<PAGE>
Filed Pursuant to Rule 424(b)(4)
File No. 333-10751
PROSPECTUS
OCTOBER 10, 1996
7,286,000 SHARES
[LOGO]
CLASS A COMMON STOCK
Of the 7,286,000 shares of Class A Common Stock (the "Class A Common Stock")
of Brown & Sharpe Manufacturing Company (the "Company") being offered hereby
(the "Offering"), 4,000,000 shares are being sold by the Company and 3,286,000
shares are being sold by certain stockholders of the Company (the "Selling
Stockholders"). See "Principal and Selling Stockholders." The Company will not
receive any proceeds from the sale of Class A Common Stock by the Selling
Stockholders. The net proceeds to the Company from the Offering will be used
to repay outstanding indebtedness and for working capital and general
corporate purposes. See "Use of Proceeds."
The Class A Common Stock is traded on the New York Stock Exchange under the
symbol "BNS." On October 10, 1996, the reported last sale price of the Class A
Common Stock on the New York Stock Exchange was $12 1/8 per share. See "Market
for Class A Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
TO BE CONSIDERED BY PROSPECTIVE INVESTORS IN CONNECTION WITH AN INVESTMENT IN
THE CLASS A COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................... $11.75 $0.70 $11.05 $11.05
Total(3).................... $85,610,500 $5,100,200 $44,200,000 $36,310,300
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
(2) Before deducting expenses of the Offering, estimated at $670,000, payable
by the Company.
(3) The Company and Finmeccanica S.p.A. have granted to the Underwriters a 30-
day option to purchase up to 1,092,900 additional shares of Class A Common
Stock on the same terms set forth above solely to cover over-allotments,
if any. If the Underwriters exercise such option in full, the total Price
to the Public, Underwriting Discounts and Commissions, Proceeds to the
Company and Proceeds to the Selling Stockholders will be $98,452,075,
$5,865,230, $52,740,545, and $39,846,300, respectively. See
"Underwriting."
The shares are being offered by the several Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain prior conditions, including the right of
the Underwriters to reject any order in whole or in part. It is expected that
delivery of the shares will be made in New York, New York on or about October
16, 1996.
DONALDSON, LUFKIN & JENRETTE CS FIRST BOSTON
SECURITIES CORPORATION
<PAGE>
The Company markets its products under the brand names of Brown & Sharpe(R),
DEA(R), Tesa(R), Etalon(R), Interapid(R), Standard Gage(R), Select Gauge(TM),
Mercer(TM) and Roch(R), which have been, or will be, registered by the Company
pursuant to applicable intellectual property laws and under the names Leitz(R)
and Mauser(R), in each case, pursuant to licensing arrangements.
[PHOTOS OF THE COMPANY'S PRODUCTS MEASURING VARIOUS MANUFACTURED COMPONENTS.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR
THE ACCOUNTS OF OTHERS IN SHARES OF CLASS A COMMON STOCK PURSUANT TO
EXEMPTIONS FROM RULES 10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE
ACT OF 1934.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and the Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Prospectus. As used in this Prospectus, the
terms "Brown & Sharpe" and the "Company" refer to Brown & Sharpe Manufacturing
Company and its subsidiaries. Except as otherwise noted, all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
See "Underwriting."
THE COMPANY
Brown & Sharpe, which was founded in 1833, is a leading designer,
manufacturer and marketer of metrology products worldwide under numerous
internationally recognized brand names. Metrology is the science of the
physical measurement of objects using various precision instruments and
equipment. The Company's high precision products measure physical dimensions
of, and inspect and verify conformance to specifications of, components and
products and are used in manufacturing, quality control and product development
operations. The Company's product line ranges from hand tools and instruments
to customized computer-controlled metrology systems which integrate hardware
and software and are augmented by service, training and aftermarket support.
The Company markets its metrology products and services in North America,
Europe, Asia, South America and the Middle East. Important end user markets for
the Company's products include the automotive, aerospace, industrial machinery,
electronics and computer industries, and the Company's customers include Ford
Motor Co., Daimler Benz, Toyota, Chrysler, BMW, Boeing Co., Eastman Kodak Co.
Inc., International Business Machines Corp., Hewlett-Packard Co., General
Electric Co., Caterpillar Inc., United Technologies Corp., Motorola Inc.,
Phillips, Samsung and Xerox Corp. For the twelve months ended June 30, 1996,
the Company recorded net sales of $335.8 million, approximately two-thirds of
which were sales to customers located outside of the United States.
Manufacturers depend upon metrology hardware and software products to monitor
consistent product conformance to their exacting specifications, thereby
improving the reliability, fit and finish of their products. In addition to
these quality and performance benefits, metrology products help manufacturers
lower costs by reducing errors, scrap, rework and warranty expense, improving
the manufacturing process, lowering throughput time, increasing capacity and
reducing work-in-progress inventories. In recent years, manufacturers have
accelerated the integration of quality control functions directly into the
production process by incorporating the use of metrology products on the
factory floor. In addition, manufacturers are demanding more precise, capable
and flexible metrology systems as their products become smaller, more complex
and/or must meet more stringent quality and safety standards. Their exacting
product specifications often require measurement to an accuracy of less than
one micron (one millionth of a meter or approximately 1/100th of the thickness
of a human hair) or, in some special cases, measurement of nanometers (one
billionth of a meter or the unit of measurement for the wavelength of light).
Increasingly, metrology systems must incorporate a mix of traditional contact
and newer non-contact technologies because of reduced part sizes and the
diversity of new materials used in manufactured products. Metrology systems are
purchased by customers regardless of their need for additional production
capacity because of ever-increasing quality requirements and the need to reduce
product costs. The price points of metrology products range from $100 for a
caliper to over $1.5 million for a sophisticated coordinate measuring machine
("CMM") system.
The Company's operations are conducted through three management units:
Measuring Systems, Precision Measuring Instruments and Custom Metrology. The
Measuring Systems Group (the "MS Group"), which accounted for approximately 67%
of the Company's net sales in 1995, manufactures and markets a wide range of
manual and computer-controlled, high precision CMMs including "in-process"
measuring systems under the Brown & Sharpe, DEA and Leitz brand names. The
Company believes it is the worldwide market leader for CMMs as measured by net
sales and installed base. The Company believes it has an installed base of
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over 18,000 CMMs worldwide, creating a significant opportunity for aftermarket
sales and services. The Precision Measuring Instruments Division (the "PMI
Division"), which accounted for approximately 30% of the Company's net sales in
1995, manufactures a wide range of mechanical and electronic measuring and
inspection tools (including height gauges, calipers, dial indicators,
micrometers and gauge blocks) which are marketed under the Brown & Sharpe,
Tesa, Etalon, Interapid, Standard Gage, Select Gauge, Mauser, Mercer and Roch
brand names through more than 450 distributors and catalog houses worldwide.
The Custom Metrology Division (the "CM Division") designs and engineers, under
the Tesa brand name, specialty products and systems that provide customized
solutions for unique measurement or inspection problems primarily utilizing
non-contact technology. Technologies and custom applications developed by the
CM Division with customer funding have been directly applied to the design of
standard products or systems distributed by the MS Group or the PMI Division.
REPOSITIONING INITIATIVES
Over the past several years, the Company has undertaken a series of
divestitures, acquisitions and other strategic initiatives which have
repositioned the Company from its historical origins as a machine tool
manufacturer into a leader in the field of metrology. These repositioning
initiatives included:
. Divestiture of Non-Core Operations. The divestiture of non-strategic
operations including the machine tool, pump and hydraulics businesses
enabled the Company to focus on its core metrology technologies and
market distribution strengths.
. Strategic Metrology Acquisitions. Strategic metrology acquisitions
enabled the Company to increase greatly the breadth of its metrology
product offering and the strength of its distribution system. These
acquisitions included the 1994 acquisitions of DEA S.p.A. ("DEA"), the
Italy-based metrology business of Finmeccanica S.p.A. ("Finmeccanica"),
Ets. Pierre Roch S.A. and its German affiliate, Mauser Prazisions-
Messmittel GmbH ("Mauser") (together, "Roch") and certain intellectual
property and assets of Metronic Engineering Limited ("Metronic Ltd.").
. Rationalization and Consolidation of Operations. Lowering the Company's
overhead cost structure by reducing duplicative functions and associated
headcount and by consolidating and rationalizing the Company's
manufacturing facilities and operations enabled the Company to increase
productivity and efficiency.
As a result of these repositioning initiatives, the Company's net sales
increased from $162.5 million in fiscal 1992 to $328.0 million in fiscal 1995,
while its gross profit margin increased from 28.5% to 32.4% and selling,
general and administrative expenses, excluding foreign currency transaction
gains and losses, as a percentage of net sales decreased from 34.0% to 29.1%
during the same period. See "Selected Consolidated Financial Data."
NEW LEADERSHIP AND BUSINESS STRATEGY
Following completion of the Company's repositioning initiatives, the Company
sought to recruit new management leadership to enhance the Company's leading
market positions, improve its global competitiveness and continue to improve
its financial performance. To that end, the Company recruited Frank T. Curtin
as its new President and Chief Executive Officer in May 1995, who then
restructured the senior management team and recruited additional senior
managers for key management roles. The current ten-member senior management
team has over 296 years of combined experience in highly competitive industrial
businesses and global manufacturing organizations. This team is focused on
enhancing the financial performance of the Company, motivated in part by an
equity-based incentive compensation system, and has made significant progress
in realigning the structure and culture of the Company towards a more focused
and integrated metrology business. As a result of the repositioning of the
Company and the focus of the current management team on enhancing financial
performance, the Company has achieved positive net income in each of its fiscal
quarters since Mr. Curtin joined the Company. In addition, management believes
that its focus on cost reduction during Mr. Curtin's tenure has resulted in a
decrease in selling, general and administrative expenses, excluding foreign
currency transaction gains or losses, as a percentage of net sales from 30.7%
in the first half of 1995 to 26.7% in the first half of 1996. See "Selected
Consolidated Financial Data."
4
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The Company is implementing its strategy based on the following elements:
. Continue Cost Improvements. The Company intends to continue to implement
measures designed to reduce its product costs through: (i) standardizing
product designs worldwide; (ii) increasing the cost-effectiveness of
product designs; (iii) outsourcing components and products; (iv)
increasing supplier partnering; and (v) focusing on core manufacturing
processes. The Company also intends to streamline its sales, marketing
and general and administrative processes in an effort to reduce selling,
general and administrative expenses as a percentage of sales.
. Develop New Products and End User Markets. The Company's goal is to
increase net sales by expanding penetration of served industrial end
user markets and by capitalizing on high growth end user markets such as
the electronics, computer and medical industries where metrology needs
are growing rapidly. To expand in these high growth industries, the
Company intends to focus on development of software and emerging non-
contact metrology technologies through continued internal development
and through strategic acquisitions and technical partnerships (such as
the acquisition of certain intellectual property and assets of Metronic
Ltd. and the Automation Software Incorporated joint venture, of which
the Company owns 50% of the voting securities ("ASI")). To expand its
penetration of served industrial end user markets, the Company expects
to continue the introduction of new metrology systems utilizing both
contact and non-contact technologies, and to develop sensors and other
sophisticated products that can be imbedded in a variety of
manufacturing processes. The Company plans to form technical and
commercial alliances with manufacturers of process equipment to provide
enhanced combined manufacturing systems utilizing the Company's sensors
and other products.
. Enhance Existing and Develop New Software. The Company intends to
emphasize research and development of software systems and applications
designed to meet the evolving metrology needs of its end users. To that
end, the Company intends to leverage off its software development team
of approximately 320 software and applications engineers and technicians
(including 50 engineers of ASI) in the following four areas: (i)
metrology software for inspection and verification of piece-part
integrity and conformance to design specifications; (ii) process control
software designed to detect and correct drifts in part tolerances before
the manufacturing process produces scrap or improperly configured
components; (iii) enhanced management information systems that report
statistical and quality information from the manufacturing process; and
(iv) new software that will link the Company's CMMs and, therefore, the
manufacturing process with computer-aided engineering and manufacturing
systems that will provide the means for real-time feedback, analysis
and, ultimately, control of manufacturing to design specifications. The
Company believes that its existing library of metrology software,
together with newly developed software, should enable it to respond to
the growing demand in manufacturing for on-line inspection and
verification. The Company also believes that its experience with CMM
software and manufacturing processes are critical to the successful
development of software that is linked with computer-aided engineering
systems.
. Leverage Worldwide Distribution Capability. Through the acquisitions of
DEA and Roch, Brown & Sharpe expanded its product lines and strengthened
its marketing and distribution capabilities in Europe, South America,
the Middle East, India and China. The Company plans to continue to
strengthen and expand its worldwide distribution capability, principally
by continuing to rationalize its existing distribution network and by
opening new demonstration centers and adding direct sales capacity and
distributors where cost effective. The Company also intends to
capitalize on the strength of its global distribution network by
increasing the number of Company-designed and third-party sourced
products sold through its distribution channels in an effort to increase
gross profit without a corresponding increase in selling, general and
administrative expenses.
5
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. Increase Aftermarket Sales and Services. The Company intends to increase
its focus on higher margin aftermarket sales and services, including
calibration and rebuilding of CMMs, software upgrades and parts sales.
The Company believes that the worldwide installed base of CMMs,
estimated at over 60,000 (including 18,000 of the Company's CMMs),
creates a significant demand for such aftermarket services. The Company
believes that the level of customer service it provides, as measured by
third-party surveys of its customers, is superior to that of its
principal competitors, and expects to further strengthen its customer
relationships through enhanced aftermarket support and increased
partnering efforts. The Company's net sales attributable to aftermarket
sales and service in 1995 were estimated to be approximately 25% of MS
Group net sales for the same period.
For a discussion of certain risk factors which the Company may face in
implementing this strategy, see "Risk Factors--Achievement of Strategic Plan."
The Company was founded in 1833, incorporated in Rhode Island in 1868 and
reincorporated in Delaware in 1969. The Company'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.
THE OFFERING
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<S> <C>
Class A Common Stock
offered(1):
By the Company........ 4,000,000 shares
By the Selling
Stockholders......... 3,286,000 shares
Total............... 7,286,000 shares
Common Stock outstanding
after the Offering(2):
Class A Common
Stock(3)............. 12,200,989 shares
Class B Common
Stock(3)............. 519,436 shares
Total............... 12,720,425 shares
Use of proceeds......... Approximately $35.1 million of the net proceeds to
the Company from the Offering will be used to repay
$31.9 million of outstanding short-term indebtedness
and $3.2 million of the current portion of long-term
indebtedness. The remaining net proceeds to the
Company of $8.4 million will be used for working
capital and general corporate purposes. See "Use of
Proceeds."
New York Stock Exchange
Symbol................. BNS
</TABLE>
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(1) Pursuant to the Rights Plan adopted in 1988, each purchaser of shares of
Class A Common Stock offered pursuant to the Offering will receive three
quarters of a preferred stock purchase right (the "Rights") for each share
of Class A Common Stock purchased. No additional consideration will be
payable with respect to the Rights and, prior to the occurrence of
specified events, the Rights will not be exercisable or evidenced
separately from the Class A Common Stock. See "Description of Capital
Stock--Rights Plan."
(2) Excludes 863,283 shares of Class A Common Stock reserved for issuance under
the 1989 Equity Incentive Plan, the Amended 1973 Stock Option Plan and the
Employee Stock Ownership and Profit Participation Plan. See "Management--
Executive Compensation." Excludes 50,000 shares of Class A Common Stock
reserved for issuance upon certain specified events under the Stock
Purchase and Transfer Agreement dated March 24, 1994 between the Company
and Diehl GmbH & Co. See "Certain Transactions."
(3) Assumes no conversions of Class B Common Stock into Class A Common Stock
after August 31, 1996.
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
During the periods presented below, the Company has undertaken a number of
divestitures and acquisitions, including the 1994 acquisitions of DEA and Roch.
Consequently, the summary consolidated financial information set forth in the
table below may not be comparable for all periods presented. The following data
should be read in conjunction with the Company's Consolidated Financial
Statements and the Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
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<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER (1) JUNE 30,
-------------------------------- ----------------------
1993 1994 1995 1995 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 159,518 $ 209,369 $ 328,031 $ 158,349 $ 166,113
Cost of sales........... 110,841 142,776 221,729 108,174 113,693
Selling, general and
administrative
expense(2)............. 48,073 68,473 94,902 46,580 45,104
Restructuring
charges(3)............. -- 4,169 336 247 --
--------- --------- ---------- ---------- ----------
Operating profit
(loss)................. 604 (6,049) 11,064 3,348 7,316
Interest expense........ 5,100 6,575 9,129 3,948 4,553
Other income, net....... 2,880 689 688 390 169
--------- --------- ---------- ---------- ----------
Income (loss) before
taxes.................. (1,616) (11,935) 2,623 (210) 2,932
Income tax provision.... 800 2,400 697 200 528
--------- --------- ---------- ---------- ----------
Net income (loss)....... $ (2,416) $ (14,335) $ 1,926 $ (410) $ 2,404
========= ========= ========== ========== ==========
Net income (loss) per
share.................. $ (0.49) $ (2.37) $ 0.22 $ (0.05) $ 0.27
========= ========= ========== ========== ==========
Weighted average number
of shares outstanding
and common stock
equivalents............ 4,969,543 6,057,090 8,772,748 8,691,487 8,884,156
OTHER DATA:
Gross profit margin(4).. 30.5% 31.8% 32.4% 31.7% 31.6%
Selling, general, and
administrative expense,
excluding foreign
currency transaction
gains or losses, as a
percent of net sales... 30.2% 33.2% 29.1% 30.7% 26.7%
Net sales per
employee(5)............ $ 104 $ 114 $ 138 NM NM
PRO FORMA FINANCIAL
DATA(6):
Interest expense........ $ 5,733 $ 2,875 $ 2,768
Net income.............. 5,294 759 3,741
Net income per share.... $ 0.41 $ 0.06 $ 0.29
Weighted average number
of shares outstanding
and common stock
equivalents............ 12,773,000 12,692,000 12,884,000
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
--------------------
AS
ACTUAL ADJUSTED(7)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 4,226 $ 12,656
Working capital............................................ 97,845 141,375
Total assets............................................... 302,652 311,082
Total debt................................................. 106,512 71,412
Total stockholders' equity................................. 84,870 128,400
</TABLE>
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(1) Fiscal years presented ended December 31, except the Company's 1993 fiscal
year which ended on December 25.
(2) During fiscal 1994, selling, general and administrative expenses included
duplicative costs associated with the DEA and Roch operations which were
consolidated during 1994 and 1995. Includes foreign currency transaction
gains of $0.2 million, $1.1 million, $0.6 million and $2.0 million in 1993,
1994, 1995 and the first half of 1995, respectively, and $0.7 million of
transaction losses in the first half of 1996.
(3) Restructuring charges are principally attributable to the payment of
employee severance and the closing of sales offices associated with
integrating the Company's existing operations with those of DEA and Roch.
