximize efficiency, and by outsourcing components and complete
products in cases where it can achieve its high quality standards at
reduced costs. During the last five years, annual net sales per employee
for Brown & Sharpe have increased from approximately $84,900 to
approximately $94,800.
"Best in Class" Customer Service and Worldwide Distribution
Capability. Brown & Sharpe provides post-sale service and support to its
customers through its customer service departments and its regional and
international demonstration centers. Brown & Sharpe is committed to
providing "best in class" customer service, and believes that the level of
customer service provided by Brown & Sharpe has improved in recent years
and is superior to the service provided by its principal competitors. In
order to continue to improve its customer service, Brown & Sharpe plans to
increase its emphasis on customer training by improving user manuals and
documentation relating to Brown & Sharpe's products, and to directly
support a greater number of its customers by adding new demonstration and
service centers in previously unserved geographic areas. In addition, Brown
& Sharpe plans to strengthen its worldwide distribution capability,
principally by continuing to rationalize its existing distribution network
and by opening new demonstration centers and adding new direct sales
capacity or distributors where increased volume makes such distribution
methods cost effective.
Technological Innovation. Brown & Sharpe intends to continue to enhance
and expand its offering of systems and products through sustained design
and manufacturing engineering. In 1993, Brown & Sharpe invested, exclusive
of customer-sponsored activities and government grants, $8.7 million,
comprising 5.5% of sales, and directly involved 120 employees in product
design, development, refinement and manufacturing engineering. After the
DEA Acquisition, Brown & Sharpe intends to continue such design and
manufacturing engineering at similar levels. Brown & Sharpe performs some
additional engineering development activities through government grants in
some countries and engages in special projects that utilize customer
funding.
MS DIVISION
The MS Division, the largest of Brown & Sharpe's three units, accounted for
approximately 55% of Brown & Sharpe's revenues in 1993. The MS Division is
headquartered in North Kingstown, Rhode Island.
36
<PAGE>
Products sold under the Brown & Sharpe (R) name are manufactured at the North
Kingstown facility and products sold under the Leitz (R) name are manufactured
in Wetzler, Germany. Brown & Sharpe also manufactures some CMM products in the
United Kingdom. The primary end markets for the CMM products of the MS Division
are the automotive, aerospace and industrial machinery industries.
MS Division products range from small, manually operated CMMs to large, high
speed, high precision automatic CMMs. In addition to these standard and custom-
configured CMMs, Brown & Sharpe also produces and sells high-speed process
control robots. The smallest machines can measure in a volume up to 16x14x12
inches and are priced at approximately $12,000, and the larger, high speed,
high accuracy CMMs with integrated software systems can cost over $3 million.
In addition, the MS Division provides accessories, parts, after-sales service,
rebuilds and computer hardware and software upgrades for Brown & Sharpe's CMMs
and competing machines.
The MS Division's "user-friendly" CMM application software is an important
component of its marketing strategy for its CMM products. Management believes
that the MS Division's uniquely functional CMM software packages give it a
competitive advantage in the marketplace for CMMs. These proprietary software
products provide the MS Division's customers with an easily understood, icon-
based inspection analysis capability, graphical user interfaces and outputs,
and networking capability with manufacturing systems. The MS Division also
provides its customers with special software and systems integration of the MS
Division's products with the customer's host computer.
The MS Division distributes the majority of its products directly to
customers through its worldwide direct sales force. The typical sales process
involves lengthy, technical, one-on-one discussions between the salesperson or
the distributor/sales agent and the customer. As an important part of its
marketing and distribution strategy, Brown & Sharpe provides in-depth training
to the customer through demonstration, installation and application support
both prior to and after the sale. This direct sales and customer support
strategy is primarily implemented through Brown & Sharpe's customer support and
demonstration centers. Brown & Sharpe currently operates demonstration centers
in seven cities throughout the United States, eight centers throughout Europe
and one in Asia, including four located at Brown & Sharpe's CMM manufacturing
facilities. Brown & Sharpe also operates contract inspection and measuring
services from these demonstration centers. Service revenue generated by the
demonstration centers offsets a portion of the cost of operating the centers.
In 1994, assuming the completion of the DEA Acquisition, Brown & Sharpe plans
to close five demonstration centers (with seven centers still remaining in the
United States) in cities where existing Brown & Sharpe and DEA demonstration
centers overlap, and to open new demonstration centers in three additional U.S.
cities and one in Asia.
PMI DIVISION
The principal products of Brown & Sharpe's PMI Division are precision
measuring tools and related instruments such as micrometers, rulers, dial
indicators, calipers, electronic height gauges and gauge blocks. These tools
and instruments have a broad application and lower unit list prices (with a
range of approximately $20 to approximately $13,000) than the prices of the MS
Division's products (which range from approximately $12,000 to over $3
million). PMI products typically measure in one or two dimensions, and are
often used in comparative measuring where an unknown part or dimension is
compared to a previously measured part or dimension. PMI products also include
systems and application software for measuring and statistical process control.
The primary end markets for the products of Brown & Sharpe's PMI Division are
the automotive, aerospace, metal processing and defense industries, although
Brown & Sharpe's PMI products are used in virtually all types of industrial
settings. Brown & Sharpe's PMI Division is headquartered in Renens,
Switzerland, and its products are manufactured at its plants in Rolle and
Renens, Switzerland; Poughkeepsie, New York; Leicester, St. Albans and
Plymouth, England; and in Luneville, France.
37
<PAGE>
The PMI Division generally distributes its products through international
import companies, regional distributors and catalog houses throughout the
world. Brown & Sharpe sales offices located in key markets provide support to
the distributors and catalog houses. The PMI Division operates four sales
offices in the United States and eight in other countries, which are staffed by
a total of 74 PMI Division employees.
CM DIVISION
Headquartered in Telford, England, the CM Division is an engineering division
which designs and engineers specialty products and systems to provide
customized solutions for unique measurement or inspection problems. For
example, the CM Division recently designed and implemented a system for
measuring the thickness of the metal top of a soda can and the thickness of the
groove scored around the can's pop-up tab, so that the manufacturer could
determine the ease with which the can could be opened by the end user while
insuring that the can would not rupture. The CM Division's products include
factory networks, contact and optical measuring machines and fixtures aimed at
specific niche markets. CM Division products also include components such as
measuring sensors used in its custom gauges and fixtures as well as those
manufactured by other companies. Prices for CM Division products range from
approximately $20,000 to $1 million for systems and from approximately $150 to
$5,000 for probes, sensors and other components.
Often, the CM Division is able to produce a superior customized product while
at the same time gaining the expertise necessary to convert such customer-
funded research into new, standard Company products. For example, the CM
Division has recently developed a family of optical measuring systems, with
list prices of approximately $50,000 to $500,000.
The primary end markets for the custom-designed products of the CM Division
currently are automotive, aerospace, defense, package and can manufacturing,
oil drilling and standards laboratories. Sales of these products typically
involve a close, highly technical relationship with the customer. This direct
relationship with the customer is reinforced by strong and continuing efforts
to provide superior customer service through ongoing customer training and
technical support. Sales of measuring sensors and other components to OEM
customers are generally conducted by regional distributors. In 1993,
approximately 48% of the CM Division's net sales were derived from custom-
engineered metrology solutions including made-to-order products, and the
balance of the CM Division's net sales were derived from sales of probes,
sensors and other components.
FOREIGN OPERATIONS
Brown & Sharpe manufactures and sells substantial amounts of its dimensional
metrology products in foreign countries. For fiscal 1993, approximately 54% of
Brown & Sharpe's net sales were to customers located outside the United States.
Manufacturing operations take place in Switzerland, Germany, England and
France, as well as in the United States, and Brown & Sharpe's products are sold
in over 60 countries worldwide. As of July 2, 1994, approximately 73% of Brown
& Sharpe's assets were located outside the United States (based on book
values). Accordingly, margins and the ability to export competitively from
these manufacturing locations are affected by fluctuations in foreign currency
exchange rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Brown & Sharpe." For financial
information concerning the foreign operations of Brown & Sharpe for 1991, 1992
and 1993, see Note 14 to the Consolidated Financial Statements of Brown &
Sharpe.
ENGINEERING AND PRODUCT DEVELOPMENT
Brown & Sharpe's commercial success is dependent upon its ability to develop
products, enhancements and applications that meet changing customer metrology
needs and anticipate and respond to technological changes. Brown & Sharpe
designs, develops and refines its products internally through engineering
departments within its product groups and divisions. Brown & Sharpe employs
approximately 120 engineers
38
<PAGE>
and technicians, the majority of whom hold engineering or other university
degrees, in its design engineering activities. When it is more cost-effective
to do so, Brown & Sharpe purchases product designs or portions of product
designs from engineering subcontractors or acquires such designs through
licensing arrangements. Brown & Sharpe also benefits from research and
development efforts which are subsidized by customer funds and, in certain
countries, by government research grants. Brown & Sharpe's research,
development and manufacturing engineering activities are conducted in the
United States, France, Switzerland, Germany, the United Kingdom and Lithuania.
Brown & Sharpe derived over 45% of its net sales in 1993 from the sale of
products that were introduced into the market after 1987. Brown & Sharpe has
been successful in bringing to market new, high-quality products and has
introduced at least one major new product every year since 1987. The current
objectives of Brown & Sharpe's design and manufacturing engineering activities
are the integration of the Roch technologies with Brown & Sharpe's existing
technologies and the introduction of new CMM and PMI products. In 1993, Brown &
Sharpe invested $8.7 million in product design and manufacturing engineering,
or about 5.5% of its 1993 net sales. In 1991 and 1992, Brown & Sharpe expended
$11.4 million and $10.9 million respectively, for product design, development,
refinement and manufacturing engineering. In addition, Brown & Sharpe performs
engineering development activities funded by government grants in some
countries and engages in special projects that utilize customer funding.
RAW MATERIALS AND SOURCES OF SUPPLY
Brown & Sharpe purchases certain products, raw materials, supplies and other
components from a variety of suppliers, and considers its source of supply to
be adequate. Brown & Sharpe does, at times, depend upon various sole sources of
supply for various procurement requirements (generally of items designed by
Brown & Sharpe), but has not experienced any significant difficulty in meeting
delivery obligations because of its reliance on such a supplier. The loss of
any one of these various sole suppliers would not have a material adverse
effect on Brown & Sharpe. Brown & Sharpe depends, as do other leading CMM
manufacturers, on a sole source of supply for certain of the electronic probes
used on CMM machines and, in the event of unavailability of such source, would
be adversely affected, as would its competitors. Brown & Sharpe continues to
explore means of lowering production through selective outsourcing in
situations where Brown & Sharpe can achieve its high quality standards at
reduced costs.
PATENTS, LICENSES, TRADEMARKS AND PROPRIETARY INFORMATION
Brown & Sharpe's business is not significantly affected by or dependent upon
the procurement or maintenance of patents covering Brown & Sharpe's products.
Nevertheless, Brown & Sharpe pursues, where appropriate, patent protection for
inventions, developments and improvements relating to its products both in the
United States and abroad. Brown & Sharpe owns or has the right to use a number
of trademarks which it believes are valuable in promoting the sale of certain
of its principal products, and it has registered the trademarks that it owns in
the United States and in some foreign countries. The internationally recognized
brand names under which Brown & Sharpe sells its products are the subject of
trademarks owned or licensed by Brown & Sharpe and are important to Brown &
Sharpe's marketing strategy, as brand name recognition is a significant factor
in the dimensional metrology market.
One of Brown & Sharpe's CMM products, a horizontal arm-type CMM, has been
manufactured and sold in North America under an exclusive license from an
independent German company which has recently been modified to a non-exclusive
license agreement. Brown & Sharpe has entered into an exclusive arrangement in
1994 with another German CMM manufacturer to market and sell its horizontal CMM
on an exclusive basis in North America and on a non-exclusive basis in the rest
of the world. In addition, Brown & Sharpe uses the Leitz (R) and Mauser (R)
brand names under royalty-free license agreements entered into in connection
with Brown & Sharpe's acquisition of these product lines. These licenses expire
in 1997 and 1999, respectively. Brown & Sharpe believes it will be able to
negotiate satisfactory extensions prior to expiration and that the failure to
renew these licenses would not have a material adverse effect on Brown &
Sharpe.
39
<PAGE>
PROPERTIES
The following table sets forth certain information concerning Brown &
Sharpe's major operating facilities:
<TABLE>
<CAPTION>
OWNED/ APPROXIMATE
LOCATION LEASED PRINCIPAL USE SQUARE FOOTAGE
-------- ------ ------------- --------------
<S> <C> <C> <C>
UNITED STATES
N. Kingstown, Rhode Owned Manufacturing, Engineering, 359,000(1)
Island............... Sales and Administration
Poughkeepsie, New Owned 58,000
York................. Manufacturing
Farmington Hills, Leased 24,000
Michigan............. Sales
SWITZERLAND
Renens................ Owned Manufacturing, Engineering, 139,000
Sales and Administration
Rolle................. Owned Manufacturing 51,000
GERMANY
Wetzler............... Owned Manufacturing, Engineering, 101,000
Sales and Administration
Ludwigsburg........... Leased Sales 15,000
UNITED KINGDOM
St. Albans............ Owned Manufacturing and Sales 36,000
Telford............... Leased Manufacturing, Engineering, 32,000
Sales and Administration
Bedford............... Leased Manufacturing, Sales and 14,000
Administration
Leicester............. Owned Manufacturing 14,000
Plymouth.............. Leased Manufacturing, Sales and 5,000
Administration
FRANCE
Luneville(2).......... Leased Manufacturing, Engineering and 77,100
Sales
</TABLE>
- --------
(1)Excludes approximately 401,000 square feet leased to unrelated parties.
(2)Acquired in the Roch Acquisition.
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.
EMPLOYEES
At December 25, 1993, Brown & Sharpe had 1,543 employees, (as compared with
1,768 at December 27, 1992), including approximately 1,000 employees located
outside the United States. The reduction from the end of 1992 was due to the
sale of the machine tool spare parts and rebuild operations and other employee
reductions implemented as a result of Brown & Sharpe's cost-cutting efforts,
especially in Europe. 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 900 of Brown & Sharpe's employees located at sites in the
United States, Switzerland, England, Germany and France are covered by
collective bargaining agreements which expire at various times between December
4, 1994 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.
40
<PAGE>
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 "--
Litigation." 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 the IAM with respect
to the terms and conditions of employment by providing notice of, and offering
to bargain with respect to, proposed changes to the terms and conditions of
employment, although no collective bargaining has resulted in recent years.
Although the manufacturing employees represented by the IAM are still
technically on strike, no strike or picket activity has occurred since 1982 and
management does not anticipate that any such activities will occur in the
future. At the time of the strike in 1981, 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.
At certain of Brown & Sharpe's European locations, Brown & Sharpe has
utilized a staffing procedure called "short work" to reduce the hours that an
employee works during periods of decreased demand for Brown & Sharpe's
products. This staffing procedure is similar to furloughs utilized by U.S.
employers, although the specifics differ in each country. Generally, payment is
made to the employee and the employer is eligible for government reimbursement
for a portion of the amount paid to the employee working reduced hours. Each
country generally requires that applications be made for reimbursement the
approval of which may be delayed for significant periods. Each country may also
impose time limits and other material conditions as to how often an employer
may use this mechanism. Brown & Sharpe has utilized "short work" in Switzerland
and Germany. This staffing procedure is not available in France or the United
Kingdom. Approximately 150 employees were on "short work" as of May 27, 1994.
The following table sets forth the location of Brown & Sharpe's employees as
of May 20, 1994:
<TABLE>
<CAPTION>
COUNTRY EMPLOYEES(1)
------- ------------
<S> <C>
France.......................................................... 166
Germany......................................................... 258
Italy........................................................... 7
Japan........................................................... 10
Spain........................................................... 0
Switzerland..................................................... 351
United Kingdom.................................................. 351
United States................................................... 485
-----
TOTAL........................................................... 1,628
=====
</TABLE>
- --------
(1) Includes full-time employees on "short-work." Other part-time employees are
included on a full-time equivalent basis.
COMPETITION
Brown & Sharpe's business is subject to intense direct and indirect
competition from a considerable number of domestic and foreign firms, a number
of which are larger in overall size than Brown & Sharpe.
41
<PAGE>
Most of these firms, however, do not compete with Brown & Sharpe in all product
lines. The principal factors affecting competition include reliability and
quality of product, technological proficiency, price, ease of system
configuration and use, application expertise, engineering support, local
presence, distribution networks and delivery times. Price competition has been
intense for dimensional metrology products, due to the recent period of
decreased demand for these products that has resulted in overcapacity within
the industry. Brown & Sharpe believes that competition in the dimensional
metrology field will continue to be intense in the future as a result of
advances in technology, continuing overcapacity in the dimensional metrology
industry and consolidations and/or strategic alliances among competitors. In
addition to direct competition from companies that market similar types of
products, Brown & Sharpe is also subject to indirect but effective competition
from firms that market other dimensional metrology products, such as fixed
gauging and vision-based systems, which utilize alternative technology or
methodologies to perform functions similar to those of the CMMs and other
products manufactured or sold by Brown & Sharpe.
Brown & Sharpe's single largest global competitor is Mitutoyo/MTI Corp., a
subsidiary of Mitutoyo Solsakusho Co. Ltd., a Japan-based company, which is the
largest supplier of metrology equipment and products worldwide. In addition to
Mitutoyo, the MS Division's main competitors are DEA, Carl Zeiss, Inc., a
subsidiary of Carl-Zeiss-Stiftung AG, the Sheffield Measurement Division of
Giddings & Lewis, Inc., and LK Tool Co. Ltd., a subsidiary of TransTech Ltd.
The primary competitors faced by the PMI Division are Mitutoyo, L.S. Starrett
Co. and Federal Products Co. (Inc.), a subsidiary of Esterline Technologies
Corporation. Marposs S.p.A. is a major competitor of the CM Division for custom
metrology sales. Marposs, which is based in Italy, competes with the CM
Division through its sales subsidiaries in all major markets.
LITIGATION
Labor Relations. Brown & Sharpe is involved in litigation stemming from an
October 1981 strike at Brown & Sharpe's North Kingstown, Rhode Island
operations. After the strike began, the IAM filed numerous charges with the
National Labor Relations Board (the "NLRB") which alleged that Brown & Sharpe
engaged in surface bargaining and other conduct constituting unfair labor
practices which caused or prolonged the strike. After investigation, the
Regional Director of the NLRB issued an unfair labor practice complaint against
Brown & Sharpe, alleging that Brown & Sharpe committed unfair labor practices
prior to and during the strike. Such allegations, if proven, would have
converted the strike from an economic strike over wages and benefits to an
unfair labor practice strike resulting in Brown & Sharpe having potential back-
pay liability to those strikers who sought reinstatement to their jobs.
Numerous striking employees have, however, been preferentially re-hired since
the strike began and such employees comprise a significant portion of the
current workforce at the North Kingstown location. After a trial before an NLRB
Administrative Law Judge, the unfair labor practice complaint was dismissed on
April 16, 1986. The IAM appealed this ruling to the NLRB. On August 28, 1990
the NLRB found in favor of the Company and upheld dismissal of IAM's complaint.
The IAM appealed the NLRB's 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 Brown & Sharpe in support of the NLRB's 1990
decision, but ordered the NLRB to further clarify and support its decision. On
the NLRB reaffirmed its original dismissal of the IAM charges. The IAM has
filed notice of an appeal of the NLRB's decision. Brown & Sharpe is continuing
to defend this case vigorously and, in the opinion of management, the
possibility of an ultimate finding of monetary liability in this matter is
remote. See Note 8 to the Consolidated Financial Statements of Brown & Sharpe.
Environmental Matters. Brown & Sharpe is involved in two proceedings under
the Comprehensive Environmental Response Compensation and Liability Act, 42
U.S.C. (S) 9601 et seq. ("CERCLA"), with the federal Environmental Protection
Agency ("EPA") and one private contribution claim lawsuit brought by a
subsequent landowner in which Brown & Sharpe has been identified as one of many
potentially responsible parties ("PRP") who may have liability for industrial
waste disposed of at two off-site sites designated for clean-up by the
government. Brown & Sharpe believes that its ultimate liability with respect to
these sites will not be material.
42
<PAGE>
Brown & Sharpe was notified by the EPA in June, 1988 that it was one of
approximately 75 PRP's having liability under CERCLA for clean-up of the
Landfill & Resource Recovery, Inc. Superfund Site located in North Smithfield,
Rhode Island. The estimated past and future costs to clean up the site under
the remedy proposed by the EPA are $18.2 million. The EPA issued an
Administrative Order in June, 1990 against the major PRP's and certain de
minimis PRP's, including Brown & Sharpe, ordering them to perform the clean-up
remedy at the site. In February, 1992 Brown & Sharpe, as a de minimis PRP
having contributed only .6% of the volume of materials deposited at the site,
settled its liability to the EPA and the State of Rhode Island for a payment of
approximately $255,000. In December, 1991 the non-settling major PRP's at the
site filed suit against all of the de minimis PRP's in United States District
Court in Rhode Island who had settled with the EPA, including Brown & Sharpe,
seeking contribution damages for half their clean-up liability to be incurred
at the site. In October, 1992 the District Court granted the Summary Judgment
motion of the defendants in that case, indicating that the defendants,
including Brown & Sharpe, having settled their liability with the EPA, had no
liability to the major PRP's. The major PRP's are continuing to challenge the
validity of the de minimis PRP settlement with the EPA on administrative
grounds.
Brown & Sharpe was notified by the EPA in June, 1992 that its former
subsidiary, Standard Gage Company, Inc. of Poughkeepsie, New York, which was
merged into Brown & Sharpe, was one of approximately 1,400 PRP's having
liability under CERCLA for clean-up at the Solvents Recovery Service of New
England Superfund Site located in Southington, Connecticut. Total past and
future estimated costs to perform the remedy proposed by the EPA to clean up
the site are approximately $8.0 million. In June, 1994 Brown & Sharpe, as a de
minimis PRP having contributed less than .01% of the volume of materials
deposited at the site, settled its liability to the EPA for a payment of
approximately $20,000.
In October, 1992 a private claim was asserted against Brown & Sharpe and
approximately 100 other PRP's for contribution to clean-up costs to be incurred
by a subsequent landowner, Duffy Brothers Construction Co., Inc. ("Duffy
Brothers") as a result of an order by the Massachusetts Department of
Environmental Protection to clean up a site located in Waltham, Massachusetts
purchased by Duffy Brothers in October, 1973. The site was formerly owned by
Pierce Brothers Oil Service, Inc., who for many years operated a waste oil
collection and treatment business at the site. The total damages sought by
Duffy Brothers from the PRP group is $5.9 million. In June, 1993 Duffy Brothers
brought suit against the PRP's in the U.S. District Court for the District of
Massachusetts seeking contribution damages under CERCLA and certain state
statutes, alleging that it will incur damages for clean-up costs at the site of
between $9.4 million and $20.5 million. Although Duffy Brothers has no
documentary evidence to link Brown & Sharpe to wastes found at the site, it
alleges that Brown & Sharpe contracted with Pierce Brothers to remove waste
cutting oils and tank bottom oils from Brown & Sharpe business during the
period from 1950 to 1962 and that such waste oils were taken to the site. The
plaintiff has offered to settle with Brown & Sharpe in a range of $81,000 to
$161,000 depending on the type of release to be given. Brown & Sharpe is
vigorously defending the suit and denies that it ever did business with Pierce
Brothers and that it has no liability to Duffy Brothers. The case is currently
in discovery and settlement discussions are continuing.
In addition, Brown & Sharpe was involved in an administrative proceeding with
the Department of Environmental Management of the State of Rhode Island
relating to the issuance of a Notice of Violation and Order in July 1991
alleging that Brown & Sharpe contaminated the groundwater at its North
Kingstown facility prior to removal of several underground storage tanks used
to store hazardous liquids used in its manufacturing process. Tests conducted
after removal of the tanks indicated levels of contamination of groundwater in
the tank area in amounts above acceptable limits. Brown & Sharpe has settled
the proceeding by entry of a Consent Order pursuant to which it agreed to pay a
fine of $10,000 and conduct additional groundwater testing. Test results to
date indicate there are no additional sources of contamination, and that
previously detected contamination appears to be dissipating. Brown & Sharpe
believes that it is unlikely to have any additional liability with respect to
this matter and that any such liability would not be material. See Note 8 to
the Consolidated Financial Statements of Brown & Sharpe.
43
<PAGE>
Environmental testing at Brown & Sharpe's Leitz CMM facility in Wetzler,
Germany conducted prior to the time of its acquisition in June, 1990 indicated
that the soil and groundwater of a portion of the facility are contaminated
with certain toxic metals and chemicals some of which are used in Leitz'
manufacturing processes. Although Leitz is not involved in any governmental
claims or proceedings relating to this contamination, the levels of
contamination are such that cleanup and future remediation of this site could
be required. The contamination of the Leitz property stems from a waste
disposal site adjacent to the Leitz property owned by the seller of the Leitz
CMM business. The seller of the Leitz business is conducting test monitoring
activity on the adjacent site at the request of governmental authorities as
well as soil gas venting remediation efforts undertaken at the request of Brown
& Sharpe to prevent migration of further contamination onto the acquired Leitz
property. Recent tests have indicated that these remediation efforts may be
inadequate. Management believes that because the Leitz facility is an
industrial site and the contamination does not impact other properties, the
German government would not require Leitz to undertake any remediation efforts
with respect to the Leitz facility at this time, and that any remediation
efforts that might be required at that site would consist of "lower" cost
containment efforts at some indeterminate time in the future. As a result Brown
& Sharpe has not established a reserve for potential Leitz environmental
liabilities.
Environmental testing at the Roch facility in Luneville, France conducted at
the time of the recent Roch acquisition (which facility is leased from the
seller of the Roch business) has indicated that the soil and groundwater are
contaminated with certain toxic metals and chemicals used in Roch's
manufacturing processes. Although Roch is not involved in any governmental
claims or proceeding relating to this contamination, the levels of
contamination are such that clean-up and future remediation of this site could
be required. Under the terms of the lease agreement between Brown & Sharpe's
Roch subsidiary and the seller of the Roch business, such seller is obligated
during the nine-year term of the lease to correct any environmental problems
arising at the site and hold Roch harmless from any liability or losses it may
incur as a result of the seller's failure to take such action. In addition,
Brown & Sharpe has certain indemnification rights under the Roch and Mauser
acquisition agreement to be indemnified by the seller against environmental
claims and remediation costs at the Roch facility site. Because management
believes that Brown & Sharpe or Roch is unlikely to be liable for remediation
costs at the Roch facility site, no reserves against such potential
environmental liabilities have been established.
Brown & Sharpe believes that these indemnification rights and in the case of
the Roch and Mauser business, clean up obligations, are enforceable against the
respective sellers of the Leitz business and the Roch and Mauser businesses.
There can be no assurance, however, that Brown & Sharpe will in fact be able to
collect any indemnification amounts to which it is entitled or that any amounts
received by Brown & Sharpe in satisfaction of its indemnification rights will
be adequate to cover Brown & Sharpe's potential liabilities.
In addition, Brown & Sharpe and its subsidiaries and predecessors have
conducted heavy manufacturing operations for many years, often in locations at
which, or adjacent to which, other industrial operations were or are conducted.
As with any such operations that involve the use, generation, and management of
hazardous materials, there is a risk that practices deemed acceptable by
regulatory authorities in the past may have created conditions which could give
rise to liability under current environmental laws. Because the law in this
area is developing rapidly, particularly in many European countries, and all
such laws are subject to amendment and widely varying enforcement, Brown &
Sharpe cannot predict with any certainty the nature and amount of any potential
environmental liability related to these operations or locations that it may
face in the future.
Under the DEA Acquisition Agreement, Finmeccanica has agreed to indemnify
Brown & Sharpe for any environmental liabilities on account of conditions or
states of fact existing on the Closing Date under the DEA Acquisition Agreement
which were caused by DEA or its subsidiaries and which constitutes a violation
of or requires remediation under applicable environmental laws at the Closing
Date. This indemnification, together with any other indemnification payments by
Finmeccanica, applies to losses and expenses up to $10
44
<PAGE>
million (after the first $500,000 in the aggregate which is not indemnified),
provided that such conditions or states of fact shall not have been discovered
as a result of Brown & Sharpe's voluntary investigative efforts.
Product Liability. Brown & Sharpe is also involved in several product
liability claims and lawsuits which arose out of and were incidental to the
conduct of its discontinued metal cutting machine tool business, the potential
liability for which Brown & Sharpe believes is adequately covered by insurance
or reserves established for such contingencies. Brown & Sharpe 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 Brown & Sharpe's financial position, results of operations or liquidity.
45
<PAGE>
BROWN & SHARPE SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information of Brown & Sharpe
for each of the last five fiscal years is derived from Brown & Sharpe's audited
consolidated financial statements, including the notes thereto. The information
for the six months ended June 26, 1993 and July 2, 1994, are unaudited but, in
the opinion of management, reflect all adjustments (consisting only of normal
recurring items) necessary for a fair presentation of the results for such
interim periods. The results for the six months ended July 2, 1994 are not
necessarily indicative of the results that may be expected for the full year.
This selected financial information should be read in conjunction with the
Consolidated Financial Statements of Brown & Sharpe, related notes and other
financial information included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------------------------------------------ ------------------
DEC. 30, DEC. 29, DEC. 28, DEC. 26, DEC. 25, JUNE 26, JULY 2,
1989 1990 1991(1) 1992(1) 1993(1) 1993(1)(2) 1994(2)
-------- -------- -------- -------- -------- ---------- -------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales:
Metrology.............. $130,933 $165,865 $166,819 $152,201 $155,133 $77,859 $79,811
General products....... 11,111 10,838 9,028 8,494 1,902 1,902 -- (3)
-------- -------- -------- -------- -------- -------- -------
Total................ 142,044 176,703 175,847 160,695 157,035 79,761 79,811
Cost of goods sold...... 95,875 135,821 119,481 116,283 110,841 54,969 55,337
Selling, general and ad-
ministrative expense... 37,898 52,971 56,672 52,509 45,474 22,923 25,871
-------- -------- -------- -------- -------- -------- -------
Operating profit (loss):
Metrology.............. 6,816 (13,005) (1,281) (8,857) 1,652 2,801 (1,397)
General products....... 1,455 916 975 760 (932) (932) -- (3)
-------- -------- -------- -------- -------- -------- -------
Total................ 8,271 (12,089) (306) (8,097) 720 1,869 (1,397)
Interest expense........ (2,340) (3,811) (4,219) (5,272) (5,100) (2,461) (2,723)
Other income (expense),
net.................... 983 (74) 824 2,135 2,764 2,035 178
-------- -------- -------- -------- -------- -------- -------
Income (loss) before in-
come taxes............. 6,914 (15,974) (3,701) (11,234) (1,616) 1,443 (3,942)
Income tax provision
(benefit).............. 961 (3,737) (800) (3,250) 800 -- 300
-------- -------- -------- -------- -------- -------- -------
Income (loss) from con-
tinuing operations..... 5,953 (12,237) (2,901) (7,984) (2,416) 1,443 (4,242)
(Loss) from discontinued
operations............. (1,138) (2,329) (1,180) -- -- -- --
-------- -------- -------- -------- -------- -------- -------
Net income (loss)....... $ 4,815 $(14,566) $ (4,081) $ (7,984) $ (2,416) $ 1,443 $(4,242)
======== ======== ======== ======== ======== ======== =======
Primary and fully di-
luted loss per common
share:
Income (loss) from con-
tinuing operations..... $ 1.30 $ (2.67) $ (0.62) $ (1.63) $ (0.49) $ .29 $ (.83)
(Loss) from discontinued
operations............. (.25) (.51) (0.25) -- -- -- --
-------- -------- -------- -------- -------- -------- -------
Net income (loss)....... $ 1.05 $ (3.18) $ (0.87) $ (1.63) $ (0.49) $ .29 $ (.83)
======== ======== ======== ======== ======== ======== =======
OTHER DATA:
Depreciation and amorti-
zation................. 7,115 9,084 8,700 7,330 6,355 3,082 2,884
Capital expenditures.... 6,262 9,277 9,864 12,474 4,399 1,971 1,363
Ratio of earnings to
fixed charges(4)....... 3.3x -- 0.3x -- 0.8x 1.3x --
BALANCE SHEET DATA (END
OF PERIOD):
Working capital......... $ 74,719 $ 59,006 $ 68,587 $ 48,036 $ 46,025 $ 49,886 $43,267
Property, plant and
equipment, net......... 33,105 42,609 44,602 46,402 43,554 42,966 45,699
Total assets............ 167,733 205,912 183,748 166,086 165,871 165,222 174,076
Total debt.............. 34,650 58,053 61,369 60,700 64,500 57,238 72,665
Shareowners' equity..... 87,403 82,893 80,268 66,674 63,520 65,628 61,691
</TABLE>
- --------
(1) Restated to reflect the change in accounting for large machinery
construction contracts for its European operations. See Note 2 of Notes to
Consolidated Financial Statements of Brown & Sharpe.
(2) The six months ended July 2, 1994 includes twenty-seven weeks, while the
six months ended June 26, 1993 includes twenty-six weeks.
(3) The machine tool spare parts and rebuild operations, the last remaining
operations in the general products segment, were sold in 1993.
(4) The ratio of earnings to fixed charges is calculated by dividing (i)
earnings from continuing operations before income taxes and fixed charges
by (ii) fixed charges, which consist of interest expense and one-third of
rental expense, which is deemed to be representative of the interest
factor. Earnings were insufficient to cover fixed charges by $20,785,
$9,267, $18,067, $7,998, and $3,942 for the years ended December 29, 1990,
December 28, 1991, December 26, 1992, and December 25, 1993 and the first
half of 1994, respectively.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BROWN & SHARPE
In completing its transformation from a machine tool company to a dimensional
metrology company, Brown & Sharpe has made a number of acquisitions and
divestitures that have impacted, and will continue to impact, its results of
operations and liquidity. At the end of the first quarter of 1994, Brown &
Sharpe acquired Roch and Mauser. During the first and second quarters of 1993,
Brown & Sharpe sold its machine tool spare parts and rebuild operations. During
the first quarter of 1992, Brown & Sharpe sold its pump operation and its 80%
ownership interest in GageTalker Corporation, a provider of data collection and
statistical process control systems ("GageTalker"). In late 1991, Brown &
Sharpe purchased Thomas Mercer Limited, a manufacturer of metrology devices
that is now included in the PMI Division ("Mercer"). At the end of the second
quarter of 1990, Brown & Sharpe acquired Leitz, a manufacturer of high accuracy
CMMs. The DEA Acquisition will also have a significant impact on Brown &
Sharpe's results of operations and liquidity. See "--Effects of Roch
Acquisition and DEA Acquisition." The following discussion of Brown & Sharpe's
historical financial condition and results of operations should be read in
conjunction with the Consolidated Financial Statements of Brown & Sharpe and
the notes thereto included elsewhere in this Proxy Statement.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales of Brown & Sharpe
represented by the components of income and expense for the years ended
December 28, 1991, December 26, 1992 and December 25, 1993 and the six months
ended June 26, 1993 and July 2, 1994:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------------------- ----------------
DEC. 28, DEC 26, DEC. 25, JUNE 26, JULY 2,
1991 1992 1993 1993 1994
-------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net sales........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................. 67.9 72.4 70.6 69.0 69.3
Selling, general and administrative
expense............................ 32.2 32.7 29.0 28.7 32.5
----- ----- ----- ----- -----
Operating profit (loss)............ (0.2) (5.0) 0.5 2.3 (1.8)
Interest expense.................... 2.4 3.3 3.2 3.1 3.3
Other income, net................... 0.5 1.3 1.8 2.6 0.2
----- ----- ----- ----- -----
Income (loss) before income taxes... (2.1) (7.0) (1.0) 1.8 (4.9)
Income tax provision (benefit)...... (0.5) (2.0) 0.5 -- 0.4
Income (loss) from continuing opera-
tions.............................. (1.7) (5.0) (1.5) -- --
Loss from discontinued operations... (0.7) -- -- -- --
----- ----- ----- ----- -----
Net income (loss)................... (2.3)% (5.0)% (1.5)% 1.8% (5.3)%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended July 2, 1994 compared to Six Months Ended June 26, 1993
Orders. Orders during the first six months of 1994 totaled $84.7 million
compared to $78.1 million for the first six months of 1993. Roch and its
affiliate company which were acquired on March 24, 1994, represented $2.5
million in orders during the first half of 1994. The machine tool spare parts
and rebuild operations, sold near the end of the first quarter of 1993,
represented $1.9 million in orders during the first half of 1993, and foreign
currency fluctuations had very little impact on the comparable 1994 and 1993
periods. Excluding the effect of these items, orders increased 7.9% to $82.2
million in the first six months of 1994 from $76.2 million in the first six
months of 1993. Sales efforts have resulted in an increasing number of larger
value orders in the United States. Orders for machines increased in 1994 from
the canning industry for CM Division equipment and the PMI Division had
increasing orders primarily from its European distributors. MS Division orders
were slightly higher in the first half of 1994 than in the first half of 1993.
Backlog at July 2, 1994 increased to $31.6 million compared to $26.1 million at
year-end 1993 and $25.9 million at the end of the first six months of 1993.
47
<PAGE>
Net Sales. Net sales in the first half of both 1994 and 1993 were $79.8
million. Roch and its affiliate represented $2.3 million in sales during the
first half of 1994. Approximately $1.9 million of first half 1993 net sales
were attributable to machine tool spare parts and rebuild operations which
businesses were sold during the first half of 1993. Foreign currency exchange
rate fluctuations caused an increase in net sales in the first half of 1994 of
$.3 million as compared to the first half of 1993. Excluding the effect of
these items, first half 1994 net sales declined approximately $.7 million from
first half 1993 sales. A decline in net sales occurred in the MS Division. MS
Division net sales in the half-year were 8.6% below the first half of 1993,
largely as a result of entering 1993 with a larger backlog than at the
beginning of 1994. In 1994, increasing U.S. orders have been received for
larger value, larger size machines which are not generally included in sales
until subsequent quarters due to required lead times. Net sales of PMI and CM
Division products increased from the prior year primarily due to the resolution
of the financial difficulties of a German distributor, which had depressed net
sales in the prior period.
Gross Profit. Gross profit margin decreased to 30.7% in the first half of
1994 from 31.0% in the first half of 1993. The decline resulted in part from a
LIFO inventory liquidation benefit of $.5 million recorded in the first half of
1993, which was partially offset by reduced design engineering costs in 1994 in
the PMI Division of about $.2 million.
Selling, General and Administrative Expense. Selling, general and
administrative ("SG&A") expense in the first half of 1994, at $25.9 million or
32.5% of net sales, increased from the $22.9 million, or 28.7% of net sales,
incurred in the comparable period in 1993. Nearly all of the increase was due
to special items including an extra week of expenses of about $1 million in the
first half of 1994 as compared to the first half of 1993, the receipt of
litigation settlement proceeds in the first half of 1993 of about $.5 million,
the addition of Roch selling, general and administrative costs since
acquisition in late March 1994 of about $.6 million and the recording in the
second quarter of 1994 of a provision increasing the allowance for
uncollectible accounts receivable of approximately $.6 million for collection
uncertainties arising from one prior sale to a single customer.
Operating Profit (Loss). Brown & Sharpe generated an operating loss of $1.4
million in the first half of 1994. This compared to an operating profit of $1.9
million in the first half of 1993. In the United States, operating profit for
the first half of 1994 totaled $1.2 million as compared to an operating profit
of $2.8 million in the first half of 1993. Foreign operations generated an
operating loss of $2.6 million in the first half of 1994 as compared to an
operating loss of $.9 in the first half of 1993. The lower operating profit in
the United States in the 1994 period as compared to the 1993 period was
substantially due to the receipt of litigation settlement proceeds and the LIFO
inventory liquidation benefit in the 1993 period, as well as an extra week of
SG&A expense in the 1994 period. Brown & Sharpe believes that its normal sales
pattern would not generally result in proportionate increases in net sales in a
twenty-seven week half year as compared to a twenty-six week half year. The
greater operating loss in foreign operations reflected the worsening
performance at Brown & Share's German CMM operations and the $.6 million
reserve for an account receivable, which was partially offset by improvement at
Brown & Sharpe's PMI Division headquartered in Switzerland.
Interest Expense. Interest expense totaled $2.7 million in the first half of
1994 compared to $2.5 million in the first half of 1993. This increase reflects
a $9.7 million increase in the average balance of borrowings, primarily in the
United States, which was partially offset by lower interest rates averaging
4.0% in the first half of 1994 as compared to 4.2% in the first half of 1993.
Other Income, Net. Other income, net was $178,000 in the first half of 1994
and $2.8 million in the first half of 1993. The 1993 first half included a gain
of approximately $2.0 million on the sale of certain small business operations
near the end of the first quarter, partially offset by foreign exchange losses.
Income Tax Provision. The provision for income taxes was $.3 million in the
first half of 1994 compared to $.5 million in the first half of 1993. The 1993
provision was offset by deferred tax benefits of $.5 million
48
<PAGE>
due to reductions in deferred tax liabilities as a result of losses in certain
of Brown & Sharpe's European subsidiaries.
Net Income (Loss). As a result of the foregoing, Brown & Sharpe had a net
loss of $4.2 million ($.83 net loss per share) in the first half of 1994,
compared to net income of $1.4 million ($.29 net income per share) in the first
half of 1993.
Brown & Sharpe expects to report a net loss for the third quarter of 1994
primarily resulting from the effect of normally low sales volume due to
vacations, shutdowns, etc. in the third quarter. Upon the expected consummation
of the DEA Acquisition, the expected net loss in the third quarter would be
increased by certain restructuring accruals associated with the integration of
the DEA business.
Year Ended December 25, 1993 Compared to Year Ended December 26, 1992
Orders. Orders totaled $155.9 million in 1993, a decline of $12.9 million, or
7.6%, from the prior year. The decrease resulted principally from the sale of
the machine tool spare parts and rebuild operations in the first quarter of
1993, which represented $8.6 million of incoming orders in 1992 compared to
$1.9 million of incoming orders in 1993. In addition, weakening of certain
European currencies against the U.S. dollar resulted in a decrease in reported
1993 orders of approximately $4.8 million compared to 1992. Excluding the
effect of these items, 1993 orders increased $1.0 million from 1992. Backlog
was $26.1 million at year-end 1993, compared with $30.2 million at year-end
1992, which was a particularly high level for Brown & Sharpe's metrology
business. The decrease in backlog resulted principally from a decrease in
orders in 1993 as compared to 1992.
Net Sales. Net sales in 1993 were $157.0 million, a decrease of $3.7 million,
or 2.3%, as compared to $160.7 million in 1992. The weakening of certain
European currencies against the U.S. dollar caused a decrease of $5.0 million
in net sales in 1993 as compared to 1992. In addition, in the first and second
quarters of 1993, Brown & Sharpe disposed of its machine tool spare parts and
rebuild operations, which accounted for $1.9 million and $8.5 million of net
sales in 1993 and 1992, respectively. Excluding the effect of these items, net
sales in 1993 increased $7.9 million from the prior year. Net sales in the
United States increased to $72.3 million in 1993 from $69.8 million in 1992, an
increase of 3.5%. The increase was primarily due to improvements in the U.S.
economy and in the automotive industry in particular and was reflected in
increased sales of both CMMs and PMI division products. The increase in U.S.
net sales was offset by a $6.7 million reduction resulting from the sale of the
machine tool parts and rebuild operations. In Europe, net sales declined to
$62.2 million in 1993 from $70.7 million in 1992, or 11.9%, as a result of the
continuing recession in Europe and the weakening of certain European currencies
against the U.S. dollar. Net sales in the rest of the world totaled $22.5
million in 1993, up 11.6% from sales of $20.2 million in 1992. This increase
was principally due to increased sales in Asia.
Gross Profit. Gross profit margin increased to 29.4% in 1993 from 27.6% in
1992. In 1992, cost of goods sold included inventory write-offs of $2.0 million
resulting from the introduction of new products that replaced certain of Brown
& Sharpe's existing products and $2.5 million of restructuring costs, primarily
employee severance expenses resulting from downsizing at Brown & Sharpe's
German and Swiss manufacturing facilities in response to declining sales. Brown
& Sharpe's gross profit for these years also reflects benefits from the
liquidation of LIFO inventories of $9.8 million in 1992 and $0.7 million in
1993 resulting from successful efforts to reduce inventory in the United
States. Gross profit in 1993 was also reduced as a result of the weakening of
certain European currencies against the U.S. dollar. Excluding the effect of
these items, gross profit was $46.7 million in 1993, or a margin of 29.7%,
compared to $39.1 million in 1992, or a margin of 24.3%. This improvement
reflects the benefits of Brown & Sharpe's cost control and restructuring
efforts described above.
Selling, General and Administrative Expense. SG&A expense was $45.5 million
in 1993 and $52.5 million in 1992. As a percentage of net sales, SG&A expense
decreased to 29.0% in 1993 from 32.7% in
49
<PAGE>
1992. SG&A expense in 1992 includes approximately $2.6 million of restructuring
costs, primarily for employee severance at European facilities, and $1.5
million of incentive compensation related to the acquisition of the remaining
minority interest in Technicomp, Brown & Sharpe's education quality training
products subsidiary.
Operating Profit (Loss). Operating profit was $0.7 million in 1993 compared
to an operating loss of $8.1 million in the prior year. Excluding an operating
loss of $0.9 million attributable to the divested machine tool operations,
operating profit in 1993 totaled $1.7 million. In the United States, operating
profit increased substantially in 1993 to $5.2 million from $1.3 million in
1992 for the reasons discussed earlier. Although the European recession
continued, Brown & Sharpe's European operations generated improved results,
posting an operating loss of $4.4 million in 1993 compared to an operating loss
of $9.4 million in 1992.
Interest Expense. Interest expense declined to $5.1 million in 1993 from $5.3
million in 1992 principally due to a reduction in interest rates on Brown &
Sharpe's borrowings.
Other Income, Net. Other income, net increased to $2.8 million in 1993 from
$2.1 million in 1992. Other income in 1993 included a $2.0 million net gain on
the sale of the machine tool parts and rebuild operations, and other income in
1992 included a net gain of $0.6 million on the sale of an office building and
an aggregate of $0.6 million on the sale of the pump operation and Brown &
Sharpe's interest in GageTalker.
Income Tax Provision (Benefit). The provisions for income taxes for 1993 and
1992 include foreign, federal and state income taxes. Income tax expense
totaled $0.8 million in 1993 based on a consolidated pretax loss of $1.6
million. The income tax expense in 1993 resulted largely from profits in the
United States. Brown & Sharpe has substantial loss carryforwards in European
countries and tax credit carryforwards in the United States. In 1992, Brown &
Sharpe recorded a tax benefit of $3.3 million in 1992 on a pretax loss of $11.2
million, an effective rate of 28.9%.
Year Ended December 26, 1992 Compared to Year Ended December 28, 1991
Orders. Orders increased 4.2% to $168.8 million in 1992 from $162.0 in 1991.
Orders in 1992 included an increase of $4.1 million resulting from the
inclusion of Mercer which was acquired on November 1, 1991, and a decrease of
$5.9 million in orders from Brown & Sharpe's pump operation and interest in
GageTalker, which were sold during the first quarter of 1992. Excluding the
effect of these items, orders in 1992 increased $8.6 million from 1991. The
increase in orders was due primarily to increased orders for Brown & Sharpe and
Leitz CMM products in the United States and Europe. This improvement resulted
from new product introductions, improved European distribution, certain product
promotions and selective competitive discounting. Backlog increased to $29.4
million at the end of 1992 from $23.2 million at the end of 1991, principally
resulting from increased orders for the CMM products described above.
Net Sales. Net sales in 1992 decreased to $160.7 million from $175.8 million
in 1991. Net sales in 1992 reflected the disposition of the pump operation and
Brown & Sharpe's interest in GageTalker in the first quarter of 1992. These
operations, and the machine tool spare parts and rebuild operation which was
sold in 1993, accounted for net sales of $9.4 million in 1992 and $16.6 million
in 1991. Excluding these businesses, 1992 net sales totaled $151.2 million
compared to $159.2 million in 1991. This decrease resulted from declining
orders from distributors of PMI products related to the global recession,
particularly in Europe. Net sales in the United States fell to $69.8 million in
1992 from $76.8 million in 1991 due in large part to the sale of the pump
operations and the interest in GageTalker. In Europe, net sales declined to
$70.7 million in 1992 from $82.7 million in 1991, resulting primarily from the
European recession. Net sales in the rest of the world increased to $20.2
million in 1992 from $16.4 million in 1991. This increase primarily resulted
from an increase in net sales in Asia due largely to sales efforts of Leitz.
Gross Profit. Gross profit margin decreased to 27.6% in 1992 from 32.1% in
1991. Gross profit in 1992 was affected by (i) the recognition of $9.8 million
of LIFO liquidation benefits due to reductions in inventory
50
<PAGE>
levels, (ii) the extension of the estimated lives of machinery and equipment at
a Swiss subsidiary based on low utilization, which resulted in a reduction in
depreciation expense of approximately $0.9 million annually, (iii) inventory
write-offs of $2.0 million that resulted from a combination of reduced sales,
new product introductions that replaced certain existing products and
restructuring decisions that resulted in removal of some products from Brown &
Sharpe's product lines and (iv) $2.5 million of restructuring costs primarily
related to employee severance at European facilities. Gross profit in 1991 was
affected by restructuring costs of $1.8 million primarily attributable to
employee severance at European facilities. Adjusted for these items, gross
profit margin was 24.9% in 1992 compared to 33.1% in 1991. This significant
decline was a result of increased pricing pressure in the metrology market in
both the United States and Europe as well as the effect of the reduced sales
volume in relation to fixed costs.
Selling, General and Administrative Expense. SG&A expense was $52.5 million
in 1992, compared to $56.7 million in 1991. As a percentage of net sales, SG&A
expense increased to 32.7% in 1992 from 32.2% in 1991. In 1992, this amount
included $2.6 million in restructuring charges primarily for employee severance
at European facilities as well as $1.5 million of incentive compensation paid
in connection with the acquisition of the remaining minority interest in
Technicomp. Excluding these items, SG&A expense declined to $48.4 million in
1992 from $56.7 million in 1991 (30.1% of net sales in 1992 compared to 32.2%
in 1991). The reduction in the amount of SG&A expense in 1992 reflected the
effect of personnel reductions.
Operating Profit (Loss). Operating losses totaled $8.1 million in 1992
compared to an operating loss of $0.3 million in the prior year. In the United
States, operating profit declined to $1.3 million in 1992 from a profit of $4.8
million in 1991 on reduced sales as discussed earlier. In Europe, losses
deepened as a result of continued competitive pressure and recessionary
conditions, with a resultant operating loss of $9.4 million in 1992 compared to
$5.1 million in 1991.
Interest Expense. Interest expense increased to $5.3 million in 1992 from
$4.2 million in 1991. The increase resulted from increased borrowing in Europe
to support operations of Mercer acquired at the end of 1991, financing of a new
building for the Leitz operation in Germany and European operating losses.
Other Income, Net. Other income, net, which includes interest income,
increased to $2.1 million in 1992 from $0.8 million in 1991, principally as a
result of an aggregate of $1.2 million in gains recognized on the sale of an
office building, the pump operation and Brown & Sharpe's interest in
GageTalker.
Income Tax Provision. Brown & Sharpe recognized an income tax benefit of $3.3
million in 1992 based on consolidated pretax losses of $11.2 million,
reflecting an effective rate of 28.9%. This compares to a benefit of $0.8
million in 1991 on a pretax loss of $3.7 million, reflecting an effective rate
of 21.6%. The increased tax benefit in 1992 reflects $4.6 million of deferred
tax reductions resulting from losses, compared to 1991 deferred tax reductions
of $1.0 million.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, Brown & Sharpe has met its liquidity needs, including
capital expenditures, working capital needs and the funding of operating
losses, through cash generated from operations, sale proceeds of discontinued
businesses, borrowings under secured and unsecured lines of credit and a
renewable secured $15.0 million two-year revolving credit facility entered into
in June 1993 (the "Foothill Facility"). Amounts outstanding under the lines of
credit are payable on demand, and certain of the lines extended to Brown &
Sharpe's foreign subsidiaries are secured by restricted cash balances and other
assets. The Foothill Facility provides for borrowings based on a percentage of
eligible domestic accounts receivable and finished inventory, is secured by
substantially all domestic assets (including the stock of domestic subsidiaries
and 65% of the stock of certain foreign subsidiaries), and requires maintenance
of a minimum current ratio, a maximum ratio of debt to adjusted net worth,
minimum adjusted net worth and minimum working capital. At July 2, 1994, Brown
& Sharpe had borrowings of $22.9 million under the lines of credit and $11.4
million borrowed under the Foothill Facility, compared to total availability at
that date of $29.2 million under the lines of credit and
51
<PAGE>
$15.0 million under the Foothill Facility. At July 2, 1994, Brown & Sharpe was
required to maintain an aggregate of $6.1 million in restricted cash balances
to support certain of the foreign lines of credit. The Three Year Guaranteed
Term Loan and the Revolving Credit Facility, each of which is conditioned on
the DEA Acquisition, will result in substantially improved liquidity of the
Combined Company as compared to Brown & Sharpe.