(4) Data for the first half of the year may not be indicative of data for the
full year due to seasonal factors and the frequent impact of product mix
variations quarter to quarter.
(5) During fiscal 1994, DEA employees have been accounted for by annualizing
the number of employees for the period.
(6) Pro forma to reflect the sale of the shares of Class A Common Stock offered
by the Company hereby, at a public offering price of $11.75 per share, and
repayment of all short-term indebtedness and current portions of long-term
debt outstanding during the pro forma periods, not exceeding $31.9 million
and $3.2 million, respectively, as if such transactions had occurred on the
first day of the relevant period. The unaudited pro forma financial
information does not purport to be indicative of the financial position or
operating results which would have been achieved had the Offering taken
place at the dates indicated and should not be construed as representative
of the Company's financial position or results of operations for any future
period or date. See "Use of Proceeds."
(7) Adjusted to reflect the sale of the Class A Common Stock offered by the
Company hereby, at a public offering price of $11.75 per share, and the
application of the net proceeds to the Company therefrom to repay
approximately $31.9 million principal amount of outstanding short-term
indebtedness and $3.2 million of the current portion of long-term
indebtedness, as if such transactions had occurred on June 30, 1996.
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Class A Common Stock offered hereby.
HISTORICAL LOSSES
Although the Company has generated net income in each of its quarters
subsequent to March 31, 1995, the Company had losses from continuing
operations of approximately $2.9 million, $8.0 million, $2.4 million and $14.3
million in fiscal 1991, 1992, 1993, and 1994, respectively. There can be no
assurance that the Company will achieve net income in future periods. See
"Achievement of Strategic Plan."
COMPETITION
The Company's MS Group currently has four principal direct domestic and
foreign competitors, some of which are owned by entities that have greater
financial and other resources than the Company. The MS Group also faces
indirect competition from other types of metrology firms such as manufacturers
of fixed gauging systems. The primary industries to which the MS Group sells
its products are characterized by a relatively small number of large
participants with significant purchasing power. In addition, the MS Group
generally sells its products through a competitive bid process in which at
least one and frequently several of the Company's competitors submit competing
bids. As a result, the Company experiences significant pricing competition in
connection with sales by its MS Group which can have an adverse impact on the
Company's net sales and margins. During periods when the metrology industry
suffers from overcapacity, downward pricing pressure experienced by the MS
Group is likely to be more intense and the Company's margins may be more
severely impacted. In addition, certain of the Company's competitors have
access to greater financial resources and may be able to withstand such
pricing pressure more effectively than the Company. Accordingly, there can be
no assurance that the MS Group will be able to continue to compete effectively
against existing competitors or new competitors, especially during periods of
overcapacity.
The market for the PMI Division's products is fragmented and the PMI
Division competes with a large number of competitors, including the market
leader in this area, primarily on the basis of the strength of its third party
distribution network, price and product innovation. New competitors from
emerging industrialized countries with lower cost production than the
Company's represent a significant competitive challenge to the Company. As a
result, the PMI Division's continued success and profitability will be
dependent on its ability to continue to develop cost-effective sourcing and
innovative products.
CYCLICALITY OF END USER MARKETS
The primary end user markets for the Company's MS Group products include the
aerospace, heavy transport and automotive (including automotive suppliers)
industries. Each of these industries experiences cyclicality in connection
with recessionary periods. In addition, the Company believes that a
significant portion of the net sales of the PMI Division and the CM Division
are made to end user markets which exhibit patterns of cyclicality in
purchases.
Net sales by the MS Group accounted for approximately 67% of the Company's
net sales in fiscal 1995. Because a large proportion of these products are
sold by the Company to end users in cyclical markets, the price of and margins
for such products have been and are likely to continue to be adversely
impacted by decreases in capital spending by such end user markets during
recessionary periods. In addition, because the PMI Division sells primarily
through distributors to ultimate end user markets that experience cyclicality,
the PMI Division is likely to experience significant declines in sales volumes
during recessionary periods because catalog houses and distributors typically
reduce purchases of the Company's PMI Division products at the onset of such
recessionary periods even more than the decline in their end user markets'
demands would dictate, in order to reduce their
9
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inventories. There can be no assurance that the Company will be able to
operate profitably during any recessionary downturn.
ACHIEVEMENT OF STRATEGIC PLAN
The Company believes it has successfully integrated its recently acquired
businesses with its existing operations which has resulted in considerable
cost and expense reductions. The Company's strategy, however, calls for
continued cost and expense reductions and other actions which require
management to achieve increased coordination and rationalization of the
Company's research and development activities, production facilities and
direct selling and distribution functions. There can be no assurance that the
Company's strategic plan will be successfully implemented or that the Company
will continue to achieve financial results that are comparable to or better
than those reported since March 31, 1995.
FOREIGN OPERATIONS
During 1994, the Company acquired DEA and Roch, substantially all of whose
operations were located outside of the United States. As a result, the portion
of the Company's operations located outside of the United States significantly
increased and, as of December 31, 1995, approximately 74% (based on book
values) of the Company's assets, 65% of the Company's net sales (based on
customer location) and 74% of its employees were located outside the United
States. Foreign operations are subject to special risks that can materially
affect the sales, profits, cash flows and financial position of the Company,
including taxes on distributions or deemed distributions to the Company or any
U.S. subsidiary, currency exchange rate fluctuations, inflation, maintenance
of minimum capital requirements, import and export controls, exchange controls
and social (labor) programs. Specifically, the Company's cost of sales for
products manufactured or assembled in certain foreign locations has been
adversely impacted, as compared with some of its competitors, by the
appreciation of the respective local currencies of such locations relative to
the U.S. dollar.
In addition, the wide-spread geographic locations of the Company's
facilities and operations, which were significantly increased by the 1994
acquisitions of DEA and Roch, made it more difficult for the Company to
coordinate its financial and operating reporting and oversee its operations
and employees. In response to these difficulties, during late 1994, and
further in 1995, the Company took various personnel and procedural actions to
improve its reporting and operating procedures. While the Company believes
that these actions have resulted in satisfactory financial and operational
reporting and oversight for its present business, additional system revisions
may be needed if the Company should experience a further increase in the
number of foreign facilities.
DEPENDENCE ON KEY SUPPLIER
The Company currently purchases the vast majority of its externally sourced
low to medium accuracy electronic touch trigger sensor probes and heads from a
publicly held United Kingdom company (the "Supplier") which is the dominant
supplier of such sensor probes to CMM manufacturers. No alternative supplier
for this class of electronic sensor probes, which are a key component of
substantially all of the Company's lower accuracy CMMs, is currently available
and developing an alternative source for the probes and heads could take more
than a year. Although adequate supplies of such probes and heads for at least
several months is potentially available from current inventories of the
Company and its customers, any reductions or interruptions in supply or
material increases in the price of electronic sensor probes purchased from the
Supplier could cause the Company to suffer disruptions in the operation of its
business or incur higher than expected costs, which could have a material
adverse effect on the Company.
TECHNOLOGY
As the size of some components measured by metrology products decreases and
the required speed and precision of such measurements increases, the Company's
products may become obsolete unless the Company develops more sophisticated
software and metrology systems. Although the Company's strategy is to focus
research and development in the area of software development and non-contact
technologies, there can be no assurance that the Company will be successful in
competing against new technologies or competitors, some of whom may not now
participate in the metrology industry.
10
<PAGE>
INDEBTEDNESS
The Company has, and, upon completion of the Offering, will continue to
have, significant debt service obligations. As of June 30, 1996, on a pro
forma basis after giving effect to the Offering and the application of the net
proceeds to the Company to repay $31.9 million of short-term indebtedness and
$3.2 million of the current portion of long-term indebtedness as described
under "Use of Proceeds," the Company would have had total outstanding
indebtedness and total stockholders' equity of $71.4 million and $128.4
million, respectively.
The degree to which the Company is leveraged could have important
consequences to the Company's stockholders, including the following: (i) the
Company may face difficulties in satisfying its obligations with respect to
its indebtedness; (ii) the Company may be placed at a competitive disadvantage
to its competitors; (iii) the Company's flexibility in planning for, or
reacting to, changes in its business and the industry may be limited; (iv) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or other general corporate
purposes may be impaired; (v) a substantial portion of the Company's cash flow
from operations will be used to pay principal and interest on its
indebtedness, thereby reducing the funds available to the Company for its
operations and future business opportunities; (vi) a portion of the Company's
borrowings bear interest at variable rates of interest which could result in
higher interest expense in the event of an increase in market interest rates;
(vii) certain of the Company's debt instruments contain financial and other
restrictive covenants which could limit the Company's operating and financial
flexibility and, if violated, would result in an event of default which, if
not cured or waived, could preclude the Company's access to credit under such
borrowing arrangements or otherwise have a material adverse effect on the
Company; (viii) the Company's $25.0 million domestic secured revolving credit
facility (the "Facility") prohibits the payment of dividends by the Company;
(ix) the Facility and $25.0 million of additional term indebtedness of the
Company (guaranteed by Finmeccanica, a stockholder of the Company) mature in
September 1997, requiring the Company to seek refinancing of such debt at that
time or before; and (x) as a result, the Company may be more vulnerable to
general economic and industry downturns. On March 31, 1996 and June 30, 1996,
the Company breached the current ratio covenant contained in the Facility.
Such breaches were waived. There can be no assurance that the Company will not
breach this covenant in the future.
The Company is currently negotiating to replace the Facility with a $40.0
million secured revolving credit facility (the "New Facility"). There can be
no assurance, however, that the New Facility will be obtained on terms
acceptable to the Company, if at all.
DEPENDENCE ON LIMITED NUMBER OF KEY PERSONNEL
The success of the Company is dependent to a significant extent upon the
continuing services of Frank T. Curtin, its Chairman, President and CEO, and a
limited number of other key executives of the senior management team. Loss of
the services of one or more of these senior executives could have a material
adverse effect on the Company. See "Management."
LIMITED VOTING RIGHTS OF CLASS A COMMON STOCK
The Company's common stock is divided into two classes, the Class A Common
Stock and Class B Common Stock, $1.00 par value per share (the "Class B Common
Stock," and, collectively with the Class A Common Stock, the "Common Stock").
Shares of Class A Common Stock are entitled to one vote per share and shares
of Class B Common Stock are entitled to ten votes per share, except as
otherwise provided by law or in the Company's certificate of incorporation
(the "Certificate of Incorporation") or by-laws (the "By-laws"). The Class A
Common Stock and the Class B Common Stock vote together as a single class on
all matters, except as otherwise provided by law and except that the Class A
Common Stock, voting as a class with the holders of shares of any series of
preferred stock entitled to vote, elects one-third (rounded down, if
necessary, to the nearest whole number, but in any event at least one) of the
directors elected each year. The issuance of additional shares of Class B
Common Stock would dilute the voting power of the Class A Common Stock,
including the Class A Common Stock offered hereby.
11
<PAGE>
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation and By-laws and the Rights Agreement dated
March 9, 1988 between the Company and the First National Bank of Boston (the
"Rights Plan") contain certain provisions that could make more difficult the
acquisition of the Company by means of a tender offer, a proxy contest or
otherwise. These provisions establish staggered terms for members of the
Company's Board of Directors, include advance notice procedures for
stockholders to designate nominees for election as directors of the Company
and for stockholders to submit proposals for consideration at stockholders'
meetings and require the vote of 80% of the stockholders entitled to vote to
effect certain mergers or acquisition transactions. The Rights Plan provides
that holders of Common Stock are currently entitled to three quarters of a
preferred stock purchase right (subject to adjustment) (a "Right") for each
outstanding share of Common Stock held by them. Each Right entitles the holder
thereof to purchase from the Company one one-hundredth of a share of Series A
Participating Preferred Stock (subject to adjustment), at an exercise price of
$55 (subject to adjustment), ten business days after a party acquires 20% of
the Company's Common Stock, or the commencement of a tender or exchange offer
(excluding, for these purposes, Finmeccanica so long as Finmeccanica does not
beneficially own shares of Common Stock other than the 3,450,000 shares of
Class A Common Stock acquired by Finmeccanica in connection with the DEA
acquisition and such additional shares as Finmeccanica may purchase in
accordance with its pre-emptive rights under the Shareholders Agreement dated
as of September 28, 1994 between Finmeccanica and the Company (the
"Shareholders Agreement")). Upon completion of the Offering, the Shareholders
Agreement will terminate. The Rights may be redeemed by the Company at a price
of $0.03 per Right; if not, the holder is entitled to purchase, at the
exercise price of the Right, an equity interest in the acquiring party having
a market value of two times the exercise price. In addition, the Company is
subject to Section 203 of the Delaware General Corporation Law ("DGCL") which
limits transactions between a publicly held company and "interested
stockholders" (generally, those stockholders who, together with their
affiliates and associates, own 15% or more of a company's outstanding capital
stock). The restriction of Section 203 does not apply to those who were
"interested stockholders" prior to 1974. The Certificate of Incorporation also
provides for 1,000,000 authorized but unissued shares of preferred stock, the
rights, preferences, qualifications, limitations and restrictions of which may
be fixed by the Board of Directors without any further action by stockholders,
which may dilute the voting power of the holders of the Common Stock. One
hundred seventy thousand shares of such preferred stock have been designated
as Series A Participating Preferred Stock issuable upon exercise of the
Rights. In addition, because the Certificate of Incorporation provides that
the Class B Common Stock is entitled to ten votes per share, the issuance of
additional shares of Class B Common Stock would dilute the voting power of the
holders of Class A Common Stock, including the shares of Class A Common Stock
offered by this Prospectus. All of the foregoing may have the effect of
deterring certain potential acquisitions of the Company or making more
difficult a change in control of the Company or the removal of incumbent
management or the Board of Directors of the Company. See "Description of
Capital Stock."
POSSIBLE VOLATILITY OF STOCK PRICE
The stock market historically has experienced volatility which has affected
the market price of securities of many companies and which has sometimes been
unrelated to the operating performance of such companies. In addition, factors
such as announcements of new products or strategic alliances by the Company or
its competitors, as well as market conditions in the metrology industry, may
have a significant impact on the market price of the Class A Common Stock. See
"Market for Class A Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of Class A Common Stock (including Class B Common Stock converted into
Class A Common Stock upon a sale) in the public market after the Offering
could adversely affect the market price of the Class A Common Stock. In
addition to the 7,286,000 shares offered hereby (assuming no exercise of the
Underwriters' over-allotment option or exercise of outstanding stock options)
and taking into account the contractual restrictions imposed by lock-up
agreements (the "Lock-up Agreements") that will be executed by certain of the
Company's stockholders, directors and officers in connection with the
Offering, approximately 1,003,408 outstanding shares of Class A Common Stock
will become eligible for sale in the open market pursuant to Rule 144
beginning 180 days following the closing date of the Offering.
12
<PAGE>
In addition, as of the date of this Prospectus, options to purchase 664,997
shares of Class A Common Stock were outstanding and 505,923 shares of Class A
Common Stock and 218,807 shares of Class B Common Stock were held by the
Employee Stock Ownership and Profit Participation Plan (the "ESOP") and the
Company's Savings and Retirement Plan (the "SARP") for distribution to
employees of the Company upon termination of their employment in accordance
with the terms thereof. Holders of outstanding options to acquire 80,000
shares of Common Stock will be subject to restrictions on resale for 180 days
following the date of this Prospectus pursuant to the Lock-up Agreements. In
addition, an executive officer of the Company to whom 1,048 shares of Common
Stock currently held pursuant to the ESOP and the SARP may be distributed upon
termination of employment, will enter into a Lock-up Agreement restricting
resales of any such shares of Common Stock for 180 days following the date of
this Prospectus. The Company has filed registration statements on Form S-8
pursuant to which shares issued upon the exercise of all outstanding options
to purchase Common Stock and shares issued as awards of restricted stock are
freely tradeable (subject to compliance with Rule 144 for affiliates), and
shares distributable to employees from the ESOP and the SARP upon their
termination of employment are also freely tradeable (subject to compliance
with Rule 144 for affiliates).
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Class A Common Stock offered by the Company hereby (at a public offering price
of $11.75 per share and net of underwriting discounts and commissions and
estimated offering expenses) are estimated to be approximately $43.5 million
($52.1 million if the Underwriters' over-allotment option is exercised in
full). Approximately $35.1 million of the net proceeds to the Company will be
used to repay $31.9 million of outstanding short-term indebtedness and $3.2
million of the current portion of long-term indebtedness of the Company under
its loan agreements and lines of credit. The remainder of the net proceeds to
the Company of $8.4 million will be used for working capital and general
corporate purposes. At August 5, 1996, the indebtedness to be repaid bore
interest at a weighted average interest rate of 8.0% per annum. Approximately
$15.1 million of such indebtedness matures in September 1997 and the remainder
is repayable on demand. The Company may incur nominal or insignifcant
prepayment penalties or fees in connection with the repayment of such debt.
Proceeds from all such short-term indebtedness incurred within the last twelve
months were used primarily for working capital, although certain amounts were
used to purchase capital equipment. Pending the uses described above, the
Company intends to invest the net proceeds primarily in short and intermediate
term interest-bearing debt obligations of investment grade. The Company will
not receive any proceeds from the sale of shares of Class A Common Stock by
the Selling Stockholders.
MARKET FOR CLASS A COMMON STOCK
The Class A Common Stock is listed on the New York Stock Exchange under the
symbol "BNS." The Class B Common Stock is generally non-transferable, and
there is no trading market for the Class B Common Stock; however, the Class B
Common Stock is freely convertible into Class A Common Stock on a share-for-
share basis, and transferable thereafter. At August 31, 1996, the Company had
approximately 1,193 holders of record of its Class A Common Stock and 952
holders of record of its Class B Common Stock. The quarterly high and low
sales prices of the Class A Common Stock on the New York Stock Exchange for
the periods indicated are set forth below. The reported last sale price of the
Class A Common Stock on the NYSE on October 10, 1996 was $12 1/8.
<TABLE>
<CAPTION>
PRICE RANGE OF
CLASS A COMMON STOCK
---------------------
HIGH LOW
<S> <C> <C>
Year ended December 31, 1994:
1st Quarter............................................ $ 7 3/4 $ 6 3/8
2nd Quarter............................................ 6 3/4 5 3/4
3rd Quarter............................................ 7 1/2 6
4th Quarter............................................ 7 1/4 5 1/4
Year ended December 31, 1995:
1st Quarter............................................ $ 7 1/2 $ 5 5/8
2nd Quarter............................................ 7 3/8 6 1/8
3rd Quarter............................................ 10 5/8 6 1/2
4th Quarter............................................ 11 7/8 9 1/4
Year ending December 31, 1996:
1st Quarter............................................ $ 10 1/8 $ 8 5/8
2nd Quarter............................................ 10 5/8 9 1/2
3rd Quarter............................................ 13 3/4 9 1/4
4th Quarter (through October 10, 1996)................. 13 3/4 12
</TABLE>
14
<PAGE>
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock since 1990 and
currently intends to retain any earnings for the expansion of its business.
Accordingly, the Company does not anticipate that it will pay dividends in the
foreseeable future. In addition, the Facility currently prohibits the Company
from paying dividends on the Common Stock and it is likely that future
indebtedness of the Company will also prohibit such dividends. The payment of
dividends is within the discretion of the Company's Board of Directors and
will depend upon the Company's earnings, financial condition, capital
requirements, contractual restrictions and such other factors as the Company's
Board of Directors may consider or deem appropriate at the time.
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of June 30, 1996, and as adjusted to give effect to the sale of the
shares of Class A Common Stock offered by the Company, at a public offering
price of $11.75 per share, and the application of the net proceeds to the
Company to repay $31.9 million principal amount of short-term indebtedness and
$3.2 million of the current portion of long-term indebtedness, as described
under "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
---------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED
<S> <C> <C>
Cash and cash equivalents(1)............................. $ 4,226 $ 12,656
======== ========
Short-term debt.......................................... $ 31,900 --
======== ========
Long-term debt, including current portion................ $ 74,612 $ 71,412
Stockholders' equity(2):
Preferred Stock(3), $1.00 par value; authorized
1,000,000 shares; none issued at June 30 and as
adjusted.............................................. -- --
Class A Common Stock; par value $1.00; authorized
15,000,000 shares; issued 8,241,798 shares at June 30
and 12,241,798 shares as adjusted..................... 8,242 12,242
Class B Common Stock; par value $1.00; authorized
2,000,000 shares;
issued 520,219 shares at June 30 and as adjusted...... 520 520
Additional paid in capital............................. 67,248 106,778
Earnings employed in the business...................... (5,628) (5,628)
Cumulative foreign currency translation adjustment..... 14,985 14,985
Treasury stock: 23,592 shares at June 30 and as
adjusted.............................................. (270) (270)
Unearned compensation.................................. (227) (227)
-------- --------
Total stockholders' equity............................. 84,870 128,400
-------- --------
Total capitalization................................. $159,482 $311,082
======== ========
</TABLE>
- ---------------------
(1) Includes approximately $700,000 of restricted cash.
(2) Excludes outstanding options to purchase 665,997 shares of Common Stock
and 214,386 additional shares of Common Stock reserved for future issuance
under the Company's stock plans. See "Management--Executive Compensation."
Excludes 50,000 shares of Class A Common Stock reserved for issuance upon
certain specified events under the Stock Purchase and Transfer Agreement
dated March 24, 1994 between the Company and Diehl GmbH & Co. See "Certain
Transactions."
(3) The Company has designated 170,000 shares of such preferred stock as
Series A Participating Preferred Stock. See "Description of Capital
Stock--Rights Plan."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data as of and for the period
ended December 31, 1995 have been derived from the Company's consolidated
financial statements, which have been audited by Ernst & Young LLP,
independent auditors. The following selected historical financial data as of
and for the four years in the period ended December 31, 1994 have been derived
from the Company's consolidated financial statements, which have been audited
by Coopers & Lybrand L.L.P., independent accountants. The selected
consolidated financial information for the six months ended June 30, 1996 and
June 30, 1995 have been derived from the Company's unaudited consolidated
financial statements included elsewhere in this Prospectus and include all
adjustments, consisting only of normal recurring adjustments, which management
considers necessary for a fair presentation of the results for such periods.
The results for the six months ended June 30, 1996 are not necessarily
indicative of results to be expected for the full year. During the periods
presented below, the Company has undertaken a number of divestitures and
acquisitions, including the 1994 acquisitions of DEA and Roch. Consequently,
the selected consolidated financial information set forth below may not be
comparable for all periods presented.
The following data should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER(1) JUNE 30,
------------------------------------------------------ ----------------------
1991 1992 1993 1994 1995 1995 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 177,053 $ 162,524 $ 159,518 $ 209,369 $ 328,031 $ 158,349 $ 166,113
Cost of sales........... 119,481 116,283 110,841 142,776 221,729 108,174 113,693
Selling, general and
administrative
expense(2)............. 57,614 54,773 48,073 68,473 94,902 46,580 45,104
Restructuring
charges(3)............. -- -- -- 4,169 336 247 --
--------- --------- --------- --------- ---------- ---------- ----------
Operating profit
(loss)................. (42) (8,532) 604 (6,049) 11,064 3,348 7,316
Interest expense........ 4,219 5,272 5,100 6,575 9,129 3,948 4,553
Other income, net....... 560 2,570 2,880 689 688 390 169
--------- --------- --------- --------- ---------- ---------- ----------
Income (loss) before
taxes.................. (3,701) (11,234) (1,616) (11,935) 2,623 (210) 2,932
Income tax provision.... (800) (3,250) 800 2,400 697 200 528
--------- --------- --------- --------- ---------- ---------- ----------
Income (loss) from
continuing operations.. (2,901) (7,984) (2,416) (14,335) 1,926 (410) 2,404
Loss from discontinued
operations............. (1,180) -- -- -- -- -- --
--------- --------- --------- --------- ---------- ---------- ----------
Net income (loss)....... $ (4,081) $ (7,984) $ (2,416) $ (14,335) $ 1,926 $ (410) $ 2,404
========= ========= ========= ========= ========== ========== ==========
Net income (loss) per
share.................. $ (0.88) $ (1.63) $ (0.49) $ (2.37) $ 0.22 $ (0.05) $ 0.27
========= ========= ========= ========= ========== ========== ==========
Weighted average number
of shares outstanding
and common stock
equivalents............ 4,639,594 4,898,536 4,969,543 6,057,090 8,772,748 8,691,487 8,884,156
OTHER DATA:
Gross profit margin(4).. 32.5% 28.5% 30.5% 31.8% 32.4% 31.7% 31.6%
Selling, general, and
administrative expense,
excluding foreign
currency transaction
gains or losses, as a
percent of net sales... 32.8% 34.0% 30.2% 33.2% 29.1% 30.7% 26.7%
Net sales per
employee(5)............ $ 89 $ 92 $ 104 $ 114 $ 138 NM NM
PRO FORMA FINANCIAL
DATA(6):
Interest expense........ -- -- -- -- $ 5,733 $ 2,875 $ 2,768
Net income.............. -- -- -- -- 5,294 759 3,741
Net income per share.... -- -- -- -- $ 0.41 $ 0.06 $ 0.29
Weighted average number
of shares outstanding
and common stock
equivalents............ -- -- -- -- 12,773,000 12,692,000 12,884,000
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER(1) AS OF JUNE 30,
-------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 8,347 $ 4,640 $ 2,094 $ 6,676 $ 6,262 $ 6,571 $ 4,226
Working capital......... 68,644 48,036 46,025 102,883 87,569 89,897 97,845
Total assets............ 183,805 166,086 165,871 272,274 295,400 281,953 302,652
Total debt.............. 61,369 60,700 64,500 92,613 102,068 101,409 106,512
Total stockholders'
equity................. 80,325 66,674 63,520 78,925 85,857 79,705 84,870
</TABLE>
- ---------------------
(1) The Company's fiscal year ended on December 28, 26 and 25 in 1991, 1992
and 1993, respectively. For all other periods presented, the Company's
fiscal year ended on December 31.
(2) During fiscal 1994, selling, general and administrative expenses included
duplicative costs associated with the DEA and Roch operations which were
consolidated during 1994 and 1995. Includes foreign currency transaction
gains of $0.2 million, $1.1 million, $0.6 million and $2.0 million in
1993, 1994, 1995 and the first half of 1995, respectively, and $0.7
million of transaction losses in the first half of 1996.
(3) Restructuring charges are principally attributable to the payment of
employee severance and the closing of sales offices associated with
integrating the Company's existing operations with those of DEA and Roch.
(4) Data for the first half of the year may not be indicative of data for the
full year due to seasonal factors and the frequent impact of product mix
variations quarter to quarter.
(5) During fiscal 1994, DEA employees have been accounted for by annualizing
the number of employees for the period.
(6) Pro forma to reflect the sale of the shares of Class A Common Stock
offered by the Company hereby, at a public offering price of $11.75 per
share, and repayment of all short-term indebtedness and current portions
of long-term debt outstanding during the pro forma periods, not exceeding
$31.9 million and $3.2 million, respectively, as if such transactions had
occurred on the first day of the relevant period. The unaudited pro forma
financial information does not purport to be indicative of the financial
position or operating results which would have been achieved had the
Offering taken place at the dates indicated and should not be construed as
representative of the Company's financial position or results of
operations for any future period or date. See "Use of Proceeds."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
During the periods discussed below, the Company undertook a number of
divestitures and acquisitions in its continuing effort to reposition itself
from its historical origins as a machine tool manufacturer to a leader in the
field of metrology. These initiatives included the disposition in March and
April of 1993 of the remainder of the Company's machine tool business, the
acquisition in March 1994 of Roch, the acquisition in September 1994 of DEA,
the acquisition in December 1994 of certain intellectual property and other
assets of Metronic Ltd. and the consolidation in 1994 and 1995 of the
operations of DEA and Roch with the MS Group and the PMI Division,
respectively. As a result, the financial results discussed below may not be
comparable for the periods presented, and, in addition to the discussion of
its historical results of operations, the Company has for 1994 included, where
appropriate, a discussion of its results of operations excluding the effects
of acquisitions.
Subsequent to the repositioning initiatives described above, the Company
commenced the realignment of its structure and culture towards a more focused
and integrated metrology business, with an emphasis on cost reduction and
profitability. Since recruiting its current President and Chief Executive
Officer in May 1995, the Company has recorded positive net income in each of
its fiscal quarters. The Company's ongoing operating strategy is intended to
further reduce product costs and, as part of this strategy, the Company
intends to standardize product designs worldwide, undertake more cost-
effective product designs, outsource components and products, increase
supplier partnering and focus on core manufacturing processes. The Company
also intends to streamline its sales, marketing and general and administrative
processes in an effort to further reduce selling, general and administrative
expenses as a percentage of net sales.
The Company currently operates entirely in the metrology industry through
three management units: the MS Group, which manufactures and markets manual
and computer-controlled, high precision CMMs and accounted for approximately
67% of the Company's net sales in 1995; the PMI Division, which manufactures
mechanical and electronic measuring and inspection tools and accounted for
approximately 30% of the Company's net sales in 1995; and the CM Division,
which designs and engineers specialty metrology products and systems primarily
utilizing non-contact technologies and accounted for less than 3% of the
Company's net sales in 1995. MS Group net sales include revenue from
aftermarket sales and service for CMMs which the Company estimates, during
1995, comprised approximately 25% of total MS Group net sales. Approximately
65% of the Company's net sales in 1995 were located outside the United States
(based on customer location).
FORWARD LOOKING STATEMENTS
This "Management Discussion and Analysis of Financial Condition and Results
of Operations" contains forward looking statements concerning the Company's
operations, economic performance and financial condition. Such statements are
subject to various risks and uncertainties, including those set forth in "Risk
Factors," and actual performance could differ materially from that currently
anticipated by the Company. In addition, this "Management Discussion and
Analysis of Financial Condition and Results of Operations" should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto included elsewhere in this Prospectus.
18
<PAGE>
Set forth below are certain results of operations of the Company, calculated
as a percentage of net sales:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER(1) JUNE 30,
--------------------------------- -------------------
1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 69.5 68.2 67.6 68.3 68.4
--------- --------- --------- -------- --------
Gross profit margin..... 30.5 31.8 32.4 31.7 31.6
Selling, general and
administrative
expense................ 30.1 32.7 28.9 29.4 27.2
Restructuring charges... -- 2.0 0.1 0.2 --
--------- --------- --------- -------- --------
Operating profit
(loss)................. 0.4 (2.9) 3.4 2.1 4.4
Interest expense........ 3.2 3.1 2.8 2.5 2.7
Other income, net....... 1.8 0.3 0.2 0.2 0.1
--------- --------- --------- -------- --------
Income (loss) before
income taxes........... (1.0) (5.7) 0.8 (0.2) 1.8
Income tax provision
(benefit).............. 0.5 1.1 0.2 0.1 0.3
--------- --------- --------- -------- --------
Net income (loss)....... (1.5)% (6.8)% 0.6% (0.3)% 1.5%
========= ========= ========= ======== ========
</TABLE>
- ---------------------
(1) In 1993, the Company's fiscal year ended on December 25. For all other
periods presented, the Company's fiscal year ended on December 31.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net Sales. Net sales increased 4.9%, or $7.8 million, from $158.3 million in
the first half of 1995 to $166.1 million in the first half of 1996. Foreign
currency exchange rate fluctuations caused a decrease in net sales of $2.1
million in the first half of 1996 as compared to a $9.3 million increase in
net sales in the first half of 1995. Excluding these foreign currency effects,
net sales for the first half of 1996 increased $9.9 million as compared to the
first half of 1995. The MS Group was responsible for $9.3 million of the
increase and the PMI and CM Divisions were responsible for the remaining $0.6
million increase. The increase in MS Group net sales was due primarily to
increased sales of smaller CMMs manufactured in the United States, as well as
increased sales of more fully configured CMMs with higher sales prices. The
increase in PMI Division net sales was primarily due to increased unit volume
in the United States and price increases worldwide.
Gross Profit. Gross profit increased 4.5%, or $2.2 million, from $50.2
million in the first half of 1995 to $52.4 million in the first half of 1996.
As a percentage of net sales, gross profit margin remained relatively
constant, with MS Group gross profit margin increasing and the PMI Division
gross profit margin decreasing. The MS Group's gross profit margin increased
due to improved product mix, in part resulting from increased sales of more
fully configured machines with higher sales prices. In addition, increased
revenue from aftermarket services contributed to the improvement in gross
profit margin. Decreased gross profit margin at the PMI Division resulted
primarily from a planned reduction of inventory levels which resulted in
reduced production levels and consequently less fixed overhead cost absorption
and lower gross profit margin in the second quarter.
Selling, General and Administrative Expense. Selling, general and
administrative expense ("SG&A") decreased 3.3%, or $1.5 million, from $46.6
million in the first half of 1995 to $45.1 million in the first half of 1996,
and decreased as a percentage of net sales from 29.4% to 27.2%. Excluding
foreign currency transaction gains or losses, which amounted to a $0.7 million
loss in the first half of 1996 and a $2.0 million gain in the first half of
1995, SG&A decreased as a percentage of net sales from 30.7% to 26.7%. The
decrease in SG&A as a percentage of net sales was primarily attributable to
the success of cost reduction efforts, primarily in the areas of advertising,
administrative and travel expenses.
Operating Profit. As a result of the foregoing, operating profit increased
118.5%, or $4.0 million, from $3.3 million in the first half of 1995 to $7.3
million in the first half of 1996.
19
<PAGE>
Interest Expense. Interest expense increased 15.3%, or $0.6 million, from
$3.9 million in the first half of 1995 to $4.6 million in the first half of
1996. This increase reflects both a $7.1 million increase in average
borrowings over the comparable period in 1995, which resulted from additional
working capital requirements and financing for the CM Division's new facility
in Telford, England, and an increase in average interest rates due to an
increased level of borrowing in Italy and the United States where applicable
interest rates are higher than the Company average.
Income Tax Expense. Income taxes include provisions for federal, foreign and
state income taxes and are based on the Company's estimate of the effective
income tax rates for the full year. The Company has estimated its 1996
effective tax rate at 18.0%, which compares with the effective tax rate of
26.6% for the year ended December 31, 1995. The reduction in the estimated
effective tax rate in 1996 from the actual effective tax rate for the year
ended December 31, 1995 is attributable to income earned in foreign tax
jurisdictions in which net operating loss carryforwards will be utilized in
1996. See Note 4 to the Consolidated Financial Statements for information on
foreign operating loss and capital loss carryforwards and deferred tax assets.
Net Income. As a result of the preceding factors, net income increased from
a net loss of $0.4 million, $0.05 per share, in the first half of 1995 to net
income of $2.4 million, $0.27 per share, in the first half of 1996.
Results for the third quarter of 1996 are not yet available. However, in
accordance with the general seasonality pattern for the Company's operations,
where the Company has typically recorded lower net sales and net income in the
first and third quarters than in the second and fourth quarters, the Company
estimates that its net income for the third quarter of 1996 will be less than
its net income for the second quarter of 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Sales. Net sales increased 56.7%, or $118.6 million, from $209.4 million
in 1994 to $328.0 million in 1995. Foreign currency exchange rate fluctuations
caused an increase in net sales of $12.1 million during 1995 as compared to an
increase of $3.3 million in 1994. Excluding these foreign currency effects,
net sales for 1995 increased $106.5 million over 1994. The MS Group was
responsible for approximately $95.4 million of the $106.5 million increase and
the PMI and CM Divisions were responsible for the remaining $11.1 million of
the increase. The increase in MS Group net sales was primarily attributable to
the DEA acquisition ($69.5 million of the increase) and an increase in unit
volumes of lower priced CMMs. The increase in PMI Division net sales was
attributable to the Roch acquisition and the introduction of new products and
new customers.
Gross Profit. Gross profit increased 59.6%, or $39.7 million, from $66.6
million in 1994 to $106.3 million in 1995. This increase was primarily a
result of the full-year sales effect during 1995 of the acquisitions of DEA
and Roch and their continued integration into the operations of the MS Group
and the PMI Division, respectively, as well as an improvement in the gross
profit margin of the PMI Division. The improvement in gross profit included
the effect of an inventory writedown of $3.7 million in 1994 primarily due to
the discontinuance of certain product lines as a result of the consolidation
of DEA and Roch as compared to a positive net inventory adjustment in 1995 of
$0.3 million. As a percentage of net sales, gross profit increased from 31.8%
to 32.4% due to an increase in the PMI Division's gross profit margin, offset
partially by a slight decrease in the MS Group's gross profit margin.
Increased gross profit margin at the PMI Division resulted from better product
mix and the impact of improved absorption of fixed costs as a result of
increased PMI Division sales and production volume. The MS Group's gross
profit margin decreased slightly, primarily as a result of increased unit
volumes of lower priced CMMs offset partially by increased unit volumes of
more fully configured CMMs.
Selling, General and Administrative Expense. SG&A increased 38.5%, or $26.4
million, from $68.5 million in 1994 to $94.9 million in 1995, and decreased as
a percentage of net sales from 32.7% to 28.9%. Exclusive of foreign currency
transaction gains or losses, which amounted to a $0.6 million gain in 1995 and
a $1.1 million gain in 1994, SG&A decreased as a percentage of net sales from
33.2% to 29.1%. The decrease in SG&A as a percentage of net sales was
primarily attributable to consolidation savings that were planned and
20
<PAGE>
achieved as a result of the consolidation of DEA sales and distribution
operations with those of the MS Group and the consolidation of Roch with the
PMI Division. Foreign currency transaction gains in 1995 include a gain of
$0.9 million due to a revaluation of a 1994 foreign denominated liability that
was incorrectly recorded at an historical, rather than current, foreign
exchange rate in the Company's previously issued consolidated financial
statements.