To provide additional liquidity, pending the DEA Acquisition and the balance
of the New Financing, Brown & Sharpe recently entered into a commitment letter
for an $8.5 million, five-year North Kingstown Mortgage, secured by Brown &
Sharpe's North Kingstown, Rhode Island facility. The North Kingstown Mortgage
bears interest at 8.75% with annual amortization based on a ten-year schedule
and the remaining balance due at maturity. Closing on this financing, expected
near the end of August, is subject to completion of a property survey, an
environmental survey that already has been completed and accepted, and
appropriate loan documentation.
In conjunction with the planned acquisition of DEA, Brown & Sharpe had filed
an S-1 Registration Statement for a public offering of $75.0 million of the
Senior Notes. However, Brown & Sharpe has decided to shift to the New
Financing, which is expected to have lower aggregate interest charges and other
fees than would the Senior Notes.
As part of the New Financing Brown & Sharpe has received written commitments
from two banks to provide the $25.0 million Three-Year Guaranteed Term Loan.
The banks' commitments for the term loans are contingent upon receipt of a full
guarantee from Finmeccanica and completion of the DEA Acquisition. Brown &
Sharpe has received a written commitment from Finmeccanica to provide the
necessary guarantees to the banks coincident with the completion of the DEA
Acquisition. The interest rate under the Three-Year Guaranteed Term Loan is
expected to be floating at approximately 75 basis points over LIBOR or the
banks' cost of funds. Brown & Sharpe has also received written assurances from
four Italian banks for the continuation of their existing demand lines of
credit to DEA totalling $7.5 million. Brown & Sharpe is also negotiating with a
number of other foreign banks to provide additional working capital lines of
credit for DEA.
Also, to provide for working capital needs expected after the DEA
Acquisition, Brown & Sharpe is negotiating with several financial institutions
to enter into the secured Revolving Credit Facility which will provide for
borrowings by Brown & Sharpe of up to $25.0 million, subject to borrowing base
limitations. Brown & Sharpe has received a written commitment from one of the
financial institutions. Availability under the Revolving Credit Facility
commitment is subject to completion of the DEA Acquisition, the Three-year
Guaranteed Term Loan and appropriate loan documentation. Brown & Sharpe expects
that if obtained, the Revolving Credit Facility will be secured by a first
priority lien, subject to certain permitted encumbrances, on domestic accounts
receivable and inventory, a second position on the North Kingstown facility and
certain equipment utilized there, and a portion of the shares of certain of
Brown & Sharpe's subsidiaries, will have a term of three years, will bear
interest at a floating rate.
It is anticipated that with the New Financing, all existing Brown & Sharpe
long-term debt, consisting of $33.8 million and $6.5 million of Italian
government subsidized long-term debt acquired in the DEA Acquisition will be
retained. The Combined Company's long-term debt will be increased by new long-
term debt including $25.0 million from the Three Year Guaranteed Term Loan and
$8.5 million from the North Kingstown Mortgage. The $31.4 million net proceeds
from these new financings would be utilized to repay certain existing Brown &
Sharpe short-term debt and the U.S. short-term debt acquired in the DEA
Acquisition. Additionally, the Combined Company will expend $1.3 million for
costs, primarily for professional fees associated with the DEA Acquisition.
Following the expected completion of the DEA Acquisition and the New
Financing arrangements, management believes that the availability of
borrowings, together with cash flow from current levels of operations and
anticipated cost savings from the integration of DEA, Roch and Mauser, will be
sufficient to
52
<PAGE>
meet operational cash requirements (including one-time costs in integrating
Roch, Mauser and DEA), working capital requirements and planned capital
expenditures, through at least three years from the date of the DEA
Acquisition. However, failure to achieve anticipated cost savings from the
integration of DEA, Roch and Mauser, or unexpected delays in or costs related
to the integration, could have a material adverse effect on Brown & Sharpe's
liquidity. See "--Effects of Roch Acquisition and DEA Acquisition."
Cash Flow. In the first half of 1994, operations used cash of $.7 million;
the net loss of $4.2 million was offset by accounts receivable collections
from typically higher sales near the end of the preceding fourth quarter.
In the first half of 1994, investment transactions used cash of $1.6
million, of which capital expenditures were $1.4 million, whereas, investment
transactions provided cash of $3.8 million in the first half of 1993 with
proceeds from the sale of the spares and rebuild operations of $8.7 million
being partially offset by capital expenditures of $2.0 million amongst other
transactions.
Cash provided from financing transactions was $3.0 million in the first half
of 1994 compared to cash used of $1.5 million in the first half of 1993.
Working Capital. Working capital was $43.3 million at the end of the first
half of 1994 compared to $46.0 million at the end of 1993. This change
resulted largely from the timing of sales during the respective periods with
higher sales in December of 1993 resulting in higher accounts receivable.
Inventories increased to $59.8 million at July 2, 1994, an increase of $5.8
million from the end of 1993 which did not require a substantial use of cash
because it primarily resulted from Brown & Sharpe's purchase of Roch and
Mauser in the first quarter of 1994 using Brown & Sharpe Shares of Class A
Common Stock. Also, debt increased at July 2, 1994 a compared to December 25,
1993 due to debt of Roch exiting at its acquisition date, increased borrowing
and foreign currency exchange rate changes.
Capital Expenditures. Brown & Sharpe's capital expenditures to support the
ongoing business were approximately $1.4 million in the first half of 1994
compared to $1.8 million in the first half at 1993. In addition, capital
spending to construct a new building at its German facility, substantially
completed in 1992, amounted to approximately $.2 million in the first half of
1993.
After the expected completion of the DEA Acquisition, total capital
expenditures for the Combined Company are expected to increase. DEA capital
expenditures totaled $.6 million in the first half of 1994 compared to $1.2
million in the first half of 1993. Management estimates that annual capital
expenditures of approximately $6.0 to $8.0 million are required to tool new
products, improve product and service quality, expand the distribution
network, and support the operations of the Combined Company. Planned capital
expenditures in 1994 and 1995 will include an aggregate of approximately $2.1
million for the construction of a new facility in Telford, England to replace
an existing facility for which the lease expires and is non-renewable.
Acquisitions and Divestitures. There were no divestitures in 1994, and Roch
and its affiliate, Mauser, were acquired in late March 1994. Proceeds from the
sale of the machine tool spare parts and rebuild operations during 1993
provided $8.7 million of cash.
FOREIGN OPERATIONS
As of July 2, 1994, approximately, 73% of Brown & Sharpe's assets were
located outside the United States (based on book values). For fiscal 1993,
approximately 54% of Brown & Sharpe's net sales were to customers located
outside the United States. The foreign operations of Brown & Sharpe are
subject to special risks that can materially affect its sales, profits, cash
flows and financial position, including taxes on distributions and payments,
currency exchange rate fluctuations, inflation, minimum capital requirements
and exchange controls. To mitigate these risks, Brown & Sharpe enters into
lines of credit denominated in currencies in which its foreign assets are held
and engages in hedging of currency risk through the use of forward contracts
and the netting of corporate-wide currency exposures. As of July 2, 1994,
after giving effect
53
<PAGE>
to the DEA Acquisition, approximately 76% of the Combined Company's assets were
located outside the United States (based on book values). For fiscal 1993, on a
pro forma basis after giving effect to the DEA Acquisition and the Roch
Acquisition, approximately 62% of the Company's Combined net sales were to
customers located outside the United States. Management believes that the DEA
Acquisition will not materially affect the risks relating to foreign operations
faced by the Combined Company.
EFFECTS OF ROCH ACQUISITION AND DEA ACQUISITION
The Combined Company's plan for integrating DEA, Roch and Mauser anticipates
cost savings (before one-time implementation cash costs) of nearly $8.3 million
to be realized within the first twelve months of combined operations. Brown &
Sharpe expects that the Combined Company will achieve these savings primarily
by eliminating duplicative administrative and sales personnel and facilities,
duplicative marketing expenses such as advertising and trade shows and certain
redundant design engineering activities, including personnel. Brown & Sharpe
expects the Combined Company to realize total annual savings of nearly $14
million after 24 months of combined operations through these actions, further
reductions in selling and administrative expenses, rationalization of European
manufacturing facilities and reductions in associated manufacturing overhead
costs. Brown & Sharpe estimates that implementation of these cost savings
measures will require one-time costs of approximately $12.4 million for
severance, lease terminations and other actions. Of this $12.4 million in
expected cash costs, $2.0 million is expected to be reflected in restructuring
expense in 1994, $10.2 million is expected to be charged against reserves
established in the allocations of purchase price associated with the Roch
Acquisition and the DEA Acquisition, and $0.2 million is expected to be
incurred with respect to capital spending associated with facilities
construction. Additionally, the Combined Company will expend $1.3 million for
costs, primarily for professional fees associated with the DEA Acquisition. The
estimates of anticipated cost savings discussed here differ from the cost
savings included in the Pro Forma Combined Financial Statements, which are
limited to cost savings to be realized from actions commenced within the first
12 months of combined operations and which assumes that savings from measures
to be commenced within the first three months of combined operations are
reflected as if such measures were commenced and are effective at the beginning
of such period. See "Notes to Pro Forma Combined Financial Statements" and
"Risk Factors--Risks Related to 1994 Strategic Acquisitions."
The following table shows the estimated cost savings (before one-time
implementation cash costs) that Brown & Sharpe expects to realize through
planned cost-cutting measures in the integration of DEA, Roch and Mauser, as
compared to the aggregate current cost structures of Brown & Sharpe and these
companies as stand-alone entities.
<TABLE>
<CAPTION>
EXPECTED ANNUAL
COST SAVINGS
-----------------
FIRST 12 AFTER 24
MONTHS MONTHS
-------- --------
(MILLIONS)
<S> <C> <C>
Roch and Mauser
Closing of Tesa office, Paris, France.............. $0.8 $ 0.8
Closing of Mauser office, Nuremberg, Germany....... 0.7 0.7
Staff reduction, Luneville, France................. 0.4 0.4
Reduction of design engineering expense............ 0.3 0.3
Negotiated purchase discounts...................... 0.1 0.1
---- -----
$2.3 $ 2.3
DEA
North American sales and distribution.............. $2.4 4.5
European sales and distribution.................... 2.9 3.4
Excess production facility space................... -- 1.2
Reduction of manufacturing overhead in European op-
erations.......................................... -- 1.6
Design engineering................................. 0.7 1.0
---- -----
$6.0 $11.7
---- -----
Total Savings (before one-time costs)............ $8.3 $14.0
==== =====
</TABLE>
54
<PAGE>
Savings From Roch Acquisition
Since consummation of the Roch Acquisition at the end of the first quarter of
1994, Brown & Sharpe has closed the Tesa PMI office in France and a Mauser
office in Germany, reduced staffing at a remaining office in France, terminated
a Brown & Sharpe design engineering project relating to technology acquired in
the Roch Acquisition, reduced design engineering staffing and used the larger
volume of the combined operations to negotiate reduced prices from certain
suppliers on certain purchasing arrangements. Brown & Sharpe anticipates that
these actions will result in approximately $2.3 million in annual cost savings
within the first twelve months following the Roch Acquisition (before one-time
implementation cash costs). Brown & Sharpe believes that these center closings
and personnel reductions will result in one-time severance, relocation and
other cash costs of approximately $0.8 million, substantially all of which will
be expended by the end of 1994.
Savings From DEA Acquisition
Brown & Sharpe has prepared a plan to eliminate duplicate operations and take
other actions to achieve cost savings in integrating the operations of DEA with
those of its existing CMM operations. This plan was developed in part based on
information provided by DEA personnel and, in certain areas, on discussions
with DEA personnel concerning appropriate staffing, facility and activity
levels of the combined operations. In certain instances where specific DEA
information has not been made available to Brown & Sharpe, such as compensation
levels of DEA personnel, Brown & Sharpe has made assumptions based on its
experience. In general, Brown & Sharpe has assumed that personnel reductions
will be effective within six months of the DEA Acquisition, and that personnel
will be entitled to severance or redundancy of six months' salary. To date, the
integration plan has been limited to functions where Brown & Sharpe management
believes that sufficient information concerning DEA's operations is available
to Brown & Sharpe to allow it to forecast cost savings with reasonable
confidence. These functions include North American sales and distribution,
European sales and distribution, certain excess production facility space,
reduction of certain manufacturing overhead in European operations and design
engineering activities.
Consolidation of North American Sales and Distribution. Following the DEA
Acquisition, Brown & Sharpe plans to consolidate North American sales and
distribution activities by reducing the number of sales and related support
employees by approximately 13%, closing five demonstration centers (net of
one replacement center) in cities where both Brown & Sharpe and DEA now
have centers, and opening three new demonstration centers where the
combined volume of the two operations will make direct sales more cost
effective than using sales agents or distributors. Brown & Sharpe believes
that these measures can all be implemented within twelve months of the DEA
Acquisition, and will result in savings within the twelve months of
approximately $2.4 million (before one-time implementation cash costs) and
total annual cost savings after 24 months of approximately $4.5 million.
Brown & Sharpe believes that these personnel reductions and center closings
and openings would result in one-time severance, relocation and other cash
costs of approximately $1.4 million, substantially all of which would be
expended in the first twelve months.
Consolidation of European Sales and Distribution. Brown & Sharpe also
plans to consolidate European sales and distribution activities by reducing
sales and related support employees by approximately 25% in Germany, Italy,
France and England, and by closing six demonstration centers (net of one
replacement center). Brown & Sharpe believes that these measures can all be
implemented within twelve months of the acquisition, and will result in
savings within the twelve months of approximately $2.9 million (before one-
time implementation cash costs) and total annual cost savings by the third
year of approximately $3.4 million. Brown & Sharpe believes that these
personnel reductions and center closings would result in one-time
severance, relocation and other cash costs of approximately $2.4 million,
substantially all of which would be expended in the first twelve months.
Elimination of Excess Facility Space. Brown & Sharpe believes that
consolidation of certain European manufacturing operations would both
reduce facility rental expense and streamline the
55
<PAGE>
manufacturing process, resulting in production savings. Brown & Sharpe
believes that this manufacturing consolidation will require up to twenty-
four months to implement, and will result in total annual cost savings of
approximately $1.2 million (before one-time implementation cash costs).
Brown & Sharpe believes that these consolidation efforts will result in
one-time relocation and other cash costs of approximately $4.9 million,
substantially all of which will be expended in the second through fourth
years following the DEA Acquisition.
Reduction of Manufacturing Overhead in European Operations. Brown &
Sharpe believes that the integration of DEA into the MS Group will permit
the reduction of supervisory and other staffing at the Combined Company's
manufacturing facilities in Europe. Brown & Sharpe believes that it will be
able to identify and provide the required statutory notice to the affected
employees within twelve months following the DEA Acquisition, and that
these reductions will result in total annual cost savings after 24 months
of approximately $1.6 million (before one-time implementation cash costs).
Brown & Sharpe believes that these staffing reductions will result in one-
time severance and other cash costs of approximately $1.6 million,
substantially all of which will be expended in the second year following
the DEA Acquisition.
Consolidation of Design Engineering. Brown & Sharpe believes that overlap
in design engineering activities of the two operations will permit
reduction of at least 9% in the total number of employees dedicated to
these activities without reducing the effective level of design engineering
activity. A portion of this reduction has already been made in Brown &
Sharpe's design engineering operations in anticipation of the acquisition,
and Brown & Sharpe expects that the balance would be made within twelve
months after the acquisition. Brown & Sharpe believes that these personnel
reductions would result in approximately $0.7 million in savings in the
first twelve months (before one-time implementation cash costs), and total
annual cost savings of approximately $1.0 million by the third year. Brown
& Sharpe believes that these reductions would result in approximately $1.0
million in one-time severance and relocation costs, substantially all of
which would be incurred in the first twelve months.
In addition to the specific cost savings plans described above, Brown &
Sharpe also believes that additional cost savings may be realized through
consolidation of certain manufacturing operations and discontinuance of
certain similar products. As of the date hereof, Brown & Sharpe does not have
sufficient specific cost and other information concerning DEA's operations to
allow Brown & Sharpe to quantify with confidence the potential additional
savings or to determine that additional savings are in fact attainable. In
addition, Brown & Sharpe is unable to predict whether and to what extent the
elimination of similar products, expected to produce further manufacturing
savings, will result in incremental decreases in revenue.
Accounting for Roch Acquisition and DEA Acquisition
Brown & Sharpe accounted for the Roch Acquisition as a purchase transaction
and will apply the same accounting method to the DEA Acquisition. In a
purchase transaction the purchase price, including assumed liabilities and the
costs of the acquisition, is allocated among the acquired assets based on
estimated fair values for purposes of recording such assets on the purchaser's
balance sheet. Brown & Sharpe expects that the purchase price for the DEA
Acquisition, including an estimated $11.1 million in reserves for acquisition
related costs and anticipated costs associated with consolidation and related
cost savings measures, will be less than Brown & Sharpe's estimate of the fair
value of the assets acquired by approximately $.4 million. This excess of fair
value over cost of assets acquired will be recorded as a long-term liability
that will be amortized over the expected ten-year period during which Brown &
Sharpe believes it will benefit from this excess. In addition to the $11.1
million in reserves established with respect to DEA personnel, assets and
liabilities and associated acquisition costs, Brown & Sharpe plans to record a
one-time charge of an estimated $2.0 million in connection with the DEA
Acquisition to establish additional reserves relating to anticipated
consolidation and related cost savings measures to be taken with respect to
Brown & Sharpe's existing personnel, assets and liabilities. Brown & Sharpe
believes that these reserves, when combined with reserves established in
connection with the Roch Acquisition, will be adequate for all currently
anticipated costs associated with the consolidation of DEA, Roch and Mauser.
56
<PAGE>
DEA S.P.A.
GENERAL
DEA S.p.A., an Italian corporation, is a wholly owned subsidiary of
Finmeccanica S.p.A., an Italian corporation, and is a major competitor of Brown
& Sharpe's MS Division. DEA is a worldwide leader in the manufacturing and
marketing of CMMs and related accessories, software and services under the
internationally recognized DEA (R) brand name, with 1993 net sales and
operating profit of approximately $112.4 million and $5.4 million, respectively
and total assets at June 30, 1994 of $106.8 million. DEA's products measure the
physical dimensions of objects and are used by a wide variety of industrial
companies to monitor product conformance to specifications. Manufacturers use
DEA's products to improve product quality and are increasingly integrating
quality control functions, and therefore DEA's products, directly into the
manufacturing process. DEA's products are sold in the dimensional metrology
market, where DEA is one of only six major worldwide competitors that
manufacture high-precision CMMs. See "Brown & Sharpe Manufacturing Company--
Dimensional Metrology Industry."
DEA derives over half of its revenues from medium-to-large vertical and
horizontal-arm CMMs used principally in the automotive and aerospace industries
and also derives a significant portion of its revenues through the sale of
upgrades, enhancements, replacement parts and services. The other major end-use
markets served by DEA are the machine tool and general machinery industries.
The DEA product line ranges from small, manually operated CMMs to large, high
speed, automatic horizontal CMMs used in sheet metal gauging systems primarily
in the automotive industry, and very large, automatic vertical gantry CMMs used
primarily in the automotive and aerospace industries. In addition, DEA provides
accessories, parts, after-sales service, rebuilds and computer hardware and
software upgrades for DEA's CMMs. DEA's CMM application software is an
important component of its marketing strategy for its CMM products. DEA also
provides its customers with software and systems integration of DEA's products
with the customer's host computer. Products sold under the DEA (R) name are
manufactured in Turin, Italy.
DEA sells the majority of its products through its distribution network of
independent agents and distributors, supported by its worldwide direct sales
force. The typical sales process involves lengthy, technical, one-on-one
discussions between the salesperson or the distributor/sales agent and the
customer. As an important part of its marketing and distribution strategy, DEA
provides in-depth training to the customer through demonstration, installation
and application support both prior to and after the sale. This direct sales and
customer support strategy is primarily implemented through its sales and
marketing organization, technical sales support and metrology system
departments. DEA has distribution capabilities in Europe, the United States,
South America, the Middle East, India, China and the Pacific Rim countries and
maintains major sales offices in the United States, Germany, the United
Kingdom, France, Spain and Japan.
FOREIGN OPERATIONS
For fiscal 1993, approximately 23% of DEA's net sales were to customers
located in Italy, approximately 31% were to customers in the United States and
approximately 47% were to customers in the rest of the world. As of June 30,
1994, approximately 60% of DEA's assets were located in Italy, approximately
20% were located in the United States and approximately 20% were located in the
rest of the world (based on book values). Accordingly, DEA's margins and its
ability to export competitively from its Italian manufacturing locations are
affected by fluctuations in foreign currency exchange rates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
DEA." For financial information concerning the foreign operations of DEA for
1991, 1992 and 1993, and the first half of 1994, see Note 2 to DEA's Combined
Financial Statements.
ENGINEERING AND PRODUCT DEVELOPMENT
DEA'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
57
<PAGE>
changes. DEA designs, develops and refines its products internally through its
engineering program headquartered in Turin, Italy.
DEA employs approximately 70 engineers and technicians in its design
engineering activities, the majority of whom hold engineering or other
university degrees. In 1991, 1992 and 1993, DEA expended L10.3 billion, L8.2
billion and L8.3 billion ($5.1 million), respectively, for product design and
manufacturing engineering. DEA also benefits from research and development
efforts which are subsidized by customer funds and by government research
grants.
PROPERTIES
The following table sets forth certain information concerning DEA's major
operating facilities:
<TABLE>
<CAPTION>
OWNED/ APPROXIMATE
LOCATION LEASED PRINCIPAL USE SQUARE FOOTAGE
-------- ------ ------------- --------------
<S> <C> <C> <C>
ITALY
Moncalieri..................... Leased Engineering, Sales and 260,000
Administration
Moncalieri..................... Leased Manufacturing 70,000
Grugliasco..................... Leased Assembly 105,000
UNITED STATES
Livonia, Michigan.............. Leased Sales and Administration 57,000
FRANCE
Villeban....................... Leased Sales 18,000
SPAIN
Barcelona...................... Leased Sales 16,000
GERMANY
Frankfurt...................... Leased Sales 11,000
UNITED KINGDOM
Swindon........................ Leased Sales 7,500
</TABLE>
In addition, DEA leases smaller sales offices located in the United States,
Europe and Asia. In the opinion of management, DEA's properties are in good
condition and adequate for DEA's business as presently conducted.
EMPLOYEES
At December 31, 1993, DEA had 671 employees, (as compared with 704 at
December 31, 1992), of which 455 were located in Italy and 216 were located at
sales and service facilities in other countries. During the last three years,
net sales per employee for DEA have increased from approximately L119.8 million
to approximately L258.4 million.
An agreement covering approximately 22 management employees expired on June
30, 1993 and an agreement covering approximately 438 clerical and production
employees at DEA's manufacturing facility in Italy expired on June 30, 1994. As
is customary in Italian industry, the employees covered by these expired
agreements are currently working, and are expected to continue to work during
contract negotiations. Contract negotiations in Italy involve the Italian
government, or an agency thereof, and may not be completed until the end of
1995. DEA expects that these agreements will be renewed, however, there can be
no assurance that this renewal and 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 DEA's
ability to produce the products manufactured at the affected location.
In Italy, at May 31, 1994 there were approximately 80 employees in "cassa
integrazione guadagni straordinaria," a mechanism designed to temporarily
reduce DEA's work force through furlough of employees with substantially all
the employment expense reimbursed by the government. Under current law, DEA's
qualifying period for governmental reimbursement expires in September 1994.
58
<PAGE>
The following table sets forth the location of DEA's employees as of April
30, 1994:
<TABLE>
<CAPTION>
COUNTRY EMPLOYEES
------- ---------
<S> <C>
France.......................................................... 52
Germany......................................................... 28
Italy........................................................... 460
Japan........................................................... 18
Spain........................................................... 14
United Kingdom.................................................. 21
United States................................................... 80
---
Total....................................................... 673
===
</TABLE>
COMPETITION
DEA's business is subject to intense direct and indirect competition from a
considerable number of domestic and foreign firms, a number of which are larger
in overall size than DEA. The principal factors affecting competition include
reliability and quality of product, technological proficiency, price, ease of
system configuration and use, application expertise, engineering support, local
presence, distribution networks and delivery times. Price competition has been
intense for dimensional metrology products, due to the recent period of
decreased demand for these products, which has resulted in overcapacity within
the industry. In addition to direct competition from companies that market
similar types of products, DEA is also subject to indirect but effective
competition from firms that market other dimensional metrology products, such
as fixed gauging and vision-based systems, which utilize alternative technology
or methodologies to perform functions similar to those of the CMMs sold by DEA.
DEA's largest global competitors are Carl Zeiss, Inc., a subsidiary of Carl-
Zeiss-Stiftung AG, LK Tool Co. Ltd., a subsidiary of TransTech Ltd, Brown &
Sharpe, the Sheffield Measurement Division of Giddings & Lewis, Inc. and
Mitutoyo/MTI Corp., a subsidiary of Mitutoyo Solsakusho Co. Ltd., a Japan-based
company.
ENVIRONMENTAL
DEA and its subsidiaries and predecessors have conducted heavy manufacturing
operations for many years, often in locations at which, or adjacent to which,
other industrial operations were or are conducted. As with any such operations
that involve the use, generation, and management of hazardous materials, there
is a risk that practices deemed acceptable by regulatory authorities in the
past may have created conditions which could give rise to liability under
current environmental laws. Because the law in this area is developing rapidly,
particularly in many European countries, and all such laws are subject to
amendment and widely varying enforcement. DEA cannot predict with any certainty
the nature and amount of any potential environmental liability related to these
operations or locations that it may face in the future.
59
<PAGE>
DEA SELECTED COMBINED FINANCIAL DATA
The following selected combined financial information of DEA for each of the
last three fiscal years is derived from the audited Combined Financial
Statements of DEA, including the notes thereto. The data for the six months
ended June 30, 1993 and June 30, 1994, are unaudited but, in the opinion of
management, reflect all adjustments (consisting only of normal recurring items)
necessary for a fair presentation of the results for such interim periods. The
results of the six months ended June 30, 1994 are not necessarily indicative of
the results that may be expected for the full year. The following selected
financial information should be read in conjunction with the Combined Financial
Statements of DEA, related notes and other financial information included
elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
-------------------------------------- ----------------------------
DEC. 31, DEC. 31, DEC. 31, DEC. 31, JUNE 30, JUNE 30, JUNE 30,
1991 1992 1993 1993 1993 1994 1994
-------- -------- -------- -------- -------- -------- --------
(LIRE IN MILLIONS; DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............... L117,662 L124,749 L178,297 $112,419 L 79,387 L 71,494 $ 45,078
Cost of goods sold...... 93,561 83,922 114,363 72,108 48,584 46,548 29,349
Selling, general and
administrative expense. 35,388 39,873 48,764 30,747 28,707 24,573 15,494
Restructuring costs..... -- 2,949 823 518 -- -- --
Depreciation and
amortization........... 5,641 5,718 5,690 3,588 2,723 2,247 1,417
-------- -------- -------- -------- -------- -------- --------
Operating profit (loss). (16,928) (7,713) 8,657 5,458 (627) (1,874) (1,182)
Interest expense, net... (12,086) (11,731) (9,918) (6,253) (4,901) (5,416) (3,415)
Other income (expense),
net.................... 10,688 (4,789) (2,599) (1,639) (1,744) (299) (188)
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... L(18,326) L(24,233) L (3,860) $ (2,434) L (7,272) L (7,589) $ (4,785)
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Capital expenditures.... 3,107 3,080 3,165 1,996 1,475 1,015 640
BALANCE SHEET DATA (END
OF PERIOD):
Working capital......... (135) 4,561 1,930 1,217 (8,801) (10,535) (6,643)
Property, plant and
equipment, net......... 12,979 9,558 9,341 5,890 9,275 8,617 5,433
Total assets............ 142,239 184,455 186,658 117,691 172,090 169,359 106,784
Total debt including
indebtedness to
affiliates............. 106,466 120,047 130,755 82,443 120,198 127,406 80,332
</TABLE>
60
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF DEA
The Combined Financial Statements of DEA have been prepared in accordance
with accounting principles generally accepted in the United States and include
the financial position and results of operations of the companies and divisions
described in Note 1 of the Combined Financial Statements of DEA. This
discussion supplements the detailed information in the Combined Financial
Statements of DEA and notes thereto included elsewhere in this Proxy Statement
and should be read in conjunction therewith.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales of DEA represented
by the components of income and expense for the years ended December 31, 1991,
1992 and 1993 and the six months ended June 30, 1993 and 1994:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
--------------------------- ------------------
DEC. 31, DEC. 31, DEC. 31, JUNE 30, JUNE 30,
1991 1992 1993 1993 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales......................... 100% 100.0% 100.0% 100.0% 100.0%
Cost of products sold............. (79.5) (67.3) (64.1) (61.2) (65.1)
----- ----- ----- ----- -----
Gross profit.................... 20.5 32.7 35.9 38.8 34.9
Selling, general and administra-
tion............................. (30.1) (31.9) (27.3) (36.2) (34.4)
Restructuring costs............... -- (2.4) (0.5) -- --
Depreciation and amortization..... (4.8) (4.6) (3.2) (3.4) (3.1)
----- ----- ----- ----- -----
Operating income (loss)......... (14.4) (6.2) 4.9 (0.8) (2.6)
Interest expense, net............. (10.3) (9.4) (5.6) (6.2) (7.6)
Other income (expense), net....... 9.1 (3.8) (1.5) (2.2) (0.4)
----- ----- ----- ----- -----
Net income (loss)............... (15.6) (19.4)% (2.2)% (9.2)% (10.6)%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended June 30, 1994 Compared to Six Months Ended June 30, 1993
Net Sales. Net sales for the six months ended June 30, 1994 fell to L71.5
billion from L79.4 billion in the six months ended June 30, 1993, a decrease of
9.9%. This decrease was due to reduced net sales in the European and U.S.
markets which were only partially offset by continued increases in net sales to
the rest of the world. In the Italian market, net sales for the six months
ended June 30, 1994 were L12.5 billion, a decrease of 48.0% as compared to net
sales of L24.2 billion in the six months ended June 30, 1993. The decrease was
primarily due to an unusually large sale of L11.8 billion to a major Italian
group in the six months ended June 30, 1993 which represented the completion of
a substantial contract begun in the latter half of 1992. Net sales in the U.S.
market in the six months ended June 30, 1994 decreased 6.9% to L21.5 billion
from L23.1 billion in the six months ended June 30, 1993. This reflected normal
timing fluctuations in the receipt and completion of sales orders rather than
any discernible contraction in the market. In the "Rest of Europe" market
(excluding Italy) net sales for the six months ended June 30, 1994 totalled
L22.8 billion, a decrease of 5.0% compared to net sales of L24.0 billion in the
six months ended June 30, 1993. This was principally due to a reduction in
maintenance and service income in the German market as technicians concentrated
on machine installation rather than servicing and maintenance. This situation
arose because many more lower value machines requiring installation were sold
in 1994 than in 1993. This decline more than offset small gains achieved in the
other major European markets as the recovery in the economies continued. Net
sales in the "Rest of the World" were L14.7 billion, an increase of 79.3% as
compared to net sales of L8.2 billion in the six months ended June 30, 1993.
This growth was achieved through continued market penetration in the emerging
markets, such as Latin America, and is indicative of the strong sales and
marketing presence DEA has established in these areas.
61
<PAGE>
Gross Profit. Gross profit margin decreased to 34.9% in the six months ended
June 30, 1994 from 38.8% in the previous period. This was principally due to
the sale of more smaller, lower margin CMM products during the first half of
1994. In addition, the six months ended June 30, 1993 included a particularly
large, high margin sale to a major Italian group.
Selling, General and Administration Expense. SG&A expense in the six months
ended June 30, 1994 totaled L24.6 billion, a decrease of L4.1 billion, or
14.4%, from the total in the six months ended June 30, 1993. As a percentage of
net sales, these expenses decreased to 34.4% from 36.2% in the six months ended
June 30, 1993. This decrease reflects the results of DEA's cost control program
implemented in 1993, comprised of a reduction in staffing of 87 employees in
1993 and the institution of more stringent advance expense approval procedures
for purchase of material and services.
Operating Profit (Loss). DEA had an operating loss of L1.9 billion during the
six months ended June 30, 1994 compared to an operating loss of L0.6 billion in
the six months ended June 30, 1993. The increase in the operating loss was the
result of reduced net sales in relation to fixed costs and a lower average
gross margin.
Interest Expense. Net interest expense for the six months ended June 30, 1994
and the six months ended June 30, 1993 totaled L5.4 billion and L4.9 billion
respectively. The increase of L0.5 billion reflects the increase in bank
overdrafts and other short term borrowings during the six months ended June 30,
1994.
Other Income, Net. Other net expenses of L0.3 billion in the six months ended
June 30, 1994 and L1.7 billion in the six months ended June 30, 1993 include
foreign exchange losses of L0.1 billion and L1.0 billion, respectively. The
large reduction was primarily due to the strengthening of the Lire exchange
rate against the currencies in which DEA has foreign denominated borrowings
with Finmeccanica, and other reserve adjustments in 1993.
Net Income (Loss). As a result of the factors discussed above, DEA recorded a
net loss of L7.6 billion in the six months ended June 30, 1994 compared to a
net loss of L7.3 billion in the six months ended June 30, 1993.
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
Net Sales. Net sales in the year ended December 31, 1993 totaled L178.3
billion, an increase of 42.9% as compared to net sales of L124.7 billion in the
year ended December 31, 1992. Net sales in Italy were L40.8 billion in 1993, a
45.4% increase as compared to L28.1 billion in 1992. The increase was
principally due to a general restructuring of the sales network, an unusually
large contract from a major Italian industrial group, and the launch of a new
line of CMM products. Net sales in 1993 in the United States increased 75.2% to
L54.3 billion from L31.0 billion in 1992. This increase resulted from a
devaluation of the Lire in the fourth quarter of 1992, as well as from general
reorganization of DEA's U.S. operations and improved economic conditions in the
United States. In Europe, other than Italy, net sales in 1993 totaled L55.1
billion, an increase of 22.4% as compared to net sales of L44.0 billion in
1992, reflecting an increase in market share resulting in part from the
devaluation of the Lire. Net sales in the rest of the world were L28.0 billion
in 1993, an increase of 29.0% as compared to net sales of L21.7 billion in
1992, in part as a result of increased net sales in China.
Gross Profit. Gross profit margin increased to 35.9% in 1993 from 32.7% in
1992. This improvement was principally due to devaluation of the Lire in the
fourth quarter of 1992, as well as cost reductions achieved as a result of a
reorganization of DEA's sales and distribution organization, as well as
increased efficiency in research and development and manufacturing operations.
Selling, General and Administrative Expense. SG&A expense increased 22.3% to
L48.8 billion in 1993 compared to L39.9 billion in 1992. SG&A expense in 1993
was offset by the recognition of L2.4 billion of government grants receivable
in connection with research and development activities. Excluding this item,
SG&A expense totaled L51.2 billion in 1993 (28.7% of net sales) compared to
L39.9 billion (32.0% of net
62
<PAGE>
sales) in 1992. This percentage decrease reflects the cost reductions achieved
following the reorganization in 1992 and management's cost control program,
described above.
Operating Profit (Loss). DEA recorded an operating profit of L8.7 billion in
1993, as compared to a loss of L7.7 billion in 1992. Included in these figures
are restructuring costs of L0.8 billion in 1993 and L2.9 billion in 1992. The
restructuring costs in 1993 related to the dismissal of employees in France.
The restructuring costs in 1992 related to staff reductions in France and the
early retirement of certain employees. The operating profit was primarily the
result of devaluation of the Lire in the fourth quarter of 1992, as well as
cost savings arising from the restructuring of DEA's operations in 1992,
increased sales volume and improvements in manufacturing efficiency.
Interest Expense. Net interest expense for 1993 and 1992 totaled L9.9 billion
and L11.7 billion, respectively. This reduction was principally attributable to
the general decrease in interest rates throughout the countries in which DEA
holds borrowings and a decline in DEA's long-term borrowings.
Other Income, Net. Other expense, net of L2.6 billion in 1993 and L4.8
billion in 1992 were primarily comprised of foreign exchange losses. The large
foreign exchange loss in 1992 principally arose due to the devaluation of the
Lire in the final quarter of 1992 against DEA's principal foreign trading
currencies, the U.S. dollar, German mark and the Japanese yen. DEA is not a
party to any forward exchange contracts or similar investments as a hedge
against transactions denominated in foreign currency.
Net Income (Loss). As a result of the factors discussed above, DEA recorded a
net loss of L3.9 billion in 1993 compared to a net loss of L24.2 billion in
1992.
Year Ended December 31, 1992 Compared to Year Ended December 31, 1991
Net Sales. Net sales in the year ended December 31, 1992 totaled L124.7
billion, an increase of 5.9% as compared to net sales of L117.7 billion in the
year ended December 31, 1991. In the Italian market, net sales in 1992 were
L28.1 billion, a 19.3% decrease as compared to L34.8 billion in 1991. However,
1991 net sales included L12.5 billion of materials transferred to DEA's
assembly operation, the net assets and results of which were excluded from the
combined financial statements in 1991 as the assembly operation did not form
part of the DEA Metrology Activities in 1991 or thereafter. These transfers
represented the value of materials utilized by the assembly operations in its
activities. Excluding these 1991 transfers, underlying net sales in 1992
increased by L5.7 billion, principally resulting from a large sale to a major
Italian group. Net sales in 1992 in the U.S. market increased 29.7% to L31.0
billion from L23.9 billion in 1991. The increase reflected the benefits arising
from the implementation of a sales and marketing strategy under the control of
a new sales manager. Net sales in the final quarter of 1992 also benefitted
from the devaluation of the Lire which increased DEA's price competitiveness in
the U.S. market. In the "Rest of Europe" market (excluding Italy) net sales for
1992 totaled L44.0 billion, a decrease of 3.7% compared to net sales of L45.7
billion in 1991. This decrease was principally due to the continuing downturn
in the major European economies. Net sales in the "Rest of the World" were
L21.7 billion in 1992, an increase of 63.2% as compared to net sales of L13.3
billion in 1991. This increase was achieved through continued growth in China
and other Far East markets where DEA has established a strong sales and service
network.
Gross Profit. Gross profit margin increased to 32.7% in 1992 from 20.5% in
1991. This substantial improvement was due to lower costs arising from a cost
control program that was implemented in 1991 and production and product
refinements which increased the margins obtained on CMM sales.
Selling, General and Administration Expense. SG&A expense increased 12.7% to
L39.9 billion in 1992, compared to L35.4 billion in 1991. As a percentage of
net sales, these expenses increased to 31.9% from 30.1% in the 1991 period.
However, after excluding L12.5 billion of material transfers to the assembly
operation in 1991 SG&A expense as a percentage of net sales decreased.
63
<PAGE>
Operating Profit (Loss). DEA recorded an operating loss of L7.7 billion in
1992 compared to a loss of L16.9 billion in 1991. Included in the 1992
operating loss were restructuring costs of L2.9 billion relating to the early
retirement of staff in Italy and the dismissal of employees in France. The
reduction in the operating loss is principally due to the additional
contribution received from the sales increase, the lower cost base arising from
the ongoing restructuring program and an improvement in margins from production
and product refinements.
Interest Expense. Net interest expense for 1992 and 1991 totaled L11.7
billion and L12.1 billion, respectively. The decrease of L0.4 billion reflects
the change in total external and affiliated borrowings during 1992 when
compared to 1991.
Other Income, Net. Other net expenses of L4.8 billion, principally foreign
currency exchange losses, were recorded in 1992 compared to net income of L10.7
billion in 1991. Included in the 1991 other net income was a gain of L11.6
billion which principally resulted from the sale of DEA's factory premises to
an affiliated company.
Net Income (Loss). As a result of the factors discussed above. DEA recorded a
net loss of L24.2 billion in 1992 compared to a net loss of L18.3 billion in
1991.
LIQUIDITY AND CAPITAL RESOURCES
DEA has historically financed its day to day operations with short term
borrowings provided from affiliated companies and banks. DEA's total long and
short term borrowings amounted to L127.0 billion at June 30, 1994, and L131.0
billion and L120.0 billion at December 31, 1993 and 1992, respectively. Of
these L89.0 billion, L83.0 billion and L96.5 billion respectively, relate to
borrowings from affiliated companies. The ability of DEA to operate as a going
concern has been dependent on the financial support of its parent company,
Finmeccanica and its affiliates. In addition, long term financing for capital
expenditures and research and development has been provided by a mix of long
term loans (from both lending institutions and government agencies) and
government grants. On July 11, 1994, DEA obtained a new long term loan of L2.7
billion and received a grant of L1.4 billion from the Italian Ministry of
Industry. Under the terms of the DEA Acquisition Agreement, Finmeccanica has
agreed to assume, discharge or waive all but approximately L21.8 billion ($13.8
million) of DEA's existing borrowings. See "The DEA Acquisition". The ability
of DEA to continue as a going concern is dependent on the continued financial
support of its owners and a return to profitability. This matter was emphasized
in the report of the independent accountants issued by Reconta Ernst & Young on
the combined financial statements as of December 31, 1993 and 1992. Management
believes this will occur in the foreseeable future as a result of the
implementation of the cost control program and the consummation of DEA
Acquisition, which as discussed above will substantially reduce DEA's
borrowings.
Cash Flow. The operating activities of DEA used cash of L6.0 billion in 1993,
primarily as a result of an increase in accounts receivable as a result of
higher sales, as well as a decrease in accounts payable from an unusually high
amount at the end of 1992. In 1992, total cash used by operating activities was
L44.7 billion, primarily due to the large loss for the year and increases in
accounts receivable and inventory. In the six months ended June 30, 1994,
operating activities provided cash of L1.8 billion, primarily as a result of a
decrease in accounts receivable due to the normal pattern of higher sales
volume at the end of the year.
In the first half of 1994, investing activities used cash of L0.7 billion as
normal capital expenditures and intangible asset additions of L1.2 billion
exceeded a reduction in other non-current assets and deferred charges of L0.5
billion. In 1993, investing activities used cash of L3.6 billion, consisting
primarily of capital expenditures. Investment transactions used cash of L3.3
billion in 1992, as the proceeds of sales of fixed assets of L4.5 billion (of
which L3.2 billion related to the sale of a property in Spain to an affiliated
company), were offset by the purchase of assets from Renault Automation of L3.0
billion and nominal capital expenditures,
64
<PAGE>
intangible asset additions and increases in other non-current assets of L3.1
billion, L0.9 billion and L0.8 billion, respectively.
Increases in short-term borrowings resulted in financing activities providing
net cash of L16.1 billion in 1993. Borrowings and current maturities of debt
increased to L47.1 billion at the end of 1993 from L21.2 billion at year end
1992. This increase of L25.8 billion resulted from the acquisition of DEA USA
from Elsag Bailey Inc. On the date of this acquisition, Elsag Bailey, Inc.,
eliminated a L6.6 billion net asset deficiency of DEA USA by waiving part of a
working capital advance granted to DEA USA. The remaining advance of
approximately L22.0 billion was then repaid by means of an overdraft facility
provided by a bank. In 1992, cash flow from financing activities provided cash
of L46.4 billion as a result of an increase in borrowings from affiliated
companies and a capital contribution by Finmeccanica of L30.0 billion. In the
first six months of 1994, financing activities used cash of L4.1 billion as a
result of long term loan repayments of L7.0 billion and a reduction in short
term borrowings of L8.9 billion. These were partly offset by an increase in
borrowings from affiliated companies of L12.2 billion.
Working Capital. Working capital (defined as total current assets less total
current liabilities) decreased to negative L10.5 billion for the six months
ended June 30, 1994 compared to L1.9 billion at the end of 1993 and L4.6
billion at the end of 1992. Accounts receivable decreased L11.8 billion for the
six months ended June 30, 1994 after an increase of L9.0 billion and L22.3
billion respectively, in 1993 and 1992, respectively. These changes reflect the
amount and timing of net sales during the respective periods with higher sales
typically being recorded in the final month of the year. Inventories decreased
to L66.3 billion for the six months ended June 30, 1994 as compared to L67.1
billion and L68.7 billion at the end of 1993 and 1992, respectively. This small
decrease is not indicative of any management actions but simply reflects the
normal timing differences relating to sales orders, purchases, production, and
sales. For example, at December 31, 1993 more CMMs were at a finished or almost
complete state than at June 30, 1994, where the machines were at a slightly
less advanced stage of production. Accounts payable decreased to L23.6 billion
at June 30, 1994 from L25.9 billion in 1993 and L33.7 billion in 1992. The
decrease between June 30, 1994 and 1993 reflects the lower level of purchases
in the first half of 1994 compared to the final months of the year when sales,
and accordingly purchases, are typically at their highest level. The decrease
between 1993 and 1992 principally reflects the payment of payables at the end
of December 1993 compared to early January in 1992.
Capital Expenditures. DEA's capital expenditures totaled L1.0 billion during
the first six months of 1994 compared to L3.0 billion and L3.1 billion in 1993
and 1992, respectively. This reduced level of capital expenditures is
sufficient to maintain the current operations of the DEA business.
65
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of , 1994 (unless otherwise
indicated), certain information with respect to the beneficial ownership of
shares of each class of Brown & Sharpe's voting securities by (i) each person
known by Brown & Sharpe to be the beneficial owner of more than 5% of Brown &
Sharpe's outstanding voting securities, (ii) each director and executive
officer of Brown & Sharpe individually, and (iii) all directors and executive
officers of Brown & Sharpe as a group. Except as otherwise noted, the persons
marked in the table have sole voting and investment power with respect to all
shares shown as beneficially owned by them.
<TABLE>
<CAPTION>
PRIOR TO DEA ACQUISITION AFTER DEA ACQUISITION
------------------------------------------ ------------------------------------------------
CLASS A CLASS B PERCENTAGE CLASS A CLASS B PERCENTAGE
--------------- --------------- OF ----------------- --------------- OF
PERCENT PERCENT COMBINED PERCENT PERCENT COMBINED
NAME AND ADDRESS OF OF VOTING OF OF VOTING
OF BENEFICIAL OWNER NUMBER CLASS NUMBER CLASS POWER NUMBER CLASS NUMBER CLASS POWER
------------------- ------- ------- ------- ------- ---------- --------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Finmeccanica S.p.A...... -- -- -- -- -- 3,450,000 42.5% -- -- 25.5%
Elsag Bailey
via G. Puccine, 2
16154 Genova, Italy
Fiduciary Trust Company 476,646 10.2% 158,920 29.2% 20.4% 476,646 5.9% 158,920 29.2% 15.2%
International(1)
Two World Trade Center
New York, NY 10048-0774
Dimensional Fund Advi- 351,766 7.5% -- -- 3.5% 351,766 4.3% -- -- 2.6%
sors(2)................
1299 Ocean Avenue
Santa Monica, CA 90401
The Killen Group, 288,058 6.2% -- -- 2.9% 288,058 3.6% -- -- 2.1%
Inc.(3)................
1189 Lancaster Avenue
Berwyn, PA 19312
Fleet National Bank(4).. 165,795 3.6% 52,744 9.7% 6.9% 165,795 2.0% 52,744 9.7% 5.1%
100 Westminster Street
Providence, RI 02903
Henry D. Sharpe, Jr.(5). 315,770 6.8% 105,256 19.3% 13.5% 315,770 3.9% 105,256 19.3% 10.1%
Fred M. Stuber(6)....... 72,000 1.5% -- -- * 72,000 * * -- --
Charles A. Junkunc(7)... 22,138 * 93 -- * 22,138 * 93 * *
Henry D. Sharpe, III.... 55,145 1.2% 18,381 * 2.4% 55,145 * 18,381 3.3% 1.8%
John M. Nelson.......... 1,453 * 151 * * 1,453 * 151 * *
Howard K. Fuguet........ 1,000 * -- * * 1,000 * -- -- *
Russell A. Boss......... 1,000 * -- * * 1,000 * -- -- *
Paul. R. Tregurtha...... 705 * 13 * * 705 * 13 * *
Richard F. Paolino...... 47,938 1.0% 2,235 * * 47,938 * 2,235 * *
Antonio Aparicio........ 20,000 * -- -- * 20,000 * -- -- *
Karl J. Lenz............ 8,000 * -- -- * 8,000 * -- * *
All Directors and Execu-
tive Officers as a
Group (13 persons)(8).. 678,219 14.5% 165,657 30.5% 23.1% 678,219 8.4% 165,657 30.5% 17.2%
</TABLE>
- --------
* Less than one percent (1%).
(1) Fiduciary Trust Company International, a bank, by virtue of various
investment management contracts and trust agreements with members of the
Sharpe family, shares voting and dispositive power with respect to the
aforementioned shares of Class A Common Stock and Class B Common Stock. See
Footnote 5 below.
66
<PAGE>
(2) At December 31, 1993, Dimensional Fund Advisors, Inc. ("Dimensional") a
registered investment advisor, is deemed to have had beneficial ownership
of 351,766 shares of Class A Common Stock of the Combined Company, 220,066
of which shares are held in portfolios of DFA Investment Dimensions Group
Inc. and The Investment Trust Company, management investment companies for
which Dimensional serves as investment manager. Dimensional disclaims
beneficial ownership of such shares.
(3) At December 31, 1993, the Killen Group, Inc. a registered investment
adviser, was the beneficial owner of 288,058 shares of Class A Common
Stock, of which it has sole dispositive power with respect to 284,892
shares and as to which it has sole voting power with respect to 96,813 of
such shares. At December 31, 1993, Robert E. Killen, the President and sole
shareholder of The Killen Group, Inc. directly owned 3,166 shares as to
which he has sole voting and dispositive power.
(4) Fleet National Bank acts as Trustee of the Brown and Sharpe Savings and
Retirement Plan (the "SARP") and in that capacity shares voting power with
respect to the shares of Class A Common Stock and Class B Common Stock,
subject to direction from participants in such SARP Plan.
(5) Various members of the Sharpe family, including Henry D. Sharpe, Jr. and
Henry D. Sharpe, III, beneficially owned an aggregate of 483,966 shares of
Class A Common Stock and 161,320 shares of Class B Common Stock of the
Combined Company, amounting to 6.0% and 29.7%, respectively, of each class
of stock and representing 15.5% of the combined voting power of the Class A
Common Stock and Class B Common Stock. The table excludes (a) 168,076
shares of Class A Common Stock and 56,024 shares of Class B Common Stock
held by Henry D. Sharpe, Jr.'s wife and children and by trusts, of which
they are beneficiaries and of which beneficial ownership is disclaimed; (b)
120 shares of Class A Common Stock and 40 shares of Class B Common Stock
held by the Sharpe Family Foundation, a charitable foundation, of which
beneficial ownership is disclaimed; and (c) 247,734 shares of Class A
Common Stock and 166,063 shares of Class B Common Stock as to which Henry
D. Sharpe, Jr., by virtue of being one of the three Trustees under Brown &
Sharpe's Employee Stock Ownership and Profit Participation Plan (the
"ESOP") has shared voting power (subject to direction from plan
participants) and limited residual investment power as a Trustee under the
terms of the Trust Agreement for the ESOP, which beneficial ownership is
disclaimed. The table includes (i) 7,200 shares of Class A Common Stock and
2,400 shares of Class B Common Stock as to which Henry D. Sharpe, Jr. has
neither voting nor dispositive power but as to which he is a beneficiary
under a trust established under the will of Henry D. Sharpe, Sr. and (ii)
308,570 shares of Class A Common Stock and 102,856 shares of Class B Common
Stock as to which Henry D. Sharpe, Jr. has shared voting and dispositive
power with Fiduciary Trust Company International.