Restructuring Charges. Restructuring charges amounted to $4.2 million in
1994 and $0.3 million in 1995. Restructuring charges in 1994 were due
principally to employee severance costs incurred in connection with sales
office closings associated with integrating Brown & Sharpe's existing
operations with those of DEA ($2.4 million) and severance costs ($1.8 million)
in connection with the consolidation of Roch and a restructuring at Tesa-Brown
& Sharpe S.A. ("Tesa").
Operating Profit. As a result of the foregoing, operating profit increased
$17.1 million, from an operating loss of $6.0 million in 1994 to an operating
profit of $11.1 million in 1995. Excluding the effects of the inventory
writedown, inventory adjustment and restructuring charges discussed above, and
a $0.5 million adjustment in 1995 relating to 1994 preliminary purchase price
adjustments in connection with the DEA acquisition, operating profit increased
$9.7 million, from $1.9 million in 1994 to $11.6 million in 1995.
Interest Expense. Interest expense increased 37.9%, or $2.5 million, from
$6.6 million in 1994 to $9.1 million in 1995. An increase in average
borrowings from $81.0 million in 1994 to approximately $100.0 million in 1995
resulted in increased interest expense in 1995. The increase in average
outstanding balances occurred after the DEA acquisition in September 1994 as a
result of additional working capital requirements arising from increased sales
and the payment of costs associated with restructuring and achieving the
acquisition consolidation savings.
Income Tax Expense. The Company has recorded a deferred tax asset for
deductible temporary differences that exist related to its U.S. operations.
This deferred tax asset has been recorded based on the existence of sufficient
taxable income in the carryback period and the reversal of existing taxable
temporary differences. For further information concerning the provision for
income taxes, as well as information regarding differences between effective
tax rates and statutory rates, see Note 4 of the Notes to the Consolidated
Financial Statements.
Net Income. As a result of the preceding factors, net income increased from
a net loss of $14.3 million, $2.37 per share, in 1994 to net income of $1.9
million, $0.22 per share, in 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 25, 1993
Net Sales. Net sales increased 31.3%, or $49.9 million, from $159.5 million
in 1993 to $209.4 million in 1994. The increase in net sales for 1994 resulted
primarily from the partial-year inclusion of sales of DEA products and
services ($37.6 million), the partial-year inclusion of sales of Roch products
($7.8 million), and a favorable currency movement ($3.3 million).
Approximately $1.9 million of net sales in 1993 were attributable to machine
tool spare parts and rebuild operations sold in early 1993. Excluding the
effects of the DEA and Roch acquisitions and the machine tool spare parts
operations, net sales in 1994 increased 4.1%, or $6.4 million, over net sales
in 1993. Excluding DEA, MS Group net sales in 1994 decreased 0.7% from net
sales in 1993, largely as a result of entering 1993 with a larger backlog than
at the beginning of 1994. PMI Division and CM Division net sales for 1994
increased primarily as a result of the resolution of financial difficulties of
a German distributor which had depressed net sales in 1993.
Gross Profit. Gross profit increased 36.8%, or $17.9 million, from $48.7
million in 1993 to $66.6 million in 1994, primarily as a result of the
partial-year sales effect during 1994 of the acquisitions of DEA and Roch and
the benefits of the integration of the Roch operations into the PMI Division.
Gross profit also benefited from increased unit volumes at all of the
Company's divisions. Gross profit in 1994 included an inventory writedown of
$3.7 million associated with the discontinuance of certain product lines as a
result of the consolidation of DEA and Roch. Excluding the gross profit of DEA
and such inventory writedowns, gross profit increased 25.3%, or $12.4 million,
from $49.0 million in 1993 to $61.4 million in 1994. As a percentage of net
sales, gross profit margin increased from 30.5% to 31.8% in 1994 due to gross
profit margin increases at the MS Group and the PMI Division. Excluding DEA,
the gross profit margin of the PMI Division and the MS Group increased and the
gross profit margin of the CM Division decreased.
21
<PAGE>
Selling, General and Administrative Expense. SG&A increased 42.4%, or $20.4
million, from $48.1 million in 1993 to $68.5 million in 1994, and increased as
a percentage of net sales from 30.1% to 32.7%. Exclusive of foreign currency
transaction gains or losses, which amounted to a $1.1 million gain in 1994 and
a $0.2 million gain in 1993, SG&A increased as a percentage of net sales from
30.2% to 33.2%. This increase was primarily attributable to the acquisitions
of DEA and Roch in 1994 and to expenses of an extra week in fiscal 1994, as
compared to 1993, of about $1.0 million, as well as the recording in the
second quarter of 1994 of a provision increasing the allowance for
uncollectible accounts receivable by approximately $0.6 million for collection
uncertainties related to a single customer. Excluding the effects of the DEA
and Roch acquisitions, SG&A was $55.3 million in 1994.
Restructuring Charges. Restructuring charges for 1994 amounted to $4.2
million ($1.0 million and $3.2 million in the third and fourth quarters,
respectively), comprised principally of employee severance and sales office
closing costs. Of this amount, $2.4 million was associated with the DEA
acquisition and $1.8 million was associated with the Roch acquisition and a
restructuring at Tesa.
Operating Profit. As a result of the foregoing, operating profit decreased
$6.6 million, from operating profit of $0.6 million in 1993 to an operating
loss of $6.0 million in 1994. Excluding the effects of the inventory
writedowns and the restructuring charges discussed above, operating profit
increased $1.0 million, from $0.9 million in 1993 to $1.9 million in 1994.
Interest Expense. Interest expense increased 29.4%, or $1.5 million, from
$5.1 million in 1993 to $6.6 million in 1994. This increase in interest
expense reflects a $22.6 million increase in the average annual balance of
borrowings, primarily the $16.6 million of debt of DEA and Roch assumed in the
acquisition thereof, offset by a slight decrease in the average effective
interest rate in 1994.
Other Income, Net. Other income decreased 76.1%, or $2.2 million, from $2.9
million in 1993 to $0.7 million in 1994. This decrease occurred because 1993
other income included a one-time gain of $2.0 million resulting from the sale
of certain small business operations.
Income Tax Expense. The Company has recorded a deferred tax asset for
deductible temporary differences that exist related to its U.S. operations.
This deferred tax asset has been recorded based on the existence of sufficient
taxable income in the carryback period and the reversal of existing taxable
temporary differences. For information concerning the provision for income
taxes, see Note 4 of the Notes to the Consolidated Financial Statements.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited consolidated financial data
for the ten most recently ended fiscal quarters through June 30, 1996. This
data has been derived from unaudited consolidated financial statements of the
Company, that, in the opinion of management, include all adjustments necessary
for a fair presentation in accordance with generally accepted accounting
principles. The Company's results of operations for a particular quarter are
not necessarily indicative of the results of operations for any future period.
As a result of the 1994 acquisition of Roch and DEA, and the consolidation in
1994 and 1995 of the operations of DEA and Roch with the MS Group and the PMI
Division, respectively, the information set forth below may not be comparable
for all periods presented. As a result of spending variations in the end user
markets that the Company serves, the Company has typically recorded lower net
sales and net income in the first and third quarters than in the second and
fourth quarters and higher net sales and net income in the fourth quarter. In
the third and fourth quarters of 1994, the Company recorded a net loss
primarily due to restructuring charges associated with the DEA acquisition,
the Roch acquisition and a restructuring at Tesa. See Note 17 to the
Consolidated Financial Statements for information with respect to the
previously reported unaudited quarterly information.
22
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------
1994 1995 1996
----------------------------------- ----------------------------------- ----------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $37,140 $43,717 $40,864 $87,648 $75,868 $82,481 $78,571 $91,111 $76,278 $89,835
Selling, general and
administrative
expense................ 12,830 14,288 14,311 27,044 24,609 21,971 21,781 26,541 22,089 23,015
Selling, general and
administrative expense
as a percent of sales.. 34.5% 32.7% 35.0% 30.9% 32.4% 26.6% 27.7% 29.1% 29.0% 25.6%
Net income (loss)....... $(2,874) $(1,368) $(4,615) $(5,478) $(1,455) $ 1,045 $ 220 $ 2,116 $ 550 $ 1,854
Earnings (loss) per
share.................. $ (0.57) $ (0.26) $ (0.86) $ (0.63) $ (0.17) $ 0.12 $ 0.03 $ 0.24 $ 0.06 $ 0.21
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Over the last several years, the Company has funded its working capital,
capital expenditure, research and development and other needs from operating
cash flows, sales proceeds from discontinued businesses, borrowings under
short-term credit facilities and an aggregate of $33.5 million of term and
mortgage indebtedness incurred in 1994. At June 30, 1996, the Company's
outstanding indebtedness was $106.5 million, including $74.6 million of long-
term indebtedness (including current portion) and $31.9 million of short-term
borrowings (including $15.1 million outstanding pursuant to the Facility), and
the Company's cash and cash equivalents were $4.2 million including restricted
cash of $0.7 million. During the first half of 1996, the Company refinanced
$12.2 million of outstanding Swiss mortgages. The Facility provides for
maximum aggregate borrowings of $25.0 million and the foreign credit
facilities provide for maximum aggregate borrowings of $47.4 million. The
Facility is available for working capital and general corporate purposes. Of
the foreign credit facilities, $24.4 million is available for working capital
and general corporate purposes to the Company's foreign subsidiary in the
country where borrowed, $17.4 million is available on presentment of eligible
invoices for discounting and $5.6 million is available to support letters of
credit and performance and bid bonds. Actual availability under the Facility
is limited on the basis of eligible United States accounts receivable and
inventory. At June 30, 1996, giving effect to such borrowing base limitations
and outstanding borrowings, the Company's maximum available additional
borrowings under the Facility were $6.8 million and its maximum available
additional borrowings and letters of credit under its foreign credit
facilities were $27.9 million.
The commitments under the Facility continue until September 1997 and
automatically renew thereafter for one year periods, subject to the
termination provisions contained in the Facility. The Facility is secured by
substantially all of the Company's domestic assets and 65% of the shares of
certain foreign subsidiaries and contains a number of covenants, including the
obligation to maintain certain financial ratios and a prohibition on the
payment of dividends. The Company's foreign credit facilities are generally
due on demand and certain of such facilities are secured by certain of the
Company's foreign assets. On March 31, 1996 and June 30, 1996, the Company
breached the current ratio covenant contained in the Facility. Such breaches
were waived. There can be no assurance that the Company will not breach this
covenant in the future.
The Company's growth during 1995 and the first six months of 1996 has
increased its working capital requirements. In order to fund such increased
working capital requirements, during the first half of 1996, the Company
restricted planned capital expenditures and funding for certain other projects
planned to achieve cost reductions and sales growth. If the Offering were not
completed or other sources of financing were not arranged by the Company, it
is likely that the Company would need to continue such restrictions in the
future.
Following the Offering, the Company expects to fund its working capital,
capital expenditures and other needs principally from cash on hand, operating
cash flows and borrowings under short-term credit facilities. At June 30,
1996, on a pro forma basis, after giving effect to the Offering and the
application of a portion of the net proceeds therefrom to repay $31.9 million
principal amount of short-term indebtedness and $3.2 million of the current
portion of long-term indebtedness, the Company would have had outstanding
approximately $71.4 million of long-term indebtedness and no short-term
indebtedness, and the Company's cash and cash equivalents would have been
$12.7 million. In addition, at June 30, 1996, on such pro forma basis, the
Company's maximum
23
<PAGE>
available borrowings under the Facility would have been $21.9 million and the
maximum available borrowings and letters of credit under its foreign credit
facilities would have been $44.7 million.
At June 30, 1996, and on a pro forma basis as set forth above, the annual
maturities of the Company's long-term debt were $3.2 million, $32.4 million,
$6.3 million and $9.9 million for 1996, 1997, 1998 and 1999, respectively.
Management believes that, upon consummation of the Offering and the
application of net proceeds to the Company therefrom, available short- and
long-term borrowings, cash on hand and cash flow from operations will be
sufficient to meet foreseeable cash requirements of the Company for the next
three to four years. Significant acquisitions or strategic partnerings could,
however, increase the Company's capital requirements, and in such event the
Company would seek to raise additional debt or equity.
The Company is currently negotiating to replace the Facility with a $40.0
million New Facility. Based on its current discussions regarding the New
Facility, the Company believes that the New Facility will, if put in place, be
secured by substantially all of its domestic assets and 65% of the shares of
some of its foreign subsidiaries and that the borrowing base limitations
contained therein will be less restrictive than those contained in the
Facility. There can be no assurance that the New Facility will be obtained on
terms acceptable to the Company, if at all.
Cash Flow. Net cash used in operations in the first half of 1996 was $4.8
million, as compared to net cash provided by operations of $3.0 million in the
first half of 1995. For the first half of 1996, net income of $2.4 million
increased by depreciation and other non-cash items of $4.5 million was offset
by increases in working capital of $11.7 million. In the first half of 1995,
net loss of $0.4 million, decreased by an increase in working capital of $1.0
million, was offset by depreciation and other non-cash items of $4.5 million.
Net cash used in investment transactions in the first half of 1996 was $5.1
million as compared to net cash used in investment transactions in the first
half of 1995 of $3.3 million. In the first half of 1996, investment
transactions included capital expenditures of $5.4 million. In the first half
of 1995, investment transactions included capital expenditures of $3.9
million.
Cash provided by financing transactions was $6.2 million in the first half
of 1996 compared with $5.4 million in the first half of 1995. Financing
transactions during 1996 consisted of a $4.4 million increase in short-term
borrowings and $3.0 million of long-term debt to finance the new CM facility
in Telford, England and the repayment of $1.6 million of long-term debt.
Financing transactions during 1995 included $6.2 million of short-term
borrowings offset by $1.2 million of long-term debt payments.
Working Capital. Working capital was $97.8 million at June 30, 1996 compared
to $87.6 million at December 31, 1995. Inventories increased to $97.0 million
at June 30, 1996, an increase of $8.4 million from the end of 1995, and
accounts receivable increased $0.7 million from December 31, 1995. In
addition, total short- and long-term borrowing increased $4.4 million to a
total of $106.5 million at June 30, 1996 as compared to $102.1 million at
December 31, 1995 primarily due to increased working capital requirements.
Capital Expenditures. The Company's capital expenditures, net of disposal
proceeds, were approximately $5.4 million in the first half of 1996, of which
$3.2 million was for the new CM facility in Telford, England, compared to
$12.1 million, $8.9 million and $4.4 million for the years 1995, 1994 and
1993, respectively, and $3.9 million, $1.4 million and $2.0 million for the
first half of 1995, 1994 and 1993, respectively. Management estimates that
capital expenditures for the remainder of 1996 will amount to approximately
$4.0 million, which includes expenditures of $0.8 million for completion of
the new CM facility in Telford. Amounts spent on capital expenditures have
been less than planned and may increase in the future if the Company has
sufficient liquidity available.
Product Design and Manufacturing Engineering. The Company invested $7.0
million, or 4.2% of net sales, in product design and manufacturing engineering
for the first half of 1996, compared to $7.6 million or 4.8% of net sales, in
the first half of 1995. The Company invested $15.8 million, or 4.8% of net
sales, $9.2 million, or 4.4% of net sales, and $8.7 million, or 5.5% of net
sales, in 1995, 1994 and 1993, respectively, for product design and
manufacturing engineering.
24
<PAGE>
BUSINESS
GENERAL
The Company, which was founded in 1833, is a leading designer, manufacturer
and marketer of metrology products worldwide under numerous internationally
recognized brand names. Metrology is the science of the physical measurement
of objects using various precision instruments and equipment. The Company's
high precision products measure physical dimensions of, and inspect and verify
conformance to specifications of, components and products and are used in
manufacturing, quality control and product development operations. The
Company's product line ranges from hand tools and instruments to customized
computer-controlled metrology systems which integrate hardware and software
and are augmented by service, training and aftermarket support. The Company
markets its metrology products and services in North America, Europe, Asia,
South America and the Middle East. Important end user markets for the
Company's products include the automotive, aerospace, industrial machinery,
electronics and computer industries, and the Company's customers include Ford
Motor Co., Daimler Benz, Toyota, Chrysler, BMW, Boeing Co., Eastman Kodak Co.
Inc., International Business Machines Corp., Hewlett-Packard Co., General
Electric Co., Caterpillar Inc., United Technologies Corp., Motorola Inc.,
Phillips, Samsung and Xerox Corp. For the twelve months ended June 30, 1996,
the Company recorded net sales of $335.8 million, approximately two-thirds of
which were sales to customers located outside of the United States.
Manufacturers depend upon metrology hardware and software products to
monitor consistent product conformance to their exacting specifications,
thereby improving the reliability, fit and finish of their products. In
addition to these quality and performance benefits, metrology products help
manufacturers lower costs by reducing errors, scrap, rework and warranty
expense, improving the manufacturing process, lowering throughput time,
increasing capacity and reducing work-in-progress inventories. In recent
years, manufacturers have accelerated the integration of quality control
functions directly into the production process by incorporating the use of
metrology products on the factory floor. In addition, manufacturers are
demanding more precise, capable and flexible metrology systems as their
products become smaller, more complex and/or must meet more stringent quality
and safety standards. Their exacting product specifications often require
measurement to an accuracy of less than one micron (one millionth of a meter
or approximately 1/100th of the thickness of a human hair) or, in some special
cases, measurement of nanometers (one billionth of a meter or the unit of
measurement for the wavelength of light). Increasingly, metrology systems must
incorporate a mix of traditional contact and newer non-contact technologies
because of reduced part sizes and the diversity of new materials used in
manufactured products. Metrology systems are purchased by customers regardless
of their need for additional production capacity because of ever-increasing
quality requirements and the need to reduce product costs. The price points of
metrology products range from $100 for a caliper to over $1.5 million for a
sophisticated CMM system.
The Company's operations are conducted through three management units:
Measuring Systems, Precision Measuring Instruments and Custom Metrology.
. THE MEASURING SYSTEMS GROUP, which accounted for approximately 67% of
the Company's net sales in 1995, manufactures and markets a wide range
of manual and computer-controlled, high precision CMMs including "in-
process" measuring systems under the Brown & Sharpe, DEA, and Leitz,
brand names. The Company believes it is the worldwide market leader for
CMMs as measured by net sales and installed base. The Company believes
it has an installed base of over 18,000 CMMs worldwide, creating a
significant opportunity for aftermarket sales and services.
. THE PRECISION MEASURING INSTRUMENTS DIVISION, which accounted for
approximately 30% of the Company's net sales in 1995, manufactures a
wide range of mechanical and electronic measuring and inspection tools
(including height gauges, calipers, dial indicators, micrometers and
gauge blocks) which are marketed under the Brown & Sharpe, Tesa, Etalon,
Interapid, Standard Gage, Select Gauge, Mauser, Mercer and Roch brand
names through more than 450 distributors and catalog houses worldwide.
25
<PAGE>
. THE CUSTOM METROLOGY DIVISION designs and engineers, under the Tesa
brand name, specialty products and systems that provide customized
solutions for unique measurement or inspection problems primarily
utilizing non-contact technology. Technologies and custom applications
developed by the CM Division with customer funding have been directly
applied to the design of standard products or systems distributed by the
MS Group or the PMI Division.
REPOSITIONING INITIATIVES
Over the past several years, the Company has undertaken a series of
divestitures, acquisitions and other strategic initiatives which have
repositioned the Company from its historical origins as a machine tool
manufacturer into a leader in the field of metrology. These repositioning
initiatives included:
. Divestiture of Non-Core Operations. The divestiture of non-strategic
operations, including the machine tool, pump and hydraulics businesses,
which enabled the Company to focus on its core metrology technologies
and market distribution strengths.
. Strategic Metrology Acquisitions. Strategic acquisitions which enabled
the Company to increase greatly the breadth of its metrology product
offering and the strength of its distribution system. These acquisitions
included the 1994 acquisitions of DEA, Roch and certain intellectual
property and assets of Metronic Ltd.
. Rationalization and Consolidation of Operations. Lowering the Company's
overhead cost structure by reducing duplicative functions and associated
headcount and by consolidating and rationalizing the Company's
manufacturing facilities and operations, which enabled the Company to
increase productivity and efficiency.
As a result of these strategic repositioning initiatives, the Company's net
sales increased from $162.5 million in fiscal 1992 to $328.0 million in fiscal
1995, while its gross profit margin increased from 28.5% to 32.4% and selling,
general and administrative expenses, excluding foreign currency transaction
gains and losses, as a percentage of net sales, decreased from 34.0% to 29.1%
during the same period. See "Selected Consolidated Financial Data."
NEW LEADERSHIP AND BUSINESS STRATEGY
Following completion of the Company's repositioning initiatives, the Company
sought to recruit new management leadership to enhance the Company's leading
market positions, improve its global competitiveness and continue to improve
its financial performance. To that end, the Company recruited Frank T. Curtin
as its new President and Chief Executive Officer in May 1995, who then
restructured the senior management team and recruited additional senior
managers for key management roles. The current ten-member senior management
team has over 296 years of combined experience in highly competitive
industrial businesses and global manufacturing organizations, is focused on
enhancing the financial performance of the Company, motivated in part by an
equity-based incentive compensation system, and has made significant progress
in realigning the structure and culture of the Company towards a more focused
and integrated metrology business. As a result of the repositioning of the
Company and the focus of the current management team on enhancing financial
performance, the Company has achieved positive net income in each of its
fiscal quarters since Mr. Curtin joined the Company. In addition, management
believes that its focus on cost reduction during Mr. Curtin's tenure has
resulted in a decrease in selling, general and administrative expenses,
excluding foreign currency transaction gains or losses, as a percentage of net
sales from 30.7% in the first half of 1995 to 26.7% in the first half of 1996.
See "Selected Consolidated Financial Data."
The Company is implementing its strategy based on the following elements:
. Continue Cost Improvements. The Company intends to continue to implement
measures designed to reduce its product costs through: (i) standardizing
product designs worldwide; (ii) increasing the cost- effectiveness of
product designs; (iii) outsourcing components and products; (iv)
increasing supplier partnering; and (v) focusing on core manufacturing
processes. The Company also intends to streamline its sales, marketing
and general and administrative processes in an effort to reduce selling,
general and administrative expenses as a percentage of sales.
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. Develop New Products and End User Markets. The Company's goal is to
increase net sales by expanding penetration of served industrial end
user markets and by capitalizing on high growth end user markets such as
the electronics, computer and medical industries where metrology needs
are growing rapidly. To expand in these high growth industries, the
Company intends to focus on development of software and emerging non-
contact metrology technologies through continued internal development
and through strategic acquisitions and technical partnerships (such as
the acquisition of certain intellectual property and assets of Metronic
Ltd. and the ASI joint venture). To expand its penetration of served
industrial end user markets, the Company expects to continue the
introduction of new metrology systems utilizing both contact and non-
contact technologies, and to develop sensors and other sophisticated
products that can be imbedded in a variety of manufacturing processes.
The Company plans to form technical and commercial alliances with
manufacturers of process equipment to provide enhanced combined
manufacturing systems utilizing the Company's sensors and other
products.
. Enhance Existing and Develop New Software. The Company intends to
emphasize research and development of software systems and applications
designed to meet the evolving metrology needs of its end users. To that
end, the Company intends to leverage off its software development team
of approximately 320 software and applications engineers and technicians
(including 50 engineers of ASI) in the following four areas: (i)
metrology software for inspection and verification of piece-part
integrity and conformance to design specifications; (ii) process control
software designed to detect and correct drifts in part tolerances before
the manufacturing process produces scrap or improperly configured
components; (iii) enhanced management information systems that report
statistical and quality information from the manufacturing process; and
(iv) new software that will link the Company's CMMs and, therefore, the
manufacturing process with computer-aided engineering and manufacturing
systems that will provide the means for real-time feedback, analysis
and, ultimately, control of manufacturing to design specifications. The
Company believes that its existing library of metrology software,
together with newly developed software, should enable it to respond to
the growing demand in manufacturing for on-line inspection and
verification. The Company also believes that its experience with CMM
software and manufacturing processes are critical to the successful
development of software that is linked with computer aided engineering
systems.
. Leverage Worldwide Distribution Capability. Through the acquisitions of
DEA and Roch, Brown & Sharpe has expanded its product lines and
strengthened its marketing and distribution capabilities in Europe,
South America, the Middle East, India and China. The Company plans to
continue to strengthen and expand its worldwide distribution capability,
principally by continuing to rationalize its existing distribution
network and by opening new demonstration centers and adding direct sales
capacity and distributors where cost effective. The Company also intends
to capitalize on the strength of its global distribution network by
increasing the number of Company-designed and third-party sourced
products sold through its distribution channels in an effort to increase
gross profit without a corresponding increase in selling, general and
administrative expenses.
. Increase Aftermarket Sales and Services. The Company intends to increase
its focus on higher margin aftermarket sales and services, including
calibration and rebuilding of CMMs, software upgrades, and parts sales.
The Company believes that the worldwide installed base of CMMs,
estimated at over 60,000 (including 18,000 of the Company's CMMs),
creates a significant demand for such aftermarket services.
The Company believes that the level of customer service it provides, as
measured by third-party surveys of its customers, is superior to that of its
principal competitors, and expects to further strengthen its customer
relationships through enhanced aftermarket support and increased partnering
efforts. The Company's net sales attributable to aftermarket sales and service
in 1995 were estimated to be approximately 25% of MS Group net sales for the
same period.
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METROLOGY INDUSTRY
GENERAL
Metrology products and systems range from hand tools for simple measuring
tasks to complex integrated systems of hardware and software that can measure,
digitize, inspect and verify manufactured parts and components to exacting
specifications. Manufacturers depend upon metrology hardware and software
products to monitor consistent product conformance to their exacting
specifications, thereby improving the reliability, fit and finish of their
products. In addition to these quality and performance benefits, metrology
products help manufacturers lower costs by reducing errors, scrap, rework and
warranty expense, improving the manufacturing process, lowering throughput
time, increasing capacity and reducing work-in-progress inventories. In recent
years, manufacturers have accelerated the integration of quality control
functions directly into the production process by incorporating the use of
metrology products on the factory floor. In addition, manufacturers are
demanding more precise, capable and flexible metrology systems as their
products become smaller, more complex and/or must meet more stringent quality
and safety standards. Their exacting product specifications often require
measurement to an accuracy of less than one micron (one millionth of a meter
or approximately 1/100th of the thickness of a human hair) or, in some special
cases, measurement of nanometers (one billionth of a meter or the unit of
measurement for the wavelength of light). Increasingly, metrology systems must
incorporate a mix of traditional contact and newer non-contact technologies
because of reduced part sizes and the great diversity of new materials used in
manufactured products. Metrology systems are purchased by customers regardless
of their need for additional production capacity because of ever-increasing
quality requirements and the need to reduce product costs.
Metrology products serve a broad range of measurement requirements. The
simplest metrology products include devices such as calipers, dial gauges,
micrometers, surface plates and height gauges. These are generally inexpensive
hand-held tools that measure in one dimension to within an accuracy of between
two (80 millionths of an inch) and 25 microns ( 1/100th of an inch). Fixed
gauges are often more expensive devices that inspect and verify in one to
three dimensions to within an accuracy of between one and 25 microns and are
typically used where manufacturers need to measure a single, uniform product
at a high rate of speed. Fixed gauges tend to make simple, comparative
measurements of products in a manufacturing process. CMMs are more
sophisticated, complex machines that use a variety of technologies to measure
in three dimensions to an accuracy of between 0.5 and 100 microns. These
technologies range from advanced probes that physically "contact" the product
being measured to highly sophisticated non-contact vision, optical, laser and
scanning probes that collect precise data without touching the product being
measured. While some CMMs are manually operated, most are now controlled by
software systems that not only compare the product to a manufacturer's CAD/CAM
models, but also provide the manufacturer with dimensions of the product to be
converted into the CAD/CAM model. CMMs are highly flexible machines that can
measure different products for a manufacturer without re-tooling or other
significant changes as opposed to fixed gauges that may require expensive and
time-consuming retooling. The price points of metrology products range from
$100 for a caliper to over $1.5 million for a sophisticated CMM such as those
used to measure car and truck bodies.
MARKETS
Participants in the metrology industry generally compete in one or more of
six broad product areas: (i) simple and relatively inexpensive tools that
measure in one dimension, such as calipers, dial gauges, micrometers, surface
plates and transfer gauges; (ii) digital electronic height gauges of varying
accuracies and sizes; (iii) sophisticated special purpose metrology systems
including fixed gauges; (iv) general purpose and application-specific CMMs;
(v) alternative technologies such as vision tunnels or surface finish and
geometry measurement; and (vi) customized metrology solutions to specific
metrology problems. The Company competes in all of the foregoing product areas
other than fixed gauges and most of the alternative technologies.
Sales of simple metrology products and less sophisticated height gauges are
driven by price, brand, product innovation, ease of purchase and effectiveness
of distribution. Products in this category are generally hand-held
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or relatively small devices that permit a manufacturer to make measurements in
one or occasionally two dimensions. These products are generally inexpensive,
providing a cost-effective solution to simple metrology problems where the
industrial customer does not need the increased capabilities of fixed gauges,
CMMs or certain other sophisticated metrology systems. However, simple
metrology products are generally limited in terms of accuracy, flexibility
and/or their ability to collect data. Further, they are dependent upon skilled
operators. The market for simple metrology products is fragmented, with many
regional suppliers. End user markets for these products include most basic
industries, including the automotive, construction, industrial machinery,
appliance and farm equipment industries.
Sales of fixed gauges have traditionally been driven by manufacturers' needs
for one, two or three dimensional metrology on the factory floor. Products in
this category, typically more expensive than simple metrology products,
compete directly with CMMs regarding inspection and verification of
manufactured parts. Fixed gauge systems are frequently a more expensive
investment than comparable CMM systems, but for the specific purpose intended,
may be less expensive over the long run. Fixed gauges can range from simple
one dimensional tools to semi- and fully-automatic three dimensional factory
floor systems that quickly compare production parts to "master parts."
However, because these gauge systems are "fixed," they are inherently
inflexible. The fixed gauge must be reworked or a new gauge designed and built
every time manufacturers make dimensional changes in the part being measured.
The trend of the industry is away from fixed gauges and toward flexible gauges
because of the need to make costly changes to fixed gauges when the part they
measure changes.
Sales of CMMs and more sophisticated height gauges are driven by
manufacturers' needs for high accuracy, flexibility, speed and information.
Products in this category, while typically more expensive than simple
metrology products and some fixed gauges, are generally more versatile
machines that can measure, digitize, inspect and verify diverse manufactured
parts. The accelerating use of more sophisticated software has played an
important role in the evolution of CMMs in response to the marketplace.
Improved software and linkage to CAD/CAM and network technologies enable CMMs
both to compensate automatically for the position of the piece to be measured,
eliminating the need for the time consuming manual positioning necessary with
less advanced metrology products, such as surface plate gauges, and also to
relay information to the manufacturer's CAD/CAM model to facilitate production
process adjustments. Although CMM-type software can be added to on-machine
gauging and a small percentage of fixed gauges, CMMs are easier to use, more
flexible, and generally provide more analytical information than most products
using competing technologies. Presently, CMMs are installed at sites ranging
from highly controlled laboratory sites to hostile, factory floor industrial
settings, and can measure objects ranging in size from a semiconductor chip to
an aircraft exterior, and can provide accuracies with tolerances of 0.5 to 100
microns. CMMs can achieve this through contact or non-contact probing methods,
depending upon the manufacturer's needs. The market for CMMs is dominated by
five competitors, including the Company.
Sales of customized metrology products are driven by specific needs in
specific industries and, in Brown & Sharpe's case, tend to focus on emerging
metrology technologies. Generally, custom metrology challenges arise where
existing metrology products and systems cannot adequately address a narrow yet
important manufacturing task. This product category requires research,
development and innovation and often includes the development of new
applications for optical, laser and scanning sensor probes.
MS GROUP
The MS Group, the largest of Brown & Sharpe's three units, accounted for
approximately 67% of Brown & Sharpe's net sales in 1995. The MS Group is
headquartered in North Kingstown, Rhode Island and manufactures and markets
CMMs. MS Group products sold under the Brown & Sharpe name are manufactured at
the Company's North Kingstown facility, MS Group products sold under the DEA
name are manufactured in Turin, Italy, and MS Group products sold under the
Leitz name are manufactured in Wetzlar, Germany. The primary end user markets
for the Company's CMM products include the automotive (including automotive
suppliers), heavy transport, aerospace, electronics, computer, industrial
machinery and medical industries.
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MS Group products range from small, manually operated CMMs to large, high
speed, high precision automatic CMMs. In addition to these standard and
custom-configured CMMs, Brown & Sharpe also produces and sells high-speed
process control systems. The smallest machines can measure in a volume up to
16x14x12 inches and are priced at approximately $10,000, while the larger,
high speed, high accuracy CMMs with integrated software systems can cost over
$1.5 million. The MS Group also provides laser scanning and optically based
measuring machinery from microscopes to vision systems.
The Company believes that its "user-friendly" CMM application software gives
it a competitive advantage in the marketplace for CMMs. These proprietary
software products provide the MS Group's customers with an understandable,
icon-based inspection analysis capability, graphical user interfaces and
outputs, and the capability to network with manufacturing systems. The MS
Group also provides its customers with special software and systems that
integrate the MS Group's products with the customer's host information and
communications network. In addition to sales of CMMs, the MS Group provides
aftermarket sales and service, including calibration and rebuilding of CMMs,
software upgrades and parts sales, for Brown & Sharpe CMMs and competing CMMs.
The Company's net sales attributable to aftermarket sales and services in 1995
were estimated to be approximately 25% of MS Group net sales for the same
period.
The MS Group distributes its products primarily through a 120-person
worldwide sales force directly to U.S. and European customers, and utilizes a
network of independent agents and distributors to cover the Pacific rim, South
American and African markets. The typical MS Group sales process involves
lengthy, technical, one-on-one discussions between the salesperson or the
distributor/sales agent and customer and is often part of a competitive bid
process. As an important part of its marketing and distribution strategy,
Brown & Sharpe provides in-depth training to its customers at 31 support and
demonstration centers located throughout the United States, Europe and Asia.
Brown & Sharpe also operates contract inspection and measuring services from
these demonstration centers which offsets a portion of the cost of operating
the centers. In 1994 and 1995, Brown & Sharpe closed five demonstration
centers in Europe and five in the United States as part of its consolidation
of DEA.
PMI DIVISION
The principal products of Brown & Sharpe's PMI Division are precision
measuring tools and related instruments such as micrometers, dial indicators,
calipers, electronic height gauges and gauge blocks. PMI Division products
accounted for approximately 30% of Brown & Sharpe's net sales in 1995. The PMI
Division's products have broader applications and lower unit list prices (with
a range of $100 to approximately $13,000) than the prices of the MS Group's
products. These tools and instruments typically measure in one or two
dimensions, and are often used in comparative measuring where an unknown part
or dimension is compared to a previously measured part or dimension. Some PMI
Division products also include systems and application software for measuring
and statistical process control. The Company believes that the primary end
user markets for the products of Brown & Sharpe's PMI Division are the
automotive, aerospace, metal processing and defense industries, although Brown
& Sharpe's PMI Division products are used in virtually all types of industrial
settings. Brown & Sharpe's PMI Division is headquartered in Renens,
Switzerland, and its products are manufactured at its plants in Rolle and
Renens, Switzerland; Poughkeepsie, New York; Leicester, St. Albans, and
Plymouth, England; and Luneville, France. The Company also purchases
components and products from third parties located in various countries.
The PMI Division generally distributes its products through international
import companies, regional distributors and catalog houses throughout the
world. Brown & Sharpe sales offices located in key markets provide support to
the distributors and catalog houses. The PMI Division operates four sales
offices in the United States and eight in other countries, which are staffed
by approximately 74 employees.
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CM DIVISION
The CM Division is an engineering division headquartered in Telford,
England. The CM Division designs and engineers specialty products primarily
utilizing non-contact technologies and systems to provide customized solutions
for unique customer measurement or inspection problems generally with customer
funding. Recent examples of CM Division products include a system for
measuring the thickness and shape of the metal top of a beverage can and the
depth and contour of the groove scored around the can's pop-up tab, so that
the manufacturer could ensure the consistency with which the can could be
opened without rupture by the end user, and an automatic multi-sensor (laser
scanning, laser ranging, optical and tactile) system to measure, inspect and
verify the ceramic substrates on which semiconductors are placed. The CM
Division also manufactures laser interferometers, measuring sensors and
factory networks, contact and optical measuring machines and fixtures aimed at
specific niche markets. Prices for CM Division products range from
approximately $20,000 to $1.0 million.
The primary end user markets for the custom-designed products of the CM
Division are package and can manufacturing, oil drilling, standards
laboratories, semiconductors, aerospace and defense. Sales of these products
typically involve a close, highly technical relationship with the customer.
This direct relationship with the customer is reinforced by strong and
continuing efforts to provide superior customer service through ongoing
customer training and technical support.
The Company believes that the CM Division provides it with cost-effective
access to emerging applications and technologies as the technologies and
custom applications developed by the CM Division with customer funding have
been directly applied to the design of standard products or systems
distributed by the MS Group or the PMI Division.
SALES AND DISTRIBUTION
The MS Group distributes its products primarily through a 120-person
worldwide sales force directly to U.S. and European customers, and utilizes a
network of independent agents and distributors to cover the Pacific Rim, South
American and African markets. The typical MS Group sales process involves
lengthy, technical, one-on-one discussions between the salesperson or the
distributor/sales agent and customer and is often part of a competitive bid
process. As an important part of its marketing and distribution strategy,
Brown & Sharpe provides in-depth training to its customers at 31 support and
demonstration centers located throughout the United States, Europe and Asia.