(6) Excludes 247,734 shares of Class A Common Stock and 166,063 shares of Class
B Common Stock, which, by virtue of Mr. Stuber's role as a Trustee of the
ESOP, are deemed to be beneficially owned but as to all of which ESOP
shares he disclaims beneficial ownership.
(7) Excludes (a) 55,000 shares of Class A Common Stock and 28,333 shares of
Class B Common Stock held by Brown & Sharpe's United Kingdom Pension Plan
as to which Mr. Junkunc has shared voting and investment power; and (b)
247,734 shares of Class A Common Stock and 166,063 shares of Class B Common
Stock, which, by virtue of Mr. Junkunc's role as a Trustee of the ESOP, are
deemed to be owned beneficially by him but as to which all of such ESOP
(except for his vested shares of Class A and Class B Common Stock in such
plan) and U.K. Pension Plan shares he disclaims beneficial ownership.
(8) With respect to Executive Officers who are not Directors, includes 101,332
shares of Class A Common Stock as to which certain of the Executive
Officers have sole voting and investment power and 7,268 shares of Class A
Common Stock and 4,186 shares of Class B Common Stock as to which the
Executive Officers have shared voting power. Includes 65,132 shares of
Class A Common Stock subject to exercisable stock options granted pursuant
to Brown & Sharpe's Amended 1973 Stock Option Plan (under which no further
awards can be made) and 1989 Equity Incentive Plan. Excludes 55,000 shares
of Class A Common Stock and 28,333 shares of Class B Common Stock held in
Brown & Sharpe's pension plan covering its United Kingdom employees as to
which an Executive Officer has shared voting and investment power.
67
<PAGE>
AVAILABLE INFORMATION
Brown & Sharpe is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, information statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, information statements and other information can be inspected and
copied at the Public Reference Room of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following
regional offices of the Commission: Seven World Trade Center, 13th Floor, New
York, New York 10048, and Suite 1400, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission at the Washington
address at prescribed rates. Brown & Sharpe's Class A Common Stock, Preferred
Stock Purchase Rights and 9 1/4% Convertible Subordinated Debentures due 2005
are registered pursuant to Section 12(b) of the Exchange Act and are listed on
the New York Stock Exchange, and Brown & Sharpe's Class B Common Stock is
registered pursuant to Section 12(g) of the Exchange Act. Reports, proxy
statements and other information concerning Brown & Sharpe may be inspected and
copied at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
SHAREHOLDER PROPOSALS
Any proposals of shareholders to be presented at the 1995 Annual Meeting of
Shareholders must be received by the Secretary of Brown & Sharpe on or before
November 30, 1994 in order to be considered for inclusion in Brown & Sharpe's
1995 proxy materials.
68
<PAGE>
EXHIBIT A
CONSOLIDATED FINANCIAL STATEMENTS OF BROWN & SHARPE
MANUFACTURING COMPANY
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants--Coopers & Lybrand...................... A-2
Consolidated Balance Sheet as of December 26, 1992, December 25, 1993 and
July 2, 1994 (Unaudited)................................................. A-3
Consolidated Statement of Income (Loss) for the Years Ended December 28,
1991, December 26, 1992, and December 25, 1993, and for the Six Months
Ended June 26, 1993 (Unaudited) and July 2, 1994 (Unaudited)............. A-4
Consolidated Statement of Cash flows for the Years Ended December 28,
1991, December 26, 1992, and December 25, 1993, and for the Six Months
ended June 26, 1993 (Unaudited) and July 2, 1994 (Unaudited)............. A-5
Notes to Consolidated Financial Statements................................ A-7
</TABLE>
A-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners and Directors
of Brown & Sharpe Manufacturing Company:
We have audited the consolidated balance sheet of Brown & Sharpe
Manufacturing Company as of December 26, 1992 and December 25, 1993, and the
consolidated statements of income (loss), cash flows, and shareowners' equity
for each of the three years in the period ended December 25, 1993. 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 as of December 25, 1993 and December 26, 1992, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 25, 1993, in conformity with generally
accepted accounting principles.
Boston, Massachusetts Coopers & Lybrand
February 14, 1994, except as to
the information presented in
Note 2, for which the date
is June 7, 1994
A-2
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DEC. 26, DEC. 25, JULY 2,
1992 1993 1994
-------- -------- -----------
(AS ADJUSTED--
NOTE 2) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................... $ 4,640 $ 2,094 $ 2,283
Restricted cash.............................. -- 6,078 6,147
Accounts receivable, net of allowances for
doubtful accounts of $1,452, $1,320 and
$2,625...................................... 37,150 44,525 42,724
Inventories.................................. 62,008 53,963 59,844
Prepaid expenses and other current assets.... 3,281 3,031 4,233
-------- -------- --------
Total current assets....................... 107,079 109,691 115,231
Property, plant and equipment:
Land......................................... 6,509 6,398 6,679
Buildings and improvements................... 32,043 32,315 34,052
Machinery and equipment...................... 83,120 77,053 86,082
-------- -------- --------
121,672 115,766 126,813
Less accumulated depreciation................ 75,270 72,212 81,114
-------- -------- --------
Total property, plant and equipment........ 46,402 43,554 45,699
Other assets................................... 12,605 12,626 13,146
-------- -------- --------
$166,086 $165,871 $174,076
======== ======== ========
<CAPTION>
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C> <C>
Notes payable and current installments of
long-term debt.............................. $ 26,074 $ 31,804 $ 38,859
Accounts payable............................. 11,818 12,716 12,351
Accrued expenses and income taxes............ 21,151 19,146 20,754
-------- -------- --------
Total current liabilities.................. 59,043 63,666 71,964
Long-term debt................................. 34,626 32,696 33,806
Deferred income taxes.......................... 1,660 1,763 1,871
Unfunded accrued pension cost.................. 4,083 4,226 4,724
SHAREOWNERS' EQUITY:
Preferred stock, $1 par value; authorized
1,000,000 shares; none issued............... -- -- --
Common stock:
Class A, par value $1; authorized 15,000,000
shares; issued 4,358,261 shares in 1992,
4,431,890 in 1993, and 4,659,444............ 4,358 4,432 4,659
Class B, par value $1; authorized 2,000,000
shares; issued 621,201 shares in 1992,
547,604 in 1993, and 546,463 in 1994........ 621 548 541
Additional paid in capital................... 45,710 45,710 46,999
Earnings employed in the business............ 6,894 4,377 135
Cumulative foreign currency translation
adjustment.................................. 10,260 9,394 10,176
Treasury stock; 16,662 shares in 1992, 8,076
in 1993 and 7,492 in 1994, at cost.......... (336) (163) (151)
Unearned compensation........................ (833) (778) (668)
-------- -------- --------
Total shareowners' equity.................. 66,674 63,520 61,691
-------- -------- --------
$166,086 $165,871 $174,076
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-3
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED SIX MONTHS ENDED
---------------------------- -----------------
DEC. 28, DEC. 26, DEC. 25, JUNE 26, JULY 2,
1991 1992 1993 1993 1994
-------- -------- -------- -------- -------
(AS ADJUSTED--NOTE 2) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.................... $175,847 $160,695 $157,035 $79,761 $79,811
Cost of goods sold........... 119,481 116,283 110,841 54,969 55,337
Selling, general and
administrative expense...... 56,672 52,509 45,474 22,923 25,871
-------- -------- -------- ------- -------
Operating profit (loss).... (306) (8,097) 720 1,869 (1,397)
Interest expense............. (4,219) (5,272) (5,100) (2,461) (2,723)
Other income, net............ 824 2,135 2,764 2,035 178
-------- -------- -------- ------- -------
Income (loss) before income
taxes..................... (3,701) (11,234) (1,616) 1,443 (3,942)
Income tax provision
(benefit)................... (800) (3,250) 800 -- 300
-------- -------- -------- ------- -------
Income (loss) from
continuing operations..... (2,901) (7,984) (2,416) 1,443 (4,242)
(Loss) from discontinued
operations................ (1,180) -- -- -- --
-------- -------- -------- ------- -------
Net income (loss)............ $ (4,081) $ (7,984) $ (2,416) $ 1,443 $(4,242)
======== ======== ======== ======= =======
Primary and fully diluted
loss per common share:
Income (loss) from
continuing operations..... $ (0.62) $ (1.63) $ (0.49) $ 0.29 $ (0.83)
(Loss) from discontinued
operations................ (0.25) -- -- -- --
-------- -------- -------- ------- -------
Net income (loss).......... $ (0.87) $ (1.63) $ (0.49) $ 0.29 $ (0.83)
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-4
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX
YEAR ENDED MONTHS ENDED
---------------------------- ------------------
DEC. 28 DEC. 26, DEC. 25, JUNE 26, JULY 2,
1991 1992 1993 1993 1994
-------- -------- -------- -------- --------
(AS ADJUSTED--NOTE 2) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATIONS:
Net loss.................... $ (4,081) $ (7,984) $ (2,416) $ 1,599 $ (4,242)
Adjustment for noncash
Items:
Depreciation and
amortization............. 8,700 7,330 6,355 3,082 2,884
Pension credits and
charges.................. 831 762 138 150 224
Deferred income taxes..... (1,000) (3,600) 500 (500) 100
Gain on sale of
operations............... -- (628) (2,182) (2,182) --
Changes in working capital:
Accounts receivable....... 822 6,925 (8,204) (4,715) 3,717
Inventories............... (282) (577) 957 (421) 1,106
Prepaid expenses and other
current assets........... (842) (859) 323 (1,353) (457)
Accounts payable and
accrued expenses......... (5,363) 2,826 (1,455) 4,311 (3,991)
Net assets of discontinued
operations............... 12,645 1,912 -- -- --
-------- -------- -------- ------- --------
Cash Provided by (Used in)
Operations................. 11,430 6,107 (5,984) (29) (659)
-------- -------- -------- ------- --------
INVESTMENT TRANSACTIONS:
Acquisitions................ (232) (1,604) -- -- --
Capital expenditures........ (9,864) (12,474) (4,399) (1,971) (1,363)
Proceeds from sale of
operations................. 216 3,615 8,700 8,700 --
Cash equivalents pledged.... -- -- (6,078) (3,000) (69)
Other investing activities.. 263 (2,270) (377) 62 (213)
-------- -------- -------- ------- --------
Cash Provided by (Used in)
Investment Transactions.. (9,617) (12,733) (2,154) 3,791 (1,645)
-------- -------- -------- ------- --------
FINANCING TRANSACTIONS:
Increase in long-term and
short-term debt............ 16,296 4,877 5,778 1,081 4,902
Payment of long-term and
short-term debt............ (16,417) (2,414) (968) (2,535) (2,276)
Other financing activities.. -- -- -- -- 395
-------- -------- -------- ------- --------
Cash Provided by (Used in)
Financing Transactions..... (121) 2,463 4,810 (1,454) 3,021
-------- -------- -------- ------- --------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH.............. (651) 456 782 (29) (528)
-------- -------- -------- ------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) during
the period................. 1,041 (3,707) (2,546) 2,279 189
Beginning balance........... 7,306 8,347 4,640 4,640 2,094
-------- -------- -------- ------- --------
Ending balance.............. $ 8,347 $ 4,640 $ 2,094 $ 6,919 $ 2,283
======== ======== ======== ======= ========
SUPPLEMENTARY CASH FLOW
INFORMATION:
Interest paid............... $ 5,117 $ 4,500 $ 4,942 $ 1,906 $ 2,547
======== ======== ======== ======= ========
Taxes paid.................. $ 215 $ 552 $ 1,158 $ 769 $ 730
======== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-5
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
COMMON EARNINGS FOREIGN
STOCK ADDITIONAL EMPLOYED CURRENCY
$1 PAR PAID IN IN THE TRANSLATION TREASURY UNEARNED
VALUE CAPITAL BUSINESS ADJUSTMENT STOCK COMPENSATION
------ ---------- -------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance--December 29,
1990................... $4,979 $47,756 $20,876 $16,710 $(7,428) $ --
Net loss................ -- -- (4,081) -- -- --
Treasury stock
transactions........... -- (2,046) -- -- 3,932 --
Foreign currency
translation adjustment. -- -- -- (430) -- --
------ ------- ------- ------- ------- -----
Balance--December 28,
1991................... 4,979 45,710 16,795 16,280 (3,496) --
------ ------- ------- ------- ------- -----
Net loss................ -- -- (7,984) -- -- --
Treasury stock
transactions........... -- -- (691) -- 1,008 --
Restricted stock awards. -- -- (1,226) -- 2,152 (833)
Foreign currency
translation adjustment. -- -- -- (6,020) -- --
------ ------- ------- ------- ------- -----
Balance--December 26,
1992................... 4,979 45,710 6,894 10,260 (336) (833)
------ ------- ------- ------- ------- -----
Net loss................ -- -- (2,416) -- -- --
Treasury stock
transactions........... -- -- (101) -- 12 --
Restricted stock awards. 1 -- -- -- 161 55
Foreign currency
translation adjustment. -- -- -- (866) -- --
------ ------- ------- ------- ------- -----
Balance--December 25,
1993................... 4,980 45,710 4,377 9,394 (163) (778)
------ ------- ------- ------- ------- -----
Net loss................ -- -- (4,242) -- -- --
Issuance of stock....... 220 1,289 -- -- -- --
Treasury stock
transactions........... -- -- -- -- 12 --
Restricted stock awards. -- -- -- -- 110
Foreign currency
translation adjustment. -- -- -- 782 -- --
------ ------- ------- ------- ------- -----
Balance--July 2, 1994
(unaudited)............ $5,200 $46,999 $ 135 $10,176 $ (151) $(668)
====== ======= ======= ======= ======= =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-6
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all subsidiaries. The Company's fiscal year ends on the last Saturday in
December. Results for 1991, 1992 and 1993 include 52 weeks. Results for the six
months ended June 26, 1993 and July 2, 1994 include 26 and 27 weeks,
respectively. 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.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements for the half-year ended June 26, 1993
and July 2, 1994 and the related notes are unaudited and in the opinion of
management, include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the results of these periods.
The results for the six months ended July 2, 1994 are not necessarily
indicative of the results to be expected for the entire year.
INVENTORY VALUATION
Inventories are stated at the lower of cost or market. Cost is determined
principally on a last-in, first-out (LIFO) basis for domestic inventories and
principally on a first-in, first-out (FIFO) basis for inventories outside the
United States. LIFO inventories at December 26, 1992, $9,000, December 25,
1993, $8,500, and July 2, 1994, $8,994, were approximately $13,800, $13,500,
and $13,400, respectively, less than the amounts of such inventories valued on
a FIFO basis, which approximates current cost. Provision is made to reduce
slow-moving and obsolete inventories to net realizable values. Inventory
reductions in 1992 and 1993 resulted in the liquidation of LIFO inventory
quantities carried at lower costs which prevailed in prior years as compared
with the current cost of inventory purchases. The effect of this LIFO
liquidation was to decrease 1992 and 1993 loss from continuing operations by
$9,822 ($2.00 per share) and $749 ($.15 per share), respectively.
The composition of inventory at the year-end 1992 and 1993 and the quarter
ended July 2, 1994 was as follows:
<TABLE>
<CAPTION>
DEC. 26, DEC. 25, JULY 2,
1992 1993 1994
-------- -------- -------
<S> <C> <C> <C>
Parts, raw materials and supplies.................... $20,076 $14,492 $30,964
Work in progress..................................... 11,353 8,490 11,436
Finished goods....................................... 30,579 30,981 17,444
------- ------- -------
$62,008 $53,963 $59,844
======= ======= =======
</TABLE>
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. In 1992, the Company
extended the estimated useful lives of machinery and equipment at its Swiss
subsidiary, based upon the current low rate of utilization. The effect of this
change was to reduce 1992 depreciation expense and net loss by $921 or $0.19
per share. Depreciation expense was $8,054, $6,836, $5,862, $2,882, and $2,684
in the years 1991, 1992, 1993, and half years of 1993 and 1994, respectively.
Repair and maintenance costs are charged against income
A-7
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
while renewals and betterments are capitalized as additions to the related
assets. Retirements, sales, and disposals of assets are recorded by removing
the cost and accumulated depreciation from the asset and accumulated
depreciation accounts with any resulting gain or loss reflected in income. At
December 25, 1993, land and buildings with a book value of $16,124 were pledged
as collateral for mortgage loans of $18,225.
OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
YEARS SIX MONTHS
--------------- ----------
1992 1993 1994
------- ------- ----------
<S> <C> <C> <C>
Goodwill............................................. $ 1,704 $ 1,654 $ 1,654
Training tape masters................................ 5,570 5,870 5,870
Prepaid pension...................................... 4,767 4,905 5,129
Equity investments................................... 567 1,551 1,857
Other................................................ 5,131 4,273 4,463
------- ------- -------
17,739 18,253 18,973
Less accumulated amortization........................ 5,134 5,627 5,827
------- ------- -------
$12,605 $12,626 $13,146
======= ======= =======
</TABLE>
Goodwill is being amortized on a straight-line basis over periods ranging
from 7 to 20 years. Training tape masters are amortized on a straight-line
basis over 3 years.
CONTRACTS IN PROCESS
Sales under large machinery construction contracts are recorded under the
percentage of completion method, wherein sales and estimated gross margin are
recorded as the work is performed. Estimated gross margin is based on the total
contract sales value and the most recent estimate of total costs. When the
current contract estimate indicates a loss, 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." The Company enters into forward exchange contracts in anticipation
of future movements in certain foreign exchange rates and to hedge against
foreign currency fluctuations on certain intercompany transactions and other
foreign currency denominated balance sheet positions. Realized and unrealized
gains and losses on these contracts are included in net income except that
gains and losses on contracts to hedge specific foreign currency commitments
are deferred and accounted for as part of the transaction.
Outstanding forward exchange contracts at December 28, 1991 had unrealized
gains of $120. There were no forward exchange contracts outstanding at December
25, 1993 and December 26, 1992. Other income and expense for the years 1991,
1992, 1993, and for the six months ended June 26, 1993 and July 2, 1994
included $264, $484, $88, $(254), and $44, respectively, relating to
transaction gains and losses.
A-8
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CREDIT RISK
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with high credit
quality financial institutions and, by policy, limits the amount of credit
exposure to any one financial institution. Concentrations of credit risk with
respect to trade receivables are limited due to the Company's large number of
customers and their dispersion across many different industries and countries
worldwide. At December 25, 1993 and July 2, 1994, the Company had no
significant concentrations of credit risk.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company does not provide postretirement or postemployment benefits as
contemplated by SFAS 112, and accordingly these statements have no impact upon
the Company's financial position or results of operations.
INCOME TAXES
The Company provides for income taxes under the provisions of SFAS No. 109
"Accounting for Income Taxes", which was adopted at the beginning of 1993,
which requires a 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 timing 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.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is based upon the weighted average number of common
shares outstanding (4,639,594, 4,898,536, 4,969,543, 4,968,758, and 5,114,403
shares) for the years 1993, 1992, 1991, and half-year ended June 26, 1993 and
July 2, 1994, respectively, since inclusion of common stock equivalents would
have been anti-dilutive.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of cash on hand, deposits in banks,
and short-term marketable securities with a maturity at acquisition of three
months or less.
2. ACCOUNTING CHANGE
During the first six months of 1994, the Company changed its method of
accounting from the completed contract method to the percentage-of-completion
method for its large machinery construction contracts for its European
operations. This conforms the worldwide accounting to the U.S. reporting
percentage-of-completion basis. Management believes that this method more
appropriately reports revenue and costs in related accounting periods rather
than recognizing substantially all revenue and cost at the time of shipment.
The Company has retroactively restated prior years' financial statements, as
required by generally accepted
A-9
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
accounting principles. The first six months of 1994 net income was decreased by
$409 or $0.08 per share. The effect of this restatement on net income of
periods previously reported is as follows:
<TABLE>
<CAPTION>
SIX
YEARS MONTHS
------------------------- ------
1991 1992 1993 1993
------- ------- ------- ------
<S> <C> <C> <C> <C>
Net income (loss) as previously reported.... $(4,024) $(8,507) $(2,244) $1,599
Adjustment for effect of the change in
accounting for long-term contracts......... (57) 523 (172) (156)
------- ------- ------- ------
Net income (loss) adjusted.................. $(4,081) $(7,984) $(2,416) $1,443
======= ======= ======= ======
Per share amounts:
Earnings (loss) per common share as
previously reported...................... $ (0.86) $ (1.74) $ (0.45) $ .32
Adjustment for effect of the change in
accounting for long-term contracts....... (0.01) 0.11 (0.04) (0.03)
------- ------- ------- ------
Net income (loss) adjusted.................. $ (0.87) $ (1.63) $ (.49) $ .29
======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
YEARS
----------------------
1992 1993 1994
------- ------ ------
<S> <C> <C> <C>
Earnings Employed in the Business--
Balance at beginning of year, as previously reported.... $16,852 $6,428 $4,083
Adjustment for the cumulative effect on prior years of
applying, retroactively, the new method of accounting
for long-term contracts................................ (57) 466 294
------- ------ ------
Balance at beginning of year, as adjusted............... $16,795 $6,894 $4,377
======= ====== ======
</TABLE>
3. DISCONTINUED OPERATIONS
On March 27, 1991, Brown & Sharpe Manufacturing Company announced its
decision to withdraw from the business of manufacturing and distributing
machine tools, but to continue to provide repair parts, tools, service, and
reconditioning for its machine tool products.
The financial statements reflect the operating results and balance sheet
accounts of the discontinued operations separately from continuing operations.
In segregating the income statement components, interest expense of $600 for
1991 has been allocated to discontinued operations based upon a proportionate
share of assets employed. Results for the discontinued operations were:
<TABLE>
<CAPTION>
1991
--------
<S> <C>
Revenues......................................................... $ 22,005
========
Loss from operations before income taxes......................... $ (530)
Income tax provision............................................. 650
--------
Loss from discontinued operations................................ $ (1,180)
========
</TABLE>
4. INCOME TAXES
Effective the beginning of 1993, the Company changed its method of accounting
for income taxes from the deferred method to the liability method as required
by SFAS 109. As permitted under the new rules,
A-10
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
prior years' financial statements have not been restated. The adoption of the
provisions of SFAS 109 in 1993 had no impact on the Company's reported results
of operations or financial position.
Income (loss) before income taxes consisted of the following:
<TABLE>
<CAPTION>
YEARS SIX MONTHS
----------------------------- ----------------
1991 1992 1993 1993 1994
-------- --------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
Domestic...................... $ 3,276 $ (2,376) $ 1,394 $4,222 $ 505
Foreign....................... (6,920) (8,858) (3,010) (2,779) (4,447)
-------- --------- -------- ------ --------
Income (loss) before income
taxes........................ $ (3,644) $ (11,234) $ (1,616) $1,443 $ (3,942)
======== ========= ======== ====== ========
</TABLE>
The following table reconciles the income tax provision (benefit) at the U.S.
statutory rate to that in the financial statements:
<TABLE>
<CAPTION>
YEARS SIX MONTHS
-------------------------- --------------
1991 1992 1993 1993 1994
-------- -------- ------ ---- --------
<S> <C> <C> <C> <C> <C>
Taxes computed at 34%.............. $ (1,239) $ (3,997) $ (491) $491 $ (1,340)
Alternative minimum and state
taxes............................. 200 350 200 75 300
Reduction of deferred tax
liability......................... (566) --
Other losses not utilizeable....... 239 397 1,091 -- 1,340
-------- -------- ------ ---- --------
Income tax provision (benefit)..... $ (800) $ (3,250) $ 800 $-- $ 300
======== ======== ====== ==== ========
</TABLE>
The income tax provision (benefit) consisted of the following:
<TABLE>
<CAPTION>
YEARS SIX MONTHS
------------------------ ------------
1991 1992 1993 1993 1994
------- -------- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Current:
Federal................................. $ 1,300 $ 1,150 $ 500 $ 400 $ --
Utilization of net operating loss and
credit carryforwards................... (1,198) -- -- -- --
------- -------- ----- ----- -----
102 1,150 500 400 --
State................................... 98 200 300 100 100
Foreign................................. -- -- 500 -- 200
------- -------- ----- ----- -----
200 1,350 1,300 500 300
------- -------- ----- ----- -----
Deferred:
Federal................................. -- (1,000) -- -- --
Foreign................................. (1,000) (3,600) (500) (500) --
------- -------- ----- ----- -----
(1,000) (4,600) (500) (500) --
------- -------- ----- ----- -----
Income tax provision (benefit).......... $ (800) $ (3,250) $ 800 $ -- $ 300
======= ======== ===== ===== =====
</TABLE>
The deferred tax benefits reflect deferred tax reductions resulting from
operating losses. Provision has not been made for U.S. taxes on $32,000 of
undistributed earnings of foreign subsidiaries as those earnings are intended
to be permanently reinvested.
A-11
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The components of the Company's deferred tax asset and liability as of
December 25, 1993 and July 2, 1994 are as follows:
<TABLE>
<CAPTION>
DEC.
25, JULY 2,
1993 1994
------- -------
<S> <C> <C>
Deferred tax assets:
Inventory reserves............................................. $ 800 $ 800
Warranty expense............................................... 400 400
Provision for doubtful accounts................................ 100 100
Depreciation................................................... 700 700
Tax credit and loss carryforwards.............................. 12,300 16,200
Other.......................................................... 400 400
------- -------
Gross deferred assets........................................ 14,700 18,600
Less valuation allowance....................................... 13,700 17,600
------- -------
Deferred tax asset........................................... $ 1,000 $ 1,000
======= =======
Deferred tax liabilities:
Pension expense................................................ $ 1,300 $ 1,300
Inventory reserves............................................. 700 700
Other.......................................................... 600 600
------- -------
Deferred tax liability....................................... $ 2,600 $ 2,600
======= =======
</TABLE>
A valuation allowance has been recognized due to the uncertainty of realizing
tax credit and loss carryforwards and some portion or all of the other deferred
tax assets.
The deferred tax asset of $1,000 is included in Other Assets in the
accompanying consolidated balance sheets. The current portion of the deferred
tax liability, $837, is included in accrued expenses and income taxes in the
accompanying consolidated balance sheets. For income tax purposes, at year-end
1993 the Company has operating loss and capital loss carryforwards of $2,400
and $700, respectively, in the U.K. and net operating loss carryforwards of
$28,000 and $15,000, respectively in Switzerland and Germany. The Company has
tax credit carryforwards of $700 in the U.S. The U.S. tax credit carryforwards
expire from 1994 to 2004. The Swiss carryforwards expire between 1995 and 1998.
There is no time limit for the U.K. and German carryforwards.
5. SHORT-TERM BORROWINGS
Bank and other financial institution lines of credit in effect at December
26, 1992, December 25, 1993, and July 2, 1994 were $28,872, $39,731, and
44,222, respectively. The 1993 year end balance includes $15,000 eligible
borrowing under a financing agreement the Company entered into on June 30, 1993
with a commercial lender for a revolving credit facility of up to a maximum of
$15,000 for an initial period of two years with successive one year renewals,
subject to termination provisions in the agreement. The borrowing limit is
determined periodically as a portion of the eligible accounts receivable and
finished inventory of the parent company headquartered in North Kingstown,
Rhode Island. Substantially all assets of the Company are pledged as
collateral. The agreement contains covenants which, among other things, require
the Company to maintain certain financial ratios and restricts the payment of
dividends. The remaining lines of credit are due upon demand by the lenders.
Borrowings under these lines were $21,502 at December 26, 1992, $30,143 at
December 25, 1993, and $37,052 at July 2, 1994, respectively. Short-term debt
represents amounts due in U.S. dollars and the U.S. dollar equivalent of
amounts due in foreign currencies. Interest on these lines of credit is
generally up to 2% above the prime or base rate of the country in which the
amounts are borrowed.
A-12
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Certain foreign lines of credit require the Company to maintain restricted
cash deposit accounts which amounted to $6,078 and $6,147 at December 25, 1993
and July 2, 1994, respectively. No compensating balances were required at
December 25, 1993 or July 2, 1994. The Company has guaranteed the bank debt of
its German subsidiary. In addition, a credit line of $3,385 ((Pounds)2,250) in
the U.K. is collateralized by the assets in that country, and the Company has
guaranteed up to $752 ((Pounds)500).
6. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
YEARS SIX MONTHS
----------------- ----------
1992 1993 1994
-------- -------- ----------
<S> <C> <C> <C>
9 1/4% convertible subordinated debentures due
December, 2005................................... $ 17,000 $ 16,000 $ 16,000
Mortgages at rates ranging from 7 3/4% to 8 1/2%.. 18,599 18,225 19,505
Notes payable..................................... 3,599 132 108
-------- -------- --------
39,198 34,357 35,613
Less: current installments........................ 4,572 1,661 1,807
-------- -------- --------
Total long-term debt.............................. $ 34,626 $ 32,696 $ 33,806
======== ======== ========
</TABLE>
The 9 1/4% subordinated debentures are convertible, at the option of the
holders, into common shares at $26.25 per share subject to antidilution
provisions. The Company, through a sinking fund, is required to provide for
retirement of $1,000 in principal amount annually. This will result in
retirement of all but $5,000 prior to maturity. The 1992 sinking fund
requirement was met through a repurchase in 1992 and 1991.The 1993 sinking fund
requirement was met by a call by the trustee for redemption of $1,000 principal
amount at par to the debenture holders, using a random selection process. At
December 25, 1993, 609,523 shares of Class A Common Stock were reserved for
conversion of these debentures. At December 25, 1993, there were mortgage notes
outstanding, in foreign currencies, equivalent to $18,225. Annual maturities of
long-term debt are as follows: 1994--$1,661, 1995--$1,794; 1996--$11,360;
1997--$3,694; 1998--$1,962; 1999 through 2004--$7,886, and $6,000 thereafter.
Interest rates on long-term debt average about 9%.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of the Company's financial instruments are
determined through relevant market information and valuation techniques. As
estimates they represent the results of management's judgment. The following
table summarizes such valuations at December 25, 1993 in accordance with
Statement of Financial Accounting Standards No. 107, implemented in 1993:
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
--------------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents............................ $ 2,094 $ 2,094
Restricted cash...................................... 6,078 6,078
Accounts receivable.................................. 44,525 44,525
Financial liabilities:
Accounts payable..................................... 12,716 12,716
Short-term debt...................................... 31,804 31,804
Long-term debt....................................... 17,696 17,478
Debentures........................................... 15,000 15,150
</TABLE>
A-13
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Cash, receivables, payables, and short-term debt carrying amounts reasonably
represent their fair values. Long-term debt rates currently available for debt
with similar terms and remaining maturities are used to estimate their fair
value. The fair value of debentures is the year-end market trading price.
8. CONTINGENCIES
On November 29, 1991, the U.S. Court of Appeals for the District of Columbia
Circuit rendered its decision on the appeal by the International Association of
Machinists (the "IAM") of the National Labor Relations Board's ("NLRB") August
28, 1990 decision dismissing unfair labor practice charges brought against the
Company by the IAM arising out of a strike which began at the Company's Rhode
Island operations in October 1981. The Court although accepting the legal
reasoning advanced by the Board and the Company in support of the Board's 1990
decision dismissing such charges ordered the NLRB to further clarify and
support its decision. The NLRB has now issued its Supplemental Decision,
favorable to the Company again reaffirming dismissal of the charges. The IAM
has filed notice of another appeal of that decision. The Company is continuing
to defend this case vigorously and management adheres to its earlier assessment
that an ultimate finding of monetary liability in this matter is remote.
The Company is also involved in several product liability claims and lawsuits
which are incidental to the conduct of its business, the potential liability
for which is adequately covered by insurance or reserves established for such
contingencies. The Company is contesting or defending these claims and suits
and management believes that the ultimate liability, if any, resulting from
these matters will not have a material effect on the Company's financial
position.
The Company is involved in two environmental proceedings in which the United
States Environmental Protection Agency ("EPA") identified Brown & Sharpe as a
potentially responsible party ("PRP") at waste disposal sites (the "Sites") in
Rhode Island and Connecticut listed on the EPA's National Priority List for
clean-up and future monitoring remedial action under the Superfund legislation.
While the Company's proportionate share of the total waste contributed to both
Sites was minimal in volume and toxicity, the EPA nevertheless with regard to
the Rhode Island site issued an Administrative Order against the Company and
other PRP's to clean up the Site. Subsequently, the Company was permitted by
the EPA to settle its liability at such Site in exchange for releases from the
EPA and contribution protection from claims of any third parties who may have
liability at the Site. A group of non-settling major PRP's at the Rhode Island
site has brought suit in the Federal District Court in Rhode Island against all
of the settling parties to recover a portion of their costs of performing the
clean-up remedy. The Court has granted a summary judgment in favor of the
Company and other settling parties. The non-settling group of major PRP's
appealed that ruling and have brought suit against the EPA to have the
settlements of the de minimis settling parties set aside. The Company is
vigorously defending this lawsuit and believes that the release and
contribution protection obtained from the EPA in connection with settlement of
its liability at the Site will ultimately bar the cost-recovery claim. The
Company will likely be offered the opportunity to settle its de minimis
liability as a PRP at the Connecticut site in an amount not deemed to be
material.
9. PREFERRED STOCK
The Board of Directors is empowered to provide from time to time for issuance
of one or more series of preferred shares without further shareowner action and
to fix various terms and provisions with respect to each such series,
including, without limitation, the dividend rate, redemption prices, terms of
any sinking fund, conversion rights, if any, voting rights, if any, and rights
of the holders upon liquidation (See Note 16--Preferred Stock Purchase Rights).
A-14
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. INCENTIVE AND RETIREMENT PLANS
PROFIT INCENTIVE PLAN
Under the provisions of the Company's Profit Incentive Plan, cash and Class A
common stock, valued at 100% of the market value on the date of award, may be
awarded as bonuses to certain management employees. Provisions regarding
forfeiture of rights to all or part of the stock awards and restrictions
regarding sale or disposition of shares lapse in equal annual installments over
a five-year period commencing one year after the date of award, and
compensation expense is recognized ratably over the vesting period. The
aggregate amount of additional shares which may be issued under the Plan may
not exceed 116,200 shares, net of forfeitures, and is subject to adjustments in
the event of stock splits and other changes. Plan awards amounted to $0, $53,
and $601 in 1991, 1992, and 1993, respectively.
STOCK INCENTIVE PLANS
Under the provisions of the Company's 1989 Equity Incentive Plan, a variety
of cash, common stock, stock option, and other stock based incentive awards are
available for grant. The Equity Incentive Plan permits the granting of both
options which do, and options which do not, qualify as incentive stock options
under the Internal Revenue Code. During 1992 and 1993, respectively, a total of
100,400 and 8,000 shares of restricted Class A common stock, utilizing shares
held in the Treasury were issued as restricted awards under the Plan. The
shares are subject to forfeiture upon the recipients' termination of employment
over a five year period, with the restriction lapsing in amounts of 25% at the
end of the 2nd and 3rd years, and 50% at the end of the 5th year. Unearned
compensation in the amount of $926 is being amortized to expense over the
forfeiture lapsing period. In 1990 and 1991, options to purchase a total of
80,000 shares of Class A common stock were granted for a ten year period at
prices between $11 and $12.125 per share. The aggregate remaining amount of
shares of Class A common stock that may be issued under the Equity Incentive
Plan is 216,600. The price for shares covered by options is 100% of the market
value on the dates such options are granted.
No further options or other awards may be granted under the Company's amended
1973 Stock Option Plan. The exercise price for shares covered by outstanding
options under both the 1993 Stock Option Plan and the Equity Incentive Plan is
100% of the market value on the dates such options were granted. Options
granted under this plan are exerciseable one year after the date of grant and
expire at the end of ten years. On December 25, 1993 all outstanding options
were exerciseable. Option activity under the Plans during the past three years
and the first six months of 1994 is summarized as follows:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
------- ----------------
<S> <C> <C>
Outstanding December 29, 1990........................ 146,387 $11.50 to $20.81
Granted............................................ 55,000 $10.25 to $12.13
Forfeited or canceled.............................. (29,930) $12.47 to $14.38
-------
Outstanding December 28, 1991........................ 171,457 $10.25 to $20.81
Forfeited or canceled.............................. (26,265) $12.13 to $20.81
-------
Outstanding December 26, 1992........................ 145,192 $10.25 to $17.86
Forfeited or canceled.............................. (21,666) $10.78 to $12.13
-------
Outstanding December 25, 1993........................ 123,526 $10.25 to $17.86
-------
Granted............................................ 145,000 $6.50
Forfeited or canceled.............................. (30,529) $12.94 to $17.86
-------
Outstanding July 2, 1994............................. 237,997 $6.50 to $17.86
=======
</TABLE>
A-15
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 years 1991, 1992, 1993 and for the six months
ended June 26, 1993 and July 2, 1994 was $824, $739, $705, $454, and $364,
respectively.
STOCK OWNERSHIP PLAN
Under the provisions of the Company's Employee Stock Ownership Plan (ESOP),
the Company may make contributions of common stock or cash to purchase common
stock from the Company or otherwise, to be held in trust for employees meeting
certain eligibility requirements until the employees reach retirement age. The
ESOP may also borrow funds to purchase common shares, for which the Company
will contribute amounts as necessary to pay down the indebtedness. ESOP expense
was $378 in 1991, $347 in 1992, $327 in 1993, and $186 and $216 for the six
months ended June 26, 1993 and July 2, 1994. At December 25, 1993, there were
no unallocated shares of Class A and B stock held in the ESOP as all shares
were allocated to participants' accounts.
RETIREMENT PLANS
The Company's subsidiaries have several defined contribution retirement plans
covering employees in the U.S. and 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 years 1991, 1992, 1993, and for the six months ended June 26, 1993 and July
2, 1994 was $2,265, $2,488, $1,223, $710, and $518, respectively.
The defined benefit plans which cover employees in the U.K. and Germany,
respectively, provide benefits based on years of service and employee
compensation. Retirement costs under both plans are compiled based on the
projected unit credit actuarial method.
The U.K. plan's actuarial assumptions used settlement rates of 8.5% at the
end of 1992 and 7.5% at the end of 1993, a long-term return on assets of 10% at
the end of 1992 and 8% at the end of 1993, and annual wage increases of 7.5% at
the end of 1992 and 6.5% at the end of 1993. Retirement costs accrued are
funded.
The German plan's actuarial assumptions used a settlement rate of 7.5% and an
annual wage increase of 4.5%. 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 28, 1991, December 26, 1992, and
December 25, 1993:
<TABLE>
<CAPTION>
1991 1992 1993
------ ------ ------
<S> <C> <C> <C>
Service cost-benefits earned........................... $ 766 $ 815 $ 664
Interest cost on projected benefit obligations......... 867 1,075 743
Return on plan assets, net............................. (1,696) (1,952) (1,200)
Amortization of unrecognized assets.................... (361) (465) (345)
------ ------ ------
Net periodic pension income............................ $ (424) $ (527) $ (138)
====== ====== ======
</TABLE>
A-16
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 28, 1991, December 26, 1992, and
December 25, 1993:
<TABLE>
<CAPTION>
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Vested and accumulated benefit obligation...... $ (11,274) $ (13,164) $ (14,571)
Projected benefit obligation................... (13,383) (15,273) (16,680)
Plan assets at fair value...................... 21,629 24,511 26,401
--------- --------- ---------
Funded status.................................. 8,246 9,238 9,721
Unrecognized portion of net assets............. (4,006) (4,471) (4,816)
--------- --------- ---------
Prepaid pension................................ $ 4,240 $ 4,767 $ 4,905
========= ========= =========
</TABLE>
The following items are the components of net periodic pension cost for the
unfunded German plan for the years ended December 28, 1991, December 26, 1992,
and December 25, 1993:
<TABLE>
<CAPTION>
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
Service cost-benefits earned............................ $ 376 $ 818 $ 112
Interest cost on projected benefit obligations.......... 184 394 295
------- ------- -------
Net periodic pension cost............................... $ 560 $ 1,212 $ 407
======= ======= =======
Vested and accumulated benefit obligation............... $ 2,303 $ 3,121 $ 3,233
======= ======= =======
Projected benefit obligation and accrued pension cost... $ 3,453 $ 4,083 $ 4,012
======= ======= =======
</TABLE>
11. RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense was $11,364, $10,903, $8,669, $4,659, and
$4,071 in the years 1991, 1992, 1993, and the six months ended June 26, 1993
and July 2, 1994, respectively.
12. OTHER INCOME AND EXPENSE
Other income (expense), net includes:
<TABLE>
<CAPTION>
YEARS SIX MONTHS
---------------------- --------------
1991 1992 1993 1993 1994
----- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Interest income.......................... $ 380 $ 457 $ 266 $ 113 $ 127
Gain (loss) on sale of fixed assets...... 94 655 44 (12) 78
Foreign currency gains (losses).......... 264 484 157 (254) (57)
Gain on sale of operations............... -- 628 2,182 2,182 --
Other income (expense)................... 86 (89) 115 6 30
----- ------- ------- ------- -----
$ 824 $ 2,135 $ 2,764 $ 2,035 $ 178
===== ======= ======= ======= =====
</TABLE>
Operations sold in 1993 were spares and rebuild, and in 1992 were GageTalker
and pump.
A-17
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. RENTAL EXPENSE AND LEASE COMMITMENTS
At December 25, 1993, the Company was obligated under operating leases
expiring on various dates. Rental expense was $4,040, $4,684 and $3,845 in
1991, 1992, and 1993 and $1,922 and $1,400 in the six months ended June 26,
1993 and July 2, 1994, respectively. Annual rental commitments under
noncancelable leases pertaining principally to buildings and equipment at
December 25, 1993 are $2,800, $2,023, $901, $279, and $251 for the years 1994
through 1998, and aggregate to $1,036 for all years subsequent to 1998.
14. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA
Following is financial information by business segment:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------
DEC 28, DEC. 26, DEC. 25,
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Metrology
Net sales.................................... $ 166,819 $ 152,201 $ 155,133
Operating profit (loss)...................... (1,281) (8,857) 1,652
Identifiable assets.......................... 163,565 153,766 157,699
Capital expenditures......................... 9,761 12,424 4,356
Depreciation................................. 7,798 6,591 5,781
General Products (through April 1993)
Net sales.................................... 9,028 8,494 1,902
Operating profit (loss)...................... 975 760 (932)
Identifiable assets.......................... 9,981 7,680 --
Capital expenditures......................... 103 50 43
Depreciation................................. 256 245 81
Geographic Area:
Sales to Unaffiliated Customers:
United States................................ $ 76,750 $ 69,810 $ 72,257
Europe....................................... 82,701 70,692 62,246
Other........................................ 16,396 20,193 22,532
--------- --------- ---------
$ 175,847 $ 160,695 $ 157,035
========= ========= =========
Transfers Between Geographic Areas:
United States................................ $ 6,977 $ 5,542 $ 4,040
Europe....................................... 16,770 12,167 12,365
--------- --------- ---------
$ 23,747 $ 17,709 $ 16,405
========= ========= =========
Operating Profit (Loss):
United States................................ $ 4,830 $ 1,283 $ 5,151
Europe....................................... (5,136) (9,380) (4,431)
--------- --------- ---------
$ (306) $ (8,097) $ 720
========= ========= =========
Identifiable Assets:
United States................................ $ 35,496 $ 34,537 $ 39,521
Europe....................................... 138,050 126,909 118,178
Corporate.................................... 10,259 4,640 8,172
--------- --------- ---------
$ 183,805 $ 166,086 $ 165,871
========= ========= =========
</TABLE>
A-18
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
15. COMMON STOCK
Both classes of common stock have equal rights upon liquidation. Class A
common stock may not receive less cash dividends per share than Class B common
stock, nor may such dividends be less frequent. The Class A common stock has
one vote per share. Except as otherwise provided by law, the Class B common
stock has ten votes per share, and the Class B common stock is convertible into
Class A common stock on a one-for-one basis, and can be transferred in Class B
form only to specified transferees, generally members of a shareowner's family
and certain others affiliated with a shareowner. During 1992 and 1993, 26,441
shares and 73,597 shares, respectively, were converted from Class B to Class A
common stock.
During 1992 and 1993, respectively, 108,400 and 8,000 treasury shares were
allocated for use as restricted stock awards, and 586 treasury shares were
issued under a Directors' deferred compensation plan. The 8,000 treasury shares
were allocated during the first quarter of 1993. During 1992, 939 shares were
sold to employee benefit plans, 44,382 treasury shares were allocated to ESOP
participants, and 1,702 treasury shares were issued under a Directors' deferred
compensation plan.
16. PREFERRED STOCK PURCHASE RIGHTS
On March 23, 1988, the Company distributed a dividend of one purchase right
for each outstanding share of common stock. Until the occurrence of specified
events, the rights are represented by the associated common stock certificates.
Following the distribution of the Class B common stock on June 10, 1988, and
until the occurrence of specified events, each certificate representing a share
of Class A or Class B common stock also represents three-quarters of a right.
Each right entitles the shareowner to buy from the Company one-hundredth of a
share of Series A Participating Preferred Stock at an exercise price of $55 per
right. The rights become exerciseable ten days after a party acquires 20% of
the Company's common stock. The rights, which are subject to adjustment, may be
redeemed by the Company at a price of $.03 per right at any time prior to the
fifteenth day after a person acquires 20% of the Company's common stock. The
rights expire on March 23, 1998.
In the event the Company is involved in certain business combination
transactions with a 20% shareowner, each right will entitle its holder (other
than a 20% shareowner) to purchase, at the right's then exercise price, an
equity interest in the acquiring person having a market value of two times the
exercise price. In the event a 20% shareholder engages in certain other
transactions with the Company or (pursuant to a February, 1989 amendment) any
person becomes a 20% shareowner, each right will entitle its holder (other than
a 20% shareowner) to purchase, at the right's then exercise price, shares of
Class A common stock having a market value of two times the exercise price.
17. ACQUISITION
Brown & Sharpe Manufacturing Company through its subsidiary Brown & Sharpe
International Capital Corporation purchased, on March 24, 1994, the stock of
the French company Ets. Pierre Roch S.A. ("Roch") and its German affiliate,
Mauser Prazisions--Messmittel GmbH ("Mauser"). Roch manufactures and, together
with Mauser, markets micrometers, calipers, height gages, digital indicators,
and other similar precision measuring instrument products. The business is
headquartered in Luneville, France which is its sole manufacturing site. The
German operation is a sales office. These operations were purchased from Diehl
GmbH & Co. of Nurnberg, Germany ("Diehl").
The purchase price was 175,000 shares of Brown & Sharpe Class A Common Stock,
subject to certain post closing adjustments and the right to receive an
additional 50,000 shares of such stock in the event the
A-19
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Company's Class A Common Stock attains a market price of $15 or more per share
for a total of 30 days or more during any twelve month period within the five
years following the purchase. The purchase price was determined through
negotiation by the parties subject to adjustment based on specified closing
balance sheet changes. Roch entered into a nine year lease agreement to lease
the Luneville facility from Societe Immobiliere Lunevilloise S.A.R.L., a
subsidiary of Diehl, for approximately $34 annually with options to purchase
the facility during the lease term.
The acquisition has been accounted for by the purchase method of accounting,
and accordingly, the purchase price has been allocated to assets acquired and
liabilities assumed based on an estimate of their fair values at the date of
acquisition. The estimated fair values of assets and liabilities after
allocation are summarized as follows:
<TABLE>
<S> <C>
Cash................................................................ $1,408
Accounts receivable................................................. 2,647
Inventory........................................................... 3,398
Other assets........................................................ 267
Machinery and equipment............................................. 726
Accounts payable and accruals....................................... 3,988
Short-term debt..................................................... 1,511
Long-term debt...................................................... 1,250
Pensions............................................................ 516
------
$1,181
======
</TABLE>
The Company's unaudited combined results of operations for the year ended
December 25, 1993 and the six months ended July 2, 1994 on a pro forma basis
assuming the acquisition of Roch occurred at the beginning of 1993 are as
follows:
<TABLE>
<CAPTION>
SIX
YEAR MONTHS
-------- -------
1993 1994
-------- -------
<S> <C> <C>
Net sales.................................................... $169,542 $83,224
Net (loss)................................................... (2,004) (4,085)
Primary and fully diluted (loss) per common share............ (.39) (.80)
</TABLE>
18. OTHER MATTERS
During the fourth quarter of 1991 and 1992, the Company recorded $1,800 and
$5,100 of restructuring costs, primarily employee severance at European
facilities. The third quarter of 1992 included about $1,500 of incentive
compensation in conjunction with acquiring a subsidiary's minority interest
whereas the fourth quarter included about $2,000 of inventory write-offs.
As announced in 1993, the Company is continuing negotiations to purchase
Finmeccanica's DEA Group of metrology companies and business units. The DEA
Group, headquartered in Turin, Italy, manufactures and markets worldwide a
variety of types of coordinate measuring machines and systems with 1993
worldwide sales of about $110 million. Under the proposed transactions, the DEA
Group would have approximately $15 million debt, and Brown & Sharpe would issue
3,450,000 shares of Brown & Sharpe Class A Common Stock to Finmeccanica. The
letter of intent would require Finmeccanica not to transfer the acquired Brown
& Sharpe shares to any person other than Brown & Sharpe for a specified period
and to afford Brown & Sharpe certain rights of first refusal with respect
thereto for a further specified period. The letter of intent contemplates that
Finmeccanica would have representatives on Brown & Sharpe's Board of
A-20
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Directors. The proposed combination is subject to negotiation of a definitive
acquisition agreement and to a number of other conditions, including
satisfactory completion of due diligence, approval by the Board of Directors of
each party, approval by Brown & Sharpe's stockholders, receipt of relevant
governmental approvals in applicable countries and successful negotiation of
financing arrangements with certain financial institutions to obtain consent of
certain existing lenders and to obtain an additional line of credit based on
DEA Group assets or upon other financing arrangements deemed satisfactory by
the Company. The waiting period with respect to the proposed transaction under
the Hart-Scott-Rodino Antitrust Improvements Act expired in August 1993. There
can be no assurance that a definitive acquisition agreement can be negotiated
and executed or that the financing arrangement conditions or all other closing
conditions will be satisfied.
A-21
<PAGE>
EXHIBIT B
COMBINED FINANCIAL STATEMENTS OF DEA S.P.A.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants--1991--Coopers & Lybrand............... B-2
Report of Independent Accountants--1992--Price Waterhouse................ B-3
Report of Independent Auditors--1992 and 1993--Reconta Ernst & Young..... B-4
Combined Balance Sheet as of December 31, 1992, 1993 and June 30, 1994
(Unaudited)............................................................. B-5
Combined Statement of Income (Loss) for the Years Ended December 31,
1991, 1992, and 1993, and for the Six Months Ended June 30, 1993
(Unaudited) and 1994 (Unaudited)........................................ B-6
Combined Statement of Cash Flows for the Years Ended December 31, 1991,
1992, and 1993, and for the Six Months Ended June 30, 1993 (Unaudited)
and 1994 (Unaudited).................................................... B-7
Combined Statement of Changes in Divisional Deficit for the Years Ended
December 31, 1991, 1992, and 1993, and for the Six Months Ended June 30,
1993 (Unaudited) and 1994 (Unaudited)................................... B-8
Notes to Combined Financial Statements................................... B-9
</TABLE>
B-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and
Board of Directors of
DEA S.p.A.
We have audited the accompanying combined statements of operations, cash
flows and changes in divisional deficit of the DEA Metrology Activities of
Finmeccanica, as described in Note 1, for the year ended December 31, 1991.
These financial statements are the responsibility of the DEA S.p.A. management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined results of operations and cash
flows of the DEA Metrology Activities of Finmeccanica for the year ended
December 31, 1991 in conformity with accounting principles generally accepted
in the United States.
Coopers & Lybrand
Turin, Italy
October 22, 1993
B-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
October 5, 1993
Toledo, Ohio
To the Board of Directors of
Elsag Bailey, Inc.
In our opinion, the accompanying statement of division assets, liabilities
and equity (deficit) and the related statements of operations and accumulated
deficit and of cash flows present fairly, in all material respects, the
financial position of Digital Electronic Automation, a division of Elsag
Bailey, Inc., at December 31, 1992, and the results of its operations and its
cash flows for the year in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the management
of Elsag Bailey, Inc. and Digital Electronic Automation; our responsibility is
to express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made be management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Digital Electronic Automation is a division of Elsag Bailey, Inc., which is a
member of a group of affiliated companies and, as disclosed in the financial
statements, has extensive transactions and relationships with members of the
group. Because of these relationships, it is possible that the terms of these
transactions are not the same as those that would result from transactions
among wholly unrelated parties.