The Company's direct sales force also provides the Company with important
opportunities to cross-sell the products of its PMI and CM Divisions.
In contrast to the MS Group, the PMI Division generally distributes its
products through international import companies, regional distributors and
catalog houses throughout the world. As of June 30, 1996, the PMI Division
utilized in excess of 450 distributors located in over 60 countries to market
its products. The Company believes that the PMI Division's established
distribution network provides it with a competitive advantage and intends to
capitalize on this network to increase sales of internally developed and
third-party products.
The CM Division primarily designs and manufactures products and services in
response to specific customer inquiries. The CM Division maintains a staff of
approximately 15 sales/project engineers to respond to customer inquiries,
and, upon receipt of an order, to develop tailored solutions and manage
projects to completion. The CM Division typically targets sales to end user
markets with a small number of participants in which the Company has little or
no competition. As a result, the Company believes that the CM Division
benefits from comparatively lower selling expenses.
The Company has no single customer which accounts for 10% or more of its
consolidated net sales; however, several well recognized major automotive
manufacturers (without regard to their suppliers) account for a significant
portion of the Company's net sales. The loss of a few of these major
manufacturers would have a substantial effect upon the Company.
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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 445 engineers and technicians in its design engineering
activities. ASI employs 50 software engineers. The development activities of
ASI are devoted to the creation and development of CMM-related metrology
software solutions. Together Brown & Sharpe and ASI employ 495 engineers and
technicians of which 320, or approximately 65%, are directly involved with
software, firmware, or applications development efforts that are core to Brown
& Sharpe's strategy. When it is more cost-effective to do so, Brown & Sharpe
purchases product designs or portions of product designs from engineering
subcontractors or acquires rights to such designs through licensing
arrangements. Brown & Sharpe also benefits from research and development
efforts which are subsidized by customer funds and, in certain countries, by
government research grants. Brown & Sharpe research, development and
manufacturing engineering activities are conducted in the United States,
Italy, France, Switzerland, Germany, the United Kingdom and Lithuania.
Brown & Sharpe derived substantial net sales in 1995 from the sale of
products that it introduced after 1993. Brown & Sharpe has introduced at least
one major new product every year since 1987. The Company's current design and
engineering focus is the continued integration of the DEA and Roch
technologies with Brown & Sharpe's previously existing technologies, software
development and non-contact metrology products. In 1995, Brown & Sharpe
invested $15.8 million, or 4.9% of its net sales during that period in product
design and manufacturing engineering. In 1993 and 1994, Brown & Sharpe
expended $8.7 million and $9.2 million, respectively, for product design,
development, refinement and manufacturing engineering. The increase from $9.2
million in 1994 to $15.8 million in 1995 was due to the inclusion of DEA for
all of 1995.
FOREIGN OPERATIONS
Brown & Sharpe manufactures and sells substantial amounts of its metrology
products in foreign countries. As of December 31, 1995, approximately 74%
(based on book values) of the Company's assets, 65% of the Company's net sales
(based on customer location) and 74% of its employees were located outside the
United States. The Company's manufacturing operations are located in Italy,
Switzerland, Germany, England and France, as well as in the United States, and
Brown & Sharpe's products are sold in over 60 countries worldwide. The
Company's cost of sales for products manufactured and assembled in certain
foreign locations has been adversely impacted, as compared with some of its
competitors, by the appreciation of the respective local currencies of such
locations relative to the U.S. dollar. Nevertheless, the Company believes that
the geographic diversity of its end user markets helps to mitigate the adverse
effects of the cyclicality of the metrology industry, as an economic downturn
in any of the Company's geographic end user markets may be offset by
relatively healthy conditions in others.
RAW MATERIALS AND SOURCES OF SUPPLY
Brown & Sharpe purchases raw materials, supplies and other components from a
variety of suppliers, and considers its sources of supply to be adequate. At
times, the Company depends upon various sole sources of supply for certain
components used by the Company (generally of items designed by Brown &
Sharpe), but has not experienced any significant difficulty in meeting
delivery obligations because of its reliance on such a supplier. In addition,
the Company currently purchases substantially all of its externally sourced
low to medium accuracy electronic touch trigger sensor probes and heads from a
publicly held United Kingdom company which is the dominant supplier of such
sensor probes to CMM manufacturers. No alternative supplier for this class of
electronic sensor probes, which are a key component of substantially all of
the Company's lower accuracy CMMs, is currently available and developing an
alternative source for the probes and heads could take more than a year. Brown
& Sharpe continues to explore means of lowering production costs through
selective
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outsourcing in situations where Brown & Sharpe can achieve its high quality
standards via subcontractors. The Company has established a corporate function
to direct its world-wide efforts to standardize product designs throughout its
operations and coordinate and direct its outsourcing efforts.
PATENTS, LICENSES, TRADEMARKS, AND PROPRIETARY INFORMATION
The Company's business is not significantly affected by or dependent upon
the procurement or maintenance of patents covering the Company's products.
Nevertheless, the Company pursues, where appropriate, patent protection for
inventions, developments and improvements relating to its products both in the
United States and abroad. In addition, the Company relies on a combination of
copyrights, trade secret law and contracts to protect its proprietary
information (principally related to its software and software development).
Despite these precautions, it may be possible to copy or otherwise obtain and
use the Company's proprietary information without authorization. In addition,
effective copyright and trade secret protection may be unavailable or limited
in certain foreign countries.
Brown & Sharpe and its subsidiaries own, or have the right to use, a number
of trademarks which they believe are valuable in promoting the sale of certain
of their principal products. The Company and its subsidiaries have registered,
or have applied to register, the trademarks owned by them in the United States
and in some foreign countries. In addition, the Company uses the Leitz and
Mauser brand names under royalty-free license agreements entered into in
connection with the Company's acquisition of these product lines. These
licenses expire in 1997 and 1999, respectively. The Company believes it will
be able to negotiate satisfactory extensions of these licenses prior to their
expiration and/or that the failure to renew these licenses would not have a
material adverse effect on the Company.
LITIGATION
Labor Relations. The Company is involved in litigation stemming from an
October 1981 strike by employees represented by the International Association
of Machinists and Aerospace Workers ("IAM") at the Company's Rhode Island
operations. Following the strike, the IAM filed charges with the National
Labor Relations Board ("NLRB") which alleged that the Company engaged in
unfair labor practices which precipitated the strike. On August 28, 1990, the
NLRB dismissed the IAM's charges. The IAM appealed this decision to the U.S.
Court of Appeals for the District of Columbia Circuit. On November 29, 1991,
the Court accepted the legal reasoning advanced by the NLRB and the Company in
support of the NLRB's 1990 decision, but ordered the NLRB to further clarify
and support its decision. The NLRB reaffirmed its original dismissal of the
IAM's charges, and the IAM appealed that decision. The Court, on April 7,
1995, vacated the NLRB's earlier decision favorable to the Company and
remanded the case to the NLRB for a decision on whether the charges should be
dismissed or a trial on the merits should proceed. On August 16, 1996, the
NLRB issued a second supplemental decision and order finding in favor of the
Company on the issue presented and dismissed the IAM complaint. Should the IAM
appeal the decision, the Company will continue to defend this case vigorously
and, in the opinion of management, the possibility of an adverse decision in
this matter is remote. If the matter were ultimately determined adversely to
the Company, the Company could be liable for back wages, subject to mitigation
for certain statutory offsets, for all union members whose strike is based on
such alleged unfair labor practices.
Environmental. The Company is involved in a lawsuit which arose out of an
environmental proceeding in which the United States Environmental Protection
Agency ("EPA") identified the Company as a potentially responsible party
("PRP") at a waste disposal site (the "Site") in Rhode Island listed on the
EPA's National Priority List for clean-up and future monitoring remedial
action under the Superfund legislation. The Company's proportionate share of
the total waste contributed to the Site was minimal in volume and toxicity,
and the Company was permitted by the EPA to settle its liability at such Site
in exchange for releases from the EPA and the State of Rhode Island and for
contribution protection from claims of any third parties who may have
liability at the Site. A group of non-settling major PRPs at the Site brought
suit in the Federal District Court in Rhode Island on January 2, 1991 against
all of the settling parties, including the Company, to recover a portion of
their past and anticipated future costs of performing the clean-up remedy. The
Court entered a summary judgment in favor of the Company and other settling
parties on October 30, 1992. The non-settling group of major PRPs
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appealed that ruling and brought suit against the EPA seeking to have the
settlements of the de minimis settling parties set aside. The Company is
vigorously defending this lawsuit and believes that given the release and
contribution protection obtained from the EPA in connection with settlement of
its liability at the Site, the cost-recovery claim will ultimately be barred.
On March 1, 1995, the Company received a notice from the State of New York
asserting a claim against it, along with a group of approximately ten other
companies, to recover costs incurred by the New York State Department of
Environmental Conservation to clean up a waste disposal site in Poughkeepsie,
New York. The State has alleged that the Company's former subsidiary, Standard
Gage Company, Poughkeepsie, New York, which was merged with and into the
Company, contributed hazardous waste to the site for disposal and that the
Company is a PRP as the surviving corporation to the merger. The total claim
asserted by the State against all parties is approximately $500,000, and it
has expressed a willingness to settle its claim with all PRPs receiving the
notice. The Company is continuing to investigate the basis for this claim and
estimates that any potential loss it might incur as a result of any
involvement or settlement at this site would not be material.
Product Liability. The Company is also involved in a number of product
liability claims and lawsuits seeking damages for personal injury which arose
out of and were incidental to the products manufactured by the Company in its
discontinued metal cutting machine tool and hydraulic businesses. The
potential liability for these claims 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.
OTHER ENVIRONMENTAL MATTERS
The nature of the Company's current operations are not significantly
affected by environmental laws, rules and regulations. However, because the
Company and its subsidiaries and predecessors have conducted heavy
manufacturing operations in the past, sometimes at facilities which have been
divested or sold and often in locations at which or adjacent to which, other
industrial operations were conducted, from time to time the Company is subject
to environmental claims. As with any such operations that involve the use,
generation, and management of hazardous materials, it is possible that
practices, including practices that were deemed acceptable by regulatory
authorities in the past, may have created conditions which could give rise to
liability under current or future environmental laws. Because the law in this
area is developing rapidly, including in many European countries, and such
environmental laws are subject to amendment and widely varying degrees of
enforcement, the Company may be subject to, and cannot predict with any
certainty the nature and amount of, potential environmental liability related
to these operations or locations that it may face in the future.
Environmental testing at Leitz's facility in Wetzlar, Germany, conducted at
the time of its acquisition in June 1990, and at Roch's Luneville facility, at
the time Roch was acquired in March of 1994, has indicated that the soil and
groundwater at both factory sites are contaminated with certain toxic waters
and chemicals used in their manufacturing processes which exceed acceptable
limits under guidelines commonly used in Europe to classify contaminant
levels. Although neither company is involved in any governmental claims or
proceedings relating to the detected materials, the concentration levels are
such that clean-up and future remediation of these sites could be required. In
addition, the contamination of the Leitz property stems from a waste disposal
site adjacent to the Leitz property previously operated and owned by the
seller of the Leitz businesses. The owner of that site is conducting soil
remediation activity on that parcel of land at the request of government
authorities. Recent tests have indicated that such existing remediation
efforts may be inadequate and could result in further contamination of the
Leitz property.
The seller of the Leitz business has agreed to indemnify the Company against
any liability incurred because of governmental action imposed on the Company
before June 29, 1997. Under Roch's lease agreement for the Luneville facility,
the seller of the Roch business is also obligated to clean up the
contamination. The Company believes that these rights are enforceable against
the sellers of the Leitz and the Roch businesses. There can be no assurance,
however, that the Company will be able to collect any amounts to which it is
entitled under such agreements or otherwise or, in the case of Roch, force the
seller to clean-up the site, or that any amounts received by the Company in
satisfaction of its indemnification rights will be adequate to cover the
Company's potential liabilities.
34
<PAGE>
EMPLOYEES
At December 31, 1995, Brown & Sharpe had 2,392 employees, including
approximately 1,773 employees located outside the United States. Brown &
Sharpe considers its relations with its employees to be good, although there
can be no assurance that Brown & Sharpe's continuing focus on cost reductions
or other factors will not cause a deterioration in these relations.
Approximately 939 of Brown & Sharpe's employees located at sites in the
United States, Italy, Switzerland, England, Germany and France are covered by
collective bargaining agreements which expire at various times between
December 31, 1996 and June 30, 1998. Brown & Sharpe expects that these
collective bargaining agreements will be renegotiated successfully prior to
their expiration. However, there can be no assurance that successor collective
bargaining agreements will be successfully negotiated, that negotiations will
not result in work stoppages, or that a work stoppage will not materially
interfere with Brown & Sharpe's ability to manufacture and assemble its
product at the affected location.
In addition to the collective bargaining agreements that cover workers at
certain of Brown & Sharpe's foreign subsidiaries, it is customary for these
employees to be represented by various works or shop councils. These councils
are governed by applicable labor laws and are comprised of members who are
elected or appointed by the work force. Except for the top level of
management, these councils represent the entire work force at their location
in its dealings with senior management on matters affecting the work force or
arising under the relevant labor contracts in effect at the location.
A collective bargaining agreement with the 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.
No successor collective bargaining agreement was entered into, although the
IAM remains the representative of the bargaining unit. Brown & Sharpe
continues to satisfy its obligation to bargain with respect to proposed
changes to the terms and conditions of employment although no collective
bargaining has occurred in recent years, and although the manufacturing
employees represented by the IAM remain technically on strike, no work
stoppage or picket activity has occurred since 1985. Following the strike in
1981, and the impasse reached in negotiations, Brown & Sharpe hired new
employees to replace striking employees. Since that time, many of the striking
employees have been rehired by Brown & Sharpe, but such employees are not
working under an IAM contract. See "Litigation."
The following table sets forth the location of Brown & Sharpe's employees as
of December 31, 1995:
<TABLE>
<CAPTION>
COUNTRY EMPLOYEES(1)
<S> <C>
France........................................................ 234
Germany....................................................... 283
Hong Kong..................................................... 7
Italy......................................................... 465
Japan......................................................... 25
Spain......................................................... 17
Switzerland................................................... 325
United Kingdom................................................ 417
United States................................................. 619
-----
Total....................................................... 2,392
=====
</TABLE>
- ---------------------
(1) Part-time employees are included on a full-time equivalent basis.
35
<PAGE>
COMPETITION
The Company's MS Group currently has four principal direct domestic and
foreign competitors, some of which are owned by entities that have greater
financial and other resources than the Company. The MS Group also faces
indirect competition from other types of metrology firms such as manufacturers
of fixed gauging systems. The primary industries to which the MS Group sells
its products are characterized by a relatively small number of large
participants with significant purchasing power. In addition, the MS Group
generally sells its products through a competitive bid process in which at
least one and frequently several of the Company's competitors have submitted
competing bids. As a result, the Company experiences severe pricing
competition in connection with sales by its MS Group which can have an adverse
impact on the Company's net sales and margins. During periods when the
metrology industry suffers from overcapacity, downward pricing pressure
experienced by the MS Group is likely to be more intense and the Company's
margins may be more severely impacted. In addition, certain of the Company's
competitors that have access to greater financial resources may be able to
withstand such pricing pressure more effectively than the Company. The MS
Group competes with Mitutoyo/MTI Corp., a subsidiary of Mitutoyo Solsakusho
Co. Ltd., a Japan-based company, which is the largest supplier of metrology
equipment and products worldwide. In addition to Mitutoyo, the MS Group's main
competitors are Carl Zeiss, Inc., a subsidiary of Carl Zeiss-Stiftung AG, the
Sheffield Measurement Division of Giddings & Lewis, Inc., and LK Tool Co.
Ltd., a subsidiary of TransTech Ltd.
The market for the PMI Division's products is fragmented and the PMI
Division competes with a large number of competitors, including the market
leader in this area, primarily on the basis of the strength of its third party
distribution network, price and product innovation. New competitors from
emerging industrialized countries with lower cost products than the Company's
represent a significant competitive challenge to the Company. As a result, the
PMI Division's continued success and profitability will be dependent on its
ability to continue to develop cost-effective and innovative products. The
primary competitors of the PMI Division are Mitutoyo, L.S. Starrett Co. and
Federal Products Co. (Inc.), a subsidiary of Esterline Technologies
Corporation.
To date, the CM Division has sold its custom solutions to markets in which
there is little or no effective competition in custom metrology systems.
However, in certain niche markets where the Company does not generally sell,
Marposs S.p.A., an Italian company, provides custom metrology products.
BACKLOG
The Company's backlog of product orders was approximately $59.0 million at
the end of fiscal 1995, compared to $61.0 million and $26.0 million at the end
of fiscal 1994 and 1993, respectively. All of the orders included in the
Company's 1995 backlog were requested to be filled and completed within one
year and are, subject to possible customer cancellation, expected to be
completed in 1996.
36
<PAGE>
PROPERTIES
The following table sets forth certain information concerning Brown &
Sharpe's major operating facilities. In addition, the Company leases smaller
sales offices located in the United States, Europe and Asia. In the opinion of
management, the Company's properties are in good condition and adequate for
the Company's business as presently conducted.
<TABLE>
<CAPTION>
OWNED/ APPROXIMATE
LOCATION LEASED PRINCIPAL USE SQUARE FOOTAGE
<S> <C> <C> <C>
United States
N. Kingstown, Rhode Owned Manufacturing, Engineering, 343,000
Island(1)............ Sales, and Administration
Poughkeepsie, New Owned 58,000
York................. Manufacturing
Farmington Hills, Leased 31,207
Michigan(2).......... Sales and Administration
Italy
Moncalieri(3)......... Leased Engineering, Sales, and 260,000
Administration
Grugliasco(4)......... Leased Assembly 105,000
Moncalieri(4)......... Leased Manufacturing 70,000
Switzerland
Renens................ Owned Manufacturing, Engineering, 139,000
Sales, and Administration
Rolle................. Owned Manufacturing 51,000
Germany
Wetzlar............... Owned Manufacturing, Engineering, 280,000
Sales, and Administration
Ludwigsburg Leased 15,000
(Stuttgart)(4)....... Sales/Service
United Kingdom
St. Albans............ Owned Manufacturing and Sales 36,000
Telford............... Owned Manufacturing, Engineering, 52,000
Sales, and Administration
Leicester............. Owned Manufacturing 14,000
Swindon(4)............ Leased Sales/Service 5,200
Torpoint(4)........... Leased Manufacturing, Sales, and 5,000
Administration
France
Luneville(4).......... Leased Manufacturing, Engineering, and 77,100
Sales
Villebon (Paris)(4)... Leased Sales/Service 18,000
Spain
Barcelona(4).......... Leased Sales/Service 16,000
</TABLE>
- ---------------------
(1) Excludes approximately 417,000 square feet leased to unrelated parties.