As described in Note 7, Brown & Sharpe Manufacturing Company has entered into
a non-binding letter of intent to purchase certain net assets of Finmeccanica's
DEA Group, of which Digital Electronic Automation is a part.
Price Waterhouse
B-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
DEA S.p.A.
We have audited the combined balance sheets of the DEA Metrology Activities
of Finmeccanica as described in Note 1, as of December 31, 1993 and 1992, and
the related combined statements of operations, divisional deficit and cash
flows for the years then ended. These combined financial statements are the
responsibility of the management of DEA S.p.A. Our responsibility is to express
an opinion on these combined financial statements based on our audit. We did
not audit the financial statements of Digital Electronic Automation (U.S.A.), a
division of Elsag Bailey Inc., for the year ended December 31, 1992 which
statements reflect total assets of Lire 28,525 million and total revenues of
Lire 30,990 million for the year then ended. Those statements were audited by
other auditors, whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for Digital Electronic Automation
(U.S.A.), a division of Elsag Bailey Inc., at December 31, 1992 is based solely
on the report of the other auditors.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the combined financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audit and the report of other auditors provide a reasonable basis for
our opinion.
As more fully described in Note 5, the DEA Metrology Activities is one of
many divisions of Finmeccanica S.p.A. and its subsidiaries and has material
transactions with the affiliated companies of IRI, an Italian State holding
company which has a controlling interest in Finmeccanica S.p.A.
In our opinion, based on our audit and the report of the other auditors on
the December 31, 1992 financial statements, the combined financial statements
referred to above present fairly, in all material respects, the combined
financial position of the DEA Metrology Activities of Finmeccanica, as
described in Note 1, at December 31, 1993 and 1992 and the combined results of
its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 19 to the combined financial statements, the DEA
Metrology Activities of Finmeccanica has a history of recurring losses from
operations and a net asset deficiency which raise substantial doubt about its
ability to continue as a going concern without the continued financial support
of Finmeccanica S.p.A. Management's plans as to these matters are also
described in Note 19. The combined financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Reconta Ernst & Young
Turin, Italy
March 18, 1994, except for the
information expressed in U.S.
Dollars referred to in Note 1,
as to which the date is
June 30, 1994
B-4
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
COMBINED BALANCE SHEET
(ITALIAN LIRE IN MILLIONS, U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
---------------------------- ------------------
1992 1993 1993 1994 1994
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... L 4,304 L 10,549 $ 6,651 L 7,682 $ 4,844
Accounts receivable, net of
allowance for doubtful
debts....................... 74,751 83,732 52,794 71,939 45,359
Other receivables from
affiliates.................. 13,383 -- -- -- --
Inventories.................. 68,709 67,088 42,300 66,315 41,813
Other current assets......... 6,411 9,852 6,213 9,746 6,144
-------- -------- -------- -------- --------
Total current assets......... 167,558 171,221 107,958 155,682 98,160
-------- -------- -------- -------- --------
Non-current assets:
Property, plant and
equipment, net of
accumulated depreciation.... 9,558 9,341 5,890 8,617 5,433
Other assets and deferred
charges..................... 7,339 6,096 3,843 5,060 3,191
-------- -------- -------- -------- --------
Total non-current assets..... 16,897 15,437 9,733 13,677 8,624
-------- -------- -------- -------- --------
Total assets................. L184,455 L186,658 $117,691 L169,359 $106,784
======== ======== ======== ======== ========
LIABILITIES AND DIVISIONAL DEFICIT
Current liabilities:
Borrowings and current
maturities of debt.......... L 21,244 L 47,083 $ 29,687 L 38,150 $ 24,054
Accounts payable............. 33,653 25,932 16,351 23,580 14,868
Other payables to affiliates. 78,596 71,288 44,948 83,507 52,653
Accrued expenses and other
liabilities................. 29,504 24,988 15,755 20,980 13,228
-------- -------- -------- -------- --------
Total current liabilities.... 162,997 169,291 106,741 166,217 104,803
-------- -------- -------- -------- --------
Non-current liabilities:
Long-term debt............... 20,207 12,384 7,808 5,749 3,625
Termination indemnities...... 11,346 11,968 7,546 12,561 7,920
-------- -------- -------- -------- --------
Total non-current
liabilities................. 31,553 24,352 15,354 18,310 11,545
-------- -------- -------- -------- --------
Total liabilities............ 194,550 193,643 122,095 184,527 116,348
-------- -------- -------- -------- --------
Divisional deficit:
Finmeccanica S.p.A.
investment in Division...... 49,685 36,540 23,039 31,547 19,891
Accumulated deficit.......... (56,514) (40,632) (25,619) (44,110) (27,812)
Foreign currency translation
adjustment.................. (3,266) (2,893) (1,824) (2,605) (1,643)
-------- -------- -------- -------- --------
Total divisional deficit..... (10,095) (6,985) (4,404) (15,168) (9,564)
-------- -------- -------- -------- --------
Total liabilities and
divisional deficit.......... L184,455 L186,658 $117,691 L169,359 $106,784
======== ======== ======== ======== ========
</TABLE>
The convenience translation into U.S. Dollars has been made using the exchange
rate of 1,586 Italian Lire to U.S. $1 existing at June 30, 1994.
See notes to combined financial statements.
B-5
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
COMBINED STATEMENT OF OPERATIONS
(ITALIAN LIRE IN MILLIONS, U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------- ----------------------------
1991 1992 1993 1993 1993 1994 1994
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... L117,662 L124,749 L178,297 $112,419 L79,387 L71,494 $45,078
Cost of products sold... 93,561 83,922 114,363 72,108 48,584 46,548 29,349
Selling, general and
administration......... 35,388 39,873 48,764 30,747 28,707 24,573 15,494
Restructuring costs..... -- 2,949 823 518 -- -- --
Depreciation and
amortization........... 5,641 5,718 5,690 3,588 2,723 2,247 1,417
-------- -------- -------- -------- -------- -------- --------
134,590 132,462 169,640 106,961 80,014 73,368 46,260
Operating (loss) income. (16,928) (7,713) 8,657 5,458 (627) (1,874) (1,182)
Interest expense, net... (12,086) (11,731) (9,918) (6,253) (4,901) (5,416) (3,415)
Other (expenses) income,
net.................... 10,688 (4,789) (2,599) (1,639) (1,744) (299) (188)
-------- -------- -------- -------- -------- -------- --------
Net loss................ L(18,326) L(24,233) L (3,860) $ (2,434) L (7,272) L (7,589) $ (4,785)
======== ======== ======== ======== ======== ======== ========
</TABLE>
The convenience translation into U.S. Dollars has been made using the exchange
rate of 1,586 Italian Lire to U.S. $1 existing at June 30, 1994.
See notes to combined financial statements.
B-6
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
COMBINED STATEMENT OF CASH FLOWS
(ITALIAN LIRE IN MILLIONS, U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------ ----------------------------
1991 1992 1993 1993 1993 1994 1994
-------- -------- ------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash provided by (used
in) operations:
Net loss............... L(18,326) L(24,233) L(3,860) $(2,434) L(7,272) L(7,589) $(4,785)
Adjustments to reconcile
net income to net cash
provided:
Depreciation and
amortization.......... 5,641 5,718 5,690 3,588 2,723 2,247 1,417
Provision for
termination
indemnities........... 2,609 2,247 2,037 1,284 1,117 1,132 714
Gain on sale of fixed
assets................ (11,553) (652) 2 1 (14) 11 7
Government grant
accrued............... -- (500) (2,410) (1,520) -- -- --
Changes in operating
assets and liabilities:
(Increase) decrease in
accounts receivable... 24,309 (22,293) (8,981) (5,663) 2,576 11,793 7,436
(Increase) decrease in
other receivables from
affiliates............ -- (13,383) 13,383 8,438 13,383 -- --
(Increase) decrease in
inventories........... 7,009 (11,887) 1,621 1,022 (2,425) 773 487
Decrease in other
current assets,
excluding government
grants................ 1,524 2,224 (1,264) (797) (1,372) (177) (111)
Increase (decrease) in
accounts payable...... (16,275) 8,986 (7,721) (4,868) (3,047) (2,352) (1,483)
Increase (decrease) in
accrued expenses and
other liabilities..... (6,211) 9,123 (4,516) (2,846) (2,224) (4,008) (2,527)
-------- -------- ------- ------- ------- ------- -------
Net cash used in
operating activities... (11,273) (44,650) (6,019) (3,795) 3,445 1,830 1,155
-------- -------- ------- ------- ------- ------- -------
Cash flows from
investing activities:
Fixed assets additions. (3,107) (3,080) (3,165) (1,996) (1,475) (1,015) (640)
Net assets acquired
from Renault
Automation business... -- (2,989) -- -- -- -- --
Proceeds from sale of
fixed assets.......... 22,969 4,490 169 107 54 70 44
Intangible asset
additions............. (2,981) (948) (361) (228) (37) (201) (127)
(Decrease) increase in
other non-current
assets and deferred
charges............... 530 (765) (228) (144) (79) 487 307
-------- -------- ------- ------- ------- ------- -------
Net cash provided from
(used in) investing
activities............. 17,411 (3,292) (3,585) (2,261) (1,537) (659) (416)
-------- -------- ------- ------- ------- ------- -------
Cash flows from
financing activities:
Increase (decrease) in
borrowings and current
maturities of long
term debt............. (27,580) (13,976) 25,839 16,292 (894) (8,568) (5,402)
Payment of long term
debt.................. (8,066) (7,707) (7,823) (4,933) (7,103) (7,000) (4,414)
(Decrease) increase in
payables to
affiliates............ 35,780 35,264 (7,308) (4,608) 8,148 12,219 7,704
Government grants
received.............. -- -- 233 147 233 283 178
Additional Finmeccanica
S.p.A. investment in
divisions............. 19,189 30,047 -- -- -- -- --
Coverage of net asset
deficiency of Digital
Electronic Automation
Company by Elsag
Bailey Inc............ -- -- 6,597 4,160 -- -- --
Payment of termination
indemnities........... (2,449) (2,206) (1,415) (892) (768) (539) (340)
Distribution to
shareholders.......... (19,556) -- -- -- -- -- --
Increase in net equity
following combination
of Metrology Division
of DEA France S.A..... -- 4,994 -- -- -- (534) (337)
-------- -------- ------- ------- ------- ------- -------
Net cash provided from
(used in) financing
activities............ (2,682) 46,416 16,123 10,166 (384) (4,139) (2,611)
-------- -------- ------- ------- ------- ------- -------
Effect of exchange rate
changes on cash....... (171) (1,133) (274) (173) (508) 101 65
-------- -------- ------- ------- ------- ------- -------
Cash and cash
equivalents:
Net increase (decrease)
in cash and cash
equivalents........... 3,285 (2,659) 6,245 3,937 1,016 (2,867) (1,807)
Cash and cash
equivalents at
beginning of period... 3,678 6,963 4,304 2,714 4,304 10,549 6,651
-------- -------- ------- ------- ------- ------- -------
Cash and cash
equivalents at end of
period................ L 6,963 L 4,304 L10,549 $ 6,651 L 5,320 L 7,682 $ 4,844
-------- -------- ------- ------- ------- ------- -------
Supplementary cash flow
information:
Net interest paid....... L 12,600 L 11,396 L11,531 $ 7,270 L 3,539 L 3,734 $ 2,354
======== ======== ======= ======= ======= ======= =======
</TABLE>
The convenience translation into U.S. Dollars has been made using the exchange
rate of 1,586 Italian Lire to U.S. $1 existing at June 30, 1994.
See notes to combined financial statements.
B-7
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
COMBINED STATEMENTS OF CHANGES IN DIVISIONAL DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1991; DECEMBER 31, 1992; AND DECEMBER 31,
1993; AND SIX MONTHS ENDED JUNE 30, 1994 (UNAUDITED)
(ITALIAN LIRE IN MILLIONS, U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN CURRENCY
FINMECCANICA S.P.A. ACCUMULATED TRANSLATION
INVESTMENT DEFICIT ADJUSTMENT TOTAL
------------------- ----------- ---------------- --------
<S> <C> <C> <C> <C>
Balance at December 31,
1990................... L 17,145 L(16,088) L(2,773) L (1,716)
Reduction of capital to
cover losses........... (4,000) 4,000 -- --
Additional capital
arising on
transformation of U.S.
activity from
subsidiary to affiliate
branch................. 1,248 -- -- 1,248
Capital contribution in
cash................... 1,500 16,441 -- 17,941
Asset distribution to
shareholders arising
from September 30, 1991
reorganization......... -- (19,556) -- (19,556)
Net loss for 1991....... -- (18,326) -- (18,326)
Currency translation
adjustments............ -- -- (171) (171)
-------- -------- ------- --------
Balance at December 31,
1991 as previously
stated................. 15,893 (33,529) (2,944) (20,580)
Reclassification of
divisional equity of
Digital Electronic
Automation (USA)....... (1,248) 1,248 -- --
-------- -------- ------- --------
Balance at December 31,
1991 as restated....... 14,645 (32,281) (2,944) (20,580)
-------- -------- ------- --------
Increase in share
capital................ 14,800 -- -- 14,800
Additional paid in
capital................ 15,247 -- -- 15,247
Divisional equity of
metrology division of
DEA France S.A......... 4,993 -- -- 4,993
Net loss for 1992....... -- (24,233) -- (24,233)
Currency translation
adjustments............ -- -- (322) (322)
-------- -------- ------- --------
Balance at December 31,
1992................... 49,685 (56,514) (3,266) (10,095)
-------- -------- ------- --------
Net loss for 1993....... -- (3,860) -- (3,860)
Net asset deficiency of
Digital Electronic
Automation Company
eliminated on
conversion of DEA
Company from a division
of Elsag Bailey Inc. to
a subsidiary of DEA
S.p.A.................. (13,145) 19,742 -- 6,597
Currency translation
adjustments............ -- -- 373 373
-------- -------- ------- --------
Balance at December 31,
1993................... L 36,540 L(40,632) L(2,893) L (6,985)
======== ======== ======= ========
U.S. Dollars December
31, 1993............... $ 23,039 $(25,619) $(1,824) $ (4,404)
======== ======== ======= ========
Balance at December 31,
1993................... L 36,540 L(40,632) L(2,893) L (6,985)
Net divisional equity of
Metrology Division of
DEA France S.A. at
December 31, 1993
eliminated on
consolidation.......... (4,993) 4,111 348 (534)
Net loss for six months
ending June 30, 1994... -- (7,589) -- (7,589)
Currency translation
adjustments............ -- -- (60) (60)
-------- -------- ------- --------
Balance at June 30, 1994
(Unaudited)............ L 31,547 L(44,110) L(2,605) L(15,168)
======== ======== ======= ========
U.S. Dollars June 30,
1994 (Unaudited)....... $ 19,891 $(27,812) $(1,643) $ (9,564)
======== ======== ======= ========
</TABLE>
The convenience translation into U.S. Dollars has been made using the exchange
rate of 1,586 Italian Lire to U.S. $1 existing at June 30, 1994.
See notes to combined financial statements.
B-8
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
The DEA Metrology Activities of Finmeccanica (the"Division") design and
manufacture at its Italian headquarters a diversified line of Metrology
Products (precision dimensional measuring systems and instruments). The
products are marketed worldwide direct from Italy and through its five overseas
operations which also provide technical assistance, sales support and other
related services.
The Division is one of many divisions of Finmeccanica S.p.A., a company which
is incorporated in Italy and wholly owned by an Italian government entity. At
June 30, 1994,the Division was comprised of DEA S.p.A. and its wholly owned
subsidiaries which are as follows:
<TABLE>
<S> <C>
DEA Iberica S.A. ................................... Spain
DEA Digital Electronic Automation Vetriebs GmbH..... Germany
DEA Kabushiki Kaisha................................ Japan
Digital Electronic Automation Company............... United States of America
DEA France S.A...................................... France
</TABLE>
The following re-organizations occurred in the structure of the Division
during the six months ended June 30, 1994 and the years ended December 31, 1993
and 1992.
DIGITAL ELECTRONIC AUTOMATION COMPANY
Digital Electronic Automation Company was originally incorporated in the
United States as Digital Electronic Automation Inc., a fully owned subsidiary
of the DEA Metrology Activities of Finmeccanica. On November 22, 1991,
following a corporate reorganization, it was sold to an affiliated company,
Bailey Controls Inc., which itself was merged into Elsag Bailey Inc.
Subsequently, Digital Electronic Automation became a trading division of Elsag
Bailey Inc. with its common stock, paid in and contribution capital being
recharacterized as Divisional equity.
On October 31, 1993 Elsag Bailey Inc. eliminated the net asset deficiency of
the division by waiving part of a working capital advance made to the division.
The remaining outstanding balance on the advance was repaid. On the following
day, the net assets of the Division were sold to Digital Electronic Automation
Company, a fully owned subsidiary of DEA S.p.A. at their net book value of
zero.
The combined statement of operations for the year ended December 31, 1993
incorporates the results of Digital Electronic Automation for the whole year as
both the Division and the Company formed part of the DEA Metrology Activities
of Finmeccanica during 1993.
DEA FRANCE S.A.
The combined financial statements for the years ending December 31, 1993 and
1992 include the results and operations of the Metrology Division of DEA France
S.A., a wholly owned subsidiary of Finmeccanica S.p.A., which was incorporated
into the combined financial statements from January 1, 1992.
On January 1, 1994 the non-metrology activities of DEA France S.A. were
transferred to another Finmeccanica group company. On the same day, the
shareholders' capital of DEA France S.A. was acquired by DEA S.p.A. for a
consideration representing the net asset value of the Company at December 31,
1993.
The net divisional equity of the Metrology Division of DEA France S.A.
included in the combined financial statements at December 31, 1993 and 1992 has
been eliminated from the combined financial statements at June 30, 1994 on
consolidation.
B-9
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
At December 31, 1992 DEA S.p.A. had two separate business divisions as
follows:
Metrology division--Design, manufacture and distribution of high precision
measuring instruments
Assembly division--Design and manufacture of assembly machines and robots.
On January 19, 1993 the net assets attributable to the assembly division of
DEA S.p.A. at December 31, 1992 were transferred to "SAR--Sistemi di
Assemblaggio Robotizzato" (a subsidiary of Finmeccanica S.p.A.). No
consideration was paid by SAR for the net assets acquired as these had a net
value of zero. The combined financial statements for the years ended December
31, 1992 and prior thereto exclude the income, expenses, assets and liabilities
of the Assembly division as these did not form part of the DEA Metrology
Activities of Finmeccanica in those years.
Principles of combination
The combined financial statements of the DEA Metrology Activities of
Finmeccanica for the years ended December 31, 1993 and 1992, and the six months
ended June 30, 1993 and 1994, include the results and operations of the
following:
. DEA S.p.A.
. DEA Iberica S.A.
. DEA Digital Electronic Automation Vetriebs GmbH
. DEA Kabushiki Kaisha
. Digital Electronic Automation Company (U.S.A.), a division of Elsag
Bailey Inc., for the years ended December 31, 1991 and 1992, and the ten
months ended October 31, 1993.
. Digital Electronic Automation Company, a subsidiary of DEA S.p.A., for
the two months ended December 31, 1993 and the six months ended June 30,
1994.
. The metrology division of DEA France S.A. for the year ending December
31, 1992 and 1993, and the three months ended March 31, 1993.
. DEA France S.A. for the six months ended June 30, 1994.
The individual companies maintain their accounting records and prepare their
financial statements for local statutory purposes in accordance with the
accounting practices and currencies of the respective countries in which they
are located. The accompanying combined financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States.
The following is a reconciliation of the legal entity consolidated financial
statements of DEA S.p.A. at December 31, 1991, 1992, 1993, and June 30, 1993
and 1994 with the combined financial statements of the DEA Metrology Activities
of Finmeccanica presented in accordance with accounting principles generally
accepted in the United States:
<TABLE>
<CAPTION>
12/31/91 12/31/92 12/31/93 06/30/93 06/30/94
------------------- -------------------- -------------------- -------------------- --------------------
DIVISIONAL DIVISIONAL DIVISIONAL DIVISIONAL DIVISIONAL
NET LOSS DEFICIT NET LOSS DEFICIT NET LOSS DEFICIT NET LOSS DEFICIT NET LOSS DEFICIT
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Legal entity
consolidated
financial
statements...... L(197) L(869) L(18,617) L12,467 L(7,958) L6,500 L(5,129) L7,110 L(9,556) L(3,701)
</TABLE>
B-10
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
12/31/91 12/31/92 12/31/93 06/30/93 06/30/94
-------------------- -------------------- -------------------- -------------------- --------------------
DIVISIONAL DIVISIONAL DIVISIONAL DIVISIONAL DIVISIONAL
NET LOSS DEFICIT NET LOSS DEFICIT NET LOSS DEFICIT NET LOSS DEFICIT NET LOSS DEFICIT
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Effect of
combination of
Digital
Electronic
Automation
U.S.A.......... (922) (1,656) (2,436) (4,184) -- -- (2,794) (7,108) -- --
Effect on the
combination of
nine months
operations of
DEA Digital
S.p.A.......... (8,337) -- -- -- -- -- -- -- -- --
Loss and
divisional
equity of the
Metrology
Division of DEA
France S.A..... L -- L -- L (3,808) L (598) L (891) L(1,382) L (880) L (125) L -- L --
-------- -------- -------- -------- ------- ------- ------- -------- ------- --------
Loss and
divisional
equity before
combination
adjustments.... (9,456) (2,525) (24,861) 7,685 (8,849) 5,118 (8,803) (123) (9,556) (3,701)
COMBINATION
ADJUSTMENTS
Elimination of
loss
attributable to
Assembly
Division....... (1,003) 4,000 1,453 4,000 -- 4,000 -- 4,000 -- 4,000
Restatement of
divisional
equity of DEA
France S.A..... -- -- -- 1,331 -- 1,331 -- -- -- --
Elimination of
research and
development
costs.......... (5,895) (13,926) (463) (14,388) 2,935 (11,453) 1,467 (12,921) 1,467 (9,986)
Amortization of
deferred
charges........ (616) (616) -- -- -- -- -- -- -- --
Warranty
installation
reserve
provision...... -- (600) -- (600) -- (600) -- (600) -- (600)
Provision for
obsolete and
slow moving
inventory...... (500) (5,000) -- (5,000) 2,200 (2,800) -- (5,000) -- (2,800)
Other
adjustments on
inventory and
fixed assets... (1,828) (1,273) (495) (2,673) (259) (2,244) 7 (2,652) 444 (1,800)
Other
adjustments
arising on
combination.... 972 (640) 133 (450) 113 (337) 57 (393) 56 (281)
-------- -------- -------- -------- ------- ------- ------- -------- ------- --------
Per accompanying
combined
financial
statements..... L(18,326) L(20,580) L(24,233) L(10,095) L(3,860) L(6,985) L(7,272) L(17,689) L(7,589) L(15,168)
======== ======== ======== ======== ======= ======= ======= ======== ======= ========
U.S. Dollars.... $(2,434) $(4,404) $(4,785) $ (9,564)
======= ======= ======= ========
</TABLE>
The assets and liabilities of the subsidiaries are combined on a line-by-line
basis and the carrying value of investments is eliminated against the related
divisional equity accounts.
All significant intercompany transactions and balances within the DEA
Metrology Activities of Finmeccanica are eliminated. Unrealized intercompany
profits and the gains and losses arising from transactions within the Division
are also eliminated.
The financial statements of the foreign entities are translated into Italian
Lire using the year-end exchange rate for balance sheet items and the average
exchange rate for the year for the income statement. Differences arising on
translation are recorded in a component of divisional deficit.
B-11
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
Interim consolidated financial statements
The consolidated financial statements for the six months ended June 30, 1993
and June 30, 1994 and the related notes are unaudited and in the opinion of
management, include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the results of these periods.
The results for the six months ended June 30, 1994 are not necessarily
indicative of the results to be expected for the entire year.
Revenue recognition
Revenues and all costs (including costs of installation and training) of
standardized machines are recognized upon shipment to the customer.
In the exceptional case of large or long term projects, where machines may
require integration into complex manufacturing operations over an extended
period of time, revenue is recognized on the percentage of completion method.
Under the percentage of completion method, revenue and gross profit are
recognized as work is performed based on the relationship between actual costs
incurred and the total estimated costs at completion. Revenues and gross
profits are adjusted prospectively for revisions in estimated total contract
costs and contract revenues. Estimated losses are recorded when identified.
In addition, the Division earns revenue from the servicing of its equipment,
in certain instances under service contracts. Revenue under such contracts is
recognized on a straight line basis over the life of the contract.
Foreign currency transactions
Gains and losses resulting from foreign currency transactions and the
remeasurement of foreign currency balances and accounts denominated in foreign
currencies are included in the determination of net income in the period in
which they occur.
Inventories
Inventories are stated at the lower of cost or market value, with cost
principally determined on an average basis. Cost is comprised of direct
materials, labor and manufacturing overhead.
An allowance is provided to account for slow moving and obsolete inventory.
Government grants
Government grants in respect of research and development projects and other
revenue items are recognized in the income statement when all the terms and
conditions of the grant have been met.
Property, plant, and equipment
All property, plant, and equipment is recorded at historical cost.
B-12
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
Depreciation is calculated so as to write off the cost of property, plant,
and equipment on a straight line basis over the expected useful lives of the
assets concerned. The principal rates used for this purpose are:
<TABLE>
<S> <C>
Property................ 10%
Leasehold improvements.. shorter of, the life of the asset or the term of the lease
Machinery, equipment,
and tools.............. 10%--25%
Office furniture and
equipment.............. 12%--18%
Motor vehicles.......... 20%
</TABLE>
Maintenance and repair expenses are charged to operations as incurred.
Other non-current assets and deferred charges
Intangibles, including goodwill, software, and deferred charges included
within non-current assets and deferred charges are amortized primarily over
five years, their expected economic life.
Research and development
The Division's research and development department is responsible for product
design, development, and refinement. All costs of the department are charged to
operations as they are incurred.
Income taxes
Income taxes are provided in accordance with applicable local tax
regulations. Deferred income taxes are provided in accordance with Financial
Accounting Standards Board Statement No. 109 "Accounting for Income Taxes" for
temporary differences between financial statements carrying amounts and the
corresponding tax bases of assets and liabilities.
Warranty costs
Warranty costs are provided for at the time of product shipment.
Termination indemnities
In accordance with Italian severance pay statutes, an employee benefit is
accrued for service to date and is payable immediately upon separation. The
cost of providing these benefits is accounted for in accordance with Financial
Accounting Standards Board Statement No. 112 "Employers Accounting for
Postemployment Benefits".
Information expressed in U.S. Dollars
The combined financial statements are stated in Italian Lire, the currency of
the country in which the divisions principal legal entity and market is
located. The translation into U.S. Dollars amounts is included solely for the
convenience of readers and has been made at the rate of Italian Lire 1,586 to
U.S. 1, the approximate rate of exchange at June 30, 1994, for December 31,
1993. Such translation should not be construed as representation that the
Italian Lire amounts could be converted into U.S. Dollars at that or any other
rate.
B-13
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
NOTE 2--OPERATIONS BY GEOGRAPHIC AREA
The divisions operations are conducted in various countries around the world.
The geographic analysis of the division's net sales, net loss, and identifiable
assets is set out below:
<TABLE>
<CAPTION>
12/31/91 12/31/92 12/31/93 12/31/93 06/30/93 06/30/94 06/30/94
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES BY GEOGRAPHIC
MARKET:
Italy.................. L 61,850 L 61,916 L 74,549 $ 47,004 L 37,669 L 30,664 $ 19,334
United States.......... 23,858 30,990 54,309 34,243 17,562 21,527 13,573
France, Germany, and
Spain................. 24,912 23,784 39,352 24,812 23,058 16,983 10,708
Japan.................. 7,042 8,059 10,087 6,360 1,098 2,320 1,463
Other.................. -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
L117,662 L124,749 L178,297 $112,419 L 79,387 L 71,494 $ 45,078
======== ======== ======== ======== ======== ======== ========
NET SALES FROM THE
ITALIAN OPERATIONS:
Domestic............... L 34,781 L 28,070 L 40,815 $ 25,734 L 24,161 L 12,505 $ 7,884
Other European......... 20,825 20,182 15,797 9,960 6,452 5,785 3,648
Rest of the world...... 6,244 13,664 17,937 11,310 7,056 12,374 7,802
-------- -------- -------- -------- -------- -------- --------
L 61,850 L 61,916 L 74,549 $ 47,004 L 37,669 L 30,664 $ 19,334
======== ======== ======== ======== ======== ======== ========
TRANSFERS BETWEEN
GEOGRAPHIC OPERATIONS:
From Italy............. L 14,909 L 25,927 L 40,322 $ 25,424 L 22,029 L 18,725 $ 11,806
From France, Germany,
and Spain............. 1,152 6,855 925 583 321 20 13
From United States..... -- 243 -- -- 17 39 25
From Japan............. 16 70 -- -- 50 -- --
-------- -------- -------- -------- -------- -------- --------
L 16,077 L 33,095 L 41,247 $ 26,007 L 22,417 L 18,784 $ 11,844
======== ======== ======== ======== ======== ======== ========
NET LOSS:
Italy.................. L(12,627) L(17,096) L 4,077 $ 2,571 L (60) L (2,878) $ (1,815)
France, Germany, and
Spain................. (460) (4,460) (2,084) (1,314) (2,384) (1,928) (1,216)
United States.......... (5,290) (2,315) (4,928) (3,107) (2,719) (1,670) (1,053)
Japan.................. 51 (362) (925) (584) (2,109) (1,113) (701)
-------- -------- -------- -------- -------- -------- --------
L(18,326) L(24,233) L (3,860) $ (2,434) L (7,272) L (7,589) $ (4,785)
======== ======== ======== ======== ======== ======== ========
IDENTIFIABLE ASSETS:
Italy.................. L131,218 L108,043 $ 68,123 L120,599 L101,696 $ 64,121
France, Germany, and
Spain................. 21,234 31,033 19,567 23,462 28,924 18,237
United States.......... 28,525 40,513 25,544 25,257 34,203 21,566
Japan.................. 3,478 7,069 4,457 2,772 4,536 2,860
-------- -------- -------- -------- -------- --------
L184,455 L186,658 $117,691 L172,090 L169,359 $106,784
======== ======== ======== ======== ======== ========
</TABLE>
Identifiable assets by geographic area are those assets used specifically by
the Division's operations in each geographic area. Interdivisional transfers
between geographic areas are generally priced to recover costs plus a
reasonable amount of profit and have been eliminated from combined net sales.
NOTE 3--RESTRUCTURING COSTS
The Division recorded restructuring costs of Lire 823 ($518) and Lire 2,949
during fiscal years 1993 and 1992, respectively.
The 1993 restructuring charges reflect the severance costs relating to the
dismissal of employees at the Metrology Division of DEA France S.A.
B-14
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
The 1992 restructuring charge relates to Lire 2,432 of social security and
pension costs that the Italian Division is obliged to pay following the
agreement with employees to take early retirement and Lire 517 to the costs of
dismissing 30 employees at the Metrology Division of DEA France S.A.
NOTE 4--OPERATING INCOME
The operating income for the year is stated after charging the costs of the
Division's research and development department of Lire 8,290 ($5,227) for 1993
(Lire 8,200 and Lire 10,900 for 1992 and 1991, respectively) and after
crediting government grants receivable of Lire 2,410 ($1,520) (Lire 500 in
1992).
NOTE 5--INTERCOMPANY BALANCES AND TRANSACTIONS
The Division is a member of an affiliated group of companies controlled by
IRI Finmeccanica, an Italian state owned financial holding entity. The
transactions with affiliated companies during the years and the respective
balances at the year ends and quarter ends are summarized as follows:
Trade receivables from affiliates included in accounts receivable
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/93 06/30/94 06/30/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Alfa Romeo Avio................... L-- L2,788 $1,758 L2,603 $1,641
Alenia group...................... -- 281 131 531 335
Sistemi di Assemblaggio
Robotizzato S.p.A................ -- 207 177 269 170
Ansaldo group..................... -- 137 86 42 26
Elsag Bailey (a division of
Finmeccanica S.p.A.)............. 234 49 31 49 31
Other affiliated companies........ 298 29 18 22 13
---- ------ ------ ------ ------
L532 L3,491 $2,201 L3,516 $2,216
==== ====== ====== ====== ======
</TABLE>
Sales to affiliated companies during the years ending December 31, 1993 and
1992 were Lire 3,339 ($2,105) and Lire 111 respectively. Sales to affiliated
companies during the six months ending June 30, 1994 and 1993 were Lire 1,132
($714) and Lire 847, respectively.
Trade payables from affiliates included in accounts payable
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/93 06/30/94 06/30/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Elsag Sistemi...................... L11 L11 $ 7 L-- $--
Other affiliated companies......... -- -- -- -- --
--- --- --- --- ----
L11 L11 $ 7 L-- $--
=== === === === ====
</TABLE>
Other receivables from affiliates
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/93 06/30/94 06/30/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CURRENT ACCOUNTS
Savafactoring S.p.A............... L -- L-- $-- L-- $--
Elsag Bailey France............... -- -- -- -- --
Sistemi di Assemblaggio
Robotizzato S.p.A................ -- -- -- -- --
Cofiri Factor S.p.A............... 10,214 -- -- -- --
Finmeccanica S.p.A................ 3,169 -- -- -- --
------- ---- ---- ---- ----
L13,383 L-- $-- L-- $--
======= ==== ==== ==== ====
</TABLE>
B-15
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
The current account operated with Savafactoring S.p.A. is used for invoice
factoring and discounting. The other current accounts are utilized to settle
commercial transactions between the Companies. Interest is charged/credited to
the accounts at normal commercial bank rates. Interest income during 1993 on
such short-term lending amounted to Lire 353 ($219) (Lire 109 for 1992).
Other payables to affiliates
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/93 06/30/94 06/30/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CURRENT ACCOUNTS AND SHORT-TERM
LOANS
Elsag Bailey (a division of
Finmeccanica S.p.A.)............. L 1,195 L19,292 $12,164 L28,172 $17,763
Finmeccanica S.p.A.--Lire......... 25,000 36,229 22,843 31,909 20,119
- --other currencies................ 24,065 14,994 9,454 23,245 14,657
Elsag Bailey Inc.................. 28,336 -- -- -- --
------- ------- ------- ------- -------
78,596 70,515 44,461 83,326 52,539
OTHER PAYABLES
Other affiliates.................. -- 773 487 181 114
------- ------- ------- ------- -------
L78,596 L71,288 $44,948 L83,507 $52,653
======= ======= ======= ======= =======
</TABLE>
The Division, under the terms of informal agreements with the above
affiliated companies, operates current accounts with them. The accounts are
used to settle commercial transactions and to provide short-term finance. The
current accounts bear interest at varying rates from 5.3% to 11.75% as
determined by the commercial rates available for the currency in which the
loans are denominated.
The interest expense relating to such borrowings was Lire 7,960 ($5,018) for
the year ended December 31, 1993 (Lire 8,134; and Lire 7,326 for 1992 and 1991,
respectively).
The interest expense relating to such borrowings was Lire 3,629 ($2,288) for
the period ended June 30, 1994 and Lire 3,499 for the six months ended June 30,
1993.
Long-term affiliated debt
The Division has a long-term loan from Elsag Bailey, a division of
Finmeccanica. The terms, conditions, and amount repayable under the loan are
detailed in Note 14 .
Interest charged on this loan was Lire 725 ($457) for the year ended December
31, 1993 (Lire 1,025; and Lire 1,325 for 1992 and 1991, respectively).
Interest charged on this loan was Lire 300 ($189) for the period ended June
30, 1994 and Lire 425 for the six months ended June 30, 1993.
Other transactions involving affiliated companies
a. On December 29, 1992, the Division's Spanish subsidiary, DEA Iberica S.A.
sold its freehold buildings to Elsag Bailey for Lire 3,208. The sales price
was based on an appraisal by an independent firm of qualified appraisers.
The profit realized on the sale of Lire 766 has been included as "other
income (expenses)" in the combined statement of income.
On January 4, 1993, DEA Iberica S.A. signed an agreement whereby it
undertook to rent the property from Elsag Bailey (a division of
Finmeccanica S.p.A.) for an annual fixed rent of Pesetas 30,600,000
B-16
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
(Lire 367 ($231)) based on the exchange rate of 12 Italian Lire to the
Spanish Peseta in existence at June 30, 1994 for a period of five years.
The contract is renewable, at the option of both parties, at the end of the
five year period. In this case, the annual rent will be revised and may be
adjusted to account for inflation in the previous five years. The new
agreed upon rent will be indexed linked from year six onwards. Rent charged
to operations in the period to June 30, 1994 amounted to Lire 181 ($114)
and Lire 182 in the six months ended June 30, 1993.
b. DEA S.p.A. rents its premises in Moncalieri from Elsag Bailey S.p.A. under
the terms of a rental agreement. The agreement commenced on January 1, 1992
and expires on December 31, 1997. The minimum annual rent payable under the
contract is Lire 1,300 per annum. The rent is adjusted to account for
inflation at the beginning of each year. Rent charged to operations in the
period to June 30, 1994 totalled Lire 674 ($425) and Lire 673 in the six
months ended June 30, 1993.
DEA S.p.A. is responsible for all maintenance and repair costs to the
buildings during the period of the contract.
NOTE 6--ACCOUNTS RECEIVABLE
The accounts receivable balance is composed of the following:
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/93 06/30/94 06/30/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Trade receivables--external
customers........................ L75,472 L81,626 $51,467 L69,727 $43,965
Trade receivables--affiliated
customers........................ 532 3,491 2,201 3,516 2,216
------- ------- ------- ------- -------
76,004 85,117 53,668 73,243 46,181
Allowance for doubtful accounts... (1,253) (1,385) (874) (1,304) (822)
------- ------- ------- ------- -------
L74,751 L83,732 $52,794 L71,939 $45,359
======= ======= ======= ======= =======
</TABLE>
Included in the trade receivables balance are receivables of Lire 10,976
($6,921), (Lire 5,230 for 1992) from one customer which accounted for
approximately 11% (12% in 1992) of the combined sales of the Metrology Division
of Finmeccanica S.p.A. There were no customers accounting for more than 10% of
the combined sales in the six months ending June 30, 1994.
NOTE 7--INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/93 06/30/94 06/30/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Parts, raw materials, and
supplies......................... L31,399 L21,689 $13,675 L22,207 $14,002
Semi-finished goods............... 23,134 21,236 13,390 22,241 14,023
Finished goods.................... 22,802 33,250 20,965 30,996 19,544
------- ------- ------- ------- -------
77,335 76,175 48,030 75,444 47,569
Provision for slow moving and
obsolete inventory............... (8,626) (9,087) (5,730) (9,129) (5,756)
------- ------- ------- ------- -------
L68,709 L67,088 $42,300 L66,315 $41,813
======= ======= ======= ======= =======
</TABLE>
B-17
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
NOTE 8--OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/93 06/30/94 06/30/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Government grants receivable...... L2,684 L4,861 $3,065 L4,578 $2,887
Prepaid expenses.................. 983 2,180 706 1,837 1,158
Advances to employees............. 526 343 742 1,278 806
Prepaid social security
contributions.................... 500 1,177 1,375 955 602
VAT and other taxes recoverable... 410 1,120 216 409 258
Other............................. 1,308 171 109 689 433
------ ------ ------ ------ ------
L6,411 L9,852 $6,213 L9,746 $6,144
====== ====== ====== ====== ======
</TABLE>
The net increase from December 1992 to December 1993 in government grants
receivable reflects the following:
. the recognition of Lire 2,410 ($1,520) of grants in the combined
statement of operations following approval of the grant project and
completion of the terms and conditions of the grant;
. the receipt of Lire 233 ($147) of government grants.
NOTE 9--PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following:
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/93 06/30/94 06/30/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Property..................... L 79 L 79 $ 50 L 79 $ 50
Leasehold improvements....... 2,623 2,879 1,815 3,296 2,078
Machinery, equipment, and
tools....................... 25,576 28,553 18,003 26,950 16,992
Office equipment and furni-
ture........................ 10,415 11,453 7,221 11,772 7,422
Motor vehicles............... 796 926 586 1,455 918
-------- -------- -------- -------- --------
39,489 43,890 27,675 43,552 27,460
Less: Accumulated deprecia-
tion........................ (29,931) (34,549) (21,785) (34,935) (22,027)
-------- -------- -------- -------- --------
L 9,558 L 9,341 $ 5,890 L 8,617 $ 5,433
======== ======== ======== ======== ========
</TABLE>
Depreciation charges relative to property, plant, and equipment were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------- ----------------------------
1991 1992 1993 1993 6/30/93 6/30/94 6/30/94
------ ------ ------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Depreciation charges..... L4,285 L4,128 L3,813 $2,404 L1,887 L1,497 $ 944
------ ------ ------ ------ -------- -------- -------
</TABLE>
B-18
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
NOTE 10--OTHER NON-CURRENT ASSETS AND DEFERRED CHARGES
Other non-current assets and deferred charges consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
1992 1993 1993 1994 1994
------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Goodwill..................... L3,656 L2,886 $ 1,820 L2,455 $ 1,548
Deposits..................... 457 779 491 485 306
Loans to employees........... 387 433 188 340 214
Advance to distributor....... -- 317 200 294 185
Software costs............... 1,319 298 273 266 168
Trade licenses and technical
rights...................... 212 157 99 133 84
Other deferred charges....... 1,308 1,226 772 1,087 686
------- ------- ------- ------------ ------------
L7,339 L6,096 $ 3,843 L5,060 $ 3,191
======= ======= ======= ============ ============
</TABLE>
Amortization charges relative to other non-current assets and deferred
charges were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1991 1992 1993 1993 1993 1994 1994
------ ------ ------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Amortization charge in
the year............... L1,356 L1,590 L1,877 $1,184 L836 L750 $ 473
------ ------ ------ ------ -------- -------- --------
</TABLE>
The written down value of the goodwill at December 31, 1993 consists of Lire
2,033 ($1,282) (Lire 2,647 for 1992) and at June 30, 1994, Lire 1,726 ($1,088)
representing the excess of the purchase cost over the net assets acquired from
Prima Industrie S.p.A. in 1990 and 1991 and Lire 853 ($538) (Lire 1,009 in
1992) arising from the acquisition of the Renault Automation business by the
Metrology Division of DEA France S.A. in July 1992.
NOTE 11--BORROWINGS AND CURRENT MATURITIES OF DEBT
Borrowings and current maturities of debt consist of the following:
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/93 06/30/94 06/30/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Bank overdrafts and other short-
term borrowings.................. L13,538 L39,163 $24,693 L30,458 $19,204
Current portion of long-term debt. 7,706 7,920 4,994 7,692 4,850
------- ------- ------- ------- -------
L21,244 L47,083 $29,687 L38,150 $24,054
======= ======= ======= ======= =======
</TABLE>
The composition of the bank overdrafts and other short term borrowings by
currency is as follows:
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/93 06/30/94 06/30/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
U.S. Dollars....................... L 54 L26,757 $16,871 L20,618 $13,000
Italian Lire....................... 2,026 1,040 656 -- --
Deutsche Mark...................... 5,071 4,436 2,797 3,985 2,513
Japanese Yen....................... 1,713 2,597 1,637 1,987 1,252
French Francs...................... 4,674 4,333 2,732 3,868 2,439
Other currencies................... -- -- -- -- --
------- ------- ------- ------- -------
L13,538 L39,163 $24,693 L30,458 $19,204
======= ======= ======= ======= =======
</TABLE>
B-19
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
As of December 31, 1992, the Division maintained relationships with banks
providing the following credit lines:
<TABLE>
<CAPTION>
CREDIT LINE UTILIZED
----------- --------
<S> <C> <C>
Bank overdraft and short-term loans........................ L47,851 L11,538
Invoice discounting facilities............................. 2,000 2,000
------- -------
L49,851 L13,538
======= =======
</TABLE>
As of December 31, 1993, the Division maintained relationships with banks
providing the following credit lines:
<TABLE>
<CAPTION>
CREDIT LINE UTILIZED CREDIT LINE UTILIZED
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Bank overdraft and other short-term
borrowings.......................... L61,707 L39,163 $38,303 $24,310
======= ======= ======= =======
</TABLE>
As of June 30, 1994, the Division maintained relationships with banks
providing the following credit lines:
<TABLE>
<CAPTION>
CREDIT LINE UTILIZED CREDIT LINE UTILIZED
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Bank overdraft and other short-term
borrowings.......................... L63,000 L30,458 $39,723 $19,204
======= ======= ======= =======
</TABLE>
The weighted average interest rates on deposits and borrowings are as
follows:
<TABLE>
<CAPTION>
BORROWINGS DEPOSITS
----------------- -----------------
12/31/92 12/31/93 12/31/92 12/31/93
-------- -------- -------- --------
<S> <C> <C> <C> <C>
U.S. Dollars--overdraft..................... -- 4.0% -- --
Italian Lire--overdraft..................... 17.5% 13.7% 7.0% 3.0%
Deutsche Mark--overdraft.................... 10.9% 10.3% -- --
Japanese Yen--overdraft..................... 4.0% 4.0% -- --
French Francs--short-term loan.............. 12.0% 12.0% -- --
</TABLE>
<TABLE>
<CAPTION>
BORROWINGS DEPOSIT
06/30/94 06/30/94
---------- --------
<S> <C> <C>
U.S. Dollars--overdraft..................................... 4.0% --
Italian Lire--overdraft..................................... 13.7% 3.0%
Deutsche Mark--overdraft.................................... 10.3% --
Japanese Yen--overdraft..................................... 4.0% --
French Francs--short-term loan.............................. 12.0% --
</TABLE>
The total interest expense during respect of short and long-term borrowings
from both external and affiliated sources was Lire 5,416 ($3,415) and Lire
5,953 for the first half of 1994 and 1993, respectively, and was Lire 12,485
($7,872) and Lire 15,272 for 1993 and 1992, respectively.
NOTE 12--ACCOUNTS PAYABLE
The accounts payable balance is composed of the following:
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/93 06/30/94 06/30/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Accounts payable--external
suppliers........................ L33,642 L25,921 $16,344 L23,580 $14,868
Accounts payable--affiliated
suppliers........................ 11 11 7 -- --
------- ------- ------- ------- -------
L33,653 L25,932 $16,351 L23,580 $14,868
------- ------- ------- ------- -------
</TABLE>
B-20
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
NOTE 13--ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/93 06/30/94 06/30/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Payroll and other related
liabilities...................... L10,243 L5,824 $ 3,672 L5,542 $ 3,494
Value added tax and other
taxation......................... 1,814 4,078 2,571 3,044 1,919
Accrued commissions............... 2,539 3,287 2,073 3,957 2,495
Social security contributions on
early retirement of staff........ 2,431 2,109 1,330 -- --
Advances from customers and
deferred income.................. 5,627 2,040 1,286 1,761 1,110
Accrued interest.................. 2,611 1,791 1,129 342 216
Warranty reserve.................. 1,003 1,679 1,058 2,606 1,643
Provision for redundancy costs.... -- 535 337 -- --
Other accruals.................... 3,236 3,645 2,299 3,728 2,351
------- ------- ------- ------- -------
L29,504 L24,988 $15,755 L20,980 $13,228
======= ======= ======= ======= =======
</TABLE>
NOTE 14--LONG-TERM DEBT
Long-term debt consists of the following
<TABLE>
<CAPTION>
12/31/92 12/31/93 06/30/94
----------------- ----------------- -----------------
CURRENT LONG-TERM CURRENT LONG-TERM CURRENT LONG-TERM
THIRD PARTY DEBT PORTION PORTION PORTION PORTION PORTION PORTION
---------------- ------- --------- ------- --------- ------- ---------
<C> <S> <C> <C> <C> <C> <C> <C>
5.5% Unsecured loan from
Istituto Mobiliare
Italiano (IMI) repay-
able in semi-annual in-
stallments expiring in
July 1996. The original
capital amount was Lire
3,563.................. L453 L1,521 L479 L1,041 L493 L790
10.05% Unsecured loan from IMI
repayable in semi-an-
nual installments ex-
piring in October 1996.
The original capital
amount was Lire 2,250.. 288 1,024 371 711 327 544
10.05% Unsecured loan from IMI
repayable in semi-an-
nual installments ex-
piring in October 1996.
The original capital
amount was Lire 783.... 101 364 110 254 115 195
10.05% Unsecured loan from IMI
repayable in semi-an-
nual installments ex-
piring in October 1996.
The original capital
amount was Lire 1,827.. 233 824 320 570 263 436
12.33% Unsecured loan from
Mediocredito Piemontese
repayable in semi-an-
nual installments ex-
piring in April 1994.
The original capital
amount was Lire 953.... 159 159 159 -- -- --
9.07% Unsecured loan from
Mediocredito Piemontese
repayable in semi-an-
nual installments ex-
piring in April 1994.
The original capital
amount was Lire 1,167.. 168 167 167 -- -- --
</TABLE>
B-21
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
12/31/92 12/31/93 06/30/94
----------------- ----------------- -----------------
CURRENT LONG-TERM CURRENT LONG-TERM CURRENT LONG-TERM
THIRD PARTY DEBT PORTION PORTION PORTION PORTION PORTION PORTION
---------------- ------- --------- ------- --------- ------- ---------
<C> <S> <C> <C> <C> <C> <C> <C>
12.39% Unsecured loan from the
Ministry of Industry
repayable in annual in-
stallments expiring in
October 1996. The orig-
inal capital amount was
Lire 787............... L 71 L 505 L 79 L 427 L 79 L 427
8.28% Unsecured loan from the
Ministry of Industry
repayable in annual
installments commencing
in 1995 and expiring in
2004. The total amount
of the loan is Lire
1,916 with Lire 1,505
received as of December
31, 1992............... -- 1,505 -- 1,505 127 1,743
11.76% Unsecured loan from the
Ministry of Industry
repayable in annual in-
stallments expiring in
1999. The original cap-
ital amount was Lire
586.................... 47 425 26 372 53 345
12.36% Unsecured loan from the
Ministry of Industry
repayable in annual in-
stallments expiring in
1999. The original cap-
ital amount of the loan
was Lire 2,344......... 186 1,713 209 1,504 235 1,269
------ ------- ------ ------- ------ ------
Total third party long
term debt.............. 1,706 8,207 1,920 6,384 1,692 5,749
------ ------- ------ ------- ------ ------
AFFILIATED DEBT
5.0% Unsecured loan from
Elsag Bailey repayable
in annual installments
of Lire 6,000 expiring
in June 1995........... 6,000 12,000 6,000 6,000 6,000 --
------ ------- ------ ------- ------ ------
Total long-term debt.... L7,706 L20,207 L7,920 L12,384 L7,692 L5,749
====== ======= ====== ======= ====== ======
U.S. Dollars............ $4,994 $ 7,808 $4,850 $3,625
====== ======= ====== ======
</TABLE>
The repayment of long-term debt outstanding at December 31, 1993 is scheduled
as follows:
<TABLE>
<CAPTION>
YEAR ITALIAN LIRE U.S. DOLLARS
---- ------------ ------------
<S> <C> <C>
1994.................................................. 7,920 4,994
1995.................................................. 7,756 4,890
1996.................................................. 1,904 1,201
1997.................................................. 636 401
1998.................................................. 707 446
Thereafter............................................ 1,381 871
------ ------
20,304 12,803
====== ======
</TABLE>
Interest charged to the income statement in the period in respect of long-
term debt was Lire 1,469 ($926) (Lire 1,919 and Lire 2,446 for 1992 and 1991,
respectively) for the year ended December 1993, of which Lire 725 ($457) (Lire
1,025 and Lire 1,325 for 1992 and 1991, respectively) relates to the loan from
Elsag Bailey (a division of Finmeccanica S.p.A.).
B-22
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
Interest charged to the income statement in the period in respect of long
term debt was Lire 553 ($349) (Lire 821 in 1993) for the period ended June 30,
1994, of which Lire 300 ($189) (Lire 425 in 1993) relates to the loan from
Elsag Bailey (a division of Finmeccanica S.p.A.).
NOTE 15--TERMINATION INDEMNITIES
Movements in the reserve for employees termination indemnities are as
follows:
<TABLE>
<CAPTION>
12/31/92 12/31/93 06/30/94
-------- -------- --------
<S> <C> <C> <C>
Balance at the beginning of the period............ L11,305 L11,346 L11,968
Provisions made during the period................. 2,247 2,037 1,132
Payments made during the period................... (2,206) (1,415) (539)
------- ------- -------
Balance at the end of the period.................. L11,346 L11,968 L12,561
------- ------- -------
U.S. Dollars...................................... $ 7,546 $ 7,920
======= =======
</TABLE>
NOTE 16--INCOME TAXES
The Division has no income tax liability due to losses made in the current
and previous years. All fiscal years from 1988 are still open for examination
by the fiscal authorities.
The Division had a deferred tax asset which is summarized as follows:
<TABLE>
<CAPTION>
12/31/91 12/31/92 12/31/93 12/31/93 06/30/93 06/30/94 06/30/94
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Tax losses available for
carry forward (per
filed tax returns)..... L 4,732 L 11,649 L 12,527 $ 7,898 L 12,178 L 12,477 $ 7,867
Deferral of research and
development costs for
tax purposes........... 7,269 5,423 3,890 2,453 5,181 3,125 1,970
Inventory valuation
reserve and provision
for warranty and
installation costs..... 3,236 3,549 3,126 1,971 3,549 3,132 1,975
Deferred depreciation
and amortization....... 1,075 1,347 1,435 905 1,347 1,170 738
Deferred maintenance
costs.................. 18 224 180 113 224 180 113
Other temporary timing
differences............ 1,340 1,352 2,224 1,402 1,220 2,224 1,402
-------- -------- -------- -------- -------- -------- --------
17,670 23,544 23,382 14,742 23,699 22,308 14,065
Valuation allowance..... (17,670) (23,544) (23,382) (14,742) (23,699) (22,308) (14,065)
-------- -------- -------- -------- -------- -------- --------
Net deferred tax asset.. L -- L -- L -- $ -- L -- L -- $ --
======== ======== ======== ======== ======== ======== ========
</TABLE>
A valuation allowance has been made against the full amount of the deferred
tax asset as the Division does not meet the "more likely than not" realization
criteria.
B-23
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
NOTE 17--FINMECCANICA S.P.A. INVESTMENT
<TABLE>
<CAPTION>
DEA S.P.A.
DEA S.P.A. ADDITIONAL DIVISIONAL
SHARE CAPITAL PAID IN CAPITAL EQUITY TOTAL
------------- --------------- ---------- --------
<S> <C> <C> <C> <C>
At December 31, 1991....... L 1,500 L -- L 14,393 L 15,893
Reclassification of
divisional equity of
Digital Electronic
Automation (USA) to
accumulated deficit....... -- -- (1,248) (1,248)
------- ------- -------- --------
At December 31, 1991 as
restated.................. 1,500 -- 13,145 14,645
Increase in share capital.. 14,800 -- -- 14,800
Additional paid in capital. -- 15,247 -- 15,247
Divisional equity of DEA
France S.A................ -- -- 4,993 4,993
------- ------- -------- --------
At December 31, 1992....... 16,300 15,247 18,138 49,685
Elimination of Divisional
equity of Digital
Electronic Automation
following conversion from
a division of Elsag Bailey
Inc. to a subsidiary of
DEA S.p.A................. -- -- (13,145) (13,145)
------- ------- -------- --------
At December 31, 1993....... L16,300 L15,247 L 4,993 L 36,540
======= ======= ======== ========
U.S. Dollars December 31,
1993...................... $10,277 $ 9,614 $ 3,148 $ 23,039
======= ======= ======== ========
Divisional equity of the
Metrology division of DEA
France S.A. at December
31, 1993 eliminated on
consolidation following
the purchase of the share
capital of DEA France S.A.
by DEA S.p.A.............. -- -- (4,993) (4,993)
------- ------- -------- --------
At June 30, 1994........... L16,300 L15,247 L -- L31,547
======= ======= ======== ========
U.S. Dollars June 30, 1994. $10,277 $ 9,614 $ -- $ 19,891
======= ======= ======== ========
</TABLE>
On December 18, 1992, the share capital of DEA S.p.A. was increased to Lire
16,300 by the creation and issue of a further 14,800 shares to Finmeccanica
S.p.A. In addition, Finmeccanica S.p.A. contributed a further Lire 16,700 as
additional paid in capital, of which Lire 15,247 related to the Metrology
Division of DEA S.p.A. These transactions were made in order to comply with the
minimum capital requirement stipulated by Italian company law.
The whole of the share capital of DEA S.p.A., consisting of 16,300,000 shares
with a nominal value of 1,000 Italian Lire, is owned by Finmeccanica S.p.A.
The divisional equity balance at December 31, 1992 is comprised of Lire
13,145 representing the common stock, paid in and contribution capital of
Digital Electronic Automation Inc. at the date it was converted into a trading
division of Elsag Bailey Inc. On October 31, 1993 the net asset deficiency
(Divisional equity and accumulated deficit) was eliminated by means of a loan
waiver from Elsag Bailey Inc. Subsequently, on November 1, 1993 the net assets
of the division were sold at their net book value of zero to DEA S.p.A. Lire
4,993 representing the divisional capital of the Metrology Division of DEA
France S.A. following its inclusion into the combined financial statements from
January 1, 1992. On January 1, 1994 the non-metrology activities of DEA France
S.A. were transferred to another Finmeccanica group entity and the
shareholders' capital of the Company acquired by DEA S.p.A. The divisional net
equity at December 31, 1993 was consequently eliminated on consolidation
against the carrying value of the investment in DEA S.p.A. at June 30, 1994.
B-24
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
On August 18, 1993, Brown & Sharpe Manufacturing Company (Brown & Sharpe)
announced that they had entered into a non-binding letter of intent to purchase
the assets of the Metrology Division of Finmeccanica S.p.A. at June 30, 1993
with the exception of certain agreed upon exclusions and adjustments. In return
for the disposal, Finmeccanica S.p.A. would receive 2.5 million shares of Class
A Brown & Sharpe common stock and a contingent non-assignable right to obtain a
further 950,000 shares of Class A Brown & Sharpe common stock. Such right would
be exercisable only if during the five year period following the closing date
of the transaction, the closing share price of Brown & Sharpe common stock
equals or exceeds $15.00 per share for thirty non-consecutive business days
over any twelve month period of time. At the date of this report, the
transaction has not yet been completed.
NOTE 18--COMMITMENTS AND CONTINGENCIES
The Company leases certain property and equipment under non-cancelable
operating leases that expire in various years through to 2002. The property
leases may be renewed upon expiry of the original term.
Future minimum payments under operating leases with initial or unexpired
terms of one year or more consisted of the following:
<TABLE>
<CAPTION>
1992 1993 1993
------- ------- -------
<S> <C> <C> <C>
1993.................................................... L 5,659 L -- $ --
1994.................................................... 5,376 6,695 4,221
1995.................................................... 4,940 5,681 3,582
1996.................................................... 4,229 4,388 2,767
1997.................................................... 3,193 3,891 2,453
1998.................................................... -- 954 602
Thereafter.............................................. 298 623 393
------- ------- -------
L23,695 L22,232 $14,018
======= ======= =======
</TABLE>
The total rental expense in respect of operating leases for the year ending
December 31, 1993 was Lire 7,300 ($4,603) (Lire 5,524 and Lire 4,224 for 1992
and 1991, respectively).
NOTE 19--GOING CONCERN
The Division has incurred substantial losses in recent years (1991: Lire
18,326, 1992: Lire 24,233, 1993: Lire 3,860 ($2,434)) and at June 30, 1994 had
a net asset deficiency of Lire 15,168 ($9,564).
The ability of the Division to operate as a going concern has been dependent
on the financial support of its parent company, Finmeccanica S.p.A.
Under the terms of the non-binding letter of intent, described in Note 17
above, Brown & Sharpe is to assume existing debt of the DEA Metrology
Activities of Finmeccanica up to the amount of $15 million. The ability of the
Division to operate as a going concern is dependent upon the continuing
financial support of its future owners and a return to profitable operations.
Management forecasts this will occur in the foreseeable future as a result of
the restructuring which has taken place and the completion of the contemplated
transaction with Brown & Sharpe, which will substantially reduce the Division's
borrowing needs.
NOTE 20--OTHER INCOME (EXPENSES)
The 1991 net other income of Lire 10,688 includes a gain of Lire 11,618 that
arose on the disposal of the factory premises at Moncalieri to an affiliated
company following the reorganization of the divisions
B-25
<PAGE>
DEA METROLOGY ACTIVITIES OF FINMECCANICA
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(ITALIAN LIRE IN MILLIONS; U.S. DOLLARS IN THOUSANDS)
operations in that year. No taxation was incurred on this transaction since the
gain was fully offset against trading losses incurred in that year.
NOTE 21--ACCUMULATED DEFICIT
The accumulated deficit at December 31, 1991 is stated net of the
recapitalization transactions made in order to comply with the minimum capital
requirements stipulated by Italian company law. Under these regulations, the
shareholders, in general meeting, elect to eliminate part of the accumulated
loss against issued share capital or additional capital injections.
B-26
<PAGE>
EXHIBIT C
FINANCIAL STATEMENTS OF ETS. PIERRE ROCH S.A.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants--Kurt Schlotthauer (Expert Computable).. C-2
Balance Sheet as of December 31, 1992, 1993, and March 31, 1994 (Unau-
dited)................................................................... C-3
Statement of Income (Loss) for the Years Ended December 31, 1991, 1992,
and 1993 and for the Quarters Ended March 31, 1993 (Unaudited) and 1994
(Unaudited).............................................................. C-4
Statement of Cash Flows for the Years Ended December 31, 1991, 1992, and
1993 and for the Quarters Ended March 31, 1993 (Unaudited) and 1994 (Un-
audited)................................................................. C-5
Notes to Financial Statements............................................. C-6
</TABLE>
C-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Ets. Pierre Roch S.A.:
We have audited the accompanying balance sheets of Ets. Pierre Roch S.A. (the
"Company") as of December 31, 1992 and 1993, and the related statements of
income (loss) and accumulated losses and cash flows for each of the three years
ended December 31, 1991, 1992 and 1993. 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 in the United States. 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 financial position of the Company as of December 31,
1992 and 1993, and the results of its operations and its cash flows for each of
the three years ended December 31, 1991, 1992 and 1993, in conformity with
generally accepted accounting principles in the United States.
As explained in Note 1 to the financial statements, on March 24, 1994, Brown
& Sharpe Manufacturing Company acquired all the common stock of the Company
from Diehl GmbH & Co., the Company's parent. The accompanying financial
statements do not include any allocation of the purchase price or other
adjustments to the Company's historical carrying values of assets and
liabilities as a result of this transaction.
Kurt Schlotthauer
Docteur Es Sciences Economiques
Wirtschaftsprufer
Expert Comptable Diplome
Commissaire Aux Comptes Inscrit
Paris, France
May 10, 1994
C-2
<PAGE>
ETS. PIERRE ROCH S.A.
BALANCE SHEET
(FRENCH FRANCS IN THOUSANDS, U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
--------------------------- -----------------
1992 1993 1993 1994 1994
-------- -------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... FF 129 FF 86 $ 15 FF 171 $ 30
Accounts receivable, net of
allowance for doubtful debts.. 19,048 11,804 2,032 13,834 2,382
Other receivables.............. 6,335 1,217 210 2,497 430
Inventories.................... 26,331 22,838 3,932 21,955 3,781
Other current assets........... -- -- -- -- --
-------- -------- ------- -------- -------
Total current assets........... 51,843 35,945 6,189 38,457 6,623
-------- -------- ------- -------- -------
Non-current assets:
Property, plant and equipment,
net of accumulated
depreciation.................. 4,793 5,574 959 4,064 700
Other assets and deferred
charges....................... 860 1,523 261 1,737 300
-------- -------- ------- -------- -------
Total non-current assets....... 5,653 7,097 1,222 5,801 1,000
-------- -------- ------- -------- -------
Total assets................... FF57,496 FF43,042 $ 7,409 FF44,258 $ 7,623
======== ======== ======= ======== =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Borrowings and current
maturities of debt............ FF24,310 FF15,891 $ 2,736 FF19,060 $ 3,282
Accounts payable............... 5,076 4,242 730 3,814 657
Other payables................. 2,123 1,785 307 3,814 656
Accrued expenses and other
liabilities................... 7,646 7,161 1,233 5,953 1,029
-------- -------- ------- -------- -------
Total current liabilities...... 39,155 29,079 5,006 32,641 5,624
-------- -------- ------- -------- -------
Non-current liabilities:
Long term debt................. 2,970 7,266 1,251 7,267 1,251
Retirement indemnities......... 3,000 3,000 516 3,000 516
-------- -------- ------- -------- -------
Total liabilities.............. 45,125 39,345 6,773 42,908 7,391
-------- -------- ------- -------- -------
Stockholders' equity:
Stock.......................... 11,750 11,750 2,023 11,750 2,023
Additional paid in Capital
Earnings employed in the
business...................... (2,643) (1,013) (174) (9,796) (1,686)
Current period earnings........ 1,716 (8,783) (1,512) (2,347) (404)
Reserves....................... 1,548 1,743 299 1,743 299
Currency translation........... -- -- -- -- --
-------- -------- ------- -------- -------
Total shareholders' equity..... 12,371 3,697 636 1,350 232
-------- -------- ------- -------- -------
Total liabilities and equity... FF57,496 FF43,042 $ 7,409 FF44,258 $ 7,623
======== ======== ======= ======== =======
</TABLE>
The convenience translation into U.S. Dollars has been made using the exchange
rate of 5.81 French Francs to U.S. $1 existing at March 31, 1994.
See notes to financial statements.
C-3
<PAGE>
ETS. PIERRE ROCH S.A.
STATEMENT OF INCOME (LOSS)
(FRENCH FRANCS IN THOUSANDS, U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
------------------------------------- --------------------------
1991 1992 1993 1993 1993 1994 1994
-------- -------- -------- ------- -------- -------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... FF97,771 FF79,072 FF57,311 $ 9,868 FF16,757 FF15,753 $2,713
Cost of products sold... 55,245 42,683 32,752 5,639 8,873 8,481 1,461
Selling, general and
administration......... 42,215 36,135 30,394 5,233 8,296 8,196 1,411
Restructuring costs..... -- -- -- -- -- -- --
Depreciation,
amortization and
reserves............... 1,106 504 203 34 320 840 145
-------- -------- -------- ------- -------- -------- ------
Operating income (loss)
....................... (795) (250) (6,038) (1,038) (732) (1,764) (304)
Interest expense, net... (3,672) (3,139) (2,590) (447) (981) (632) (108)
Other income (expenses),
net.................... 1,584 5,105 (155) (27) 16 49 8
-------- -------- -------- ------- -------- -------- ------
Net Income (loss)....... FF(2,883) FF1,716 FF(8,783) $(1,512) FF(1,695) FF(2,347) $ (404)
======== ======== ======== ======= ======== ======== ======
</TABLE>
The convenience translation into U.S. Dollars has been made using the exchange
rate of 5.81 French Francs to U.S. $1 existing at March 31, 1994.
See notes to financial statements.
C-4
<PAGE>
ETS. PIERRE ROCH S.A.
STATEMENT OF CASH FLOWS
(FRENCH FRANCS IN THOUSANDS, U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
------------------------------------- -------------------------
1991 1992 1993 1993 1993 1994 1994
-------- -------- -------- ------- -------- -------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash provided by (used
in) operations:
Net loss............... FF(2,883) FF 1,716 FF(8,783) $(1,512) FF(1,695) FF(2,347) $(404)
Adjustments to reconcile
net income to net cash
provided:
Depreciation and
amortization.......... 2,240 1,718 1,425 245 60 1,510 260
Other non-cash
expenses and
reserves.............. 660 (5,487) (149) (26) -- -- --
Gain on sale of fixed
assets................ -- -- (82) (14) -- -- --
Changes in working
capital--
(Increase) decrease
in:
Accounts receivable.. 551 (6,480) 7,355 1,266 4,206 (3,310) (570)
Inventories.......... 1,095 2,597 2,090 360 (281) 883 152
Other current assets. 357 (460) 612 106 38 -- 1
Accounts payable..... (4,759) (441) 3,109 535 728 394 68
-------- -------- -------- ------- -------- -------- -----
Net cash used in
operating activities... (2,739) (6,837) 5,577 960 3,056 (2,870) (493)
-------- -------- -------- ------- -------- -------- -----
Cash flows from
investing activities:
Fixed assets
additions............. (2,381) (1,019) (1,669) (287) (198) -- --
Proceeds from sale of
fixed assets.......... 1,036 4,428 162 28 -- -- --
Other investing
activities............ 138 137 10 2 (677) (214) (37)
-------- -------- -------- ------- -------- -------- -----
Net cash provided by
(used in) investing
activities............. (1,207) 3,546 (1,497) (257) (875) (214) (37)
-------- -------- -------- ------- -------- -------- -----
Cash flows from
financing activities:
Borrowings and current
maturities of long
term debt............. 8,246 5,159 2,120 365 -- 3,169 545
Payment of long term
debt.................. (4,023) (2,301) (6,243) (1,075) (2,192) -- --
-------- -------- -------- ------- -------- -------- -----
Net cash provided by
(used in) financing
activities............. 4,223 2,858 (4,123) (710) (2,192) 3,169 545
-------- -------- -------- ------- -------- -------- -----
Cash and cash
equivalents:
Increase (decrease)
during the period .. 277 (433) (43) (7) 11 85 15
Beginning balance.... 285 562 129 22 129 86 15
-------- -------- -------- ------- -------- -------- -----
Ending balance....... FF 562 FF 129 FF 86 $ 15 FF 140 FF 171 $ 30
-------- -------- -------- ------- -------- -------- -----
Supplementary cash flow
information:
Net interest paid....... FF 3,021 FF 2,791 FF 2,616 $ 450 FF -- FF -- $ --
======== ======== ======== ======= ======== ======== =====
Income taxes paid....... FF 1,440 FF 1,505 FF 1,033 $ 178 FF -- FF -- $ --
======== ======== ======== ======= ======== ======== =====
</TABLE>
The convenience translation into U.S. Dollars has been made using the exchange
rate of 5.81 French Francs to U.S. $1 existing at March 31, 1994.
See notes to financial statements.
C-5
<PAGE>
ETS. PIERRE ROCH S.A.
NOTES TO FINANCIAL STATEMENTS
(FRENCH FRANCS IN THOUSANDS; U.S. DOLLARS IN THOUSANDS)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business:
The company manufactures and distributes precision measuring instruments and
associated tools throughout France and to its affiliate Company in Germany.
The Company:
Ets. Pierre Roch is a wholly-owned subsidiary of Diehl GmbH & Co. ("Diehl").
Sale of the Company:
On March 24, 1994, Brown & Sharpe Manufacturing Company acquired all the
common stock of the Company from Diehl. The financial statements do not include
any allocations of the purchase price or other adjustments to the Company's
historical carrying values of assets and liabilities as a result of this
transaction.
Interim Financial Statements:
The financial statements for the quarters ended March 31, 1993 and 1994 and
the related notes are unaudited and in the opinion of management, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the results of the period. These results are not
necessarily indicative of the results to be expected for the entire year.
Translation of Foreign Currencies:
The functional currency for the accounts of the Company is the local
currency, the French Franc (FF). A translation of convenience has been applied
in translating the financial statements into US Dollars at the rate prevailing
at March 31 1994, US$1 - FF5.81. (FF1 = US$0.17).
Revenue Recognition:
Revenue is recognized upon shipment of product.
Cash and Cash Equivalents:
The Company considers all debt instruments purchased with a maturity of three
months or less at the time of acquisition to be cash equivalents.
Inventories:
Inventories of finished measuring instruments are carried at the lower of
average cost or market.
Machinery and Equipment:
Machinery and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is provided using the straight line and accelerated
methods over the estimated useful lives of the assets of between two and ten
years. Depreciation expenses was FF2,240, FF1,718, and FF1,425 ($245) for the
years ended December 31, 1991, 1992, and 1993, respectively.
C-6
<PAGE>
ETS. PIERRE ROCH S.A.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(FRENCH FRANCS IN THOUSANDS; U.S. DOLLARS IN THOUSANDS)
Repair and maintenance costs are expensed, while additions and betterments
are capitalized. The cost and related accumulated depreciation of assets sold
or retired are eliminated from the accounts and any gains or losses are
reflected in earnings.
Income Taxes:
Due to losses in 1991 and 1993, no income taxes are payable. In accordance
with Statement of Financial Accounting Standards No. 109, deferred tax assets
and liabilities are recognized for the expected future tax consequences of
events that have been included in the financial statements or tax returns under
the liability method. A valuation allowance is provided for when it is more
likely than not that some portion or all of a deferred tax asset will not be
realized.
2. CURRENT ASSETS
INVENTORIES
<TABLE>
<CAPTION>
DEC. 31, DEC. 31, DEC. 31,
1992 1993 1993
NET VALUE NET VALUE NET VALUE
--------- --------- ---------
<S> <C> <C> <C>
Raw materials and consumables.................. FF 5,399 FF 5,459 $ 940
Work in progress............................... 4,769 2,568 442
Finished goods................................. 12,351 12,662 2,180
Goods for sale................................. 2,685 1,876 323
Payments on account............................ 1,127 274 47
-------- -------- ------
FF26,331 FF22,839 $3,932
======== ======== ======
</TABLE>
Valuation principles
Raw materials and consumables and goods for sale are valued at purchasing
cost. Purchasing cost is determined on a "weighted average cost" basis.
Indirect purchasing costs amounting to 5% or 3% are also included, according to
the geographic origin of the goods concerned.
Work in progress and finished goods are valued at manufacturing cost, which
includes:
. Cost of raw materials and consumables consumed
. Individual and global costs based on an hourly rate applied to the
average production time.
ACCOUNTS RECEIVABLES
Trade debtors
<TABLE>
<CAPTION>
1992 1993 1993
-------- -------- ------
<S> <C> <C> <C>
Trade receivables..................................... FF13,979 FF10,988 $1,891
Short terms notes receivable.......................... 4,808 485 83
Other................................................. 1,905 1,864 321
-------- -------- ------
Gross value........................................... 20,692 13,337 2,296
Allowance for doubtful accounts....................... 1,644 1,533 264
-------- -------- ------
Net value............................................. FF19,048 FF11,804 $2,032
======== ======== ======
</TABLE>
C-7
<PAGE>
ETS. PIERRE ROCH S.A.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(FRENCH FRANCS IN THOUSANDS; U.S. DOLLARS IN THOUSANDS)
The depreciation of doubtful accounts is recorded without V.A.T., on a net
basis.
Other debtors
<TABLE>
<CAPTION>
1992 1993 1993
------- ------- ----
<S> <C> <C> <C>
Advances to employees..................................... FF 35 FF 164 $ 28
Prepaid V.A.T............................................. 694 355 61
Taxes..................................................... 474 362 62
Other accounts receivable................................. 255 299 53
Group companies........................................... 4,877 37 6
------- ------- ----
FF6,335 FF1,217 $210
======= ======= ====
</TABLE>
3. STOCKHOLDERS' EQUITY
Net income appropriation December 31, 1992:
<TABLE>
<CAPTION>
1991 PLUS MINUS 1992
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Capital stock........................... FF11,750 FF -- FF -- FF11,750
Revaluation reserve..................... 519 -- -- 519
Statutory or contractural reserves...... 50 5 -- 55
Long term capital gains reserves........ 79 695 -- 774
Retained earnings....................... 941 (2,643) 941 (2,643)
Profit and loss account................. (2,883) 1,716 (2,883) 1,716
Investment subsidies.................... 174 138 112 200
-------- -------- -------- --------
FF10,630 FF (89) FF(1,830) FF12,371
======== ======== ======== ========
</TABLE>
At December 31, 1992 and December 31, 1993, capital stock consists of 235,000
ordinary shares of F 50 each. The shareholders' list at December 31, 1993 is
analysed below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Diehl GmbH & Co. ................................................. 234,313
Plachez........................................................... 180
Marchal........................................................... 61
Heckel............................................................ 50
Hederer........................................................... 50
Hobrecker......................................................... 50
Niethammer........................................................ 50
Around 26 people who own less than 50 shares each................. 246
-------
235,000
=======
</TABLE>
C-8
<PAGE>
ETS. PIERRE ROCH S.A.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(FRENCH FRANCS IN THOUSANDS; U.S. DOLLARS IN THOUSANDS)
Net income appropriation December 31, 1993:
<TABLE>
<CAPTION>
1992 PLUS MINUS 1993 1993
-------- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C>
Capital stock.................... FF11,750 FF -- FF -- FF11,750 $2,022
Revaluation reserve.............. 519 -- -- 519 90
Statutory or contractural re-
serves.......................... 55 86 -- 141 24
Long term capital gains reserves. 774 -- -- 774 133
Retained earnings................ (2,643) 1,630 -- (1,013) (174)
Profit and loss account.......... 1,716 (8,783) 1,716 (8,783) (1,512)
Investment subsidies............. 200 170 61 309 53
-------- -------- ------- -------- ------
FF12,371 FF(6,897) FF1,777 FF 3,697 $ 636
======== ======== ======= ======== ======
</TABLE>
4. BANK LOANS AND OVERDRAFTS
At December 31, 1992 and 1993, the Company's long term borrowings consisted
of the following:
LONG-TERM DEBT
<TABLE>
<CAPTION>
1992 1993 1993
-------- ------- ------
<S> <C> <C> <C>
Diehl GmbH & Co. (current account)..................... FF 2,595 FF -- $ --
Diehl GmbH & Co. (loan)................................ -- 1,670 287
Bayerische Vereinsbank................................. -- 5,113 880
Aprodi................................................. 375 375 65
Accrued interest payable............................... -- 109 19
-------- ------- ------
F F2,970 FF7,267 $1,251
======== ======= ======
</TABLE>
SHORT-TERM DEBT
"Borrowings and current maturities of debt" generally consists of bank loans,
overdrafts and interest thereon.
5. OTHER INCOME (EXPENSES) NET
This largely consists of gains and losses on sales of fixed assets.
6. OPERATING LEASES
Minimum lease payments by year amount to the following:
<TABLE>
<CAPTION>
FF $
--- ---
<S> <C> <C>
1994............................................................. 774 133
1995 through 1999................................................ 598 103
</TABLE>
Rental payments amounted to FF835 for 1991, FF704 for 1992 and FF876 ($151)
for 1993.
7. DISCOUNTED NOTES NOT YET MATURED
<TABLE>
<CAPTION>
1991 1992 1993 1993
------- ----- ------- ----
<S> <C> <C> <C> <C>
These notes amounted to............................. FF3,173 FF444 FF4,011 $690
======= ===== ======= ====
</TABLE>
C-9
<PAGE>
ETS. PIERRE ROCH S.A.
ASSETS SCHEDULE
(FRENCH FRANCS IN THOUSANDS, U.S. DOLLARS IN THOUSANDS)
<TABLE>
<S> <C> <C> <C>
8. FIXED ASSETS:
<CAPTION>
BOOK VALUE BOOK VALUE BOOK VALUE
12/31/92 12/31/93 12/31/93
---------- ---------- ----------
<S> <C> <C> <C>
Lands........................................ FF 554 FF 554 $ 95
Buildings.................................... 1,043 827 142
Plant & machinery............................ 2,603 3,814 656
Cars & trucks................................ 77 -- --
Computer & office equipment.................. 516 379 66
------- ------- ----
FF4,793 FF5,574 $959
======= ======= ====
</TABLE>
C-10
<PAGE>
EXHIBIT D
FINANCIAL STATEMENTS OF MAUSER PRAZISIONS--MESSMITTEL GMBH
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants--Coopers & Lybrand
Wirtschaftsprufungsgesellschaft Gesellschaft mit beschrankter Haftung... D-2
Balance Sheet as of December 31, 1992, 1993, and March 31, 1994 (Unau-
dited).................................................................. D-3
Statement of Income (Loss) and Accumulated Losses for the Years Ended De-
cember 31, 1991, 1992, and 1993, and for the Quarters Ended March 31,
1993 (Unaudited) and 1994 (Unaudited)................................... D-4
Statement of Cash Flows for the Years Ended December 31, 1991, 1992, and
1993 and for the Quarters Ended March 31, 1993 (Unaudited) and 1994 (Un-
audited)................................................................ D-5
Notes to Financial Statements............................................ D-6
</TABLE>
D-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Mauser Prazisions-Messmittel GmbH:
We have audited the accompanying balance sheets of Mauser Prazisions-
Messmittel GmbH (the "Company") as of December 31, 1992 and 1993, and the
related statements of income (loss) and accumulated losses and cash flows for
the period September 1, 1992 through December 31, 1992 and for the year ended
December 31, 1993. 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 in the United States. 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 financial position of Mauser Prazisions-
Messmittel GmbH as of December 31, 1992 and 1993, and the results of its
operations and its cash flows for the period September 1, 1992 through
December 31, 1992 and for the year ended December 31, 1993, in conformity with
generally accepted accounting principles in the United States.
As explained in Note 1 to the financial statements, on March 24, 1994, Brown
& Sharpe Manufacturing Company acquired all the common stock of the Company
from Diehl GmbH & Co., the Company's parent. The accompanying financial
statements do not include any allocation of the purchase price or other
adjustments to the Company's historical carrying values of assets and
liabilities as a result of this transaction.
Coopers & Lybrand
Wirtschaftsprufungsgesellschaft
Gesellschaft mit beschrankter
Haftung
Munich, Germany
May 31, 1994
D-2
<PAGE>
MAUSER PRAZISIONS-MESSMITTEL GMBH
BALANCE SHEET
(DEUTSCH MARKS IN THOUSANDS, U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1992 1993 1993
------- ------ ------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Note 1).................. DM 3 DM 2 $ 1
Accounts receivable trade (net of allowances of DM
22 in 1992 and DM 110 in 1993)..................... 614 477 286
Affiliates........................................ 696 14 8
Other............................................. 12 23 14
Inventories (Note 1)................................ 267 195 117
Prepaid expenses.................................... 30 14 8
------- ------ ------
Total current assets.................................. 1,622 725 434
------- ------ ------
Machinery and equipment at cost....................... 34 76 46
Less accumulated depreciation......................... 8 33 20
------- ------ ------
Machinery and equipment, net.......................... 26 43 26
------- ------ ------
Goodwill (net of accumulated amortization of DM 32 in
1992 and DM 1,043 in 1993) (Note 1).................. 1,111 100 60
------- ------ ------
DM2,759 DM868 $ 520
======= ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current portion of long-term debt due to parent..... DM -- DM 25 $ 15
Accounts payable
Affiliates (Note 2)............................... 2,686 3,058 1,831
Other............................................. 144 30 18
Accrued and other current liabilities (Note 3)...... 94 182 109
------- ------ ------
Total current liabilities............................. 2,924 3,295 1,973
Long-term debt due to parent less current portion
(Note 4)............................................. -- 55 33
------- ------ ------
2,924 3,350 2,006
------- ------ ------
Stockholder's Equity (Deficit):
Common stock (Note 5)............................... 50 50 30
Accumulated losses.................................. (215) (2,532) (1,516)
------- ------ ------
Total stockholder's equity (deficit).................. (165) (2,482) (1,486)
------- ------ ------
Total liabilities and stockholder's equity (deficit).. DM2,759 DM 868 $ 520
======= ====== ======
</TABLE>
The convenience translation into U.S. Dollars has been made using the exchange
rate in effect at March 31, 1994 of 1.67 Deutsche Marks to U.S. $1.
The accompanying notes are an integral part of the financial statements.
D-3
<PAGE>
MAUSER PRAZISIONS-MESSMITTEL GMBH
STATEMENT OF INCOME (LOSS) AND ACCUMULATED LOSSES
(DEUTSCH MARKS IN THOUSANDS, U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOUR MONTHS YEAR ENDED QUARTER ENDED
ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------- ---------------
1992 1993 1993 1994 1994
------------ -------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales..................... DM2,039 DM 4,398 $ 2,634 DM1,185 $ 710
Cost and expenses:
Cost of goods sold.......... 1,642 3,698 2,214 865 518
Selling, general and
administrative expenses.... 627 1,932 1,157 617 370
Amortization of goodwill
(Note 1)................... 32 1,010 605 2 1
------- -------- ------- ------- ------
Operating loss................ (262) (2,242) (1,342) (299) (179)
Other income (expense)
Interest income............. 15 27 16 -- --
Interest expense............ -- (118) (71) -- --
Other income, net (Note 2).. 15 16 10 2,502 1,498
------- -------- ------- ------- ------
Net income (loss)............. (232) (2,317) (1,387) 2,203 1,319
Retained earnings (accumulated
losses), beginning of period. 17 (215) (129) (2,532) (1,516)
------- -------- ------- ------- ------
Accumulated losses, end of
period....................... DM (215) DM(2,532) $(1,516) DM (329) $ (197)
======= ======== ======= ======= ======
</TABLE>
The convenience translation into U.S. Dollars has been made using the exchange
rate in effect at March 31, 1994 of 1.67 Deutsche Marks to U.S. $1.
The accompanying notes are an integral part of the financial statements.
D-4
<PAGE>
MAUSER PRAZISIONS-MESSMITTEL GMBH
STATEMENT OF CASH FLOWS
(DEUTSCH MARKS IN THOUSANDS, U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOUR MONTHS YEAR ENDED QUARTER ENDED
ENDED DECEMBER 31, DECEMBER 31, MARCH 31,
------------------ ----------------- -----------------
1992 1993 1993 1994 1994
------------------ -------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)....... DM(232) DM(2,317) $(1,387) DM 2,203 $ 1,319
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Forgiveness of
accounts payable to
parent............... -- -- -- (2,495) (1,494)
Depreciation and
amortization......... 40 1,036 621 7 4
Provision for losses
on accounts
receivable........... 22 88 53 (67) (40)
Changes in operating
assets and liabilities:
Accounts receivable--
trade................ (636) 49 29 (32) (19)
--
affiliates. (625) 682 408 (35) (21)
--other. (12) (11) (7) 16 10
Inventories........... (267) 72 43 (14) (8)
Prepaid expenses...... (30) 16 10 (7) (4)
Accounts payable--
affiliates........... 2,685 372 222 454 272
--other.. 144 (114) (68) (2) (1)
Accrued and other
current liabilities.. 91 88 53 280 167
------ -------- ------- -------- -------
Net cash provided by
(used in) operating
activities............. 1,180 (39) (23) 308 185
------ -------- ------- -------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Acquisition of branch
assets................. (1,177) -- -- -- --
Additions to machinery
and equipment.......... -- (42) (26) -- --
------ -------- ------- -------- -------
Net cash used in
investing activities... (1,177) (42) (26) -- --
------ -------- ------- -------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from
borrowings............. -- 80 48 -- --
------ -------- ------- -------- -------
Net cash provided by
financing activities... -- 80 48 -- --
------ -------- ------- -------- -------
Net increase (decrease)
in cash and cash
equivalents............ 3 (1) (1) 308 185
Cash and cash
equivalents, beginning
of period.............. -- 3 2 2 1
------ -------- ------- -------- -------
Cash and cash
equivalents, end of
period................. DM 3 DM 2 $ 1 DM 310 $ 186
====== ======== ======= ======== =======
</TABLE>
The convenience translation into U.S. Dollars has been made using the exchange
rate in effect at March 31, 1994 of 1.67 Deutsche Marks to U.S. $1.
The accompanying notes are an integral part of the financial statements.
D-5
<PAGE>
MAUSER PRAZISIONS-MESSMITTEL GMBH
NOTES TO COMBINED FINANCIAL STATEMENTS
(DEUTSCH MARKS IN THOUSANDS; U.S. DOLLARS IN THOUSANDS)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business:
The Company distributes precision measuring instruments and associated tools
throughout Germany.
Formation of the Company:
Mauser Prazisions-Messmittel GmbH, a wholly-owned subsidiary of Diehl GmbH &
Co. ("Diehl"), was formed from its predecessor company, Elektrosil GmbH. Prior
to the formation, Elektrosil GmbH was a dormant wholly-owned subsidiary of
Diehl GmbH & Co. On August 27, 1992, the Company's articles were rewritten in
order to effect the change in name and business. With effect from September 1,
1992, the Company acquired certain assets of the former Oberndorf branch of
Ets. Pierre Roch S.A., Luneville, France for DM 1,177.
Consequently, the fiscal periods included in these financial statements are
for the period September 1, 1992 to December 31, 1992 and for the year ended
December 31, 1993, and for the quarter ended March 31, 1994.
Sale of the Company:
On March 24, 1994, Brown & Sharpe Manufacturing Company acquired all the
common stock of the Company from Diehl. The financial statements do not include
any allocations of the purchase price or other adjustments to the Company's
historical carrying values of assets and liabilities as a result of this
transaction.
Interim Financial Statements:
The financial statements for the quarter ended March 31, 1994 and the related
notes are unaudited and in the opinion of management, include all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the results of the period. These results are not necessarily
indicative of the results to be expected for the entire year.
Translation of Foreign Currencies:
The functional currency for the accounts of the Company is the local
currency, the Deutschmark (DM). A translation of convenience has been applied
in translating the financial statements into US Dollars at the rate prevailing
at March 31, 1994, US$1--DM 1.67. (DM 1 = US $0.60).
Revenue Recognition:
Revenue is recognized upon shipment of product.
Cash and Cash Equivalents:
The Company considers all debt instruments purchased with a maturity of three
months or less at the time of acquisition to be cash equivalents.
Inventories:
Inventories of finished measuring instruments are carried at the lower of
average cost or market.
D-6
<PAGE>
MAUSER PRAZISIONS-MESSMITTEL GMBH
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DEUTSCH MARKS IN THOUSANDS; U.S. DOLLARS IN THOUSANDS)
Machinery and Equipment:
Machinery and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is provided using the straight line over the
estimated useful lives of the assets of between two and six years. Depreciation
expenses was DM 8, DM 25 ($15) and DM 5 ($3) for the period September 1, 1992
through December 31, 1992 the year ended December 31, 1993, and the quarter
ended March 31, 1994, respectively.
Repair and maintenance costs are expensed, while additions and betterments
are capitalized. The cost and related accumulated depreciation of assets sold
or retired are eliminated from the accounts and any gains or losses are
reflected in earnings.
Goodwill:
The excess of cost over the fair value of net assets of a purchased business
is recorded as goodwill, which is included in intangible assets. In 1993, an
adjustment was made to the valuation of goodwill to take account of the adverse
development of the business, which had not previously been expected.
Consequently, DM 1,010 ($605) was written off in order to revalue the remaining
goodwill at DM 100 ($60), which is being amortized on a straight-line basis
over 10 years.
Income Taxes:
Due to losses in 1991 and 1993, no income taxes are payable. In accordance
with Statement of Financial Accounting Standards No. 109, deferred tax assets
and liabilities are recognized for the expected future tax consequences of
events that have been included in the financial statements or tax returns under
the liability method. A valuation allowance is provided for when it is more
likely than not that some portion or all of a deferred tax asset will not be
realized.
2. ACCOUNTS PAYABLE TO AFFILIATES
At December 31, the Company owed the following amounts to affiliates
(excluding the long-term debt--see Note 4):
<TABLE>
<CAPTION>
1992 1993 1993
------- ------- ------
<S> <C> <C> <C>
Diehl GmbH & Co. Nurnberg, Germany...................... DM 175 DM2,414 $1,446
Mauser-Werke Oberndorf, Germany......................... 5 21 12
Ets. Pierre Roch S.A., Luneville, France................ 2,566 623 373
------- ------- ------
DM2,686 DM3,058 $1,831
======= ======= ======
</TABLE>
The Company purchases all goods for resale from Ets. Pierre Roch S.A. Amounts
owed Diehl principally represent net operating expenditures incurred by Diehl
on behalf of the Company. During the quarter ended March 31, 1994, Diehl
forgave all amounts owed to Diehl by the Company.
D-7
<PAGE>
MAUSER PRAZISIONS-MESSMITTEL GMBH
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DEUTSCH MARKS IN THOUSANDS; U.S. DOLLARS IN THOUSANDS)
3. ACCRUED AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
1992 1993 1993
---- ----- ----
<S> <C> <C> <C>
Due to customer............................................. DM46 DM 45 $ 27
Employees................................................... -- 21 13
Taxes other than income..................................... -- 18 11
Compensated absences........................................ 36 14 8
Miscellaneous accrued expenses.............................. 12 84 50
---- ----- ----
DM94 DM182 $109
==== ===== ====
</TABLE>
4. LONG-TERM DEBT DUE TO PARENT
Long-term debt amounting to DM 80 ($48) is due to the Company's parent, Diehl
GmbH & Co., Nurnberg, Germany and bears interest at 7.5% per annum. It is
repayable as follows:
<TABLE>
<S> <C>
1994................................................................. DM 25
1995................................................................. DM 25
1996................................................................. DM 30
</TABLE>
5. COMMON STOCK
As a "GmbH"--form of company incorporated in Germany, the Company's common
stock is not divided into individual shares.
6. INCOME TAXES
Due to losses in 1992 and 1993, no income taxes are payable by the Company.
At December 31, 1993, a deferred tax asset of DM 1,025 ($614) existed in
connection with net German operating loss carryforwards, which do not expire.
The Company has provided a valuation allowance in full for this asset due to
the uncertainty of realizing the benefit of the loss carryforwards.
D-8
<PAGE>
EXHIBIT E
WERTHEIM SCHRODER & CO. EQUITABLE CENTER
INCORPORATED 787 SEVENTH AVENUE
NEW YORK, NEW YORK
10019-6016
TELEPHONE 212-492-6000
June 15, 1994
The Board of Directors
Brown & Sharpe Manufacturing Company
Precision Park
200 Frenchtown Road
North Kingston, RI 02852-1700
Members of the Board:
We have acted as financial advisor to Brown & Sharpe Manufacturing Company
("Brown & Sharpe") in connection with its negotiations with Finmeccanica S.p.A.
("Finmeccanica") which have resulted in the acquisition agreement, dated as of
June 10, 1994 (the "Acquisition Agreement"), pursuant to which Brown & Sharpe
and Finmeccanica have entered into a transaction (the "Transaction") in which
Brown & Sharpe will acquire all of the outstanding shares of the DEA Metrology
Activities of Finmeccanica ("DEA").
The Acquisition Agreement provides, among other things that, upon closing of
the DEA acquisition, Finmeccanica will receive 3,450,000 newly issued shares of
Class A Common Stock of Brown & Sharpe subject to adjustments related to the
change in Adjusted Net Asset Value (as defined in the Acquisition Agreement) of
DEA's balance sheet audited on the basis of Italian Generally Accepted
Accounting Principles ("Italian GAAP"), as of July 31, 1994, as compared to the
Adjusted Net Asset Value of DEA's balance sheet, audited on the basis of
Italian GAAP, as of June 30, 1993. As of the closing, DEA will have
approximately $13,800,000 of debt. In addition, Brown & Sharpe will assume some
other liabilities for payments for termination of certain employees and
transfer taxes whose maximum amount has been estimated to be approximately $2.1
million (the "Additional Payments"). The Acquisition Consideration is deemed to
consist of the Class A Common Stock to be issued to Finmeccanica at closing,
the amount of debt on DEA's balance sheet at closing and the Additional
Payments. The terms of the Transaction are more fully set forth in the
Acquisition Agreement.
You have requested our opinion, as investment bankers, as to the fairness
from a financial point of view, to the common shareowners of Brown & Sharpe, of
the Transaction.
In connection with our opinion set forth herein, we have, among other things:
(i) reviewed the Letter of Intent dated May 3, 1993 between Brown &
Sharpe and Finmeccanica;
(ii) reviewed the Acquisition Agreement dated June 10, 1994 and the
Shareholders Agreement dated June 14, 1994;
(iii) reviewed DEA's Audited Combined Financial Statements for the fiscal
years ended December 31, 1990 through December 31, 1993; the Unaudited
Combined Financial Statements for the quarters ended March 31, 1993 and
March 31, 1994; and the Audited Combined Financial Statement for the six
months ended June 30, 1993;
(iv) reviewed DEA's internally prepared 1994 budget;
E-1
<PAGE>
(v) reviewed and discussed, with the management of DEA, certain financial
information prepared by the management of DEA, including the 1994 budget,
the results for the fiscal years ended December 31, 1990 through 1993; the
results of the quarters ended March 31, 1993 and 1994 and for the six
months ended June 30, 1993; and the financial condition, earnings, assets
and prospects of DEA;
(vi) compared the results of operations of DEA with those of certain
companies which we deemed to be reasonably comparable to DEA;
(vii) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(viii) participated in discussions and due diligence sessions among
representatives of Brown & Sharpe, Finmeccanica and DEA;
(ix) reviewed, with DEA's auditors, DEA's financial statements, financial
controls and financial reporting systems;
(x) discussed the market position of DEA and its major competitors with
some customers of DEA and Brown & Sharpe; and
(xi) performed such other analyses and reviewed and analyzed such other
information as we deemed appropriate.
In rendering our opinion, we have, with the permission of Brown & Sharpe,
relied upon the accuracy and completeness of all information supplied or
otherwise made available to us by Finmeccanica and DEA, and we have not
independently verified such information, undertaken an independent appraisal of
the assets or liabilities (contingent or otherwise) of DEA or been furnished
with any such appraisals. With respect to financial forecasts furnished to us
by DEA, we have been advised by the senior management of Finmeccanica and DEA
and we have assumed that they have been reasonably prepared and reflect the
best currently available estimates and judgement of the senior management of
Finmeccanica and DEA as to the expected future financial performance of DEA. We
have also reviewed and discussed with the management of Finmeccanica and DEA
the various competitive factors affecting the worldwide market for metrology
products and the potential effect on DEA's future results. Our opinion is
necessarily based upon financial, economic, market and other conditions as they
exist, and the information made available to us, as of the date hereof.
Wertheim Schroder & Co. Incorporated, ("Wertheim Schroder"), as part of its
investment banking business, is continually engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwriting, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. Wertheim Schroder, during the past twelve months, acted as a co-
manager of two underwritten initial public offerings of two subsidiaries of
Finmeccanica.
This letter is for the information of The Board of Directors of Brown &
Sharpe and is to be included in the Proxy Statement to be filed by Brown &
Sharpe in connection with the shareowners meeting to be held to approve the
Acquisition Agreement.
Based upon and subject to the foregoing, we are of the opinion, as investment
bankers, that as of the date hereof, the Acquisition Consideration to be paid
by Brown & Sharpe in the Acquisition is fair to the common shareowners of Brown
& Sharpe from a financial point of view.
Very truly yours,
Wertheim Schroder & Co.
Incorporated
E-2
<PAGE>
EXHIBIT F
ACQUISITION AGREEMENT
DATED AS OF JUNE 10, 1994
BETWEEN
BROWN & SHARPE MANUFACTURING COMPANY
AND
FINMECCFANICA S.P.A.
F-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
1. Acquisition of the DEA Shares by Brown & Sharpe on the Closing Date... F-5
1.1 Purchase and Sale of the DEA Shares............................. F-5
1.2 Purchase Price for the DEA Shares............................... F-5
1.3 Elements of the Purchase Price.................................. F-5
1.3A Aggregate Permitted Indebtedness................................ F-5
1.4 Post-Closing Purchase Price Adjustment.......................... F-6
2. Closing............................................................... F-10
2.1 Delivery and Recordation of the DEA Shares by Finmeccanica...... F-10
2.2 Payment to Finmeccanica......................................... F-10
2.3 Stockholders Agreement.......................................... F-10
2.4 [Intentionally Left Blank]...................................... F-10
2.5 [Intentionally Left Blank]...................................... F-11
2.6 Certificates, Opinions, etc..................................... F-11
2.7 Conduct of DEA Business Between the Pricing Date, July 31, 1994
and the Closing................................................ F-11
3. Representations and Warranties by Finmeccanica........................ F-11
3.1 Corporate Status................................................ F-12
3.2 Capitalization and Ownership of the DEA Shares.................. F-12
3.3 Subsidiaries.................................................... F-12
3.4 Authority for Agreement......................................... F-12
3.5 Financial Statements; Indebtedness.............................. F-13
3.6 Absence of Undisclosed Liabilities.............................. F-14
3.7 Absence of Changes.............................................. F-14
3.8 Taxes........................................................... F-15
3.9 Property........................................................ F-16
3.10 Material Contracts.............................................. F-17
3.11 Accounts Receivable; Inventories................................ F-18
3.12 Intellectual Property........................................... F-18
3.13 Insurance....................................................... F-19
3.14 Litigation...................................................... F-19
3.15 Compliance with Laws; Governmental Authorizations............... F-20
3.16 Environmental Matters........................................... F-20
3.17 Brokers, Finders, etc. ......................................... F-21
3.18 Directors, Officers and Employees; Compensation................. F-21
3.19 Labor and Employment; ERISA..................................... F-21
3.20 Investment Representation....................................... F-23
3.21 Government Grants............................................... F-23
3.22 Customers, Suppliers, Product Warranties, Defects in Products... F-23
3.23 No Illegal Payments, etc. ...................................... F-24
3.24 Financial Statements and Other Information for Inclusion in the
Brown & Sharpe Proxy Statement................................. F-24
3.25 Disclosure...................................................... F-24
4. Representations and Warranties by Brown & Sharpe...................... F-25
4.1 Corporate Status................................................ F-25
4.2 Authority for Agreement......................................... F-25
4.3 Capitalization; Authorization of Brown & Sharpe Purchase Price
Shares and Brown & Sharpe Purchase Price Shares Right.......... F-25
4.4 Subsidiaries.................................................... F-26
4.5 Financial Statements............................................ F-27
4.6 Absence of Changes.............................................. F-27
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
4.7 Taxes.......................................................... F-28
4.8 Litigation..................................................... F-29
4.9 Filings Under the Securities Exchange Act of 1934.............. F-29
4.10 Brokers, Finders, etc.......................................... F-29
4.11 Disclosure..................................................... F-29
4.12 Contracts and Other Instruments................................ F-30
4.13 Compliance with Laws; Governmental Authorizations.............. F-30
4.14 Environmental Matters.......................................... F-30
4.15 Absence of Undisclosed Liabilities............................. F-31
4.16 Prohibited Foreign Trade Practices Act; Sensitive Payments..... F-31
5. Expenses.............................................................. F-31
6. Additional Covenants of the Parties................................... F-32
6.1 Conduct of Business............................................ F-32
6.2 Governmental Filings........................................... F-32
6.3 Shareholder Approval........................................... F-33
6.4 Elimination of Excess Indebtedness............................. F-33
6.5 B&S Business Plan.............................................. F-34
7. Survival of Representations and Warranties............................ F-34
8. Indemnification....................................................... F-34
8.1 Indemnity by Finmeccanica...................................... F-34
8.2 Brown & Sharpe Indemnity....................................... F-36
8.3 Certification of Claims........................................ F-36
8.4 Third Party Actions............................................ F-37
8.5 Definition of Damages.......................................... F-38
8.6 Pricing Balance Sheet.......................................... F-38
8.7 Environmental Limitations...................................... F-38
9. Access and Information; Confidentiality............................... F-39
10. Conditions Precedent to Brown & Sharpe's Obligations.................. F-39
10.1 Performance by Finmeccanica; Certificate....................... F-39
10.2 Representations and Warranties; Certificate.................... F-40
10.3 Opinions of Counsel............................................ F-40
10.4 Absence of Litigation.......................................... F-40
10.5 Governmental Clearance and Approval............................ F-40
10.6 Approval by Stockholders of Brown & Sharpe..................... F-40
10.7 Approval of Proceedings; Documentation......................... F-40
10.8 Factoring of Receivables....................................... F-40
10.9 Stockholder Agreement.......................................... F-40
10.10 [Intentionally left blank]..................................... F-40
10.11 Working Capital and Refinancing Requirements................... F-40
10.12 Company Indebtedness; Consents of Lenders...................... F-40
10.13 Resignations of Members of the Board of Directors.............. F-41
10.14 [Intentionally left blank]..................................... F-41
10.15 [Intentionally left blank]..................................... F-41
11. Conditions Precedent to the Obligations of Finmeccanica............... F-41
11.1 Performance by Brown & Sharpe; Certificate..................... F-41
11.2 Representations and Warranties; Certificate.................... F-41
11.3 Opinion of Counsel............................................. F-41
11.4 Absence of Litigation.......................................... F-41
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
11.5 Governmental Clearance and Approval......................... F-41
11.6 Approval by Stockholders of Brown & Sharpe.................. F-41
11.7 Approval of Proceedings; Documentation...................... F-41
11.8 Execution and Delivery of Stockholder Agreement............. F-42
11.9 [Intentionally Left Blank].................................. F-42
11.10 Guarantees of Indebtedness of the Company to Banks.......... F-42
12. Covenant Not to Compete............................................ F-42
13. Agreed Exchange Ratio.............................................. F-42
14. Entire Agreement................................................... F-42
15. Amendment.......................................................... F-43
16. Press Releases..................................................... F-43
17. Termination........................................................ F-43
18. Headings........................................................... F-43
19. Exhibits, etc. .................................................... F-43
20. Assignment, Successors and Assigns; Benefits of Agreement.......... F-43
21. Notices............................................................ F-43
22. Accounting Terms; Proxy Statement; Registration Statement.......... F-44
23. Severability....................................................... F-44
24. Arbitration........................................................ F-44
25. Governing Law...................................................... F-45
26. Tax Return Cooperation............................................. F-45
27. Counterparts....................................................... F-45
ANNEX A................................................................ F-48
</TABLE>
F-4
<PAGE>
ACQUISITION AGREEMENT
ACQUISITION AGREEMENT made as of June 10, 1994 (this "Agreement") by and
between Brown & Sharpe Manufacturing Company, a Delaware corporation with its
principal offices at 200 Frenchtown Road, Precision Park, North Kingstown,
Rhode Island 02852 U.S.A. ("Brown & Sharpe") and Finmeccanica S.p.A., an
Italian corporation, operating through its Elsag Bailey division, with offices
at Via Puccini, 2, 16154 Genoa, Italy ("Finmeccanica").