(2) By February 1997, the Company expects to vacate these premises and to
occupy and lease a new 37,600 square foot building in Wixom, Michigan that
is currently under construction. The lease for the new premises is
expected to expire on November 30, 2011.
(3) The Company expects to vacate these premises in the first quarter of 1997
in connection with the consolidation of its Grugliasco and Moncalieri
operations, which will include approximately 1,700 square feet of
additional leased space at Grugliasco.
(4) The leases in Grugliasco, Moncalieri, Ludwigsburg, Swindon, Torpoint,
Luneville, Villebon and Barcelona expire on December 31, 2002, December
31, 1997, September 30, 2003, September 28, 1997, August 18, 2001, March
23, 2003, October 20, 2001, and January 4, 1998, respectively.
37
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages as of
August 31, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Frank T. Curtin.......... 61 President, Chief Executive Officer, Chairman of
the Board and Director
Charles A. Junkunc....... 54 Vice President and Chief Financial Officer
Richard F. Paolino....... 51 Vice President--Customer Development
Robert D. Batting........ 55 Vice President & General Manager--Measuring
Systems U.S.A.
Antonio Aparicio......... 46 Vice President & General Manager--Precision
Measuring Instruments
Edward J. LaGraize....... 53 Vice President & General Manager--Measuring
Systems, Commercial Operations
C. John Cooke............ 59 Vice President & General Manager--Custom Metrology
Sergio Cappa............. 49 Managing Director, DEA S.p.A.
James W. Cooper.......... 50 Vice President Procurement
Karl J. Lenz............. 49 Vice President
Alfred J. Corso.......... 59 Controller
Enrico Albareto.......... 66 Director
Russell A. Boss.......... 57 Director
Vincenzo Cannatelli...... 43 Director
Alberto de Benedictis.... 44 Director
Howard K. Fuguet......... 59 Director
John M. Nelson........... 64 Director
Henry D. Sharpe, Jr...... 73 Director
Henry D. Sharpe, III..... 42 Director
Paul R. Tregurtha........ 60 Director
</TABLE>
Frank T. Curtin has served as a Director of the Company since 1995 and as
Chairman of the Board since May 1996. Mr. Curtin has also served as the
President and Chief Executive Officer of the Company since May 1995. From 1992
to May 1995, Mr. Curtin was Vice President of the National Center for
Manufacturing Sciences, a research and development organization. From 1989 to
May 1995, Mr. Curtin was President of Curtin & Associates, a software
development company.
Charles A. Junkunc has served as the Vice President and Chief Financial
Officer of the Company since May 1992. From November 1990 until May 1992, Mr.
Junkunc was a self-employed consultant. From April 1987 until November 1990,
he served as Senior Vice President--Finance and Chief Financial Officer of
Data Products Corporation, a manufacturer of computer printers.
Richard F. Paolino has served as Vice President--Customer Development since
August 1996. Mr. Paolino was the Vice President and General Manager of
Commercial Operations Measuring Systems of the Company since October 9, 1995.
Previously he was Vice President--Measuring Systems Division.
Robert D. Batting has served as the Vice President and General Manager of
Measuring Systems U.S.A. of the Company since October 1995. From October 1993
until October 1995, Mr. Batting was the President of Clearing-Niagra Inc. He
was a self-employed business consultant from September 1991 to October 1993
and a Group Vice President of Textron, Inc. prior to September 1991.
Antonio Aparicio has served as the Vice President and General Manager of the
PMI Division of the Company since September 1991. Prior to that time, Mr.
Aparicio was Marketing Director of the PMI Division.
38
<PAGE>
Edward J. LaGraize joined the Company on August 20, 1996 as Vice President
and General Manager--Measuring Systems, Commercial Operations. From April 1994
until February 1996, Mr. LaGraize served as President of Linotype-Hell, Co.,
the U.S. subsidiary of Linotype-Hell AG, a manufacturer of systems for the
commercial printing industry. From June 1991 until April 1994, he served as
executive Vice President of Gerber Scientific Inc., a manufacturer of
computer-aided design and manufacturing systems.
C. John Cooke has served as the Vice President and General Manager of the CM
Division of the Company since September 1991. Prior to that time, Mr. Cooke
was Managing Director of Tesa.
Sergio Cappa has served as Managing Director, DEA, since May 1995. From 1992
Mr. Cappa was a general manager with the Hurth Group and from 1989 to 1992 he
was a general manager with the SIV Group, both German industrial companies.
James W. Cooper joined the Company as Vice President Procurement on August
19, 1996. From March 1995 until April 1996 Mr. Cooper was Vice President--
Purchasing of Delco Remy America, an automotive supplier, and from 1981 to
March 1995 Mr. Cooper was Vice President--Materials Management of Simpson
Industries, an automotive supplier.
Karl J. Lenz has served as a Vice President of the Company since September
1991. From June 1990 until September 1991, Mr. Lenz was General Manager of
Leitz--Brown & Sharpe Messtechnik GmbH. Prior to that time, Mr. Lenz was
General Manager of the Messtechnik Division of Leica Industrieverwaltung.
Alfred J. Corso has served as the Controller and Principal Accounting
Officer of the Company since June 1995. Previously, Mr. Corso was a Partner
with Ernst & Young LLP since 1991.
Enrico Albareto has served as a Director of the Company since 1994. Over the
past five years Mr. Albareto has served as the Chief Executive Officer of the
Elsag Bailey Division of Finmeccanica, a manufacturer of automated process
control systems and devices.
Russell A. Boss has served as a Director of the Company since 1990. Mr. Boss
has been the President and Chief Executive Officer and a Director of A. T.
Cross Company, a manufacturer of fine writing instruments since 1994.
Previously he was a Director and President and Chief Operating Officer of the
same company. Since 1991, Mr. Boss has served as trustee of Eastern Utilities
Assoc., a utility company, and on the board of governors of the American Stock
Exchange.
Vincenzo Cannatelli has served as a Director of the Company since 1994.
Since November 1993, Mr. Cannatelli has been the Managing Director and Chief
Executive Officer of Elsag Bailey Process Automation N.V., a Dutch company and
manufacturer of automated process control systems and devices. Also since
January 1996, Mr. Cannatelli has been Managing Director of Hartmann & Braunn
A. G., a German corporation and manufacturer of industrial process controls
and field instrumentation equipment. Prior to 1993, Mr. Cannatelli served as
Group Executive Vice President of Elsag Bailey Inc., an affiliate of
Finmeccanica.
Alberto de Benedictis has served as a Director of the Company since 1994.
Since February 1995, Mr. de Benedictis has served as the Senior Vice
President, Corporate Development of Finmeccanica. Mr. de Benedictis is also a
Director of Union Switch & Signal, Inc., a manufacturer of railway signaling
systems, Elsag Bailey Process Automation N.V., and Concentra Corp., a
developer of CAD software. Prior to February 1995, Mr. de Benedictis served as
Vice President, Corporate Development of Finmeccanica North America.
Howard K. Fuguet has served as a Director of the Company since 1990. Mr.
Fuguet has been a partner of the law firm of Ropes & Gray since 1971.
John Nelson has served as Director of the Company since 1975. Mr. Nelson is
currently Chairman of the Board of the Wyman-Gordon Company, a manufacturer of
forgings and castings. Mr. Nelson also serves as Chairman of the Board of the
TJX Companies, Inc., an off-price specialty apparel retailer. Until October
1990, Mr. Nelson served as Chairman of the Board and Chief Executive Officer
of Norton Company, a manufacturer
39
<PAGE>
of abrasive and ceramic products. Mr. Nelson also serves as Director of
Cambridge Biotech Company, a biotechnology firm, Commerce Holdings Inc., a
holding company for a property and casualty insurance company, and Stocker &
Yale Manufacturing Company, a specialty products company.
Henry D. Sharpe, Jr. has served as a Director of the Company since 1949.
Until May 1996, Mr. Sharpe served as Chairman of the Board of Directors. From
August 1991 through May 1996, Mr. Sharpe was a director of the Providence
Journal Co., a television and newspaper company.
Henry D. Sharpe, III has served as a Director of the Company since 1992. Mr.
Sharpe is also the co-founder and Vice President Engineering of Design Lab,
Inc., a multi-disciplinary product design firm specializing in research and
design of new products, re-design of existing products, and engineering
management services and has served in that position since 1990.
Paul R. Tregurtha has served as Director of the Company since 1984. Mr.
Tregurtha has been the Chairman of the Board and Chief Executive Officer of
Mormac Marine Group, Inc., a marine transportation company during the past
five years. He is also a Director of the Fleet Financial Group, Inc., a bank
holding company and FPL Group, Inc., a utility company. Mr. Tregurtha also
serves as Trustee of the Teachers Insurance and Annuity Assoc. He is Chairman
of the Moran Transportation Company, and Vice Chairman of the Interlake
Steamship Company, both marine transportation companies.
BOARD COMPOSITION AND COMMITTEES
The Company's By-Laws provide for a Board of Directors of not less than six
and not more than ten directors, and the number of directors is currently
fixed at ten. Under the terms of the Certificate of Incorporation, the Board
of Directors is composed of three classes of similar size, each elected in a
different year, so that only approximately one-third of the Board of Directors
is elected in any single year. Directors Curtin, de Benedictis and Tregurtha
are designated Class I directors and have been elected for a term expiring in
1997 or until their successors are elected and qualified; Directors Henry D.
Sharpe, Jr., Fuguet, Albareto and Henry D. Sharpe, III are designated Class II
directors elected for a term expiring in 1998 or until their successors are
elected and qualified; and Directors Nelson, Cannatelli and Boss are
designated Class III directors elected for a term expiring in 1999 or until
their successors are elected and qualified.
The Board of Directors maintains a standing Executive Committee, composed of
Messrs. Curtin, Boss, Cannatelli and Tregurtha, which has substantially all of
the powers and authority of the Board of Directors when the full Board is not
in session. The Board of Directors also maintains standing committees on audit
("Audit Committee"), corporate development ("Corporate Development Committee")
and compensation ("Salary Committee"), each of which is composed exclusively
of non-employee Directors.
The Audit Committee, whose members are Messrs. Nelson, Fuguet, Sharpe III
and Cannatelli, recommends to the Board of Directors, for approval by the
stockholders, the appointment of independent certified public accountants to
audit the Company's financial statements. The Audit Committee also meets with
the independent accountants and the Company's Chief Financial Officer to
review the scope and results of the audit, the scope of audit and non-audit
services, the range of audit and non-audit fees, any proposed changes in
accounting policies, practices, or procedures, including those relating to the
Company's internal accounting controls, and the Company's financial statements
to be included in the Company's Annual Report to Stockholders and other
related matters.
The Corporate Development Committee, whose members are Messrs. Curtin,
Fuguet and Tregurtha, considers matters concerning the relationship between
the Company and its stockholders, including offers to purchase outstanding
Company stock, acquisition proposals and other matters which could affect the
existence of the Company as an independent company or otherwise affect the
control of the Company.
The Salary Committee, whose members are Messrs. Boss, Tregurtha, Nelson and
de Benedictis, performs a periodic review of the appropriate salaries and
compensation plans for the executive officers and other key
40
<PAGE>
management personnel of the Company and administers the Amended Profit
Incentive Plan (the "PIP"), the 1989 Equity Incentive Plan (the "EIP") and the
Key Employees' Long-Term Deferred Cash Incentive Plan (the "LTDCIP").
BOARD COMPENSATION
As compensation for services rendered during 1995, the Company paid each
non-employee Director an annual retainer of $10,000 (except the former
employee Chairman of the Board, who was paid $15,000), a fee of $800 for each
Board meeting attended, a fee of $400 for each teleconference meeting which
lasted more than one-half hour in duration, and a fee of $500 for each
Committee meeting attended ($200 if held on the same day as a Board meeting).
Directors who are members of the Audit Committee also receive an additional
$1,000 in their annual retainer fee.
Mr. Tregurtha has elected to defer 50% of his Director's fees under a
deferred stock equivalent unit contract with the Company dated September 3,
1987 pursuant to which all fees earned and deferred after that date are
converted into deferred stock equivalent units based on the market value of
the Company's stock on each fee payment date. Under such contract, dividend
equivalents in amount and timing equal to any cash dividends paid on the
Company's outstanding stock are similarly converted into additional stock
equivalent units. The Company has not paid any cash dividends on its stock
since 1990. Mr. Tregurtha's contract matures on October 1, 2005 or the earlier
date of death or other termination of Mr. Tregurtha as a Director. The
contract was amended in 1992 to provide that fee amounts deferred after May 1,
1991 (including any dividend equivalent amounts) shall be payable on maturity
only in cash, with amounts deferred prior to such date payable in cash or
shares.
The law firm of Ropes & Gray, Boston, Massachusetts, of which Mr. Fuguet is
a partner, has provided legal services to the Company since 1957.
41
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation during
each of the Company's last three fiscal years for Mr. Frank T. Curtin, the
Company's President and Chief Executive Officer, the four other highest-paid
Executive Officers (as such term is defined under rules promulgated under the
Securities and Exchange Act of 1934 (the "Exchange Act")) whose earned
compensation exceeded $100,000 in 1995 for each such person, and compensation
for Mr. Fred M. Stuber, who served as the Company's President and Chief
Executive Officer until May 2, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------ ----------------------
AWARDS
----------------------
NUMBER OF
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDERLYING OTHER
NAME AND COMPEN- STOCK OPTIONS/ COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS SATION AWARD(S)(1) SARS SATION
<S> <C> <C> <C> <C> <C> <C> <C>
Frank T. Curtin(2)..... 1995 $193,846 $75,000 $71,937 -- 200,000 $44,886(3)(4)
President and Chief
Executive 1994 -- -- -- -- -- --
Officer (and Chairman
since 1993 -- -- -- -- -- --
May 2, 1996)
Charles A. Junkunc..... 1995 190,000 61,332 -- -- 40,000 43,674(5)(3)(4)
Vice President and
Chief 1994 190,000 19,000 -- $39,000 25,000 21,247(5)(3)
Financial Officer 1993 178,369 46,720 -- -- -- 7,719(5)
Richard F. Paolino..... 1995 214,230 44,550 -- -- 30,000 49,257(5)(3)(4)
Vice President--
Customer 1994 190,000 19,000 -- -- 25,000 20,854(5)(3)
Development 1993 178,369 42,473 -- -- -- 15,532(5)
Antonio Aparicio(6).... 1995 251,256 75,636 -- -- 33,000 66,956(7)(4)
Vice President--
Precision 1994 216,962 16,500 -- 26,000 25,000 18,904(7)
Measuring Instruments 1993 182,601 41,376 -- -- -- 15,209(7)
C. John Cooke(6)....... 1995 123,232 24,955 -- -- 15,000 16,212(4)
Vice President--Custom 1994 119,592 8,250 -- -- 15,000 --
Metrology 1993 110,903 22,134 -- -- -- --
Fred M. Stuber(6)(8)... 1995 155,653 -- -- -- -- 592,079(8)
President and Chief
Executive 1994 320,742 19,000 -- -- 40,000 31,125(7)
Officer 1993 285,811 50,000 -- -- -- 28,009(7)
</TABLE>
- ---------------------
(1) Represents the dollar value at the date of the award of restricted stock.
Unvested restricted stock awarded to and held by the Executive Officers
listed in the table above is as follows:
<TABLE>
<CAPTION>
AGGREGATE MARKET VALUE OF
TOTAL NUMBER RESTRICTED RESTRICTED UNVESTED SHARES
UNVESTED SHARES HELD HELD AS OF 1995 FISCAL
NAME AS OF 1995 FISCAL YEAR-END* YEAR-END
<S> <C> <C>
Charles A. Junkunc....... 14,000 $143,500
Richard F. Paolino....... 10,100 103,525
Antonio Aparicio......... 12,000 123,000
C. John Cooke............ 8,000 82,000
</TABLE>
* The awards to Messrs. Paolino and Cooke were made in 1992 and the awards to
Messrs. Junkunc and Aparicio were made in 1992 and 1994. Restrictions lapse
ratably over 5 years from the date of award with 25% of the shares awarded
vesting two years and three years, respectively, after such date and the
remaining 50% of the shares vesting 5 years after such date. The Company
has not paid any dividends on its Class A Common Stock since 1990; however,
should it be reinstated, dividends would be paid on the restricted stock
42
<PAGE>
reported above. At December 29, 1995 the closing market price of the
Company's shares of Class A Common Stock was $10.25 per share.
(2) Mr. Curtin commenced his employment with the Company on May 2, 1995. The
salary shown in the table above was the amount paid to him from May 2,
1995 through December 31, 1995. The bonus amount in the table above was
guaranteed, for the 1995 "short" year only, under his Employment
Agreement. Other annual compensation represents payment of relocation and
moving expenses.
(3) Includes $6,937 and $6,629 for 1994 and $6,446 and $8,842, including
interest, for 1995 for Messrs. Junkunc and Paolino, respectively, and
$19,384 for Mr. Curtin, provided under his Employment Agreement,
representing retirement benefits provided in excess of limitations imposed
by the Internal Revenue Code on Company contributions to such SARP and
ESOP retirement accounts, which are credited to an unfunded deferred
compensation retirement plan account under the Supplemental Executive
Retirement Plan (the "SERP"). See "Employment, Severance and Other
Agreements."
(4) Includes $25,502, $24,996, $28,183, $30,610 and $16,212 for Messrs.
Curtin, Junkunc, Paolino, Aparicio and Cooke representing amounts credited
to a long-term deferred cash incentive plan account established for the
executive as of the end of the 1995 fiscal year. On February 23, 1996, the
Board of Directors approved, on recommendation of the Salary Committee,
the LTDCIP with effect from January 1, 1995. Under the LTDCIP, award
credits are to be made annually beginning with the 1995 year for LTDCIP
participants based on one year's financial performance out of an award
pool of 6% of the Company's pre-tax adjusted earnings with participants
becoming vested in each accrued annual award after three years subject to
accelerated vesting upon a change of control (as defined) and with payout
of the credited vested amounts plus interest accrued at a market rate in
three annual installments following termination of employment, subject to
the right to defer payment until retirement at age 65, death or
disability, or earlier upon termination of employment for reasons other
than cause.
(5) Includes values of 1993, 1994 and 1995 year-end Company contributions to
the SARP (4% cash contribution) and ESOP (2% in shares of Class A Common
Stock) and, with respect to Mr. Junkunc for 1993, reflects eligible wage
participation for approximately six months, and for 1994 and 1995 also
includes amounts contributed to a SERP account maintained by the Company
for Messrs. Junkunc and Paolino. See footnote 3.
(6) Amounts shown converted from the Swiss Franc equivalent with respect to
Messrs. Stuber and Aparicio for 1995, 1994 and 1993 at the average U.S.
dollar exchange rates of $0.8461, $0.7332 and $0.6759, respectively, and
from the British pound equivalent with respect to Mr. Cooke for 1995, 1994
and 1993 at the average U.S. dollar exchange rates of $1.5799, $1.5332 and
$1.4987, respectively.