WHEREAS, Brown & Sharpe and Finmeccanica have agreed to combine the DEA
Business with the Brown & Sharpe business upon the terms and conditions set
forth below, intending thereby to expand the combined business line of CMM (as
defined below) products, strengthen CMM distribution capability worldwide,
augment its R&D capabilities, and provide for other synergies.
WHEREAS, Finmeccanica, through its direct and indirect ownership of all of
the issued and outstanding shares of capital stock of DEA S.p.A., an Italian
corporation (the "Company"), and the other DEA companies listed in Annex A
attached hereto (collectively, the "DEA Companies or sometimes "the Company and
its Subsidiaries") is engaged in the design, engineering, development, testing,
manufacture, sale and servicing of coordinate measuring machines ("CMMs") and
parts and accessories therefor (the "DEA Business");
WHEREAS, Brown & Sharpe and certain of its subsidiaries (collectively, the
"B&S Subsidiaries") are engaged in the design, engineering, development,
testing, manufacture, sale and servicing of CMMs and other metrology products
(the "B&S Business");
NOW THEREFORE, and in consideration of the respective covenants and
conditions herein contained, Finmeccanica and Brown & Sharpe hereby agree as
follows:
1. ACQUISITION OF THE DEA SHARES BY BROWN & SHARPE ON THE CLOSING DATE.
1.1 Purchase and Sale of the DEA Shares. Finmeccanica agrees to sell and
transfer to Brown & Sharpe (or, at the option of Brown & Sharpe, to one or more
wholly owned subsidiaries of Brown & Sharpe designated by Brown & Sharpe (its
"designee" or "designees")) at the Closing (as defined in Section 2), and Brown
& Sharpe agrees to purchase (or cause its designee or designees to purchase)
from Finmeccanica at the Closing, all of the issued and outstanding shares of
capital stock of the Company (the "DEA Shares").
1.2 Purchase Price for the DEA Shares. In consideration of the assignment,
transfer, conveyance and delivery by Finmeccanica of the DEA Shares to Brown &
Sharpe (or its designee or designees) and of the other agreements of
Finmeccanica stated herein, Brown & Sharpe (or its designees) will pay and
Finmeccanica will receive the purchase price for the DEA Shares determined in
accordance with Section 1.3 below.
1.3 Elements of the Purchase Price. Subject to the Post-Closing Purchase
Price Adjustment as described in Section 1.4, the purchase price for the DEA
Shares (the "Purchase Price") shall be 3,450,000 shares of Class A Common
Stock, $1.00 par value per share (the "Brown & Sharpe Purchase Price Shares"
which term shall also include any additional shares of Class A Common Stock of
Brown & Sharpe issued to Finmeccanica pursuant to the Post-Closing Purchase
Price Adjustment referred to in Section 1.4 below).
1.3A Aggregate Permitted Indebtedness. As of July 31, 1994 (the "Pricing
Date"), the amount of Indebtedness (as defined herein) which shall be reflected
on the books of the Company and its Subsidiaries shall be the sum of (w) 8,000
Million Italian Lire ("Lit.") denominated Indebtedness ("Lit. Debt"), plus (x)
$9,897,960 U.S. Dollar denominated Indebtedness ("U.S. Debt"), plus (y) the
aggregate amount of the Company's and its Subsidiaries' cash and cash
equivalents in excess of Lit. 800 Million, minus (z) the amount of the accrual
for TFR Liabilities of the Company and the Subsidiaries attributable to CIGS
Employees reflected on and as of the date of the Pricing Balance Sheet, but not
to exceed Lit. 1,700 Million ("Aggregate
F-5
<PAGE>
Permitted Indebtedness"); such amount of TFR Liabilities shall first reduce
short term Lit. Debt to the maximum extent possible and then to the extent
short term Lit. Debt cannot be reduced by such amount, U.S. Debt converted at
the U.S. Dollar/Lit. exchange rate in effect on the business day immediately
preceding July 31, 1994 as published in SOLE 24 ORE. "Indebtedness" shall mean
amounts classified on the Pricing Balance Sheet (as such term is defined in
Section 1.4(c) below) as borrowings, including short-term debt, current
maturities of debt, long term debt and payables (other than payables for goods
or services) of the DEA Companies to Finmeccanica (including its Elsag Bailey
division and its subsidiaries).
1.4 Post-Closing Purchase Price Adjustment.
(a) For purposes of this Agreement and of calculating the Post-Closing
Purchase Price Adjustment, based on the Pricing Balance Sheet as of July 31,
1994, the following terms shall have the meanings ascribed to them below:
"Adjusted Net Asset Value" of the DEA Companies shall mean an amount
determined, as the case may be, by reference to the audited combined
balance sheets of the DEA Companies at the relevant balance sheet dates
(June 30, 1993 or the Pricing Date), equal to:
(i) the total assets (excluding cash and cash equivalents) of the DEA
Companies as shown on and as of the date of the relevant balance sheet;
minus
(ii) the total liabilities of the DEA Companies as shown on and as of
the date of the relevant balance sheet, other than amounts classified
on the balance sheet of the DEA Companies as of such relevant balance
sheet date as Indebtedness; plus
(iii) the accrual for TFR Liabilities of the Company and the
Subsidiaries attributable to CIGS Employees shown on and as of the date
of the relevant balance sheet in the amount of Lit. 1,700 Million as of
the Pricing Date and Lit. 1,700 million as of June 30, 1993; plus.
(iv) solely with respect to the June 30, 1993 DEA Financial
Statements, the net accrual of Lit. 2,019 million for INPS liability
for terminated employees reflected on such financial statements.
"CIGS Employees" shall mean, as of the relevant balance sheet date, any
and all employees of the Company and the Subsidiaries that are, or have
been in the past, placed in Cassa Integrazione Guadagni Straordinaria
and/or in the solidarity system and/or in any temporary or definitive lay-
off plan other than (i) those employees who have been terminated with all
TFR Liabilities on account thereof having been paid in full and no accrual
in respect thereof is recorded on the books of the Company or any
Subsidiary, and (ii) those employees who have been recalled to full-time
active employment by the Company or any of its Subsidiaries.
"TFR Liabilities" shall mean T.F.R. "trattamento di fine rapporto"
severance pay liabilities of the Company and the Subsidiaries accrued as of
the relevant balance sheet dates.
"Pricing Adjusted Net Asset Value" shall mean an amount equal to the
Adjusted Net Asset Value determined by reference to the Pricing Balance
Sheet (as herein defined), plus either (A) Lit. 3.4 Billion which amount is
equal to the aggregate amount of the understatement of the provision for
excess, slow moving and obsolete inventory and the provision for warranty
costs identified in the report of RE&Y (as defined below) to the December
31, 1993 DEA Financial Statements if such reserves have been charged to the
inventory account and charged as a warranty liability on the Pricing
Balance Sheet or (B) zero if there has been no change in the accounting
methodology for excess, slow moving and obsolete inventory or warranty
costs, i.e., no such charge or change in warranty costs is reflected in the
Pricing Balance Sheet. Any unrealized loss or gain on foreign currency
exchange with respect to Indebtedness (which was, by way of reference, Lit
1.19 Billion on June 30, 1993) shall be assumed to be zero in the Pricing
Balance Sheet for purposes of the pricing adjustments made pursuant to this
Section 1.
"June 30, 1993 Adjusted Net Asset Value" shall mean an amount equal to
Lit. 112,551 Billion.
F-6
<PAGE>
(b) Finmeccanica represents and warrants to Brown & Sharpe that attached
hereto as Schedule 1.4(b), is a true and accurate list of all employees of the
Company and its Subsidiaries who are on CIGS on the date hereof; no additional
employees will be on CIGS at the Pricing Date or the Closing Date. In
connection with such Schedule, Finmeccanica represents and warrants to Brown &
Sharpe that (i) other than the 77 employees on CIGS (as set forth on the
Schedule), no Employee is on the date hereof, or as of the Pricing Date or the
Closing Date will be, on the solidarity system, the mobilita system or on any
temporary or definitive layoff system, nor has any of such 77 employees on CIGS
been recalled to full employment and active work by the Company or any
Subsidiary, except in each case with the consent of Brown & Sharpe, and (ii)
except to the extent required by the Verbale di Accordo dated June 15, 1993
among the Company, INTERSIND, FIOM-CGIL, FIM-CISL, UILM-UIL and RSA-DEA no
commitment has been or will have been made on or prior to the Pricing Date or
the Closing Date with respect to any CIGS Employees being placed on the
solidarity system or the mobilita system or being recalled to full employment
and active work by the Company or any Subsidiary, except that with regard to
(i) and (ii) above, not more than five employees in the aggregate may be
recalled to full employment to replace vacancies in the Company's existing work
force, and for each employee recalled from CIGS, another employee can be put on
CIGS so that the number of employees on CIGS never exceeds 77 employees.
(c) Subsequent to the Closing, Finmeccanica will cause combined financial
statements of the DEA Companies (consisting of a balance sheet as of the
Pricing Date (the "Pricing Balance Sheet") and the related income statement,
statement of stockholder's equity and statement of cash flows for the period
January 1, 1994 through July 31, 1994, the Pricing Date, together with notes
thereto (hereinafter the "Pricing Financial Statements", or sometimes the
"Closing Financial Statements") prepared by the Company to be audited and
certified by Reconta Ernst & Young ("RE&Y") and delivered to the parties within
75 days after the Closing Date. The scope of the audit will be consistent with
the scope used in the audits of the December 31, 1992 and 1993 and June 30,
1993 DEA Financial Statements. Brown & Sharpe will cause the DEA Companies to
furnish to Finmeccanica and RE&Y such assistance in the preparation of the
Pricing Financial Statements and their certification as they shall reasonably
request, including making available at no cost to Finmeccanica all books and
records pertinent thereto and employees of the DEA Companies customarily
involved in the preparation of the DEA financial statements. Such employees may
be requested by Finmeccanica and under Finmeccanica's supervision to prepare
the Pricing Financial Statements and to perform other tasks with respect
thereto which shall generally be consistent with tasks performed by such
employees prior to the Closing Date. These employees will prepare the Pricing
Financial Statements using the same accounting principles and accounting
policies and methodologies (including those policies attached as Annex C and
referred to below) used in the December 31, 1992 and 1993 and June 30, 1993 DEA
Financial Statements, consistently applied, except to the extent that those
accounting principles and methodologies applicable to the provision for
warranty costs and the provision for slow moving and obsolete inventories, as
applied to the Pricing Financial Statements, may be provided for in accordance
with Italian GAAP or, in the absence thereof, IASC GAAP (each as defined
below), thereby eliminating the understatement for warranty costs and
overstatement of inventory values as indicated in the report of RE&Y to the
audited combined financial statements for the Company and its Subsidiaries for
the periods ending December 31, 1993 and 1992 and June 30, 1993.
Finmeccanica has previously delivered to Brown & Sharpe and C&L descriptions
of the accounting principles and methodologies used in the preparation of such
financial statements with regard to revenue recognition, accounts receivable
reserves and related receivables credit policy, excess and obsolete inventory
and warranty policy which are attached as Annex C hereto.
(d) The Pricing Financial Statements shall be denominated in Italian Lire and
shall fairly present, in conformity with generally accepted Italian accounting
principles (hereinafter "Italian GAAP") or, in the absence thereof, accounting
principles recommended by the International Accounting Standards Committee
("IASC") (hereinafter "IASC GAAP") (except to the extent that an increase of
Lit. 2,800 Million to the reserve for excess, slow-moving and obsolete
inventory and a provision of Lit. 600 Million for warranty costs
F-7
<PAGE>
may not be reflected in the Pricing Balance Sheet) on a basis consistent with
the December 31, 1992 and 1993 and June 30, 1993 DEA Financial Statements and
the methodologies described in Annex C, in all material respects the combined
financial position of the DEA Companies as of the Pricing Date and the results
of operations, changes in stockholder's equity and cash flows during the period
covered thereby. The amount on the Pricing Balance Sheet for TFR Liability
shall reflect an accrual in respect of the number of CIGS Employees at the
Pricing Balance Sheet date, which accrual shall be calculated utilizing the
same methodology used in the December 31, 1993 and June 30, 1993 DEA Financial
Statements for determining TFR Liability for CIGS Employees, consistently
applied. The Closing Financial Statements shall be accompanied by certificates
of the Chief Financial Officer of Elsag Bailey S.p.A., a subsidiary of
Finmeccanica as to the compliance with the provisions of this Section 1.4(d)
and the auditor's report of RE&Y.
(e) Although it is not to be a joint audit, Coopers & Lybrand ("C&L") and
Brown & Sharpe's accounting staff shall be permitted access to work papers
supporting specific audit areas when completed and reviewed by the RE&Y
engagement partner in each respective country and will be allowed to observe
any physical counts and similar procedures RE&Y may conduct during the audit.
RE&Y will not be required to address, prior to certification, any C&L and/or
Brown & Sharpe accounting staff's questions concerning the working papers. C&L
will not in any way interfere with the timely and efficient completion of the
audit. In addition, RE&Y and C&L will meet and agree with each other on the
scope and procedures for the audit.
(f) Within 30 days of Brown & Sharpe's receipt of the Pricing Balance Sheet,
Brown & Sharpe shall inform Finmeccanica if Brown & Sharpe does not agree with
the amounts contained in such Pricing Balance Sheet, and, in the absence of
such notification, such Pricing Balance Sheet shall become final and binding
upon Brown & Sharpe and Finmeccanica at the expiration of such 30 day period.
If Brown & Sharpe gives such notification to Finmeccanica, Brown & Sharpe and
Finmeccanica shall promptly meet in an effort to resolve any differences. In
the event any differences remain 30 days after Finmeccanica's receipt of such
notification by Brown & Sharpe, Brown & Sharpe and Finmeccanica shall refer the
question to their respective independent public accountants which shall attempt
to resolve such differences and whose determination shall be final and binding
upon Brown & Sharpe and Finmeccanica. If such independent public accountants
are themselves unable to resolve any differences, they shall refer such
differences to a third firm of independent public accountants selected by lot
from among such of the "Big Six" accounting firms (or their successors) as are
not the past or then current principal auditors of Finmeccanica and Brown &
Sharpe, whose determination of the Pricing Balance Sheet shall be final and
binding upon Brown & Sharpe and Finmeccanica. Such accounting firm shall make
its determination within sixty (60) days after the referral. Each party shall
bear the cost of its own employees and independent accountants and shall share
equally the cost of any third firm of independent public accountants in
connection with such determination.
(g) The Purchase Price shall be adjusted as follows:
(i)(A) If the Pricing Adjusted Net Asset Value as of July 31, 1994 is
greater than the June 30, 1993 Adjusted Net Asset Value by an amount which,
after netting the amounts required pursuant to Clauses (iii), A(i), A(ii)
and A(iii) below, is greater than Lit. 800 Million (the "Basket"), then
Brown & Sharpe shall issue an additional number of shares of its Class A
Common Stock with a value (as determined by the average of the Closing
Prices of such shares on the Listing Exchange over a thirty day period
immediately preceding the Closing Date) equal to the amount by which the
Pricing Adjusted Net Asset Value exceeds the June 30, 1993 Adjusted Net
Asset Value after netting the amounts referred to in Clauses (iii), A(i),
A(ii) and A(iii) below ("Purchase Price Increase").
(i)(B) If the Pricing Adjusted Net Asset Value as of July 31, 1994 is
less than the June 30, 1993 Adjusted Net Asset Value by an amount which,
after netting the amounts required pursuant to Clauses (iii), B(i), B(ii)
and B(iii) below, is greater than the Basket, then Finmeccanica shall
contribute cash to the capital of Brown & Sharpe (without receiving shares
therefor) in an amount equal to the amount of the difference between the
Pricing Adjusted Net Asset Value and the June 30, 1993 Adjusted Net Asset
Value after netting the amounts referred to in Clauses (iii), B(i), B(ii)
and B(iii) below ("Purchase Price Decrease").
F-8
<PAGE>
(ii) If the Pricing Adjusted Net Asset Value is less than or more than
the June 30, 1993 Adjusted Net Asset Value by an amount which, after
netting the amounts referred to in the clauses set forth in (iii)(A) and
(iii)(B) below, is, in either case, less than or equal to the Basket, no
adjustment shall be made pursuant to Clause (i)(A) or (i)(B).
(iii) Any Post-Closing Purchase Price Adjustment required to be made
pursuant to Sections 1.4(g)(i)(A) or (B) above shall be calculated by
netting against the amount by which Actual Excess Indebtedness as of July
31, 1994 is greater than or less than Estimated Excess Indebtedness as of
July 31, 1994.
(A)(i) In the event an adjustment is required to be made pursuant to Section
1.4(g)(i)(A) above, the amount of the Purchase Price Increase shall
be netted against the amount by which Actual Excess Indebtedness is
greater than Estimated Excess Indebtedness. (As a result, the number
of shares of Brown & Sharpe's Class A Common Stock to be issued to
Finmeccanica pursuant to Section 1.4(g)(i)(A) shall be reduced by the
difference between Actual Excess Indebtedness and Estimated Excess
Indebtedness.)
(A)(ii) In the event an adjustment is required to be made pursuant to Section
4(g)(i)(A) above, and if the amount by which Actual Excess
Indebtedness exceeds Estimated Excess Indebtedness is greater than or
equal to the Purchase Price Increase (the "difference") under Section
1.4(g)(i)(A), then no shares shall be issued by Brown & Sharpe to
Finmeccanica, and Finmeccanica will contribute cash to Brown & Sharpe
in an amount equal to such difference.
(A)(iii) In the event an adjustment is required to be made pursuant to
Section 1.4(g)(i)(A) above, and if Actual Excess Indebtedness is
less than Estimated Excess Indebtedness, Brown & Sharpe shall issue
to Finmeccanica shares of stock in an amount equal to the sum of (1)
the amount of the Purchase Price Increase and (2) the difference
between Estimated Excess Indebtedness and Actual Excess
Indebtedness.
(B)(i) In the event that an adjustment is required to be made pursuant to
Section 1.4(g)(i)(B) above, the amount of the Purchase Price Decrease
shall be netted against the amount by which Actual Excess
Indebtedness is less than Estimated Excess Indebtedness, and the
amount of cash contributed to Brown & Sharpe by Finmeccanica under
Section 1.4(g)(i)(B) shall be reduced by an amount equal to the
difference between (1) the shortfall between Actual Excess
Indebtedness and Estimated Excess Indebtedness and (2) the Purchase
Price Decrease.
(B)(ii) In the event an adjustment is required to be made pursuant to Section
1.4(g)(i)(B) above, and if the amount by which Actual Excess
Indebtedness is less than Estimated Excess Indebtedness exceeds the
Purchase Price Decrease, then Brown & Sharpe will issue shares to
Finmeccanica in an amount equal to such difference.
(B)(iii) In the event that an adjustment is required to be made pursuant to
Section 1.4(g)(i)(B) above, and the Actual Excess Indebtedness is
greater than the Estimated Excess Indebtedness, Finmeccanica will
contribute cash to Brown & Sharpe in an amount equal to the sum of
(1) the Purchase Price Decrease and (2) the amount by which Actual
Excess Indebtedness is greater than Estimated Excess Indebtedness.
(h) In the event of any Post-Closing Purchase Price Adjustment pursuant to
all of the provisions of 1.4(g) (after taking into account by netting any
adjustment required because Actual Excess Indebtedness as of July 31, 1994 is
more or less than Estimated Excess Indebtedness as of July 31, 1994), (a) the
delivery of a certificate or certificates representing additional Brown &
Sharpe Purchase Price Shares to Finmeccanica or (b) the payment of cash by
Finmeccanica to Brown & Sharpe (as a contribution to capital, without the
receipt of any additional shares of stock) shall take place within ten days
following acceptance (or final determination) under Section 1.4(f) of the
Pricing Balance Sheet. Any certificates representing additional Brown & Sharpe
Purchase Price Shares shall bear legends as required by Section 2.2 hereof.
F-9
<PAGE>
(i) Not less than ten (10) days prior to July 31, 1994, Finmeccanica shall
cause to be delivered to Brown & Sharpe an estimated unaudited combined balance
sheet of the DEA Companies as of the July 31, 1994 Pricing Date ("Forecasted
Pricing Balance Sheet"). The Forecasted Pricing Balance Sheet shall be
denominated in Lit. and shall be prepared by the chief financial officer of the
Elsag Bailey division of Finmeccanica to the extent practicable on a basis
consistent with the December 31, 1993 and the June 30, 1993 combined balance
sheets included in the DEA Financial Statements (except for such changes as are
necessary to comply with the provisions hereof).
(j) The parties agree that, prior to July 31, 1994, if the Pricing Adjusted
Net Asset Value (as computed based on the Forecasted Pricing Balance Sheet) is
or may be, depending on certain contingencies, greater than the June 30, 1993
Adjusted Net Asset Value without regard to the Basket, Finmeccanica shall cause
the Company and/or its Subsidiaries to factor on commercially reasonable terms
and at market rates, without recourse, an amount, which shall be mutually
agreed between the parties, of the receivables then on the books of the Company
and its Subsidiaries. Any differential between the cash received and the face
amount of such receivables (net of any reserves in respect thereto), as
reflected on the Forecasted Pricing Balance Sheet, shall be added to the
Pricing Adjusted Net Asset Value and the face amount (net of reserve) of the
receivables factored shall be subtracted from the Pricing Adjusted Net Asset
Value and the term Forecasted Pricing Balance Sheet shall thereafter include
the results of such factoring transactions.
2. CLOSING. The acquisition of the DEA Shares by Brown & Sharpe or its
designee(s) from Finmeccanica in exchange for the Purchase Price and the
consummation of the transactions contemplated by this Agreement (the "Closing")
shall be held at 12:00 P.M. at the offices of Ropes & Gray, One International
Place, Boston, Massachusetts, 02110 U.S.A. on the date of the Special Meeting
of Stockholders of Brown & Sharpe relating to the transactions contemplated
hereby (the "Closing Date"), or at such other time and place as the parties may
agree in writing. It is understood, however, that July 31, 1994 is the "Pricing
Date" and that the parties are using a July 31, 1994 Pricing Balance Sheet as
distinguished from a balance sheet dated as of the actual Closing for various
purposes under this Agreement, including purchase price adjustment.
At the Closing:
2.1 Delivery and Recordation of the DEA Shares by Finmeccanica. Finmeccanica
will deliver to Brown & Sharpe (or one or more of its designees) certificates
representing the DEA Shares, duly endorsed with authenticated signature, in
proper form for transfer and will cause upon said delivery the due recordation
of such transfer of such DEA Shares on the stock ledger book of the Company as
required to vest in Brown & Sharpe (or its designee) all of the right, title
and interest in the DEA Shares.
2.2 Payment to Finmeccanica. Brown & Sharpe (or its designee) will deliver to
Finmeccanica a certificate or certificates representing 3,450,000 of the Brown
& Sharpe Purchase Price Shares, which shall in each case bear a legend
referencing the investment representation in Section 3.20 and the restrictions
and provisions of the Stockholders Agreement referred to below.
2.3 Stockholders Agreement. Finmeccanica and Brown & Sharpe shall execute and
deliver a Stockholders Agreement providing for the election of directors of
Brown & Sharpe, restrictions on transfer, sale of or other disposition of the
Brown & Sharpe Purchase Price Shares issued or to be issued to Finmeccanica and
registration and pro rata securities purchase rights, in substantially the form
of Exhibit 2.3 (the "Stockholders Agreement").
It is expressly understood that Finmeccanica's right to purchase a pro-rata
portion of future issues of securities by Brown & Sharpe from time to time, in
order to maintain its percentage ownership of the capital stock of Brown &
Sharpe after giving effect to the issue of stock of Brown & Sharpe at the
Closing, is an integral part of the acquisition transaction contemplated by
this Agreement. Said right is, for the convenience of the parties, set forth in
the Stockholders Agreement to be delivered at the Closing hereunder.
2.4 [Intentionally Left Blank]
F-10
<PAGE>
2.5 [Intentionally Left Blank]
2.6 Certificates, Opinions, etc. Each party will deliver to the others such
certificates, opinions and other documents as are contemplated hereby or as may
reasonably be requested by the other parties to evidence compliance with the
terms of Sections 1 and 2 and the other provisions of this Agreement, including
Sections 10 and 11.
2.7 Conduct of DEA Business Between the Pricing Date, July 31, 1994 and the
Closing. In addition to complying with the provisions of Section 6.1 hereof,
from July 31, 1994 (the date of the Pricing Balance Sheet) through the Closing,
subject always to the Closing occurring, the parties further agree to cause the
Company to operate the DEA Companies as follows:
(a) Accrual of Economic Benefits From July 31, 1994 to the Closing
Date. In view of the fact that the Post-Closing Purchase Price Adjustment
will reflect the operation of the DEA Business only through July 31, 1994,
the economic risks and benefits which derive from the DEA Business from
such date through the Closing shall accrue for the account of Brown &
Sharpe, and Finmeccanica shall, if requested by Brown & Sharpe, execute
such documents and instruments and shall take such action or refrain from
taking such action as Brown & Sharpe may reasonably request, in order to
evidence and to give effect to Brown & Sharpe's rights to such economic
risks and benefits.
(b) Operation and Management of the DEA Business after the Pricing Date,
July 31, 1994. Finmeccanica shall manage the DEA Business for the benefit
of Brown & Sharpe in accordance with this Section 2.7. Except to the extent
of cash and cash equivalents shown on the Pricing Balance Sheet (less Lit.
800 Million), the DEA Companies shall not use any of their cash or other
assets to pay any principal, interest or other charges in connection with
Indebtedness existing as of the close of business on the Pricing Date, July
31, 1994, in excess of Aggregate Permitted Indebtedness; nor shall any such
principal, interest or other charges be charged to or in any way become the
responsibility of the DEA Companies. The DEA Companies shall, however, be
responsible for and make all accruals and payments required in connection
with principal, interest and other charges in connection with new
borrowings or incremental utilization of existing lines of credit after
July 31, 1994. Finmeccanica shall not permit any cash or other assets to be
transferred out of the DEA Companies by way of a dividend or distribution
or in any other manner to Finmeccanica or any affiliate thereof, except
that the DEA Companies may pay trade payables in the ordinary course of the
conduct of the DEA Business, consistent with past practice; nor shall the
DEA Companies forgive or compromise any amount owed to them by Finmeccanica
or any affiliate thereof (or any amount owed to a third party without the
consent of Brown & Sharpe). Finmeccanica shall not be required to fund,
contribute to the assets of or otherwise make any commitments or guarantees
with respect to any action taken or proposed to be taken by the DEA
Business unless specifically consented to and indemnified by Brown &
Sharpe. Finmeccanica shall be entitled to rely on any written instruction
as to the operation of the DEA Business given by Brown & Sharpe, shall not
be liable for any failure to act or for action it takes pursuant to such
written instruction and shall be promptly indemnified by Brown & Sharpe for
any "damages" (as defined in Section 8.5) arising from such reliance,
inaction or action, except that Finmeccanica shall be liable to Brown &
Sharpe for any damages resulting from any negligence on Finmeccanica's part
in failing to act or not to act in accordance with such written
instructions from Brown & Sharpe, or failing to refrain from acting, in
each case, in accordance with such written instructions from Brown &
Sharpe.
3. REPRESENTATIONS AND WARRANTIES BY FINMECCANICA. Finmeccanica represents
and warrants to Brown & Sharpe (and its designee(s)) as to the matters set
forth in this Section 3. For purposes of this Section 3, the term "best
knowledge of Finmeccanica" shall mean the actual knowledge of the Chief
Financial Officer and Chief Legal Officer the Elsag Bailey division of
Finmeccanica, the Managing Director, Chief Financial Officer, and Director of
Sales and Marketing of DEA SpA and the general manager of each DEA Company and
branch other than DEA SpA and (solely as to the matters covered by Section
3.12) the Director of Product Development of DEA SpA.
F-11
<PAGE>
3.1 Corporate Status. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the Republic of Italy and has
all necessary corporate power and authority to carry on the DEA Business as now
conducted and as proposed to be conducted. The Company has delivered to Brown &
Sharpe a complete and correct copy of its charter and by-laws, each as amended
to date and all minutes of meetings of its stockholders and directors since
January 1, 1991. On the Closing Date Finmeccanica will have delivered to Brown
& Sharpe or to the possession of DEA all other minutes of meetings of
stockholders and directors and all other corporate records of DEA and its
subsidiaries (or branches). Finmeccanica is a corporation duly organized,
validly existing and in good standing under the laws of the Republic of Italy
and has all necessary corporate power and authority to carry on its business.
Except as set forth in Schedule 3.1, the assets of the DEA Companies
constitute all of the property and property rights (including contract rights)
used in the conduct of the DEA Business in the manner and to the extent
presently conducted and conducted since June 30, 1993 except for incidental
changes in such items in the ordinary course of business. Finmeccanica is not
engaged in any aspect of the manufacture and sale of CMM's except through the
DEA Companies.
3.2 Capitalization and Ownership of the DEA Shares. The authorized and issued
share capital of the Company consists of 16,300,000 shares of common stock,
nominal value Lit. 1,000 per share (the "Company Common Stock" or the "DEA
Shares"). Finmeccanica owns of record and beneficially all of the issued and
outstanding Company Common Stock, free and clear of all liens, claims, charges,
encumbrances and restrictions ("Encumbrances"). No other person or entity has
or shares any direct or indirect interest or right with respect to the DEA
Shares. The DEA Shares have been duly authorized and validly issued and are
fully paid and nonassessable. There are no preemptive rights or rights of first
refusal on the part of any holder of any class of securities of the Company or
any other person. There are no options, warrants, conversion or other rights,
agreements or commitments of any kind obligating the Company, contingently or
otherwise, to issue or sell any shares of its capital stock of any class or any
securities convertible into or exchangeable for any such shares, and no
authorization therefore has been given. Finmeccanica has full right, power and
authority to transfer the DEA Shares to Brown & Sharpe and/or its designees,
free and clear of any Encumbrances, and such transfer will not constitute a
breach or violation of, or a default under, any agreement or instrument by
which Finmeccanica is bound.
3.3 Subsidiaries. The DEA Companies listed on Annex A, other than the Company
(each, a "Subsidiary" and, collectively, the "Subsidiaries"), are the only
corporations, associations, partnerships or other entities or business
enterprises in which the Company has any investment or owns any shares of
capital stock or any other record or beneficial equity or other ownership or
control interest. Except as set forth on Schedule 3.3, the Company owns or is
sole beneficiary of all of the issued and outstanding stock options, warrants,
rights or commitments, relating to the issuance of any shares of capital stock
of or equity interests in the Subsidiaries. Each Subsidiary is a duly
organized, validly existing corporation in good standing under the laws of its
jurisdiction of organization and has all necessary power and authority,
corporate or otherwise, to carry on its business as presently conducted and as
proposed to be conducted. The Company has delivered to Brown & Sharpe a
complete and correct copy of the organizational and governance documents, each
as amended to date, of each Subsidiary.
3.4 Authority for Agreement. Finmeccanica has all necessary power and
authority to execute and deliver this Agreement and the Stockholders Agreement
and to carry out its obligations hereunder and thereunder. Each of this
Agreement and the Stockholders Agreement constitutes the valid and legally
binding obligation of Finmeccanica and is enforceable in accordance with its
terms, subject to bankruptcy, insolvency, reorganization or similar laws of
general application affecting the rights and remedies of creditors. The
execution and delivery of this Agreement and the Stockholders Agreement and the
consummation of any of the other transactions contemplated hereby and thereby
will not conflict with, or result in any violation of, or default with respect
to, or require the consent of any third parties under, any mortgage, loan,
indenture,
F-12
<PAGE>
lease, agreement or other instrument, permit, concession, grant, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Company or any of its Subsidiaries, or Finmeccanica. Subject
to the receipt prior to the Closing of the consents of certain of the DEA
Companies' lenders as provided in Section 10.12 below, such execution, delivery
and consummation will not accelerate the maturity of or otherwise modify in any
material respect the terms of any indebtedness of the Company or any
Subsidiary, or result in the creation of any Encumbrance upon any of the
property or assets of the Company or any Subsidiary.
There are no agreements by which the Company or any Subsidiary is bound which
restrict the ability of the Company to carry on the DEA Business or any other
metrology business anywhere in the world. Except as described in Schedule 3.4,
there are no agreements to which the Company or any Subsidiary is a party which
upon the consummation of the transactions contemplated hereby create rights in
any third party enforceable against the Company or any Subsidiary as a
consequence of a change in control of the Company or any Subsidiary, and no
consent, approval, order or authorization of, recording, or registration,
declaration or filing with any governmental authority is required in connection
with the execution and delivery of this Agreement and the Stockholders
Agreement or the consummation of any of the other transactions contemplated
hereby and thereby by the Company or Finmeccanica.
3.5 Financial Statements; Indebtedness.
(a) Attached hereto as Schedule 3.5 are true and correct copies of (i) the
audited combined balance sheets of the Company and the Subsidiaries as of
December 31, 1993 and 1992 and June 30, 1993 and the related combined
statements of operations, accumulated deficit and cash flows all denominated in
Lit (together with the auditors' reports thereon, including any exceptions
noted therein) for the twelve and six month periods then ended (excluding any
non-metrology activities of any DEA Company), together with the notes to such
financial statements (the "Audited Combined DEA Financial Statements"); (ii)
the separate audited balance sheets of each of the Subsidiaries other than
Digital Electronic Automation Company ("DEA U.S.") as of December 31, 1993 and
1992 and June 30, 1993 and the related statements of operations, accumulated
deficit and cash flows for the twelve and six month periods then ended,
together with the notes to such financial statement (the "Audited DEA
Subsidiaries Financial Statements"); and (iii) the audited balance sheets of
DEA U.S. as of December 31, 1993 and of the Digital Electronic Automation
division of Elsag Bailey, Inc. as of December 31, 1992 and June 30, 1993 and
the related statements of operations, divisional deficit and cash flows
(together with the auditors' reports thereon, including any exceptions noted
therein) for the twelve and six month periods then ended, together with the
notes to such financial statements (the "Audited DEA U.S. Financial
Statements") (collectively, the "DEA Financial Statements").
(b) Except as otherwise indicated in the respective reports of auditors or in
the notes thereto, all of the DEA Financial Statements have been prepared (in
the case of the Audited Combined DEA Financial Statements) in accordance with
Italian GAAP or, in the absence thereof, with IASC GAAP or (in the case of the
Audited DEA Subsidiaries Financial Statements) in accordance with IASC GAAP or,
in the case of the U.S. entity, United States generally accepted accounting
principles ("U.S. GAAP"), in each case consistently applied throughout the
periods indicated, and fairly present, in all material respects, the financial
condition of the DEA Companies (excluding any non-metrology activity of any DEA
Company) and the results of their operations and cash flows as of the dates and
for the periods covered thereby, subject to the exceptions stated in the
auditor's reports included therewith.
(c) The DEA Financial Statements are in accordance with the books and records
of the DEA Companies. All material transactions occurring during the periods
covered by the DEA Financial Statements have been disclosed in the DEA
Financial Statements to the extent required to be disclosed under the
applicable generally accepted accounting principles referred to above.
F-13
<PAGE>
At the Closing Finmeccanica will place in the possession of Brown & Sharpe
the books and records of the DEA Companies, including without limitation the
accounting journals and general ledgers of the DEA Companies.
3.5.1 Terms of Indebtedness of the Company and the Subsidiaries on the
Closing Date. The principal terms of the Aggregate Permitted Indebtedness
of the Company and the Subsidiaries which will be outstanding on the
Closing Date are set out on Schedule 3.5.1 (identifying the lender, amount
outstanding, interest rate(s) and maturity). The Company has provided Brown
& Sharpe with access to all agreements relating to such Aggregate Permitted
Indebtedness and all copies of such agreements delivered by the Company to
Brown & Sharpe are true and correct.
3.6 Absence of Undisclosed Liabilities. Except as set forth in Schedule 3.6
and other than liabilities which have arisen after December 31, 1993 in the
ordinary course of business and consistent with past practice, neither the
Company nor any of its Subsidiaries has any material liabilities or obligations
of any nature, whether absolute, contingent or otherwise (including without
limitation, letters of credit for the purchase of inventory) which are required
to be reflected or reserved against in, or otherwise provided for in the notes
to, the DEA Financial Statements under Italian GAAP or, in the absence thereof,
IASC GAAP, and which are not so reflected or reserved against therein or in the
notes thereto.
3.7 Absence of Changes. Except as set forth in Schedule 3.7 since December
31, 1993, (a) there has been no material adverse change in the condition,
financial or otherwise (other than as a result of general external economic
conditions affecting the metrology industry), properties, assets, liabilities,
business or operations of the Company and its Subsidiaries, considered as a
whole ("Material Adverse Change"); and (b) neither the Company nor any of its
Subsidiaries has:
(i) declared, set aside, made or paid any dividend or other distribution
in respect of its capital stock or agreed to do any of the foregoing, or
purchased or redeemed or agreed to purchase or redeem, directly or
indirectly, any shares of its capital stock;
(ii) issued or sold any shares of its capital stock of any class or any
options, warrants, conversion or other rights to purchase any such shares
or any securities convertible into or exchangeable for such shares;
(iii) incurred any indebtedness for purchase money or borrowed money
other than in the ordinary course of business consistent with past
practice;
(iv) mortgaged, pledged, or subjected to any Encumbrance, any of its
properties or assets, tangible or intangible, except Permitted Encumbrances
(as defined in Section 3.9.1);
(v) acquired or disposed of any assets or properties in any transaction
involving money or value in excess of $25,000 with any officer, director or
salaried employee of the Company, or any Subsidiary, or any relative by
blood or marriage, or except in the ordinary course of business acquired or
disposed of any assets or properties having a value in excess of $100,000
in any transaction with any other person;
(vi) forgiven or canceled any debts or claims, or waived any rights,
except in the ordinary course of business and consistent with past
practices;
(vii) (A) granted to any officer, director or consultant or to any
employee whose annual compensation is, or was during the year ended
December 31, 1993, in excess of the equivalent of $50,000, any material
increase in compensation in any form (including any material increase in
scope of any benefits), other than annual salary increases consistent with
prior practice, or (B) become subject to any request for severance or
termination pay, or granted any severance or termination pay, or entered
into any employment or severance agreement with any officer or employee
(other than a CIGS Employee) whose annual compensation is or was during the
year ended December 31, 1993 in excess of the equivalent of $50,000;
F-14
<PAGE>
(viii) adopted, or amended in any material respect, any bonus, profit-
sharing, compensation, stock option, pension, welfare, security,
retirement, deferred compensation or other material plan, agreement, trust,
fund or arrangement for the benefit of any employee or employees;
(ix) except as disclosed on Schedule 3.7 experienced any actual or, to
the best of the knowledge of the Company and the Subsidiaries, threatened
dispute with a supplier involving more than $100,000 or with a customer
involving more than the lower of (a) $90,000 or (b) the full contract value
of the machine or other product which is the subject of the dispute;
(x) except as disclosed on Schedule 3.7, made any capital expenditures or
commitment therefor in excess of $250,000;
(xi) incurred any liability (absolute, accrued or contingent) except
current liabilities incurred, liabilities under contracts entered into,
borrowings under short-term lines of credit and liabilities in respect of
letters of credit issued under credit facilities, in each case incurred in
the ordinary course of business consistent with past practices;
(xii) suffered a loss, damage or destruction, whether or not covered by
insurance, in excess of $25,000; or
(xiii) extended or modified in any material respect the terms or
provisions of any lease of real property of the character set forth on
Schedule 3.9 or described in Section 3.9.2.
(xiv) made any changes in accounting principles or accounting practices.
3.8 Taxes.
(a) The following defined terms shall have the meanings set forth below:
(i) "Tax" means any (and in the plural "Taxes" shall mean all) income,
gross receipts, license, payroll, employment, excise, manufacturing,
severance, stamp, occupation, premium, windfall profits, environmental,
customs, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property,
sales, use, transfer, registration, value added, turnover, alternative or
add-on minimum, estimated or other tax, duty, or other fiscal charge of any
kind whatsoever (whether payable directly, or by way of withholding or on
account, and including those paid or withheld in the capacity as
withholding tax agent), including without limitation any interest, penalty,
or addition thereto, whether disputed or not, imposed by any national or
local taxing authority or other authority having jurisdiction to administer
or enforce any of the foregoing.
(ii) "Tax Return" means any return, declaration, report, claim for
refund, or information return relating to Taxes, including without
limitation any schedule or attachment thereto, and any amendment thereof.
(b) Except as set forth on Schedule 3.8:
(i) The Company and each of the Subsidiaries have filed or caused to be
filed and, from the date hereof until the Closing Date, will file or cause
to be filed all Tax Returns required to be filed by them in accordance with
applicable laws on or before the date hereof or the Closing Date (as
applicable) with respect to Taxes.
(ii) All Taxes which are shown on Tax Returns filed on or before the date
hereof as due from or payable by the Company or the Subsidiaries have been
paid in full or adequately disclosed and fully provided for in the DEA
Financial Statements, and all Taxes which are shown on Tax Returns filed
after the date hereof and on or before the Closing Date as due from or
payable by the Company or the Subsidiaries will be paid in full or
adequately disclosed and fully provided for in the Company's Closing
Financial Statements.
(iii) There are no actions, suits, proceedings, examinations, audits,
claims or assessments by any governmental authority now pending against the
Company or the Subsidiaries in respect of Taxes or any Tax Return.
F-15
<PAGE>
(iv) There are no outstanding agreements or waivers between the Company
or any Subsidiary and any governmental authority extending the statute of
limitations applicable to any Tax Return of the Company or any of the
Subsidiaries for any period;
(v) The Company and the Subsidiaries have delivered to Brown & Sharpe
correct and complete copies of all income Tax Returns, examination reports,
and statements of deficiencies for the 1990, 1991 and 1992 tax years and
shall deliver all income Tax Returns for subsequent periods that are filed
on or before the Closing Date. No Tax deficiency (whether or not agreed to
by the Company or the Subsidiaries) have been assessed against or proposed
in writing to be assessed against the Company or any Subsidiary by any
governmental authority except for Tax deficiencies that have been paid in
full or adequately disclosed and fully provided for in the DEA Financial
Statements. Prior to the Closing Finmeccanica will have placed in the
possession of the Company all other tax returns of the Company and its
Subsidiaries.
(vi) The Company and the Subsidiaries are not a party to any Tax sharing
agreement. It is understood, however, that Istituto per la Ricostruzione
Industriale--IRI S.P.A. files consolidated VAT returns for all its
consolidated Italian subsidiaries (including the Company).
(vii) The Company and the Subsidiaries are not liable, by contract or as
a matter of law, primarily or otherwise, for the payment of any Taxes for
which another person is liable.
(viii) The Company has reported net operating losses as reflected in its
Tax Returns filed for the 1988, 1989, 1990, 1991 and 1992 tax years and a
cumulative net operating loss of 23.5 Billion Lit. in its draft Tax Return
for the 1993 tax year, a copy of which is furnished as Exhibit 3.8(viii).
Finmeccanica makes no representation or warranty that the net operating
losses of the Company and its Subsidiaries referred to above will be
allowed as deduction by the Company or its Subsidiaries in tax periods
ending after the Closing Date.
3.9 Property.
3.9.1 Title; Encumbrances. Except as stated in Schedule 3.9, each of the
Company and its Subsidiaries (as indicated in Schedule 3.9) has good and
marketable title to all real properties owned by it and to all material
tangible personal property reflected in the June 30, 1993 and December 31,
1993 combined balance sheets included in the DEA Financial Statements or
acquired after such dates (except to the extent of property disposed of
since such dates in the ordinary course of business), and valid leasehold
interests in all real properties leased by the Company or its Subsidiaries
and all material tangible personal properties leased by the Company or its
Subsidiaries, in each case free and clear of all mortgages, liens, charges,
encumbrances, easements, security interests or title imperfections except
(a) liens for current taxes not due and payable or the validity of which is
being contested in good faith, (b) liens securing Indebtedness reflected on
the December 31, 1993 balance sheet included in the DEA Financial
Statements, which liens are listed on Schedule 3.9, (c) purchase money
security interests and liens securing rental payments under leases incurred
in the ordinary course of business, (d) liens arising by operation of law
in favor of mechanics, materialmen and similar parties for work done to the
extent that the obligation secured thereby is not at the time required to
be paid and (e) other encumbrances on real property, such as ordinary
utility easements, rights of way, zoning, building and use restrictions,
that do not materially interfere with the existing use of such property in
the conduct of the DEA Business or materially detract from the value of
such property (the exceptions described in the foregoing clauses (a), (b),
(c), (d) and (e) being referred to herein as "Permitted Encumbrances").
Neither the Company nor any Subsidiary has received any notice or has any
knowledge of any violation of any zoning restrictions and ordinances, health
and fire codes and ordinances, laws or regulations, affecting any such parcel
in any material respect, and have no reason to believe that any authority
contemplates issuing the same. Neither the Company nor any Subsidiary has
received any notice of any condemnation or eminent domain proceeding for any
taking of any such parcel, or any part thereof or of any negotiations for the
purchase of any such parcel, or any part thereof in lieu of condemnation and,
to the best of their knowledge,
F-16
<PAGE>
no condemnation or eminent domain proceedings or negotiations have been
commenced or threatened in connection with any such property.
3.9.2 Leases. Except as set forth on Schedule 3.9.2, the Company and its
Subsidiaries enjoy peaceful and undisturbed possession under all leases of
real and personal property to which they are parties (which in the case of
personal property means any lease having an unexpired term of one or more
years and remaining rental payments aggregating in excess of $10,000) and
all such leases are valid and subsisting; the Company or its Subsidiaries,
as the case may be, have paid all rent due and payable under all such
leases, and there exists no material default on the part of the Company or
its Subsidiaries, or, to the best of Finmeccanica's and the Company's
knowledge, the lessors, existing thereunder.
3.9.3 Condition. Except as set forth in Schedule 3.9.3, all structures
and other improvements, including fixtures, located on the real property
owned or leased by the Company or any of its Subsidiaries and all tangible
personal property owned or leased by the Company or its Subsidiaries, which
in each case are necessary for the conduct of the DEA Business as presently
conducted, are in good operating condition in all material respects for
property of its type and age, subject to ordinary wear and tear.
3.10 Material Contracts. Schedule 3.10 contains a complete and correct list
of all agreements, contracts and commitments of the following types, written or
oral, to which the Company or any of its Subsidiaries is a party or by which
any of their property is bound as of the date hereof (collectively the "DEA
Material Contracts"):
(a) notes, loans, credit agreements, overdraft facilities, mortgages,
indentures, security agreements and other agreements and instruments
relating to the borrowing of money or extension of credit to the Company or
its Subsidiaries or to any guarantee by the Company or its Subsidiaries of
any obligations of a third party;
(b) consulting or professional services agreements, or employment
agreements;
(c) all distribution, agency, commission or sales representative
agreements;
(d) agreements, orders, or commitments for the purchase of raw materials
exceeding $75,000 in any case or for the purchase of supplies or finished
products exceeding $75,000 in any case or;
(e) agreements, orders or commitments for the sale or lease to customers
of products or services exceeding $200,000 in any case (or $100,000, if
such agreements, orders or commitments for sale or lease involve a warranty
or performance representation, terms or acceptance criteria imposed by the
purchaser which are different from the standard warranty and terms and
conditions of sale terms disclosed in or scheduled pursuant to Section
3.22);
(f) all licenses by or to the Company or its Subsidiaries (other than
solely intercompany licenses between the Company and any of the
Subsidiaries) of any Intellectual Property (as defined in Section 3.12) to
or from any affiliated or unaffiliated third party (excluding any end-user
licenses available through normal commercial channels), including all
licenses from third parties relating to Software Programs and Technical
Documentation (as such terms are defined in Section 3.12);
(g) agreements or commitments for capital expenditures in excess of
$100,000 for any single project or series of related projects; and
(h) other agreements or obligations material to the Company and its
Subsidiaries involving payments, receipts, assets or obligations of more
than $100,000.
The Company has delivered or made available to Brown & Sharpe complete and
correct copies of all written Material Contracts and accurate summaries of all
oral Material Contracts. Except as disclosed in Schedule 3.10, all such
Material Contracts are in full force and effect. Except as set forth on
Schedule 3.10, neither the Company nor any of its Subsidiaries have any
outstanding powers of attorney, except routine powers of attorney relating to
representation before governmental agencies or given in connection with
qualification to conduct business in another jurisdiction.
F-17
<PAGE>
3.11 Accounts Receivable; Inventories. (a) The accounts receivable of the
Company and its Subsidiaries reflected on the combined balance sheets of the
DEA Companies as at June 30, 1993 and December 31, 1993 contained in the DEA
Financial Statements (except those collected since such date) and such
additional accounts receivable as are reflected on the books of the Company and
its Subsidiaries on the date hereof, net of applicable reserves as shown on
such June 30, 1993 and December 31, 1993 balance sheets or applicable reserves
on the additional accounts receivable subsequent to December 31, 1993, (which
reserves have been determined in accordance with the general accounting
methodology with respect to reserves against accounts receivable and with
respect to credit policies relating to receivables utilized by the Company and
its Subsidiaries and furnished to Brown & Sharpe pursuant to Section 1.4(b)
above) and arose out of bona fide sales and deliveries of goods or the
performance of services in the ordinary course of the DEA Business in
accordance with past practice.
(b) The inventories reflected on such combined balance sheet as at December
31, 1993 and held by the Company and its Subsidiaries on the date hereof are in
good, usable or saleable condition and, except as indicated in the report of
RE&Y accompanying the DEA Financial Statements for the periods ended December
31, 1993 and 1992, have been reflected on such balance sheet in accordance with
Italian GAAP or, in the absence thereof, IASC GAAP consistently applied. The
reserves with respect to obsolete, slow moving or discontinued items and the
accounting for inventory is in accordance with the general accounting policy
and methodology with respect to inventory utilized by the Company and its
Subsidiaries and furnished to Brown & Sharpe pursuant to Section 1.4(b) above,
except as indicated in the report of RE&Y accompanying the DEA Financial
Statements for the periods ended December 31, 1993 and 1992.
To the best knowledge of Finmeccanica and the Company, except as disclosed on
Schedule 3.11(b), none of the DEA Companies holds any goods on consignment from
third parties. Except as disclosed on Schedule 3.11(b), no third party
(including Finmeccanica or any of its affiliates) holds any goods on
consignment from the DEA Companies or has purchased goods from the DEA
Companies on a "sale on approval" basis or with a right of return (other than
pursuant to an express warranty as disclosed in Schedule 3.22D).
3.12 Intellectual Property. (a) For purposes of this Section 3.12, the term
"Intellectual Property" shall mean all patents and patent applications,
registered or unregistered trademarks, copyrights, service marks, applications
for registration thereof, trade names, inventions, processes, designs and
design rights, formulas, trade secrets, know-how, software and computer
programs, including all software or program logic burned into a chip
("Firmware") and other items of intellectual property and propriety rights.
(b) The Company and the Subsidiaries own all rights to the name "DEA" and the
other names listed on Schedule 3.12 for all products, and no other person has
acquired or owns any rights thereto. Schedule 3.12 also contains a complete and
correct list of all patents, patent applications, registered or unregistered
trademarks, tradenames or servicemarks, registered trademarks, tradenames or
servicemarks applications, and all copyrights or copyright applications (which
copyrights are listed by general category only), which are, in the case of each
item on said lists, owned by the Company and the Subsidiaries or in which the
Company or its Subsidiaries has any rights or licenses. Schedule 3.12 also sets
forth the principal products (or features such as controls) which utilize or
are covered by the software programs and Firmware which the DEA Companies own
or have the right to use.
The Company and its Subsidiaries own, or possess adequate rights to use, all
Intellectual Property necessary for the conduct of the DEA Business as
presently conducted and as conducted since June 30, 1993.
Except as set forth on Schedule 3.12, neither the Company nor any of its
Subsidiaries has any obligation to make payments of royalties or other amounts
or transfer any interest in such Intellectual Property to any third party,
including Finmeccanica and its other affiliates.
(c) For the purposes of this Section 3.12(c), the term "Technical
Documentation" shall mean flow charts, diagrams, descriptive texts and
programs, computer print-outs, underlying tapes, source codes and computer data
bases, mechanical designs, parts manufacturing and assembly processes and
similar items
F-18
<PAGE>
owned by the Company and the Subsidiaries or in which the Company or the
Subsidiaries has any right or interest with respect to the software programs
and Firmware.
To the best knowledge of Finmeccanica, the Technical Documentation, including
that relating to the Firmware and the software programs (except with respect to
any third party software programs which include only the materials and
Technical Documentation actually delivered to the Company and the Subsidiaries
by the third party under any third party software contract) includes the source
code, system documentation, statements of principles of operation, and
schematics for all software programs and Firmware used in the conduct of the
DEA Business. Except with respect to third party software programs, the
Technical Documentation also includes any program (including compilers),
"workbenches", tools and higher level (or "proprietary") language used for the
development, maintenance, and implementation of the software programs and
Firmware.
(d) To the best knowledge of Finmeccanica and the Company, the Company and
the Subsidiaries have obtained all necessary rights and licenses to use, copy
and distribute as part of the software programs or Firmware used in the DEA
business the third-party programming and materials contained in the software
programs and Technical Documentation. The Company has exercised reasonable
efforts to maintain the source codes and system documentation relating to the
software programs. The software programs and Firmware have been maintained in
confidence, except for end-user licenses solely for use in connection with
products of the Company and the Subsidiaries purchased by such end-users. The
Company and the Subsidiaries have not received or have knowledge of any claims
from any person or entity that the use of the Intellectual Property by the
Company and the Subsidiaries infringes or conflicts with any intellectual
property right or other proprietary right of any person or entity.
(e) Except as indicated in Schedule 3.12, to the best knowledge of
Finmeccanica and the Company, the Company and the Subsidiaries have not
granted, transferred or assigned, or acquiesced in or permitted use without a
license of, any right or interest in the Intellectual Property to any person or
entity, except pursuant to non-exclusive end-user license agreements for
internal purposes only.
3.13 Insurance. The Company and its Subsidiaries have maintained and now
maintain, as the case may be, (i) insurance on the DEA Business covering
property damage and loss of income by fire and other casualty to the limits and
with the deductibles shown on Schedule 3.13 and (ii) insurance protection
against such liabilities, claims and risks including product liability, and in
such amounts, as is shown on such Schedule. The Company will, upon request,
deliver to Brown & Sharpe complete and correct copies of all such policies
together with all riders and amendments thereto. Such policies are in full
force and effect, all premiums due thereon have been paid, and the Company and
its Subsidiaries have complied in all material respects with the provisions of
such policies and have not received notice of any material increase in
insurance premiums payable.
3.14 Litigation. (a) Except for the matters described in Schedules 3.8, 3.14
and 3.19.1 and claims fully covered by insurance policies of the Company and
its Subsidiaries, there are no judicial or administrative actions, suits,
proceedings or arbitrations or investigations (domestic or foreign) pending or,
to the best knowledge of Finmeccanica or the Company, threatened (for an amount
in excess of $100,000 in the case of threatened matters) against the Company or
any of its Subsidiaries or their respective assets, including the DEA Shares,
or which were pending or threatened at any time since January 1, 1991.
Finmeccanica has heretofore furnished or made available to Brown & Sharpe, if
so requested by Brown & Sharpe, true and complete copies of all relevant court
papers, proceeding administrative request, and other documents relating to the
matters specifically set forth on Schedules 3.8, 3.14 and 3.19.1. Grievance
matters if less than $15,000 or, in the aggregate $50,000, are excluded from
this Section 3.14.
(b) Except as listed on Schedule 3.14, there are no machines, products,
systems or equipment sold by the Company or any of its Subsidiaries as to
which, to the best knowledge of Finmeccanica, there is pending a written
dispute with a customer for an amount in excess of $100,000 as to the
performance or functionality
F-19
<PAGE>
of the items sold to such customer (and all such disputes where the Company or
a Subsidiary has received a letter from legal counsel for such customer have
been reflected in the reserve to the accounts receivable on the December 31,
1993 combined balance sheet included in the DEA Financial Statements or
reserved against in the case of any such disputes occurring after December 31,
1993 to the extent required in each case to be so reserved against under
applicable Italian GAAP or in the absence thereof IASC GAAP and the reserves
policies furnished to Brown & Sharpe under Section 1.4(c)).
3.15 Compliance with Laws; Governmental Authorizations. Except for matters
described in Schedule 3.15 and excluding environmental matters that are
encompassed by Section 3.16 below and all matters encompassed by Section 3.19
below, the Company and its Subsidiaries are not in violation of or default in
any material respect under any statute, law, ordinance, rule, regulation,
judgment, order, decree, permit, concession, grant, franchise, license or other
governmental authorization or approval including without limitation any laws,
rules or regulations of the European Union ("EU Law") applicable to the Company
or its Subsidiaries or to any of their assets, properties, products or
services. All permits, concessions, grants, franchises, licenses and other
governmental authorizations and approvals necessary for the conduct of the DEA
Business have been duly obtained and are in full force and effect, except where
the failure to obtain or maintain in effect any of the foregoing would not have
a material adverse effect on any plants or facilities of the Company or any
Subsidiary or on the business of the Company or any Subsidiary, and there are
no proceedings pending or, to Finmeccanica's knowledge threatened that may
result in the revocation, cancellation or suspension, or any materially adverse
modification, of any thereof.
3.16 Environmental Matters. Schedule 3.16 is a true and complete list of all
known conditions or states of fact existing on the date hereof and as of the
Closing Date based on or resulting from the presence in or discharge, spill,
disposal, emission, generation, storage or release of any chemical, pollutant,
contaminant, waste, toxic or hazardous substance or petroleum product into the
environment caused by any of the DEA Companies at any location owned or leased,
currently or in the past, by the Company or any of its Subsidiaries, which
constitutes a violation of or requires remediation under any Health and
Environmental Laws.
"Health and Environmental Laws" means any decree, order (including any
administrative act issued by any authority requiring compliance with applicable
laws, statutes, rules and regulations before the issue of a formal order) or
arbitration award of, any EU Regulation and Decision (as defined below) or any
law, statute, or binding decision or regulation of or any agreement with, or
any license, authorization or permit from, any EU Institution, national,
regional or local governmental authority or court relating to occupational and
public health and safety (including fire prevention), or the environment in
effect as of the date hereof and the Closing Date (including, without
limitation, national, regional and local laws, statutes, rules and regulations
relating to environmental matters and contamination of any type whatsoever).
"EU Institution" shall mean the EU Council, the European Commission and the
European Court of Justice.
"EU Regulations and Decisions" means all applicable regulations and decisions
adopted by the EU Council (or the former Council of the European Community) or
the European Commission (or the former Commission of the European Community).
3.16.1 Except as disclosed on Schedule 3.16, the Company and its
Subsidiaries are in compliance in all material respects with all applicable
Health and Environmental Laws with respect to the use, transport, import,
export, temporary or final storage, recycling or disposal of any waste,
chemical substance or mixture, pollutant, including without limitation, any
contaminant, irritant, or pollutant or other hazardous or toxic substance
("Hazardous Materials") which are identified as such in any jurisdiction in
which the Company or its Subsidiaries either owns or leases real property
or conducts its business.
F-20
<PAGE>
3.16.2 Except as disclosed on Schedule 3.16, (i) neither the Company nor
any of its Subsidiaries has received notice from any governmental authority
(or has knowledge that any governmental authority may give notice) that it
is in violation of any applicable Health and Environmental Laws with
respect to the use, transport, import, export, temporary or final storage,
recycling or disposal of any such Hazardous Materials; (ii) the Company and
its Subsidiaries have obtained and have complied with all financial or
other conditions contained in all necessary permits, licenses,
authorizations and consents for the use, transport, import, export,
temporary or final storage, recycling and disposal of all Hazardous
Materials used in the conduct of the DEA Business except for those permits,
licenses or authorizations the failure to obtain which would not have a
Material Adverse Effect on the DEA Business; and (iii) to the knowledge of
Finmeccanica, there have been no direct or indirect discharges, spills,
leaks or releases, whether accidental or voluntary, of any Hazardous
Materials caused by any of the DEA Companies on any real property (a) now
leased or previously leased or (b) now owned or previously owned by the
Company or any of its Subsidiaries, which in any case constitutes a
violation of or requires remediation under any Health and Environmental
Law.
3.17 Brokers, Finders, etc. Neither Finmeccanica, the Company or any of its
Subsidiaries has retained any financial advisor, broker, agent or finder or
paid or agreed to pay for any financial advisor, broker, agent, or finder on
account of this Agreement or any transaction contemplated hereby, or any
transaction of like character that would be required to be paid by
Finmeccanica, the Company, any of its Subsidiaries or Brown & Sharpe.
3.18 Directors, Officers and Employees; Compensation. The Company has
delivered to Brown & Sharpe a true and complete list of directors and officers
of the Company and its Subsidiaries and of all employees and consultants of the
Company and its Subsidiaries whose current total compensation was for the
calendar year ended 1993 at an annual rate in excess of $50,000 (or the
equivalent amount in foreign currency), which list states the annual rate of
compensation of, and the positions held by, the persons listed.
3.19 Labor and Employment; ERISA.
3.19.1 Except as set forth on Schedule 3.19.1:
(a) each of the Company and its Subsidiaries is in compliance in all
material respects with all applicable EU Regulations and Decisions,
national and state or local laws, rules and regulations with respect to
its employees and employment practices, and terms and conditions of
employment, including without limitation any provisions thereof
relating to wages, bonuses, hours of work and social security pensions
and other mandatory contributions, medical laws and safety insurance
laws and regulations (including [INPS, INAIL] and other similar
authorities as well as other funds, entities or agencies, as provided
for by the applicable national collective bargaining agreements);
(b) there is not pending or, to the best knowledge of Finmeccanica,
threatened, and there has not occurred since January 1, 1991, any
material trade union or collective labor-related disputes or strikes
involving the Company or any of its Subsidiaries;
(c) there are no grievance or arbitration proceedings arising out of
or under any national collective bargaining agreement pending or, to
the best knowledge of Finmeccanica, threatened, and no claim therefor
has been asserted against the Company, in each case for an amount in
excess of $15,000 or in the aggregate $50,000;
(d) all pension plans and severance funds required by law to be
funded by the Company or any Subsidiary are funded in accordance with
applicable laws, regulations or statutes;
(e) there are no material written agreements or understandings with
any unions or shop committees (in regard to employees outside the
United States), except under the provisions of the applicable national
collective bargaining agreements;
(f) except where required by law, there are no employment agreements
(other than those the terms of which are solely prescribed by laws,
regulations and applicable national collective
F-21
<PAGE>
bargaining agreements) or agreements for provision of services or
consultancy of whatever nature, which (A) are not terminable by the
Company or its Subsidiaries on 90 or fewer days notice at any time
without penalty, (B) have a remaining term, as of the date hereof, of
more than one year in length of obligation on the part of the Company
or its Subsidiaries or (C) involve payment by the Company and its
Subsidiaries, subsequent to the date hereof, of more than US $50,000;
(g) there are no employment agreements whatsoever that may be
terminated solely as a result of a change of control of the Company or
any of its Subsidiaries, other than for as provided for by any
applicable national collective bargaining agreements.
3.19.2 Schedule of Employee Benefit Plans.
(a) Schedule 3.19.2 contains a true and complete list, as of the date of this
Agreement, of all profit sharing, deferred compensation, severance pay, bonus,
stock option, stock purchase, pension, retainer, consulting, retirement,
change-in-control, welfare or incentive plans, contracts, arrangements,
policies, programs or practices, vacation pay (or so-called "thirteen months'
pay") or other plans, policies or agreements for the benefit of employees
whether or not subject to the US Employee Retirement Income Security Act of
1974, as amended ("ERISA") (including any funding mechanism therefor now in
effect or required in the future as a result of the transaction contemplated by
this Agreement or otherwise) maintained or contributed to by the Company and
its Subsidiaries (other than government plans) and in which any one or more of
the employees (including former employees and beneficiaries of employees or
former employees) of the Company and its Subsidiaries participates or is
eligible to participate, whether or not reduced to writing, including, without
limitation, a complete list of all plans, agreements, arrangements, policies,
programs or practices which constitute "fringe benefits" with respect to any of
the employees of the Company and its Subsidiaries, vacation plans or programs,
sick leave plans or programs, group medical insurance, group life insurance,
medical reimbursement, disability insurance, workmen's compensation,
supplemental unemployment benefits, other insurance coverage relating to
employees (including any self-insured arrangements) and related benefits, any
employee benefit plan (as defined in Section 3(3) of ERISA), maintained by the
Company or any of its Subsidiaries or to which the Company or any of its
Subsidiaries makes or is required to make contributions, or to which the
Company or any of its Subsidiaries is a party or by which it is bound, except
any such plan, contract, arrangement, policy, program or practice which the
Company or any of its Subsidiaries is required by law to maintain or to which
the Company or any of its Subsidiaries is required by law to contribute
(collectively, the "Plans"). True, current and complete copies of such Plans,
all amendments and written interpretations with respect thereto, if any, and to
the extent applicable, copies of the most recent of the following have been
furnished to Brown & Sharpe: (i) determination letter of the Internal Revenue
Service and any outstanding request for a determination letter; (ii) Form 5500,
attached schedules, audited financial statements, and any related actuarial
valuation reports with respect to the last three plan years for each Plan; and
(iii) any summary plan description.
(b) Each Plan and each trust or funding vehicle related to such Plan has been
administered and operated in all material respects in compliance with its terms
and with all applicable statutes, orders, rules and regulations, including
where applicable, ERISA and the US Internal Revenue Code of 1986, as amended
("Code"), including, but not limited to, the preparation and filing of all
required reports and returns with respect to such Plan, the submission of such
reports or returns to the appropriate governmental authorities, the timing,
preparation and distribution of all required employee communications (including
without limitation any notice of plan amendments which is required prior to the
effectiveness of such amendments), and the proper and timely disposition of all
benefit claims. Each Plan which is intended to be a "qualified plan" as
described in Section 401(a) of the Code has been determined by the Internal
Revenue Service to so qualify (or a timely application for such determination
has been or is intended to be submitted to the Internal Revenue Service), and
neither the Company nor any Subsidiary knows of any fact or facts which might
adversely affect such qualification. Neither the Company nor any Subsidiary
sponsors or contributes to any Plan subject to the funding requirements of
Section 412 of the Code.
F-22
<PAGE>
(c) With respect to all Plans and related trusts, no "prohibited
transaction," as that term is defined in Section 406 of ERISA, has occurred
which is likely to subject any Plan, related trust or party dealing with any
such Plan or related trust to any material tax or penalty on prohibited
transactions imposed by Section 502(i) of ERISA or Section 4975 of the Code and
the consummation of the transactions contemplated hereby will not constitute
such a prohibited transaction. There are no actions, suits, arbitrations or
claims with respect to a Plan (other than routine claims for benefits by
employees, beneficiaries or dependents arising in the normal course of
operations of such Plan) pending, or to the best knowledge of Finmeccanica,
threatened, with respect to any such Plan or any fiduciary or sponsor of such
Plan with respect to their duties under such Plan or the assets of any trust
under any such Plan.
(d) Other than the TFR Liabilities reflected on the December 31, 1993 balance
sheet included in the DEA Financial Statements, there are no unfunded
obligations under any Plan providing pension or post-retirement welfare
benefits to any employee of the Company or any Subsidiary who will be employed
by Brown & Sharpe after the Closing Date (other than continuation of health
coverage as provided pursuant to Sections 601 through 608 of ERISA, Sections
104, 105, 106, and 4980B of the Code).
3.20 Investment Representation. Neither Finmeccanica nor any of its
affiliates owns beneficially or of record any of the capital stock of Brown &
Sharpe. Finmeccanica is acquiring the Brown & Sharpe Purchase Price Shares and
the Contingent Stock for its own account and not with a view to, or for sale in
connection with, directly or indirectly, any distribution thereof that would
require registration under the Securities Act of 1933, as amended (the
"Securities Act") or applicable state "blue sky" or securities laws or would
otherwise violate the Securities Act of 1933 or such state securities laws.
3.21 Government Grants. Attached as Schedule 3.21 is a true and correct list
of grants from governmental bodies to the Company and its Subsidiaries as
reflected on the combined balance sheet at December 31, 1993 included in the
DEA Financial Statements. Except as set forth in Schedule 3.21, the funds
represented by such grants have been disbursed by the relevant governmental
bodies and received by the relevant DEA Companies, and no DEA Company which is
a recipient of any such grant is in default of any of the terms and conditions
specified in the governmental authorization of such grant.
3.22 Customers, Suppliers, Product Warranties, Defects in Products. Schedule
3.22A contains a correct and complete list of all orders for unshipped goods
involving a sales price of $95,000 or more for non-standard and $150,000 or
more for standard machines, products or equipment. To the best of the knowledge
of the Company and the Subsidiaries, all such orders are written orders signed
by the customer, with a delivery date as set forth on Schedule 3.22A and such
orders do not require any reserves to be established under Italian GAAP or, in
the absence thereof, IASC GAAP or under the past practices of the Company and
the Subsidiaries. Schedule 3.22A also includes a current and complete list of
all sales transactions involving a sales price of $95,000 or more for non-
standard and $150,000 for standard machines, products or equipment pursuant to
which the goods have been shipped and the revenue therefrom recognized in full
but as to which (i) the Company or a Subsidiary has an obligation to perform
services (excluding warranty services) or additional work (such as for example
software programming) at no additional charge in addition to the sales price
and (ii) the gross margin recognized in the transaction is less than the cost
of performing the service or other work (other than warranty work) that is
contractually to be performed by the Company or the Subsidiary.
Schedule 3.22B is a list by country of the top 20 customers of the Company
and its Subsidiaries, having the largest aggregate monetary purchases from the
Company and the Subsidiaries for each of the years 1993, 1992 and 1991, with
notation of the aggregate dollar purchases, and a list of the top 10 suppliers
to the Company for each of the years 1993, 1992 and 1991.
The estimated costs of warranty work and "out-of-warranty" work (less any
payments received therefor) for machines sold by the Company and the
Subsidiaries in each of 1993, 1992 and 1991 are set forth on Schedule 3.22C. It
is expressly acknowledged and agreed by Brown & Sharpe that inasmuch as the DEA
F-23
<PAGE>
Companies do not charge warranty costs to a separate account in the ordinary
course of business, actual historical warranty cost data are not available, and
that the figures stated in the foregoing sentence are solely estimates provided
in good faith for informational purposes. Unless such information has not been
provided in good faith, Finmeccanica shall not be liable for any failure to
disclose, or inaccurate disclosure of, the actual warranty cost of the DEA
Companies in respect of the machines described in the foregoing sentence.
Schedule 3.22D sets forth a correct and complete list of machines sold for
$95,000 or more (for standard machines) and $150,000 or more (for nonstandard
machines) under warranty as of the date hereof for which the Company has
provided special or non-standard warranty provisions. Attached as Schedule
3.22E are the standard warranty provisions relating to CMMs and spare parts
therefor produced and sold as part of the DEA Business since January 1, 1993.
3.23 No Illegal Payments, etc. Neither Finmeccanica, the Company or any of
its Subsidiaries, nor, to the knowledge of Finmeccanica or the Company, any of
their respective officers, employees or agents, has (a) directly or indirectly
given or agreed to give any illegal gift, contribution, payment or similar
benefit to any supplier, customer, governmental official or employee or other
person who was, is or may be in a position to help or hinder the Company or any
of its Subsidiaries (or assist in connection with any actual or proposed
transaction) or made or agreed to make any illegal contribution, or reimbursed
any illegal political gift or contribution made by any other person, to any
candidate for federal, state, local or foreign public office (i) which would
subject the Company, any of its Subsidiaries to any damage or penalty in any
civil, criminal or governmental litigation or proceeding or (ii) the non-
continuation of which has had or will have, individually or in the aggregate, a
material adverse effect on the Company or any Subsidiary or (b) established or
maintained any unrecorded fund or asset or made any false entries on any books
or records for any purpose.
3.24 Financial Statements and Other Information for Inclusion in the Brown &
Sharpe Proxy Statement. Finmeccanica has heretofore delivered to Brown & Sharpe
for inclusion in the Brown & Sharpe Proxy Statement and the Brown & Sharpe
Registration Statement (each as defined in Section 22) (i) consolidated
financial statements (expressed in U.S. dollars) consisting of balance sheets,
income statements, statements of cash flow and the footnotes relating thereto
for the Company and the Subsidiaries and including the operations of the
metrology business units in the United States, France and England (to the
extent not included in the above referred entities as at the end of and for
each of the years ended December 31, 1993, 1992 and 1991, and at March 31, 1994
and for the three months then ended (which statements are audited in the case
of the years ended December 31, 1993, 1992 and 1991 and unaudited in the case
of the three months ended March 31, 1994) in each case in accordance with U.S.
GAAP and in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations promulgated by the Securities
Exchange Commission (the "Commission Rules") applicable to financial statements
prepared for inclusion in proxy statements and registration statements, in each
case reported on and certified by the unqualified opinion of RE&Y with respect
to years ending December, 1992 and 1993 and of Coopers & Lybrand with respect
to years ending 1990 and 1991, together with the text of Management's
Discussion and Analysis of Financial Condition and Results of Operations
("Management's Discussion and Analysis") for the year ended December 31, 1993
and the three months ended March 31, 1994 and (ii) a description of the
business of the entities included in the consolidated financial statements
referred to above complying with the requirements, in each case, of the
Securities Act and the Exchange Act and the Commission Rules applicable to such
information. All of the financial statements referred to in this Section 3.24
are true and complete in all material respects and the Management's Discussion
and Analysis referred to above and the description of the business does not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading.
3.25 Disclosure. Neither this Agreement (including without limitation the
Schedules hereto), nor the DEA Financial Statements, nor the information and
financial statements furnished to Brown & Sharpe and referred to in Section
3.24 furnished for the Brown & Sharpe Proxy Statement and for the Brown &
Sharpe Registration Statement, nor any other document, certificate, financial
statement or other instrument furnished
F-24
<PAGE>
or to be furnished by or on behalf of Finmeccanica, contains or will contain
any untrue statement of a material fact, nor, considered as a whole, omit to
state a material fact necessary in order to make the statements contained
herein or therein not misleading.
4. REPRESENTATIONS AND WARRANTIES BY BROWN & SHARPE. Brown & Sharpe
represents and warrants to Finmeccanica as follows:
4.1 Corporate Status. Brown & Sharpe is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
full corporate power and authority to carry on its business as now conducted
and to own or lease and operate its properties as and in the places where such
business is now conducted and such properties are now owned, leased or
operated. Brown & Sharpe is qualified to do business in each jurisdiction in
which such qualification is required and where the failure to do so would have
a Material Adverse Effect (as defined in Section 4.6).
4.2 Authority for Agreement. Brown & Sharpe has all necessary corporate power
to execute and deliver this Agreement and the Stockholders Agreement and to
carry out its obligations hereunder and thereunder and to cause any of its
subsidiaries to carry out any of its obligations. The execution and delivery of
this Agreement and the Stockholders Agreement and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary actions on behalf of Brown & Sharpe on the date hereof, except for
the approval of its stockholders as contemplated by Section 10.6. Upon
obtaining of such approval by stockholders of Brown & Sharpe, this Agreement
and the Stockholders Agreement constitute the valid and legally binding
obligations of Brown & Sharpe and are enforceable against Brown & Sharpe in
accordance with their respective terms, subject to bankruptcy, insolvency,
reorganization or similar laws of general application affecting the rights and
remedies of creditors and to general equity principles; and the execution and
delivery of this Agreement and the Stockholders Agreement and the consummation
of the transactions contemplated hereby will not conflict with, or result in
any violation of, or default under, any provision of the charter or by-laws of
Brown & Sharpe or any mortgage, loan indenture, lease, agreement or other
instrument, permit, concession, grant, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Brown &
Sharpe, any of its subsidiaries or any of their respective properties or
assets. Except as set forth in Schedule 4.2, such execution, delivery and
consummation will not accelerate the maturity of or otherwise modify in any
material respect the terms of any indebtedness of Brown & Sharpe or any of its
subsidiaries, or result in the creation of any Encumbrance upon any of the
properties or assets of Brown & Sharpe or any of its subsidiaries. There are no
agreements by which Brown & Sharpe or any of its subsidiaries is bound which
restrict the ability of Brown & Sharpe to carry on the B&S Business anywhere in
the world. Except as set forth on Schedule 4.2 and subject to such filings as
may be required by the Securities and Exchange Commission, no consent,
approval, order or authorization of, or registration, declaration or filing
with, any governmental authority is required in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby and thereby by Brown & Sharpe.
4.3 Capitalization; Authorization of Brown & Sharpe Purchase Price Shares and
Brown & Sharpe Purchase Price Shares Right. Brown & Sharpe's authorized capital
stock consists of 15,000,000 shares of Class A Common Stock, 2,000,000 shares
of Class B Common Stock and 1,000,000 shares of Preferred Stock. On March 4,
1994 there were issued and outstanding 4,468,138 shares of Class A Common
Stock, 545,693 shares of Class B Common Stock and no shares of Preferred Stock.
On March 24, 1994, a total of 175,000 shares of Class A Common Stock were
issued to Diehl GmbH & Co. ("Diehl") in connection with the acquisition by
Brown & Sharpe from Diehl of the share capital of Ets. Pierre Roch S.A. and
Mauser Prazisions--Messmittel GmbH (the "Roch Group"), of which 140,350 shares
of Class A Common Stock were issued to Diehl for cash and 34,650 shares were
issued to Diehl in consideration for the transfer of the Roch Group to Brown &
Sharpe International Capital Corporation, a wholly-owned subsidiary of Brown &
Sharpe and an additional 25,000 shares of Class A Common Stock have been
reserved for issuance to Diehl pursuant to purchase price adjustments. In
connection with the acquisition of the Roch Group, Diehl also
F-25
<PAGE>
received a non-assignable contingent right to receive an additional 50,000
shares of Class A Common Stock of Brown & Sharpe.
As of March 24, 1994, the Company had reserved for issuance 609,523 shares of
Class A Common Stock issuable on conversion of the 9 1/4% Convertible
Debentures Due December 15, 2005 outstanding in principal amount of
$16,000,000, and shares of Class A Common Stock, not exceeding 800,000 shares
in the aggregate, issuable pursuant to the Amended Profit Incentive Plan, the
amended 1973 Stock Option Plan, the Restated Employee Stock Ownership and
Profit Participation Plan, the Savings and Retirement Plan and the 1989 Equity
Incentive Plan. Upon obtaining approval by the Stockholders of Brown & Sharpe,
the Brown & Sharpe Purchase Price Shares to be issued in connection with the
transactions contemplated hereby will have been duly authorized and, when
issued under this Agreement shall be validly issued, fully paid and non-
assessable. Brown & Sharpe has reserved a sufficient number of Class A Common
Stock for issuance pursuant to the Post-Closing Price Adjustment provided for
in Section 1.4 hereof. The Brown & Sharpe Purchase Price Shares will be duly
authorized for listing on the New York Stock Exchange upon the required
approval by stockholders of Brown & Sharpe of the issue thereof pursuant to
this Agreement. There are no preemptive rights on the part of any holder of any
class of securities of Brown & Sharpe. There are no options, warrants,
conversion or other rights, agreements, or commitments of any kind obligating
Brown & Sharpe, contingently or otherwise, to issue or sell any shares of its
capital stock of any class or any securities convertible into or exchangeable
for any such shares except as set forth above, and no authorization therefor
has been given, except for not exceeding 100,000 shares of Class A Common Stock
which may be issued in connection with potential acquisitions. All outstanding
shares of Brown & Sharpe's Class A Common Stock and Class B Common Stock and
any outstanding options, warrants or other rights to purchase shares of Brown &
Sharpe's capital stock and any shares of Brown & Sharpe's stock issuable upon
exercise, conversion or exchange thereof, have been issued or granted in
compliance with the registration or qualification provisions of the Securities
Act and any applicable state securities laws, or pursuant to valid exemptions
therefrom. Brown & Sharpe is not a party or subject to any agreement or
understanding and, to the best of its knowledge, there is no agreement or
understanding between any persons that affects or relates to the voting or
giving of written consents with respect to any security or the voting by a
director of Brown & Sharpe. Except for agreements relating to shares of Class A
common stock held by members of the Mercer family and by Diehl GmbH & Co.,
which together do not exceed in the aggregate 300,000 shares (exclusive of
50,000 contingent shares which Diehl GmbH has a right to acquire), Brown &
Sharpe is not under any obligation to register any of its presently outstanding
securities or any of its securities which may hereafter be issued. To the
extent Brown & Sharpe is under any obligation to register any of its
securities, such obligations do not violate, limit or impede the rights granted
to Finmeccanica under the Stockholders Agreement.
Brown & Sharpe has heretofore delivered a true and complete copy of its
Certificate of Incorporation, as amended, setting forth the rights and
privileges associated with the classes of its capital stock. A correct list as
of March 4, 1994 of beneficial owners of 5% or more of the capital stock of
Brown & Sharpe is contained in the Brown & Sharpe Proxy Statement delivered to
its securities holders for the 1994 Annual Meeting on April 29, 1994.
4.4 Subsidiaries. Except as set forth on Schedule 4.4, there are no
corporations, associations, partnerships or other entities or business
enterprises in which Brown & Sharpe, directly or indirectly, has any investment
or owns any shares of capital stock or any other record or beneficiary equity
or other ownership or control interest (except such investments or interests
which as of December 25, 1993 had a book value as reflected in the Brown &
Sharpe Financial Statements (as defined in Section 4.5) of less than $250,000)
which are set forth in a letter of even date from Brown & Sharpe to
Finmeccanica. Except as set forth on Schedule 4.4, Brown & Sharpe owns or is
sole beneficiary of all of the issued and outstanding stock options, warrants,
rights or commitments, relating to the issuance of any shares of capital stock
or equity interests of its subsidiaries. Brown & Sharpe and its subsidiaries
have no commitment to contribute to the capital of, make loans to or share the
losses of any enterprise.
F-26
<PAGE>
Each of Brown & Sharpe's subsidiaries is a duly organized, validly existing
corporation in good standing under the laws of its jurisdiction of
organization, and has all necessary power and authority (corporate or
otherwise) to carry on its business as presently conducted and as proposed to
be conducted.
4.5 Financial Statements. Attached hereto as Schedule 4.5 are copies of the
audited consolidated balance sheets of Brown & Sharpe and its subsidiaries at
and for the years ending December 25, 1993, December 26, 1992 and December 28,
1991 and the three months ending April 2, 1994 (unaudited) and related
statements of operations, changes in shareholder equity and cash flows
(together with the auditors' reports thereon) for each of the years in the
three year period ended December 25, 1993 and for the three months ended April
2, 1994 (unaudited), together with the notes to such financial statements (all
of such financial statements being herein referred to as the "Brown & Sharpe
Financial Statements"). Such financial statements are true and complete in all
material respects and have been prepared in accordance with U.S. GAAP
consistently applied throughout the periods indicated (except as otherwise
indicated in the report of Coopers & Lybrand and except as indicated in the
footnotes to the Financial Statements for the three months ended April 2,
1994), and fairly present the financial condition of the entities covered
thereby, as of the dates thereof, and the results of their operations for the
indicated periods subject, in the case of the unaudited statements, to normal
and recurring year-end audit adjustments.
4.6 Absence of Changes. Except as set forth in the Brown & Sharpe Report on
Form 10-Q for the quarter ended April 2, 1994 and in Schedule 4.6 and other
than liabilities which have arisen after December 25, 1993 in the ordinary
course of business consistent with past practice, since December 25, 1993, (a)
there has been no material adverse change in the condition, financial or
otherwise (other than as a result of general external economic conditions
affecting the metrology industry), properties, assets, liabilities, business or
operations of Brown & Sharpe and its subsidiaries, considered as a whole (a
"Material Adverse Effect") and (b) neither the Company nor any of its
subsidiaries has:
(i) declared, set aside, made or paid any dividend or other distribution
(other than intercompany dividends or distributions) in respect of its
capital stock, or agreed to do any of the foregoing, or purchase or redeem
or agreed to purchase or redeem, directly or indirectly, any shares of its
capital stock;
(ii) issued or sold any shares of its capital stock of any class or any
options, warrants, conversion or other rights to purchase any such shares
or any securities convertible into or exchangeable for such shares; except
for issuances or proposed issuances as referred to in Section 4.3;
(iii) incurred any indebtedness for purchase money or borrowed money
other than in the ordinary course of business consistent with past
practices, except that it is understood that Brown & Sharpe and its
Subsidiaries may borrow additional amounts under the lines of credit and
agreements described in its Annual Report on Form 10-K for the year ended
December 25, 1993 (the "Annual Report") and that Brown & Sharpe may obtain
a Rhode Island Plant mortgage which would be repaid following the Closing
out of the proceeds of the funding referred to in Section 10.11;
(iv) mortgaged, pledged, or subjected to any Encumbrance any of its
properties or assets, tangible or intangible, except for loans under the
lines of credit and agreements described in its Annual Report and Permitted
Encumbrances; other than in connection with a Rhode Island Plant Mortgage
referred to above;
(v) except in the ordinary course of business or in connection with the
Roch Group acquisition or any pending acquisition by Brown & Sharpe the
consideration for which consists of shares of its Class A Common Stock as
contemplated by Section 4.3, acquired or disposed of any tangible assets or
properties having a value in excess of $100,000 in any transaction with any
other person;
(vi) forgiven or canceled any debts or claims, or waived any rights,
except in the ordinary course of business and consistent with past
practices;
(vii) with respect to any director, officer, employee or consultant whose
annual compensation is, or was during the year ended December 25, 1993, in
excess of the equivalent of $50,000, (A) granted to any such person any
material increase in compensation in any form (including any material
increase in
F-27
<PAGE>
scope of any benefits), other than annual salary increases consistent with
prior practice, or increases upon promotions or bonuses under the
President's Award Program and the Profit Incentive Plan or promotional
increases in sales commissions, or (B) become subject to any request for
severance or termination pay, or granted any severance or termination pay,
or entered into any employment or severance agreement with any such person;
(viii) adopted, or amended in any material respect, any bonus, profit-
sharing, compensation, stock option, pension, welfare, security,
retirement, deferred compensation or other material plan, agreement, trust,
fund or arrangement of Brown & Sharpe Manufacturing Company for the benefit
of any employee or employees;
(ix) experienced any Material Adverse Effect in its relations with any of
its suppliers or customers;
(x) except for the construction of the TML Building in England or as
disclosed on Schedule 4.6, made any capital expenditures or commitment
therefor in excess of $250,000;
(xi) incurred any liability (absolute, accrued or contingent) except
current liabilities incurred, liabilities under contracts entered into, in
each case incurred in the ordinary course of business, borrowings under
short-term lines of credit, the borrowings referred to in clauses (iii) and
(iv) above and liabilities in respect of letters of credit issued under
credit facilities;
(xii) extended or modified in any material respect the terms or
provisions of any lease of real property to the Company or any Subsidiary
that is a Brown & Sharpe Material Contract (as defined in Section 4.12).
(xiii) made any change in accounting principles or practices, except for
a shift to percentage of completion accounting for its Leitz subsidiary
(Brown & Sharpe already being on percentage of completion accounting
method).
4.7 Taxes.
Except as set forth on Schedule 4.7:
(i) Brown & Sharpe and each of its Subsidiaries have filed or caused to
be filed and, from the date hereof until the Closing Date, will file or
cause to be filed all Tax Returns required to be filed by them on or before
the date hereof or the Closing Date (as applicable) with respect to Taxes.
(ii) All Taxes which are shown on Tax Returns filed on or before the date
hereof as due from or payable by Brown & Sharpe or its Subsidiaries have
been paid in full or adequately disclosed and fully provided for in the
Brown & Sharpe Financial Statements and all Taxes which are shown on Tax
Returns filed after the date hereof and on or before the Closing Date due
from or payable by Brown & Sharpe or its Subsidiaries will be paid in full
or adequately disclosed and fully provided for in the Brown & Sharpe
financial statements.
(iii) There are no actions, suits, proceedings, examinations, audits,
claims or assessments by any governmental authority now pending against
Brown & Sharpe or its subsidiaries in respect of Taxes or any Tax Return.
(iv) There are no outstanding agreements or waivers between Brown &
Sharpe or any subsidiary and any governmental authority extending the
statute of limitations applicable to any Tax Return of Brown & Sharpe or
any of its subsidiaries for any period;
(v) No Tax deficiency (whether or not agreed to by Brown & Sharpe or its
Subsidiaries) have been assessed against proposed in writing to be assessed
against Brown & Sharpe or any subsidiary by any governmental authority
except for Tax deficiencies that have been paid in full or adequately
disclosed and fully provided for in the Brown & Sharpe Financial
Statements.
(vi) Brown & Sharpe and its subsidiaries are not a party to any Tax
sharing agreement.
(vii) Brown & Sharpe and its subsidiaries are not liable, by contract or
as a matter of law, primarily or otherwise, for the payment of any Taxes
for which another person is liable.
F-28
<PAGE>
4.8 Litigation. Except for the matters described in Schedule 4.8 and claims
fully covered by insurance policies of the Company and its subsidiaries, there
are no judicial or administrative actions, suits, proceedings or arbitrations
or investigations (domestic or foreign) pending or, to the best knowledge, of
Brown & Sharpe, threatened (for an amount in excess of $100,000 in the case of
threatened matters) against Brown & Sharpe or any of its subsidiaries. Brown &
Sharpe has heretofore furnished or made available to Finmeccanica, if so
requested by Finmeccanica, true and complete copies of all relevant court
papers, proceedings, administrative requests, and other documents relating to
the matters specifically set forth on Schedule 4.8.
4.9 Filings Under the Securities Exchange Act of 1934.
(a) The Brown & Sharpe Annual Report on Form 10-K for the year ended December
25, 1993, the Report on Form 10-Q for the first quarter of 1994 and the 1994
Annual Meeting Proxy Statement heretofore filed under the Exchange Act, when
they were filed (or, if any amendment with respect to any such document was
filed, when such amendment was filed), conformed in all material respects with
the requirements of the Exchange Act and the rules and regulations thereunder;
and no such document when it was filed (or, if an amendment with respect to any
such document was filed, when such amendment was filed), contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading.
(b) The Brown & Sharpe Proxy Statement to approve the issue of the Brown &
Sharpe Purchase Price Shares and the Contingent Stock under this Agreement,
when filed, will conform in all material respects with the requirements of the
Exchange Act and the rules and regulations thereunder and, when it is filed,
will not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, excluding from the provisions of this
Section 4.9(b) the description of the DEA Business, the financial statements of
the Company and the Subsidiaries, the related Management's Discussion and
Analysis and financial and other data relating to the Company and the
Subsidiaries contained therein.
(c) The Brown & Sharpe Registration Statement, when filed, will conform in
all material respects with the requirements of the Securities Act and the
Commission Rules and, when it is declared effective in accordance with the
Commission Rules, will not contain an untrue statement of a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading, in light of the circumstances under which they were
made, excluding from the provisions of this Section 4.9(c) the description of
the business of the Company and the Subsidiaries (or information in respect
thereof contained in a combined description of the business of Brown & Sharpe
after giving effect to the transactions contemplated by this Agreement), the
financial statements of the Company and the Subsidiaries, the related
Management's Discussion and Analysis and financial and other data relating to
the Company and the Subsidiaries contained therein.
4.10 Brokers, Finders, etc. Neither Brown & Sharpe nor any of its
subsidiaries has retained any financial advisor, broker, agent or finder or
paid or agreed to pay for any financial advisor, broker, agent, or finder on
account of this Agreement or any transaction contemplated hereby, or any
transaction of like character that would be required to be paid by Brown &
Sharpe, the Company, any of its Subsidiaries or Finmeccanica, except for the
fees of Wertheim Schroder payable by Brown & Sharpe pursuant to the agreements
between Brown & Sharpe and Wertheim Schroder.
4.11 Disclosure. This Agreement (including without limitation the Schedules
hereto), the Brown & Sharpe Financial Statements, the information furnished by
Brown & Sharpe for the Brown & Sharpe Proxy Statement, any other document,
certificate, financial statement or other instrument furnished or to be
furnished by or on behalf of Brown & Sharpe do not contain any untrue statement
of a material fact, or, considered as a whole, omit to state a material fact
necessary in order to make the statements contained herein or therein not
misleading.
F-29
<PAGE>
4.12 Contracts and Other Instruments
(a) The Brown & Sharpe Annual Report on Form 10-K for the year ended December
25, 1993 includes in Item 14 a list of all contracts, agreements and other
instruments material to Brown & Sharpe ("B&S Material Contracts"), to the
extent required to be so listed and filed as an exhibit by applicable rules
under the Exchange Act and, except as specified therein, as of the date such
Annual Report was filed pursuant to the Exchange Act, there is no other
contract, agreement or other instrument that is material to the Brown & Sharpe
Business, taken as a whole, which was required to be so filed.
(b) Except as disclosed in Schedule 4.12, neither Brown & Sharpe nor, to
Brown & Sharpe's best knowledge, any other party to any B&S Material Contract
to which Brown & Sharpe is a party or which any of their assets or properties
are bound is in breach of or default under or is claimed to be in breach of or
default in complying with any provision thereof or has committed or permitted
any event which, with notice or the passage of time or both, would constitute
such a breach or default, except for such breaches and defaults which in the
aggregate would not have a Material Adverse Effect on the B&S Business taken as
a whole.
(c) Except as set forth in Schedule 4.12, no consent of any party to any such
contract, agreement or other instrument to which Brown & Sharpe is a party or
by which any of their properties or assets are bound is required for any of the
transactions contemplated by this Agreement except for such consents, the
failure of which to obtain would not in the aggregate have a Material Adverse
Effect on Brown & Sharpe.
4.13 Compliance with Laws; Governmental Authorizations. Except for matters
described in Schedule 4.13 or covered elsewhere in this Section 4, Brown &
Sharpe and its subsidiaries are not in violation in any material respect of any
governmental license or permit, statute, law, ordinance, rule, regulation,
judgment, order, decree, permit, concession, grant, franchise, license or other
governmental authorization or approval including without limitation any EU laws
applicable to Brown & Sharpe or its subsidiaries or to any of their assets,
properties, properties or businesses. All permits, concessions, grants,
franchises, licenses and other governmental authorizations and approvals
necessary for the conduct of the business of Brown & Sharpe and its
subsidiaries as presently conducted have been duly obtained and are in full
force and effect, except where the failure to obtain or maintain in effect any
of the foregoing would not have a material adverse effect on the business of
Brown & Sharpe or any subsidiary, and there are no proceedings pending or, to
the Brown & Sharpe's best knowledge, threatened that may result in the
revocation, cancellation or suspension, or any materially adverse modification,
of any thereof.
4.14 Environmental Matters. Schedule 4.14 is a true and complete list of all
known conditions or states of fact existing on the date hereof and as of the
Closing Date based on or resulting from the presence in or discharge, spill,
disposal, emission, generation, storage or release of any chemical, pollutant,
contaminant, waste, toxic or hazardous substance or petroleum product into the
environment caused by any of Brown & Sharpe or any of its subsidiaries at any
location owned or leased, currently or in the past, by Brown & Sharpe or any of
its subsidiaries, which constitutes a violation of or requires remediation
under any Health and Environmental Laws.
4.14.1 Except as disclosed on Schedule 4.14, Brown & Sharpe and its
subsidiaries are in compliance in all material respects with all applicable
Health and Environmental Laws with respect to the use, transport, import,
export, temporary or final storage, recycling or disposal of any waste,
chemical substance or mixture, pollutant, including without limitation, any
contaminant, irritant, or pollutant or other hazardous or toxic substance
("Hazardous Materials") which are identified as such in any jurisdiction in
which Brown & Sharpe or its subsidiaries either owns or leases real
property or conducts its business.
4.14.2 Except as disclosed on Schedule 4.14, (i) neither Brown & Sharpe
nor any of its subsidiaries has received notice from any governmental
authority (or has knowledge that any governmental authority may give
notice) that it is in violation of any applicable Health Environmental Laws
with respect to the
F-30
<PAGE>
use, transport, import, export, temporary or final storage or disposal of
any such Hazardous Materials; (ii) Brown & Sharpe and its subsidiaries have
obtained and have complied with all financial or other conditions contained
in all necessary permits, licenses, authorizations and consents for the
use, transport, import, export, temporary or final storage, recycling and
disposal of all Hazardous Materials used in the conduct of the Brown &
Sharpe Business except for those permits, licenses or authorizations the
failure to obtain which would not have a Material Adverse Effect on the
Brown & Sharpe Business; and (iii) to Brown & Sharpe's knowledge, there
have been no, direct or indirect, discharges, spills or leaks or releases,
whether accidental or voluntary, of any Hazardous Materials caused by any
of Brown & Sharpe or any of its subsidiaries on any real property (a) now
leased or previously leased or (b) now owned or previously owned by Brown &
Sharpe or any of its subsidiaries, which in any case constitutes a
violation of or requires remediation under any Health and Environmental
Law.
4.15 Absence of Undisclosed Liabilities. Except as set forth in Schedule 4.15
and other than liabilities which have arisen after December 25, 1993 in the
ordinary course of business consistent with past practice (including those
permitted by or scheduled pursuant to Section 4.6), neither Brown & Sharpe nor
any of its Subsidiaries has any material liabilities or obligations of any
nature, whether absolute, contingent or otherwise which are required to be
reflected or reserved against in, or otherwise provided for in the notes to,
the Brown & Sharpe Financial Statements under U.S. GAAP and which are not so
reflected or reserved against therein or in the notes thereto.
4.16 Prohibited Foreign Trade Practices Act; Sensitive Payments. To the best
of Brown & Sharpe's knowledge, Brown & Sharpe and its subsidiaries are in
compliance with the Prohibited Foreign Trade Practices Act with respect to the
Brown & Sharpe Business, and have no "sensitive" receipts or disbursements,
which are defined to mean the following types of transactions: (i) illegal
receipts from or payments to governmental officials or employees; (ii)
commercial bribes or kickbacks; (iii) amounts disbursed or received with an
understanding that rebates or refunds will be made in contravention of the laws
of any nation or other jurisdiction; (iv) illegal political contributions; or
(v) payments of commitments, regardless of form, made with the knowledge or
under circumstances that would indicate that all or part thereof is to be paid
ultimately to or for the benefit of governmental officials or employees or as
an influence payment or kickback.
5. EXPENSES. Each of the parties hereto shall assume and bear all expenses,
costs and fees (including any fees of investment banks, financial advisors,
professional advisers and legal counsel) incurred or assumed by such party in
the preparation and execution of this Agreement and compliance herewith,
whether or not the transactions herein provided for shall be consummated, it
being understood and agreed that Finmeccanica and not the Company shall assume
and bear the reasonable legal, and other out-of-pocket expenses, costs and fees
of the Company and the Subsidiaries in connection with the transactions hereby
contemplated, except that the Company may pay for the audit fees of RE&Y in
preparing the audited financial statements of the Company and the Subsidiaries,
including the Closing Financial Statements; Brown & Sharpe, on the one hand,
and Finmeccanica, on the other, shall indemnify and hold each other harmless
from and against any and all liabilities and claims in respect of any such
expenses, costs or fees or taxes which are the responsibility of or assumed by
Brown & Sharpe, the Company and the Subsidiaries on the one hand and which are
the responsibility of or assumed by Finmeccanica and their affiliates on the
other hand. Notwithstanding the foregoing, all excise, documentary, transfer
(including indirect transfer of stock of the Subsidiaries), value added taxes
and like taxes, if any, or fees for the like payable in connection with the
sale, transfer and delivery of the DEA Shares to Brown & Sharpe or its
designees (including indirect transfer of DEA Subsidiary shares and
transactions pursuant to the Post-Closing Purchase Price Adjustment provisions)
shall be paid in the first instance by Brown & Sharpe and the total cost
thereof shall be borne equally by the parties, except that in this connection
it is agreed that any liability for registration taxes or issue taxes incurred
by the Company in connection with the removal of "excess" Indebtedness of the
Company in accordance with Section 6.4 and other applicable sections shall be
paid by the Company and shall be the responsibility of Brown & Sharpe and shall
not be reflected in the Pricing Adjusted Net Asset Value for purposes of
determining the Post-Closing Purchase Price Adjustment.
F-31
<PAGE>
6. ADDITIONAL COVENANTS OF THE PARTIES. The parties further covenant and
agree as follows:
6.1 Conduct of Business. From and after the date of this Agreement and until
the Closing Date, except as the other party shall otherwise specifically
consent to in writing, each of the parties will conduct, or in the case of
Finmeccanica, cause the Company and the Subsidiaries to conduct, their affairs
so that they:
(a) carry on their respective businesses in, and only in, the usual,
regular and ordinary course in substantially the same manner as conducted
since January 1, 1994 and use reasonable efforts to preserve intact their
respective present business organizations, to the extent reasonably
possible keep available the services of present officers and employees, and
preserve their respective relationships with customers, suppliers and
others having business dealings with them;
(b) not sell or withdraw assets, including factoring of receivables,
except for inventory in the ordinary course of business or disposals of
assets which are replaced in the ordinary course.
(c) maintain all of the material structures, equipment and other tangible
personal property used in the conduct of their respective businesses as
conducted since January 1, 1993 in good repair, order and condition except
for ordinary wear and tear;
(d) keep in full force and effect insurance comparable in amount and
scope of coverage to the insurance now carried by them and, in the case of
Finmeccanica, as disclosed on Schedule 3.13;
(e) perform in all material respects all obligations under all DEA
Material Contracts and B&S Material Contracts, as the case may be;
(f) maintain their books of account and records in the usual, regular and
ordinary manner;
(g) comply in all material respects with all applicable statutes, laws,
ordinances, rules and regulations;
(h) not take or permit to be taken any action or incur any liability or
obligation which if taken or incurred prior to the date hereof would have
been required to be disclosed pursuant to any of the representations and
warranties made by Finmeccanica or Brown & Sharpe, as the case may be;
(i) not issue any capital stock or other securities other than, in the
case of Brown & Sharpe, as may be required pursuant to any of Brown &
Sharpe's stock option or employee benefit plans described in Section 4.3 or
from such reserves as are disclosed in Section 4.3 or not exceeding 100,000
shares of Class A Common Stock for purposes of future acquisitions; and
(j) maintain adequate reserves under the applicable accounting principles
specified in Section 3.5 and the reserve policies provided to Brown &
Sharpe and referred to in Section 1.4(b) or the applicable accounting
principles specified in Section 4.5 for all Taxes and other governmental
charges which have occurred during such period and for any disputes with
customers.
Notwithstanding the foregoing provisions of this Section 6.1, this Section
6.1 shall be subject to the over-riding provisions of Section 2.7 which
provides, as set forth therein, that the business of the DEA Companies during
the period after July 31, 1994 and prior to the completion of the Closing on
the Closing Date shall be operated for the economic benefit of Brown & Sharpe.
In addition, the factoring of a mutually agreed amount of receivables of the
DEA Companies, as contemplated by Section 1.4(j) and Section 6.4, shall not
constitute a violation of this Section 6.1.
6.2 Governmental Filings. (a) The parties shall fully cooperate in making
joint or separate filings to the German, Belgian, and Portuguese antitrust or
competition authorities and in seeking any approvals which may be required from
such authorities for the consummation of the transactions contemplated hereby.
Each party shall be responsible for any inaccuracy or omission relating to
information supplied by it and contained in such filings and further agrees to
indemnify and hold harmless the other party for any damages, including without
limitation, fines imposed by such authorities, arising from such inaccuracy or
omission.
(b) The parties acknowledge that the Closing may occur on a date which is
more than one year after the expiration in August 1993 of the waiting period
under the Hart-Scott-Rodino Antitrust Improvement
F-32
<PAGE>
Act of 1976 ("HSR") for completion of the transactions contemplated hereby and
that it is a condition to each of Finmeccanica's and Brown & Sharpe's
obligation to perform its agreements hereunder that the transactions either
close prior to the expiration of said one year period or that the parties
refile reports under the HSR Act and not complete the transactions hereby
contemplated until after the expiration of the HSR waiting period following
said 1994 HSR filings by the parties. Accordingly, each of the parties
covenants and agrees to cooperate and use their best efforts to make all
necessary filings and notifications under HSR permit the Closing.
6.3 Shareholder Approval. (a) Brown & Sharpe shall, as soon as reasonably
practicable after the date hereof, take all action necessary in accordance with
the Exchange Act, the laws of the State of Delaware and Brown & Sharpe's
Certificate of Incorporation and By-laws to give notice of and convene a
special meeting (the "Meeting") of its shareholders to consider and vote upon
the approval of the issuance of the Brown & Sharpe Purchase Price Shares in
connection with the consummation of the transactions contemplated hereby and
for such other purposes as may be necessary or desirable. The Board of
Directors of Brown & Sharpe shall, consistent with their fiduciary obligations,
recommend without qualification of any nature that Brown & Sharpe's
shareholders vote to approve such issuance of the Brown & Sharpe Purchase Price
Shares, and use its reasonable best efforts to solicit and secure from the
shareholders of Brown & Sharpe such approval, which efforts may include,
without limitation, causing Brown & Sharpe to solicit shareholder proxies
therefor and to advise Finmeccanica upon its request from time to time as to
the status of the shareholder vote then tabulated.
(b) Promptly following the date of this Agreement, Brown & Sharpe shall
prepare and file with the Securities and Exchange Commission under the Exchange
Act and the Commission Rules a preliminary draft of the Brown & Sharpe Proxy
Statement. The Company and Finmeccanica shall cooperate fully with Brown &
Sharpe in the preparation and filing of the Brown & Sharpe Proxy Statement and
any amendments and supplements thereto. So far as practicable in the judgment
of Brown & Sharpe's counsel, the Brown & Sharpe Proxy Statement shall not be
filed, and no amendment or supplement thereto shall be made by Brown & Sharpe,
without Finmeccanica's (or its counsel's) prior approval which shall not be
unreasonably delayed or withheld. Brown & Sharpe shall use its reasonable best
efforts to have any review of the Brown & Sharpe Proxy Statement conducted by
the Securities and Exchange Commission promptly. As soon as reasonably
practicable following the date hereof, Brown & Sharpe shall cause to be mailed
a definitive Brown & Sharpe Proxy Statement to its shareholders entitled to
vote at the Meeting called to vote upon the issuance of the Brown & Sharpe
Purchase Price Shares promptly following completion of any review by, or in the
absence of such review, the termination of any applicable waiting period
required under the Exchange Act and the Commission Rules.
6.4 Elimination of Excess Indebtedness. Finmeccanica will, prior to July 31,
1994, make its best possible forecast of the amount of total Indebtedness of
the DEA Companies, net of cash, in excess of Lit. 800 Million, on the
Forecasted Pricing Balance Sheet of the DEA Companies as of July 31, 1994.
Based on that forecast, Finmeccanica will identify the amount of total
Indebtedness of the DEA Companies to be discharged at the Closing by
Finmeccanica. If practical, Finmeccanica may concentrate the Indebtedness of
the DEA Companies (including through a payoff of certain Indebtedness to third
parties) in the so-called current account of the DEA Companies with
Finmeccanica. By making contributions of the appropriate amount to the capital
of DEA on or prior to the Closing, Finmeccanica will put itself in a position
to cause the DEA Companies to be obligated at the Closing in the aggregate only
with respect to an amount of Indebtedness equal to the amount of Aggregate
Permitted Indebtedness as of July 31, 1994. It is understood that, as of the
Pricing Date, July 31, 1994, the exact amount of Indebtedness of the DEA
Companies to be discharged can only be estimated. After July 31, 1994 and prior
to the Closing, Finmeccanica shall use its best efforts to gather the
information necessary to verify the accuracy of the forecast made prior to July
31, 1994 with regard to the amount of Indebtedness of the DEA Companies to be
discharged. Finmeccanica will share such information with Brown & Sharpe, and
the parties agree that they will work together in good
F-33
<PAGE>
faith to effect the required reduction of Indebtedness in a manner that will
result, after making all of the calculations contemplated by Section 1.4, in
the issuance of the least possible number of additional Brown & Sharpe Purchase
Price Shares under Section 1.4(h). Accordingly, Finmeccanica will determine,
with the consent of Brown & Sharpe, which may not unreasonably be withheld, if
the forecast for the amount of Indebtedness of the DEA Companies to be
discharged by Finmeccanica on the Closing needs to be modified based on the new
information, and any such modification shall be reflected on the Forecasted
Pricing Balance Sheet (which term shall thereafter for all purposes reflect
such modification).
On the Closing Date Finmeccanica shall cause the DEA Companies to be
obligated in the aggregate only with respect to Indebtedness equal to the
amount of Aggregate Permitted Indebtedness as of July 31, 1994 by discharging
any DEA Companies Indebtedness in excess of Aggregate Permitted Indebtedness.
Subsequent to the Closing, on the basis of the final Pricing Balance Sheet as
determined under Section 1.4(f), the precise actual amount of Excess
Indebtedness that should have been discharged at the Closing shall be
established ("Actual Excess Indebtedness"). In the event that the Actual Excess
Indebtedness as of July 31, 1994 based on the Pricing Balance Sheet is less or
more than the Forecasted Excess Indebtedness based on the Forecasted Pricing
Balance Sheet as of July 31, 1994 (as adjusted by Finmeccanica for any
reforecast required by this Section 6.4 above), the amount of said overage or
shortfall shall be taken into account and netted in the Post-Closing Purchase
Price Adjustment calculation as provided in Section 1.4(g). Then, as and to the
extent required by Section 1.4(h), Brown & Sharpe shall issue additional Brown
& Sharpe Purchase Price Shares or Finmeccanica shall contribute cash to the
capital of Brown & Sharpe (without receiving any shares of stock therefor).
6.5 B&S Business Plan. As soon as practicable after the date hereof, and in
any event not later than the Closing Date, the executive management of Brown &
Sharpe shall submit for approval by the Board of Directors of Brown & Sharpe
(as evidenced by an extract from the meeting of the Board of Directors of Brown
& Sharpe) a business plan for the 18-month period commencing upon the Closing
Date (containing a detailed action plan for the implementation of management's
revenue and cost objectives). Brown & Sharpe shall deliver to Finmeccanica, not
later than the Closing, a copy of such business plan.
7. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Except as otherwise
specifically provided for in this Agreement, all representations, warranties
and agreements (other than Section 8) of Finmeccanica and Brown & Sharpe
contained herein or in any document, certificate or other instrument required
to be delivered hereunder in connection with the transactions contemplated
hereby shall survive for a period of 21 months from the Closing Date.
Notwithstanding the foregoing:
(a) the representations and warranties set forth in Sections 3.16, 3.20,
and 3.21 and Section 4.14 shall survive for five years from the Closing
Date;
(b) the representations and warranties set forth in Sections 3.8, 3.19,
3.23 and 3.24 and Sections 4.7 and 4.9 shall survive until thirty (30) days
after the expiration of the relevant statutes of limitation, including any
extensions thereof; and
(c) the representations and warranties set forth in Sections 3.2, 3.4,
3.9.1, 3.12 and 3.17 and Sections 4.2, 4.3 and 4.10 shall survive without
limit as to time.
8. INDEMNIFICATION.
8.1 Indemnity by Finmeccanica. Finmeccanica hereby agrees to indemnify,
defend and hold harmless Brown & Sharpe and its directors, officers and
affiliates (and, in the case of claims arising in connection with the DEA
Financial Statements and the information furnished by Finmeccanica and included
in the Brown & Sharpe Proxy Statement or the Brown & Sharpe Registration
Statement, each person, if any, who controls Brown & Sharpe within the meaning
of Section 15 of the Securities Act) against and in respect of any damage that
results from
(i) the inaccuracy of any representation or warranty made by Finmeccanica
herein, or resulting from any misrepresentation, breach of warranty or non-
fulfillment of any agreement or covenant of
F-34
<PAGE>
Finmeccanica contained herein or in any agreement or instrument required to
be entered into in connection herewith and specifically identified herein
or from any misrepresentation in or omission from any schedule, document,
certificate or other instrument required to be furnished by Finmeccanica
hereunder and specifically identified herein;
(ii) (a) the amount (if any) by which the accrual for TFR Liabilities on
the Pricing Balance Sheet exceeds Lit. 1,715 million; (b) the amount (if
any) by which the Lit. 2,400 million liability for INPS for terminated
employees reflected on the June 30, 1993 DEA Financial Statements has not
been actually paid by the Closing, except for Lit. 16 million which the
parties agreed need not be paid by such date; and (c) any liability to any
employee of the Company or any Subsidiary terminated or terminating prior
to or on the Closing Date or, after the Closing Date, if such termination
results from or grants rights to any such employee as a consequence of a
change in control (excluding those provisions provided for under applicable
labor or national contract or statute); and (d) any in accuracy in the
representations and warranties made in Section 1.4(b) above and in Schedule
1.4(b);
(iii) any liability of the Company or any Subsidiary for Indebtedness in
excess of the Aggregate Permitted Indebtedness on the Closing Date (subject
to the Post-Closing Purchase Price Adjustment);
(iv) any liability on account of any conditions or states of fact
existing on the Closing Date based on or resulting from the presence in or
discharge, spill, disposal, emission, generation, storage or release of any
chemical, pollutant, contaminant, waste, toxic or hazardous substance or
petroleum product into the environment caused by any of the DEA Companies
at any location owned or leased, currently or in the past, by the Company
or any of its Subsidiaries, which constitutes a violation of or requires
remediation under Environmental Laws other than any such conditions or
states of fact disclosed on Schedule 3.16 (as to which Finmeccanica shall
have no liability under this clause (iv)); provided that such condition or
states of fact shall not have been discovered as a result of Brown &
Sharpe's voluntary investigative efforts; provided, further that nothing in
this clause (iv) shall limit the obligations of Finmeccanica pursuant to
clause (i) to the extent such matters relate to a breach of the
representations and warranties covered by Section 3.16 hereof;
(v) all Taxes arising from judgments, assessments, impositions,
administrative decrees or arbitration awards upon, or being the liabilities
of, the Company or any of the Subsidiaries to the extent that such Taxes
are not absorbed by net operating losses and are attributable to any period
ending on or prior to the Closing Date and the aggregate liability in
respect thereof exceeds the amount provided for Taxes in the Closing
Balance Sheet;
(v) (A) any liability or other damages (including without limitation, the
cost of making improvements to facilities or changes in operations
conducted at the facilities in order to obtain the issuance of the permits
and certificates noted in Schedule 3.15) resulting from the failure of the
DEA Business to have the permits or certificates noted in Schedule 3.15.
(vi) any and all claims, actions, suits and proceedings resulting from
any of the foregoing (hereinafter called a "Brown & Sharpe Claim" or "Brown
& Sharpe Claims").
At the option of Brown & Sharpe, any dispute between the parties under clause
(iv) of Section 8.1 as to the existence of states of fact or conditions on or
prior to the Closing Date or having come into existence after the Closing Date
shall be referred to the parties' respective independent environmental
consultants which shall attempt to resolve such disputes and whose
determination shall be final and binding on the parties. If such independent
environmental consultants are themselves unable to agree, they shall refer any
such dispute to a third firm of independent environmental consultants whose
determination and resolution of such dispute shall be final and binding on the
parties. Such third firm of independent environmental consultants shall make
its determination within sixty (60) days after the referral. Each party shall
bear the cost of its own independent environmental consultants and shall share
equally in the costs of any third firm of independent environmental consultants
so appointed.
Notwithstanding the foregoing, Finmeccanica shall have no obligation to
indemnify Brown & Sharpe under this Section 8.1 unless, and only to the extent
that, the aggregate of all amounts for which indemnity
F-35
<PAGE>
would otherwise be due as a result of or arising out of the matters set forth
in clauses (i) through (vi) of Section 8.1 (but excluding clause (ii)(a)) above
exceed $500,000, provided that in computing such amount each single indemnity
amount (or any series of amounts relating to a class action or series of claims
arising out of a common set of facts) of less than $10,000 shall be
disregarded. Finmeccanica's liability under this Section 8.1 shall not exceed
in the aggregate $10,000,000.
8.2 Brown & Sharpe Indemnity. Brown & Sharpe hereby agrees to indemnify and
hold harmless Finmeccanica and its directors, officers and affiliates against
and in respect of any damage resulting from
(i) the inaccuracy of any representation or warranty made by Brown &
Sharpe or resulting from any misrepresentation, breach of warranty or non-
fulfillment of any agreement or covenant of Brown & Sharpe contained herein
or in any agreement or instrument required to be entered into in connection
herewith and specifically identified herein or from any misrepresentation
in or omission from any document, certificate or other instrument required
to be furnished by Brown & Sharpe hereunder and specifically identified
herein or any liability or any other damage arising prior to the expiration
of 21 months from the Closing resulting from (i) any accounting restatement
of Brown & Sharpe Financial Statements (other than a restatement for the
change in accounting principle previously disclosed in Brown & Sharpe's 10Q
for the first quarter of 1994) or (ii) the establishment of a specific
receivable reserve relating to one customer, as disclosed in the Brown &
Sharpe Registration Statement, or any charges made thereto, (it being
understood that this provision shall be the only remedy for breach of any
representation by Brown & Sharpe based on the occurrence of any such
restatement, or the transaction giving rise to said restatement).
(ii) any liability on account of (A) facts or conditions which present a
substantial threat to human health or to the environment, including
environmental conditions at operating facilities, or (B) any violation of
any environmental laws which are or may become applicable, relating to any
act or failure to act by Brown & Sharpe or condition or occurrence existing
on or prior to the Closing Date unless such facts or conditions are set
forth on Schedule 4.14 (in which event there shall be no liability with
respect thereto under this clause (ii)); provided, however, that nothing in
this clause (ii) shall limit the obligations of Brown & Sharpe pursuant to
clause (i) to the extent that such matters relate to a breach of the
representations and warranties covered by Section 4.14 hereof;
(iii) all Taxes arising from judgments, assessments, impositions,
administrative decrees or arbitration awards upon, and being the
liabilities of, Brown & Sharpe or any of the Brown & Sharpe Subsidiaries to
the extent that such Taxes are attributable to the period prior to the
Closing Date and the aggregate liability in respect thereof exceeds the
amount provided for Taxes in the December 25, 1993 consolidated balance
sheet included in the Brown & Sharpe Financial Statements, as adjusted in
the interim consolidated financial statements of Brown & Sharpe during the
period from December 25, 1993 through the quarter ending prior to the
Closing Date; and
(iv) any and all claims, actions, suits and proceedings resulting from
any of the foregoing (hereinafter called an "Finmeccanica Claim" or
"Finmeccanica Claims").
Notwithstanding the foregoing, Brown & Sharpe shall have no obligation to
indemnify Finmeccanica under this Section 8.2 unless, and only to the extent
that, the aggregate of all amounts for which indemnity would otherwise be due
as a result of or arising out of the matters set forth in clauses (i) through
(iv) above exceed $500,000; provided that in computing such amount each single
indemnity amount (or any series of amounts relating to a class action or series
of claims arising out of a common set of facts) of less than $10,000 shall be
disregarded. Brown & Sharpe's liability under this Section 8.2 shall not exceed
$10,000,000.
8.3 Certification of Claims. If Brown & Sharpe or Finmeccanica is of the
opinion that any Brown & Sharpe Claim or an Finmeccanica Claim, as the case may
be, has occurred or will or may occur, Brown & Sharpe or Finmeccanica, as the
case may be, shall so notify the other, and each such notice shall specify the
circumstances of such asserted Brown & Sharpe Claim or Finmeccanica Claim.
F-36
<PAGE>
8.4 Third Party Actions.
(a) In the event any claim is made, suit is brought or tax audit or other
proceeding, including any administrative action relating to environmental laws
or conditions, is instituted against Brown & Sharpe or the Company or any
Subsidiary, or any of their respective directors, officers or affiliates which
involves or appears reasonably likely to involve a Brown & Sharpe Claim for
which indemnification may be sought against Finmeccanica hereunder, Brown &
Sharpe will, promptly (and in any event within 15 days) after receipt of notice
of any such claim, suit, tax audit or proceeding, notify Finmeccanica of the
commencement thereof. The failure to so notify Finmeccanica of the commencement
of any such claim, suit, tax audit or proceeding will relieve Finmeccanica from
liability only to the extent that such failure materially adversely affects the
ability of Finmeccanica to defend its interests in such claim, suit, tax audit
or proceeding. Finmeccanica (at its expense) shall have the right and shall be
given the opportunity (i) to assume and control the defense of such claim,
suit, tax audit or proceeding or (ii) in the case of any environmental claim or
administrative action for which remediation is or may be required, to have
authority and control as to the methodology, extent and implementation of any
clean-up or remedial measures ("Remedial Measures") with respect thereto,
provided that Brown & Sharpe and its counsel (at Brown & Sharpe's expense) may
participate in (but not control the conduct of) all matters pertaining to the
defense or settlement of such claim, suit, tax audit or proceeding and, in the
case of any Remedial Measures required by law or administrative action, have
the rights provided in Section 8.7.1 hereof. Whether or not Finmeccanica elects
to assume such defense, Brown & Sharpe shall not, except at its own cost, make
any settlement with respect to any such claim, suit, tax audit or proceeding
without the prior consent of Finmeccanica, which may not be unreasonably
withheld; provided, that, if Finmeccanica elects not to undertake any Remedial
Measure(s) as may be required either by law or pursuant to an administrative
order, Brown & Sharpe may undertake any and all such Remedial Measures as may
be required by such law or administrative order without the consent of
Finmeccanica but the lack of Finmeccanica's consent thereto shall not relieve
it of its indemnification obligations hereunder. In the event that Brown &
Sharpe determines to settle any such claim, suit, tax audit or proceeding
without the prior consent of Finmeccanica (as provided above), Finmeccanica
shall have no indemnification obligations with respect to such claim, suit, tax
audit or proceeding. Brown & Sharpe's consent to the settlement of any such
claim, suit, tax audit or proceeding by Finmeccanica shall be required and
shall not be unreasonably withheld, but such consent shall not be required if
(or to the extent that) such settlement only requires the payment of a monetary
amount.
(b) In the event any claim is made, suit is brought or tax audit or other
proceeding is instituted against Finmeccanica which involves or appears
reasonably likely to involve a Finmeccanica Claim for which indemnification may
be sought against Brown & Sharpe hereunder, Finmeccanica will, promptly (and in
any event within 15 days) after receipt of notice of any such claim, suit, tax
audit or proceeding, notify Brown & Sharpe of the commencement thereof. The
failure to so notify Brown & Sharpe of the commencement of any such claim,
suit, tax audit or proceeding will relieve Brown & Sharpe from liability only
to the extent that such failure materially adversely affects the ability of
Brown & Sharpe to defend its interest in such claim, suit, tax audit or
proceeding. Brown & Sharpe (at its expense) shall have the right and shall be
given the opportunity to assume and control the defense of such claim, suit,
tax audit or proceeding, provided that Finmeccanica and their counsel may
participate in (but not control the conduct of) all matters pertaining to the
defense or settlement of such claim, suit, tax audit or proceeding. Whether or
not Brown & Sharpe elects to assume such defense, Finmeccanica shall not,
except at its own cost, make any settlement with respect to any such claim,
suit, tax audit or proceeding without the prior consent of Brown & Sharpe,
which may not be unreasonably withheld. In the event that Finmeccanica
determines to settle any such claim, suit, tax audit or proceeding without the
prior consent of Brown & Sharpe (as provided above), Brown & Sharpe shall have
no indemnification obligations with respect to such claim, suit, tax audit or
proceeding. Finmeccanica's consent to the settlement of any such claim, suit,
tax audit or proceeding by Brown & Sharpe shall be required and shall not be
unreasonably withheld, but such consent shall not be required if (or to the
extent that) such settlement only requires the payment of a monetary amount.
F-37
<PAGE>
8.5 Definition of Damages. For purposes of this Section 8, the term "damages"
shall mean the amount of any loss, claim, demand, damage, deficiency,
assessment, judgment, remediation, cost or expense (including reasonable
attorneys', consultants' and experts' fees and expenses) actually incurred, (in
the case of a Finmeccanica Claim, either by Finmeccanica directly or by virtue
of its shareholding in Brown & Sharpe) less the sum of the following economic
benefits, if any, pertaining to such loss, claim, demand, damage, deficiency,
cost or expense: (i) any income tax savings (net of any income tax cost
attributable to the indemnity payment) actually realized (or incurred) that
affect the overall economic impact of the damage to the indemnified party and
(ii) any insurance proceeds actually realized and adverse insurance
consequences actually incurred (such as premium adjustments and other
detriments) that affect the overall economic impact of the damages to the
indemnified party. Notwithstanding the foregoing, neither party will be
entitled to any special, exemplary or consequential damages, including without
limitation lost profits, good will or investments (excluding any damage
resulting from a diminution in the value of the Brown & Sharpe Purchase Price
Shares), loss of distributors, suppliers or customers or inability to use any
of the properties of the DEA Business or the B&S Business with respect to any
environmental matters covered under Sections 8.1(i) and (iv) and 8.2(i) and
(ii). In the event that an indemnified party hereunder pays a claim covered by
the indemnified party's insurance for which it is entitled to indemnification
by another party hereunder, such indemnified party shall pay such claim and the
indemnifying party shall reimburse the indemnified party the full amount of
such claim (less the amount of any insurance proceeds previously recovered by
the indemnified party with respect to such claim). If the indemnified party
subsequently receives insurance proceeds with respect to such claim, the
indemnified party shall pay the indemnifying party such insurance proceeds up
to the amount actually paid by the indemnifying party. In the event of any
claim by any third party based on facts which, if true as alleged, would give
rise to any liability for damages as to which indemnification exists under this
Agreement, the amount of the damages shall be deemed to include the reasonable
costs of the defense thereof, whether or not successful, subject to the rights
of the indemnifying party to assume such defense pursuant to Section 8.4
hereof.
8.6 Pricing Balance Sheet. Neither party shall be entitled to seek damages
from the other party pursuant to this Section 8 with respect to any claim to
the extent that the liability forming the basis for such claim is reflected as
a liability in the Pricing Balance Sheet and thereby included in the
calculation of the Post-Closing Purchase Price Adjustment under Section 1.4,
including a liability not resulting in an adjustment as a result of the Basket.
8.7 Environmental Limitations. For the avoidance of doubt, no claim for
damages by either party for which indemnification is available pursuant to
Sections 8.1(iv) or 8.2(ii), respectively, may be made by either party if the
basis for such claim derives from a change in law or regulation or a change in
the standards of enforcement or remediation applicable to environmental
conditions or hazards which change becomes effective on or after the Closing
Date.
8.7.1 Remediation. (a) In the event of any Brown & Sharpe Claim under
Section 8.1(iv) which involves the taking or required taking of a Remedial
Measure with respect to any leased real property of the Company or any of
its Subsidiaries and which Finmeccanica undertakes pursuant to Section
8.4(a), then Finmeccanica shall use its reasonable efforts to minimize
interruption or other disruption of the operations of the DEA Business and
exercise its authority and control over the remediation in a reasonable
manner and in compliance with all applicable Environmental Laws.
Finmeccanica shall inform Brown & Sharpe at least quarterly of actions
taken in furtherance of such remedial measures since the previous update
and actions anticipated prior to the next update. The purpose of such
updates shall be to attempt to reach consensus as to the best means of
handling such matters. All consultant proposals, reports, conclusions
and/or data shall be submitted promptly to Brown & Sharpe upon
Finmeccanica's receipt. To the extent reasonably practicable, any
submissions by Finmeccanica to environmental regulatory agencies shall be
submitted to Brown & Sharpe for review prior to submission to such agency.
Brown & Sharpe shall cooperate, assist and not interfere with
Finmeccanica's performance of its obligations hereunder, including without
limitation allowing Finmeccanica and its
F-38
<PAGE>
agents, representatives or contractors to have access to the premises of
the DEA Companies in order to (i) conduct studies, take samples and perform
other inspections on the premises of the DEA Companies, (ii) install,
maintain and operate treatment systems, equipment and other apparatus
incidental to implementing a remedial measure; (iii) consult pertinent
books and records and knowledgeable employees of the DEA Companies; and
(iv) take any other remediation or other actions necessary to fulfill
Finmeccanica's responsibilities under Sections 8.1(iv) and 8.4(a);
provided, however, that if any Remedial Measure shall require the closing
of any facility (or significant portion thereof) of the DEA Business for a
period of greater than one week, then Finmeccanica shall consult with Brown
& Sharpe so as to determine a reasonable period of shut down, taking into
account Brown & Sharpe's need to minimize any disruptive effect on the
facilities' operations and Finmeccanica's desire to utilize the most cost-
effective method of remediation, and Finmeccanica shall conform the
remediation plan accordingly.
9. ACCESS AND INFORMATION; CONFIDENTIALITY.
9.1 Finmeccanica shall cause the Company to afford to Brown & Sharpe and its
employees, accountants, counsel and other authorized representatives reasonable
access during normal business hours, upon reasonable notice, throughout the
period prior to the Closing to the facilities, properties, books and records of
the Company and its Subsidiaries and shall cause its representatives to furnish
to Brown & Sharpe such additional financial and operating data and other
information as Brown & Sharpe may from time to time reasonably request. Brown &
Sharpe shall cause all information obtained by it or its representatives
pursuant to this Agreement or in connection with the negotiation hereof to be
treated as confidential and shall not use, nor permit others to use, any such
information for any purpose whatsoever in a manner detrimental to the Company
or its Subsidiaries. In the event that this Agreement is terminated, Brown &
Sharpe shall promptly return all documents (together with all copies thereof)
provided by the Company or any of its Subsidiaries.
9.2 Brown & Sharpe shall afford to Finmeccanica and its employees,
accountants, counsel and other authorized representatives reasonable access
during normal business hours, upon reasonable notice, throughout the period
prior to the Closing to the facilities and properties of Brown & Sharpe and its
subsidiaries and shall cause its representatives to furnish to Finmeccanica
such additional financial data and other information (including action plans
and projections relating to the transactions contemplated hereby) as
Finmeccanica may from time to time reasonably request. Finmeccanica shall cause
all information obtained by it or its representatives pursuant to this
Agreement or in connection with the negotiation hereof to be treated as
confidential and shall not use, nor permit others to use, any such information
for any purpose whatsoever in a manner detrimental to Brown & Sharpe. In the
event that this Agreement is terminated, Finmeccanica shall promptly return all
documents (together with all copies thereof) provided by Brown & Sharpe.
9.3 Confidentiality. Following the Closing Date, Finmeccanica shall hold in
confidence all financial information concerning the business, assets,
intellectual property, products, application methods, sources of supply,
markets, marketing methods and customers of the Company and its Subsidiaries
that heretofore has been treated as proprietary or confidential. This Agreement
shall continue to apply after the Closing Date for a period of five years, but
shall cease to apply to information that comes into the public domain (other
than through a breach by Finmeccanica of an obligation of confidentiality owed
to Brown & Sharpe hereunder) and to information the disclosure of which is
required by law or pursuant to any request or order of any governmental agency
or authority.
10. CONDITIONS PRECEDENT TO BROWN & SHARPE'S OBLIGATIONS. All obligations of
Brown & Sharpe under this Agreement are subject to the fulfillment to the
satisfaction of Brown & Sharpe and its counsel prior to or at Closing of each
of the following conditions, any of which may be waived in writing by Brown &
Sharpe:
10.1 Performance by Finmeccanica; Certificate. Finmeccanica shall have
performed and complied with all agreements and conditions required by this
Agreement to be performed or complied with by it prior to or at the Closing,
and shall deliver to Brown & Sharpe a certificate of the Chief Executive
Officer and Chief Financial Officer of the Elsag Bailey Division of
Finmeccanica, dated the Closing Date, to such effect.
F-39
<PAGE>
10.2 Representations and Warranties; Certificate. The representations and
warranties of Finmeccanica contained in this Agreement shall be true and
correct in all material respects on and as of the Closing Date except for
changes contemplated by this Agreement or specifically consented to or approved
by Brown & Sharpe, and Brown & Sharpe shall have received a certificate of the
Chief Executive Officer and Chief Financial Officer of the Elsag Bailey
Division of Finmeccanica dated the Closing Date to the foregoing effect.
10.3 Opinions of Counsel. Brown & Sharpe shall have received such opinions of
counsel for Finmeccanica and the Company and its Subsidiaries with respect to
the subject matter of this Agreement as Brown & Sharpe and its counsel shall
deem necessary, the form and substance of such opinions of counsel to be
determined by Brown & Sharpe and its counsel.
10.4 Absence of Litigation. No action or proceeding shall have been
instituted or threatened prior to or at the Closing Date before any court or
governmental agency, body or authority pertaining to the transactions
contemplated hereby, the result of which could prevent or make illegal the
consummation of such transactions.
10.5 Governmental Clearance and Approval. All required filings with all
United States, European, federal, national, state, local and foreign
governmental agencies or authorities, the notification of which, or consent,
approval or clearance by which, is necessary in connection with the
consummation of the transactions (or any of them) contemplated hereby shall
have been made, and all clearances or consents required in order to effect the
transactions contemplated hereby shall have been obtained, or any applicable
waiting period under any applicable statute or regulation shall have expired or
been terminated, without any objection or notice of intent to challenge the
transactions contemplated hereby having been received by any of the parties
hereto or their subsidiaries and not withdrawn by the objecting or challenging
agency.
10.6 Approval by Stockholders of Brown & Sharpe. The issue of the Brown &
Sharpe Purchase Price Shares pursuant to this Agreement shall have been
approved by the stockholders of Brown & Sharpe in accordance with its Bylaws
and the rules of the New York Stock Exchange, and in connection therewith,
Wertheim Schroder shall have provided Brown & Sharpe with a fairness opinion on
the contemplated transactions hereunder in customary form, which is
satisfactory to the Board of Directors of Brown & Sharpe.
10.7 Approval of Proceedings; Documentation. All corporate and other
proceedings in connection with the transactions contemplated by this Agreement,
and the form and substance of all opinions, certificates and other documents
hereunder shall be reasonably satisfactory in form and substance to Brown &
Sharpe and its counsel.
10.8 Factoring of Receivables. The parties shall have mutually agreed on the
amount of factoring of DEA receivables and such factoring shall have been
satisfactorily completed on or prior to July 31, 1994.
10.9 Stockholder Agreement. Finmeccanica shall have executed and delivered
the Stockholders Agreement.
10.10 [Intentionally left blank]
10.11 Working Capital and Refinancing Requirements. Brown & Sharpe shall have
completed arrangements with its principal lending institutions to ensure that
Brown & Sharpe and its Subsidiaries, including the Company and its
Subsidiaries, are able to obtain sufficient borrowings to meet working capital
requirements, including refinancing of their working capital requirements for
the Brown & Sharpe Business and the DEA Business to be conducted after the
Closing Date, or shall have simultaneously completed such other arrangements to
raise such necessary funding, in each case as Brown & Sharpe deems appropriate.
10.12 Company Indebtedness; Consents of Lenders. The aggregate Indebtedness
of the Company and its Subsidiaries as of the Closing Date shall not exceed the
Aggregate Permitted Indebtedness as defined by
F-40
<PAGE>
and calculated in accordance with the applicable Sections of this Agreement;
and the terms and conditions of such Aggregate Permitted Indebtedness shall be
satisfactory to Brown & Sharpe, and the Lenders identified on Schedule 3.5.1
shall, if required, have consented to the transactions contemplated hereby.
10.13 Resignations of Members of the Board of Directors. All of the members
of the boards of directors of the Company and each Subsidiary shall have
submitted their resignations as directors effective upon the Closing on the
Closing Date and upon their acceptance by Brown & Sharpe after the Closing
Date.
10.14 [Intentionally Left Blank]
10.15 [Intentionally Left Blank]
11. Conditions Precedent to the Obligations of Finmeccanica. The obligation
of Finmeccanica to consummate the transactions contemplated hereby shall be
subject to the fulfillment prior to or at the Closing of each of the following
conditions, any of which may be waived by Finmeccanica:
11.1 Performance by Brown & Sharpe; Certificate. Brown & Sharpe shall have
performed and complied with all agreements and conditions required by this
Agreement to be performed or complied with by it prior to or at the Closing on
the Closing Date and Brown & Sharpe shall delivered a certificate of its
President and Chief Financial Officer, dated the Closing Date, to such effect.
11.2 Representations and Warranties; Certificate. The representations and
warranties of Brown & Sharpe contained in this Agreement shall be true and
correct in all material respects on and as of the Closing Date, except for
changes contemplated by this Agreement or specifically concerted to or approved
by Finmeccanica, and Finmeccanica shall have received a certificate of the
President and Chief Financial Officer of Brown & Sharpe to that effect.
11.3 Opinion of Counsel. Finmeccanica shall have received an opinion of Ropes
& Gray, counsel to Brown & Sharpe, and, if appropriate, an opinion of James W.
Hayes, III or other counsel to Brown & Sharpe, with respect to the subject
matter of this Agreement in form and substance reasonably satisfactory to
Finmeccanica and its counsel.
11.4 Absence of Litigation. No action or proceeding shall have been
instituted or threatened prior to or at the Closing Date before any court or
governmental agency, body or authority pertaining to the transactions
contemplated hereby, the result of which could prevent or make illegal the
consummation of such transactions.
11.5 Governmental Clearance and Approval. All required filings with all
United States, European, federal, state, local and foreign governmental
agencies or authorities, the notification of which, or consent, approval or
clearance by which, is necessary in connection with the consummation of the
transactions contemplated hereby shall have been made, and all clearances or
consents required in order to effect the transactions contemplated hereby shall
have been obtained, or any applicable waiting period under any applicable
statute or regulation shall have expired or been terminated, without any
objection or notice of intent to challenge the transactions contemplated hereby
having been received by any of the parties hereto and not withdrawn by the
objecting or challenging agency.
11.6 Approval by Stockholders of Brown & Sharpe. The issue of the Brown &
Sharpe Purchase Price Shares and the Contingent Stock pursuant to this
Agreement shall have been approved by the stockholders of Brown & Sharpe in
accordance with its Bylaws and the rules of the New York Stock Exchange.
11.7 Approval of Proceedings; Documentation. All corporate and other
proceedings in connection with the transactions contemplated by this Agreement,
and the form and substance of all opinions, certificates and other documents
hereunder shall be satisfactory in form and substance to Finmeccanica and its
counsel.
F-41
<PAGE>
11.8 Execution and Delivery of Stockholder Agreement. Brown & Sharpe shall
have executed and delivered the Stockholders Agreement.
11.9 [Intentionally Left Blank]
11.10 Guarantees of Indebtedness of the Company to Banks. Each relevant
lender to the DEA Companies shall have released Finmeccanica from its guarantee
of Indebtedness of the Company and either (a) such Indebtedness shall have been
extinguished or an agreement to repay all of such indebtedness shall have been
reached with each such lender as of the Closing Date or (b) Brown & Sharpe
shall have agreed to guarantee that portion of Aggregate Permitted Indebtedness
of the Company and its Subsidiaries which is owed to each such lender on the
Closing Date and each such lender shall have agreed to substitute the guaranty
of Brown & Sharpe for the guaranty of Finmeccanica.
12. COVENANT NOT TO COMPETE. (a) Finmeccanica agrees that, in consideration
of the purchase by Brown & Sharpe hereunder, neither Finmeccanica nor any
affiliate thereof shall, on or prior to the date which is five (5) years after
the Closing Date directly or indirectly own, manage, operate, control or have
any greater than 20% ownership interest in any business, venture or activity
which competes with the metrology business relating to CMMs (including parts
and accessories therefor) being conducted or proposed to be conducted at the
Closing Date by the Company and its Subsidiaries or relating to metrology
products performing functions similar to those of the products manufactured and
sold by the Company and its Subsidiaries, whether or not the assets of the
Company and the Subsidiaries are subsequently moved in whole or in part into
another legal entity within Brown & Sharpe and its Subsidiaries, provided that
the provisions of this Section 12(a) shall terminate if Brown & Sharpe no
longer owns a greater than 50% ownership interest in the DEA Business and
provided further that Finmeccanica shall not be in breach of the covenant made
in this Section 12(a) if Finmeccanica or any of its affiliates acquires or
invests in any company or group of companies, whether through an acquisition of
assets or stock, merger, consolidation or other combination or otherwise, which
includes among its business operations the manufacture and sale of metrology
products performing functions similar to those of the products manufactured and
sold by the DEA Companies to the extent that sales of such products constitute
only an immaterial portion of the total revenues of the acquired business. In
this connection Finmeccanica represents to Brown & Sharpe that it has no
present intention of acquiring any company or group of companies engaged in the
business of manufacturing and selling such metrology products.
(b) Finmeccanica further agrees that for a period of three (3) years after
the Closing Date it will not, without the prior written consent of Brown &
Sharpe, recruit, offer employment, including employment as a consultant, to any
person who is an employee of Brown & Sharpe (including the Company and its
Subsidiaries) or any subsidiary, group, or division of Brown & Sharpe
(including the Company and its Subsidiaries), unless such person has been
terminated by the Company or a Subsidiary.
13. AGREED EXCHANGE RATIO. Except as otherwise specified in this Agreement,
the Agreed Exchange Ratio for the purposes of calculating 8 Billion Lit.
Indebtedness of the Company and the Subsidiaries on the Closing Date shall be
$1 = Lit. 1,568. For all other purposes, the Agreed Exchange Ratio shall be the
U.S. Dollar/Lit. exchange rate, as published in SOLE 24 ORE, in effect on the
date preceding the date a payment of cash or delivery of Brown & Sharpe
Purchase Price Shares is required.
14. ENTIRE AGREEMENT. This Agreement, together with the schedules and
exhibits hereto, constitutes the entire agreement between the parties hereto
pertaining to the subject matter hereof and supersedes all prior and
contemporaneous agreements, understandings, negotiations and discussions,
whether oral or written, of the parties, and there are no warranties,
representations, or other agreements between the parties in connection with the
subject matter hereof except as specifically set forth or incorporated herein;
provided, however, that the provisions of Section 9 shall survive the
termination of this Agreement pursuant to Section 17.
F-42
<PAGE>
15. AMENDMENT. This Agreement may be amended by the parties hereto at any
time, but only by an instrument in writing duly executed and delivered on
behalf of each of the parties hereto.
16. PRESS RELEASES. Each of the parties agrees that they (and their
respective affiliate and subsidiaries) will not issue any announcements or
reports, or confirm any statements by third parties pertaining to any of the
proposed transactions until after the Closing Date under this Agreement except
as may be advisable for Brown & Sharpe under U.S. securities laws or
Finmeccanica under Italian securities laws upon advice of counsel or except as
may be mutually agreed upon by the parties.
17. TERMINATION. This Agreement may be terminated without liability:
(a) at any time by mutual agreement of Brown & Sharpe and Finmeccanica;
(b) by either Brown & Sharpe or Finmeccanica if, by the close of business
on October 31, 1994, or such later date as the parties may mutually agree,
the consummation of the transactions hereby contemplated to take place on
the Closing Date shall not have occurred; provided, however, that this
Agreement may not be terminated by a party which at such time is in
material breach of a provision of this Agreement.
18. HEADINGS. Section headings are not to be considered part of this
Agreement and are included solely for convenience and are not intended to be
full or accurate descriptions of the content thereof. References to sections
are to portions of this Agreement unless the context requires otherwise.
19. EXHIBITS, ETC. Exhibits and schedules referred to in this Agreement are
an integral part of this Agreement.
20. ASSIGNMENT, SUCCESSORS AND ASSIGNS; BENEFITS OF AGREEMENT. This Agreement
may not be assigned by any party without the prior written consent of the other
parties hereto, except that Brown & Sharpe may designate one or more of its
Subsidiaries to acquire all or some of the DEA Shares. All of the terms and
provisions of this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective transferees, successors and,
subject to the foregoing, their assigns, and shall not inure to the benefit of,
or be enforceable by, any other person or entity.
21. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or courier or delivery service or mailed, first-class postage
prepaid,
(a) if to Brown & Sharpe:
Brown & Sharpe Manufacturing Company
200 Frenchtown Road
Precision Park
North Kingstown, Rhode Island 02852
USA
Attn: Vice President and Chief Financial Officer
In each case, with a copy to:
Ropes & Gray
One International Pace
Boston, MA 02110-2624
USA
Attn: Howard K. Fuguet, Esq.
F-43
<PAGE>
(b) if to Finmeccanica:
Elsag Bailey
via G. Puccini, 2
16154 Genova
Italy
Attn: Chief Financial Officer and General Counsel
in each case, with a copy to:
Coudert Brothers
1114 Avenue of the Americas
New York, NY 10036-7794
USA
Attn: W. Preston Tollinger, Esq.
or, in each case, at such other address as the party receiving notice shall
have furnished in writing to the party giving notice.
22. ACCOUNTING TERMS; PROXY STATEMENT; REGISTRATION STATEMENT. All accounting
terms not otherwise defined herein have with respect to Finmeccanica and its
affiliates the meanings assigned to them in accordance with generally accepted
Italian accounting principles or, in the absence thereof, with accounting
principles as recommended by the IASC, except for the financial statements to
be delivered for inclusion in the Brown & Sharpe Proxy Statement and the Brown
& Sharpe Registration Statement which shall have the meanings assigned to them
in accordance with United States generally accepted accounting principles, and
shall have, with respect to Brown & Sharpe and its affiliates, the meanings
assigned to them in accordance with United States generally accepted accounting
principles.
The term "Brown & Sharpe Proxy Statement" shall mean the definitive proxy
statement of Brown & Sharpe as filed or to be filed with the Securities and
Exchange Commission relating to the transactions contemplated hereby.
The term "Brown & Sharpe Registration Statement" shall mean a Registration
Statement on Form S-1 of Brown & Sharpe covering the registration of an
aggregate of $75,000,000 of debt securities of Brown & Sharpe to be offered and
sold under the Securities Act.
23. SEVERABILITY. The provisions of this Agreement are severable, and in the
event that any one or more provisions are deemed illegal or unenforceable, the
remaining provisions shall remain in full force and effect.
24. ARBITRATION. All disputes, differences, controversies or claims arising
in connection with, or questions occurring under, this Agreement (other than
those relating to the Post-Closing Purchase Price Adjustment, which shall be
resolved in the manner provided in Section 1.4) shall be finally settled under
the Rules of Arbitration (the "Rules") of the International Chamber of Commerce
("ICC") by an arbitral tribunal composed of three arbitrators appointed in
accordance with said Rules.
24.1. Each of Brown & Sharpe and Finmeccanica shall each nominate one
arbitrator in accordance with the Rules. If a party fails to nominate an
arbitrator within thirty (30) days from the date when the claimant's request
for arbitration has been communicated to the other party, such appointment
shall be made by the ICC International Court of Arbitration.
24.2. The two arbitrators so appointed shall agree upon the third arbitrator
who shall act as Chairman of the arbitral tribunal. If said two arbitrators
fail to nominate a Chairman, the Chairman shall be selected by the ICC
International Court of Arbitration.
F-44
<PAGE>
24.3. In all cases the Chairman of the arbitral tribunal shall be a lawyer
fluent in English and not of the same nationality as either party.
24.4. The place of arbitration shall be London, England.
24.5. The arbitral proceedings shall be conducted in the English language.
24.6. The parties hereby exclude any right of appeal to any court on the
merits of the dispute.
24.7. Judgment on the award may be entered in any court having jurisdiction
over the award or any of the parties or their assets.
24.8. At the time of the arbitration, the parties may agree in writing to
submit the dispute to a single arbitrator. In such event said single arbitrator
shall be appointed by the ICC International Court of Arbitration, and shall be
subject to the same qualifications as would have been the Chairman under
Section 24.3 hereof.
24.9. Nothing contained in this arbitration clause shall prevent either party
from seeking injunctive relief or interim measures of protection in the form of
pre-award attachment of assets from a court of competent jurisdiction.
25. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws (other than those with respect to conflict
of laws) of the State of New York.
26. TAX RETURN COOPERATION. (a) Brown & Sharpe shall provide Finmeccanica or
any affiliate that Finmeccanica may designate (hereinafter the "Finmeccanica
Group") with such financial, accounting, tax and other information with respect
to the Company and the Subsidiaries as shall be reasonably required by the
Finmeccanica Group to enable the Finmeccanica Group to prepare:
(i) the income tax returns of the Company and the Subsidiaries for the
taxable years ending on December 31, 1993 and for any other taxable periods
beginning before the Closing Date and ending on or before the Closing Date,
including, without limitation, the U.S. Federal income tax returns and the
U.S. state and local corporate franchise and income tax returns of DEA
Company (which state and local tax returns may be prepared on a separate
return basis or on a unitary, combined or consolidated basis),
(ii) any non-income tax return or report properly due by the Company or
any Subsidiary for any taxable periods beginning before and ending on or
before the Closing Date, except for any return for registration or capital
tax, if any, arising in connection with the reduction of Indebtedness of
DEA and its subsidiaries required by Section 6.4 and other applicable
sections of this Agreement required to be filed by the Company or any of
its Subsidiaries for any period beginning on or after January 1, 1994.
(iii) any income tax returns and non-income tax return or report of the
Finmeccanica Group which requires information with respect to the Company
or any Subsidiary.
(b) At the reasonable request of the Finmeccanica Group, Brown & Sharpe shall
cause a representative of the Company, or the relevant Subsidiary, or any
successor to the Company or the relevant Subsidiary to sign any returns and
related consents prepared by the Finmeccanica Group for the Company or its
Subsidiaries for taxable periods ending on or before the Closing Date pursuant
to this Section 26.
(c) The Finmeccanica Group shall provide Brown & Sharpe, the Company, any
Subsidiary, or any affiliate of Brown & Sharpe that Brown & Sharpe may
designate (collectively, the "Brown & Sharpe Group") with such financial,
accounting, tax and other information with respect to the Company and the
Subsidiaries as shall be reasonably required by the Brown & Sharpe Group to
enable the Brown & Sharpe Group to prepare:
F-45
<PAGE>
(i) the income tax returns of the Company and the Subsidiaries for any
taxable periods beginning on or before the Closing Date and ending after
the Closing Date and for the two taxable years following each such period,
including, without limitation, the Italian national income tax returns and
the Italian local income tax returns of the Company and comparable returns
for the Subsidiaries in other countries,
(ii) any non-income tax return or report properly due by the Company or
any Subsidiary for any taxable periods beginning on or before and ending
after the Closing Date, and any return for registration or capital tax, if
any, arising in connection with the reduction of Indebtedness required by
applicable sections of this Agreement that is required to be filed by the
Company or its Subsidiaries for any period beginning on or after January 1,
1994;
(iii) any income tax return, non-income tax return or report of the Brown
& Sharpe Group which requires information with respect to the Company or
any Subsidiary.
(d) Brown & Sharpe will be responsible for filing, and agrees to file or to
cause the Company and the Subsidiaries to file, all tax returns and reports of
the Company and the Subsidiaries for any taxable periods beginning on or after
the Closing Date and any return for registration or capital tax, if any,
arising in connection with the reduction of Indebtedness required by applicable
sections 6.4, 10.12 and 1.4(f) of this Agreement that is required to be filed
by the Company or its Subsidiaries for any period beginning on or after January
1, 1994.
(e) None of the provisions of this Section 26 shall relieve Finmeccanica of
its obligation to indemnify, defend and hold harmless Brown & Sharpe and its
directors, officers and affiliates as more fully provided in Section 8.1 of
this Agreement, except to the extent attributable to the acts or omissions of
Brown & Sharpe, of its directors, officers or affiliates.
27. COUNTERPARTS. This Agreement may be executed simultaneously in any number
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
F-46
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement,
attested by their respective Secretaries as of the day and year first above
written.
ATTEST: Brown & Sharpe Manufacturing Company
By
- ------------------------------------- -----------------------------------
Secretary Title:
ATTEST: Finmeccanica S.p.A. (through its
Elsag Bailey Division)
By
- ------------------------------------- -----------------------------------
Title:
Secretary
F-47
<PAGE>
ANNEX A
LIST OF DEA COMPANIES
1. D.E.A. SpA (Italy)
Outstanding Capital Stock: 16,300,000 shares; nominal value: L.1,000/share
Corporate Headquarters: Corso Torino, 70, Moncalieri (TO), Italy
2. D.E.A. Company (USA)
Outstanding Capital Stock:
Corporate Headquarters: 37100 Plymouth Rd., Livonia, Michigan 48150,
U.S.A.
3. D.E.A.K.K. (Japan)
Outstanding Capital Stock:
Corporate Headquarters: 1030 Kawaraguchi-Ebina Shi, Kanagawa Pref.,
Japan
4. D.E.A. France S.A. (France)
Outstanding Capital Stock:
Other Shareholders:
Corporate Headquarters: 122, Rue Marcel Hartmann, 94853 Ivry-sur-Seine
CEDEX France
5. D.E.A. GmbH (Germany)
Outstanding Capital Stock:
Corporate Headquarters: Praunheimer Landstr. 32, 6000 Frankfurt 90,
Germany
6. D.E.A. IBERICA S.A. (Spain)
Outstanding Capital Stock:
Corporate Headquarters: Ctra. del Mig, 37, 08940 CORNELLA
(Barcelona), Spain
7. D.E.A. U.K. (United Kingdom)
Corporate Headquarters:
Terminal Three, 3B2, Sontehill Green, WESTLEA
SWINDON, WILTS, SN5 7HB United Kingdom
F-48
<PAGE>
P
R
O BROWN & SHARPE MANUFACTURING COMPANY
X
Y PROXY FOR CLASS A COMMON STOCK AND CLASS B COMMON STOCK
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
AUGUST __, 1994
The undersigned appoints each of Henry D. Sharpe, Jr., John M. Nelson and
Russell A. Boss proxies with power of substitution to vote for the undersigned
at the Special Meeting of Shareholders called for Wednesday, September 28, 1994
at 10:00 A.M., at Precision Park, 200 Frenchtown Road, North Kingstown, Rhode
Island, and at any adjournments, all shares of stock which the undersigned would
be entitled to vote if present in accordance with their judgment upon any
matters that may properly come before said meeting and to vote as specified on
the reverse.
A majority of the proxies present and acting at the meeting in person or
by substitute (or if only one shall be so present, then that one) shall have
and may exercise all of the power and authority of said proxies hereunder.
The undersigned hereby revokes any proxy previously given and acknowledges
receipt of the Notice of Special Meeting and Proxy Statement pertaining to the
aforesaid meeting.
Your Shares of Class A Common Stock on the back are designated "Class A
Stock", and your Shares of Class B Common Stock are designated "Class B Stock".
To approve the Board of Directors' recommendations, simply sign and date
the back. You need not mark any boxes.
-----------
SEE REVERSE
SIDE
-----------
<PAGE>
[X] Please mark
votes as in
this example.
To consider and vote on a proposal to approve the issuance of shares of Class
A Common Stock, $1.00 par value, of Brown & Sharpe pursuant to the terms of
(i) an acquisition agreement between Brown & Sharpe and Finmeccanica S.p.A,
("Finmeccanica"), as amended, dated as of June 10, 1994 (the "DEA Acquisition
Agreement"), and (ii) a shareholders agreement to be entered into between Brown
& Sharpe and Finmeccanica in connection with the closing under the DEA
Acquisition Agreement.
FOR AGAINST ABSTAIN
[_] [_] [_]
MARK HERE
FOR ADDRESS [_]
CHANGE AND
NOTE AT LEFT
Note: When signing as Executor, Administrator, Trustee,
Guardian, etc., add full title. (Sign exactly as name appears
on this card.)
This proxy when properly executed will be voted in the manner directed herein.
If no direction is made the proxy will be voted FOR the proposal.
Signature: Date
--------------------------------------- -----------------------
Signature: Date
--------------------------------------- -----------------------