(7) Represents contributions made to Tesa's retirement plans for Messrs.
Stuber and Aparicio; with respect to Mr. Aparicio for 1995, includes Swiss
Franc contributions to such Tesa retirement plans in the equivalent amount
of $36,346.
(8) Mr. Stuber resigned from the Company on May 31, 1995. The salary shown in
the table above was paid to him from January 1, 1995 through the date of
his resignation. All other compensation represents a severance payment
made to him and amounts contributed to the Tesa retirement plan for his
service during 1995. See "Employment, Severance and Other Agreements."
43
<PAGE>
STOCK OPTION/SAR GRANTS
Under the provisions of the EIP, a variety of stock and stock-based awards,
performance cash awards and related benefits, including stock options and
stock appreciation rights ("SARs"), may be awarded to Executive Officers and
other key employees of the Company and its subsidiaries. The Company's
stockholders approved an amendment to the EIP at the 1995 Annual Meeting
increasing by 500,000 shares to 875,000 shares the aggregate number of shares
of Class A Common Stock which may be issued and delivered upon exercise of
options, restricted stock awards or other stock-based awards granted to
employees under such plan and to limit to 300,000 shares the number of shares
that any recipient can thereafter be awarded in any calendar year pursuant to
options granted under the EIP. The following table sets forth stock options
granted to Executive Officers under the EIP in 1995.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
---------------------------------------------- REALIZABLE VALUE AT
PERCENTAGE ASSUMED ANNUAL
NUMBER OF OF TOTAL RATES OF STOCK
SECURITIES OPTIONS/SARS EXERCISE PRICE APPRECIATION
UNDERLYING GRANTED TO OR BASE FOR OPTION TERM(1)
OPTIONS/SARS EMPLOYEES IN PRICE PER EXPIRATION -------------------
NAME GRANTED(2) FISCAL YEAR SHARE DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Frank T. Curtin......... 200,000 37.8% $6.75 5-03-05 $849,000 $2,151,540
Charles A. Junkunc...... 40,000 7.5 7.00 7-27-05 176,092 446,248
Richard F. Paolino...... 30,000 5.7 7.00 7-27-05 132,069 334,686
Antonio Aparicio........ 33,000 6.2 7.00 7-27-05 145,275 368,154
C. John Cooke........... 15,000 2.8 7.00 7-27-05 66,034 167,343
</TABLE>
- ---------------------
(1) The potential realizable values represent future opportunity and have not
been reduced to present value in 1996 dollars. The dollar amounts included
in these columns are the result of calculations at assumed rates set by
the Securities and Exchange Commission (the "Commission") for illustrative
purposes, and these rates are not intended to be a forecast of the Class A
Common Stock price and are not necessarily indicative of the values that
may be realized by the named Executive Officer. The potential realizable
values are based on arbitrarily assumed annualized rates of stock price
appreciation of five and ten percent over the full ten-year term of the
options.
(2) There were no SARs granted in 1995 to any of the Executive Officers named
in the table.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table summarizes (i) options, including options outstanding
under the Company's Amended 1973 Stock Option Plan (the "73 Plan") which
terminated on April 26, 1989, and (ii) SARs exercised during 1995 and presents
the value of unexercised options and SARs held by the named Executive Officers
at fiscal year-end:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FISCAL YEAR-END FISCAL YEAR-END
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Frank T. Curtin......... None -- -- 200,000 -- $700,000
Charles A. Junkunc...... None -- 25,000 40,000 $93,750 130,000
Richard F. Paolino...... None -- 49,332 30,000 93,750 97,500
Antonio Aparicio........ None -- 25,000 33,000 93,750 107,250
C. John Cooke........... None -- 15,000 15,000 56,250 48,750
</TABLE>
44
<PAGE>
FOREIGN RETIREMENT PLANS
Tesa maintains a defined contribution retirement plan required by Swiss law,
pursuant to which benefits accrue on behalf of Mr. Aparicio annually in an
amount equal to a percentage (based on the executive's age and on his salary)
of annual compensation and under which interest accrues on accrued benefit
amounts at a compound annual rate of 4%. Upon retirement, the executive is
entitled to receive an annual pension in an amount equal to 7.2% of the
executive's total accrued benefits, and the estimated annual pension payable
upon retirement at normal retirement age under such plan is an amount
equivalent to $99,416 for Mr. Aparicio. In addition, Tesa sponsors a separate
defined contribution plan pursuant to which Mr. Aparicio is eligible to
receive a lump-sum payment upon retirement. The estimated lump sum payable
upon retirement under this sponsored plan at normal retirement age is an
amount equivalent to $335,691 for Mr. Aparicio. Mr. Stuber, formerly Managing
Director of Tesa and who resigned from the Company May 31, 1995, was entitled
to an accrued vested amount equivalent to $258,940 under such plan, which
amount was transferred by Tesa to Mr. Stuber's retirement account with his new
employer. Amounts were converted at the rate of $0.7332 per Swiss Franc.
Dr. C. John Cooke is a participant in the Brown & Sharpe Pension Plan
covering the Company's U.K. employees, pursuant to which employees contribute
4.5% of their salary. Dr. Cooke, who is designated a "Special Member" of the
plan which entitles him to the highest retirement benefit under such plan, is
eligible to retire and receive pension benefits under the plan at age 60 on
January 19, 1997 at the rate of 1/40 of pensionable salary for each year of
service. Based on an estimated total final average salary of (Pounds)90,000,
length of service and 14 3/4 years' participation in the plan, he would be
eligible to receive an estimated final annual pension benefit net of any
statutory governmental social benefit of (Pounds)33,188 equivalent to
approximately $52,433 at the average exchange rate of $1.5799 per British
Pound.
EMPLOYMENT, SEVERANCE AND OTHER AGREEMENTS
Mr. Frank T. Curtin has an employment agreement with the Company for a
three-year term of employment commencing on May 2, 1995 in the capacity of
President and Chief Executive Officer. The agreement provides for: (i) an
annual base salary of $300,000, subject to increases at the discretion of the
Board of Directors (which base salary was increased by the Board to $315,000
as of January 1, 1996); (ii) a guaranteed cash incentive bonus for 1995
performance of $75,000; (iii) future cash incentive bonuses for subsequent
fiscal years in an amount not to exceed the maximum amount permitted under the
PIP with all or a portion thereof to be "earned out" and subject to
achievement of objectives determined by the Salary Committee of the Board; and
(iv) participation in other executive employee benefits. Pursuant to the
agreement, Mr. Curtin also received an award of non- incentive stock options
disclosed under "Option/SAR Grants" above, and the Company agreed to annually
contribute an amount of 10% of his base salary to a SERP account for his
benefit. The agreement provides that the Company may terminate his employment
for a reason other than death, disability or cause (as defined in the
agreement) subject, however, to continuation of his base salary and benefits
for the unexpired term remaining under the agreement, but in any event not
less than twelve months. In addition Mr. Curtin has the right under the
agreement to terminate his employment following a Change of Control of the
Company (as defined in the agreement) in the event his position or job
responsibilities change or the compensation and benefits reserved to him in
the agreement are not provided. In such event the Company would be required to
continue to pay him the base salary and benefits in effect at the time of such
termination for the unexpired term of the employment agreement. No salary or
benefits are continued if Mr. Curtin's employment is terminated for cause or
upon death or disability. Mr. Curtin is subject to a covenant not to compete
with the Company for two years after the termination of his employment.
The Company has an employment/severance agreement with Mr. Richard F.
Paolino. Under the agreement as amended through September 12, 1996, in
addition to his current salary, benefits and fringe benefits until the date of
termination of employment, Mr. Paolino will receive on any termination of
employment, by his resignation or a termination by the Company (other than a
termination by the Company for cause), a lump sum equal to the amount of his
highest annual base salary during the three-year period immediately preceding
the termination of employment, the value of annual fringe benefits, and the
highest cash bonus received for any of
45
<PAGE>
the years in such prior three-year period. Upon any such termination, Mr.
Paolino is also entitled to Company contributions on his behalf under the SARP
and the ESOP and participation in all life insurance, health plans and other
welfare plans of the Company through December 31, 1997 and to accelerated
vesting of any stock options or restricted stock provided that he must be an
employee on January 3, 1997 and not have been terminated prior thereto by the
Company for cause in order to receive accelerated vesting with respect to
options granted to him in July 1995. The payment and benefits under any such
termination of employment will be reduced to the extent necessary to preserve
their deductibility to the Company for Federal income tax purposes and to
avoid imposition of any "excess parachute payments" taxes under the Internal
Revenue Code. Mr. Paolino is subject to a covenant not to compete with the
Company during his employment and for one year following any termination of
employment. The agreement also obligates the Company to pay for any legal fees
incurred by Mr. Paolino to enforce his rights under the agreement and provides
for letter of credit mechanics to carry this out.
The Company also has an agreement with Mr. Charles A. Junkunc who joined the
Company on May 4, 1992, to pay a severance amount to him equal to his annual
salary in effect at the time of termination and to continue his basic employee
benefits for a one-year period in the event his employment with the Company is
terminated for any reason. Under the agreement, the Company will pay a bonus
equal to the average of the bonus payments received by him during the three
years (or such lesser period) prior to termination, pro rated according to the
number of months of service during the year in which any termination occurs.
In addition, a minimum bonus of $34,000 for 1993 was guaranteed pursuant to
this agreement. Upon any termination Mr. Junkunc, if requested by the Company,
is to provide consulting services to the Company for one year, with offsets
against the payments to be made by the Company for any income received from
other sources.
The Company entered into an agreement with Dr. Cooke in November 1991 which
provides for payment of a severance amount equal to: (i) two times base
salary; plus (ii) two years' bonus calculated on the basis of the average
annual bonus granted over the five years preceding termination, in the event
that the Company terminates his employment other than for a serious
professional misdemeanor.
The Company also entered into an agreement with Mr. Antonio Aparicio in
October 1995 which provides for payment of a severance amount upon termination
equal to the salary he received during the 12 month period prior to the
effective date of the termination.
Mr. Fred M. Stuber was a Director and President and Chief Executive Officer
of the Company from January 1, 1991 to May 31, 1995. The Company entered into
a severance agreement with Mr. Stuber on the date of his termination, which
provided for a severance payment to him of 681,211 Swiss Francs equivalent to
$576,372 at an average annual exchange rate of $0.8461 per Swiss Franc. One
half of the severance amount was paid to Mr. Stuber in a lump sum in cash on
termination, and the balance was paid in seven equal monthly installments with
the final payment being made on December 1, 1995. The agreement also provided
for the forfeiture of 16,100 shares of unvested restricted Class A Common
Stock previously awarded to Mr. Stuber, that he would retain his rights to his
accrued retirement benefits in the Tesa retirement plans and a covenant by Mr.
Stuber that he would not directly or indirectly compete with the business of
the Company for a period of two years following his resignation.
SALARY COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company has served as a director or member of
the compensation committee (or other committee serving an equivalent function)
of any other entity, whose executive officers served as a director of or
member of the Salary Committee of the Company. See "Certain Transactions."
46
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of August 31, 1996, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby (assuming no
exercise of the Underwriters' over-allotment option), by: (i) each person or
entity known to the Company to own beneficially more than 5% of any class of
Common Stock; (ii) each of the Company's directors; (iii) each of the named
Executive Officers; (iv) all directors and executive officers as a group; and
(v) the Selling Stockholders. Except as indicated below, none of these
entities has a relationship with the Company or, to the knowledge of the
Company, any Underwriters of the Offering or their respective affiliates. The
address for the listed beneficial owners, unless stated otherwise, is c/o
Brown & Sharpe Manufacturing Company, Precision Park 200 Frenchtown Road,
North Kingstown, RI 02852-1700.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING AFTER THE OFFERING
------------------------------------------------ ------------------------------------------------
CLASS A CLASS B CLASS A CLASS B COMMON
COMMON STOCK COMMON STOCK COMMON STOCK STOCK
------------------ ------------------ ------------------ ------------------
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NAME AND ADDRESS OF NUMBER PERCENT NUMBER PERCENT VOTING NUMBER PERCENT NUMBER PERCENT VOTING
BENEFICIAL OWNER OF SHARES OF CLASS OF SHARES OF CLASS POWER OF SHARES OF CLASS OF SHARES OF CLASS POWER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SIGNIFICANT
STOCKHOLDERS
Fiduciary Trust
Company
International(1)... 476,766 5.8% 158,920 30.6% 15.4% 476,766 3.9% 158,920 30.6% 11.9%
Two World Trade
Center
New York, NY 10048-
0774
Henry D. Sharpe,
Jr.(2)............. 483,966 5.9% 161,320 31.1% 15.7% 483,966 4.0% 161,320 31.1% 12.1%
Frank T. Curtin(3).. 303,283 3.7% 166,063 32.0% 14.7% 303,283 2.5% 166,063 32.0% 11.3%
Charles A.
Junkunc(3)......... 355,551 4.3% 194,794 37.5% 17.2% 355,551 2.9% 194,794 37.5% 13.2%
Robert A.
Batting(3)......... 303,283 3.7% 166,063 32.0% 14.7% 303,283 2.5% 166,063 32.0% 11.3%
The Killen Group,
Inc.(4)............ 427,576 5.2% -- -- 3.2% 427,576 3.5% -- -- 2.5%
Donald Smith & Co.,
Inc.(5)............ 419,600 5.1% -- -- 3.1% 419,600 3.4% -- -- 2.4%
Putnam Fiduciary 202,640 2.5% 52,744 10.2% 5.5% 202,640 1.7% 52,744 10.2% 4.2%
Trust Co.(6).......
Putnam Defined
Contribution Plans
859 Willard Street
Quincy, MA 02269-
9110
OTHER DIRECTORS
Enrico Albareto(7).. 3,450,000 42.1% -- -- 25.8% 320,000 2.6% -- -- 1.8%
Alberto de
Benedictis(7)...... 3,450,000 42.1% -- -- 25.8% 320,000 2.6% -- -- 1.8%
Russell A. Boss..... 1,000 * -- -- * 1,000 * -- -- *
Vincenzo
Cannatelli(7)...... 3,450,000 42.1% -- -- 25.8% 320,000 2.6% -- -- 1.8%
Howard K. Fuguet.... 1,000 * -- -- * 1,000 * -- -- *
Henry D. Sharpe,
III................ 55,145 * 18,381 3.5% 1.8% 55,145 * 18,381 3.5% 1.4%
John M. Nelson...... 1,453 * 151 -- * 1,453 * 151 -- *
Paul R. Tregurtha... 705 * 26 -- * 705 * 26 -- *
NAMED EXECUTIVE
OFFICERS
Antonio Aparicio.... 37,000 * -- -- * 37,000 * -- -- *
C. John Cooke....... 31,000 * -- -- * 31,000 * -- -- *
Richard F. Paolino.. 73,603 * 2,432 * * 73,603 * 2,432 -- *
All executive
officers and
directors as a
group
(19 persons)(8).... 4,458,278 53.5% 358,710 69.1% 59.5% 1,328,278 10.8% 358,710 69.1% 28.1%
SELLING STOCKHOLDERS
Diehl GmbH & Co..... 156,000 1.9% -- -- 1.2% -- -- -- -- --
Stephanstrasse 49
90478 Nurnberg
Germany
Finmeccanica 3,450,000 42.1% -- -- 25.8% 320,000 2.6% -- -- 1.8%
S.p.A.(9)..........
4, Piazza Monte
Grappa
Rome 00195 Italy
</TABLE>
47
<PAGE>
- ---------------------
* Less than one percent (1%).
(1) Fiduciary Trust Company International, 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 shares of
Class A Common Stock and Class B Common Stock referred to in footnote (2)
below.
(2) Various members of the Sharpe family, including Henry D. Sharpe, Jr. and
his son Henry D. Sharpe, III, beneficially own an aggregate of 483,966
shares of Class A Common Stock and 161,320 shares of Class B Common Stock
of the Company. The table includes: (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 (including Henry D. Sharpe III referred to in the
table) 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 by Mr. Sharpe; (c) 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 (d)
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 with respect
to the shares of Class A Common Stock and Class B Common Stock described
in sub-clause (a) above, and sole voting and dispositive power with
respect to the shares of Class A Common Stock and Class B Common Stock
described in subclause (b) above. Of the shares shown in the table, the
7,200 shares of Class A Common Stock and 2,400 shares of Class B Common
Stock in subclause (c) are owned indirectly.
(3) Includes: (i) 303,283 shares of Class A Common Stock and 166,063 shares of
Class B Common Stock, as to which Messrs. Curtin, Junkunc and Batting, by
virtue of being Trustees under the ESOP, have shared voting power (subject
to direction from plan participants) and limited residual investment power
as Trustees under the terms of the Trust Agreement for the ESOP and as to
all of which ESOP shares (except, with respect to Mr. Junkunc, his vested
shares of Class A Common Stock and Class B Common Stock in such plan) they
disclaim beneficial ownership; (ii) shares of Class A Common Stock
issuable upon exercise of stock options held by such Executive Officers
that are exercisable within 60 days of the date of this Prospectus; and
(iii) with respect to Mr. Junkunc, includes 5,618 shares of Class A Common
Stock and 28,333 shares of Class B Common Stock held by the Company's
United Kingdom Pension Plan as to which Mr. Junkunc has shared voting and
investment power with respect to which Mr. Junkunc disclaims beneficial
ownership.
(4) The Killen Group, Inc., a registered investment advisor, owns beneficially
426,442 shares of Class A Common Stock, of which it has sole voting power
over 173,713 shares and sole dispositive power with respect to 422,610
shares. Robert E. Killen, President and sole stockholder of the Killen
Group, directly owns 3,832 shares of Class A Common Stock, as to which he
has sole voting and dispositive power. Of the shares shown in the table,
3,832 shares of Class A Common Stock are owned indirectly.
(5) Donald Smith & Co., an investment advisory firm, has sole voting power
over 294,300 shares of Class A Common Stock and sole dispositive power
over 419,600 shares of Class A Common Stock.
(6) Putnam Fiduciary Trust Co. acts as Trustee of the SARP, the Brown & Sharpe
Savings and Retirement Plan for Management Employees and a substantially
similar tax qualified 401(k) savings plan covering U.S. non-management
employees, 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 plans. Putnam Fiduciary Trust Co.
disclaims beneficial ownership with respect to all such shares of Class A
Common Stock and Class B Common Stock.
(7) Messrs. Albareto, Cannatelli and de Benedictis, by virtue of their
positions as senior executives and employees of Finmeccanica or its
affiliates and Finmeccanica's authority to vote or direct the vote and to
dispose or direct the disposition of the Class A Common Stock, may each be
deemed to beneficially own the shares of Class A Common Stock owned of
record by Finmeccanica and as to all of which stock they disclaim
beneficial ownership. See footnote (9) below and "Certain Transactions."
48
<PAGE>
(8) Includes an aggregate of 129,332 shares of Class A Common Stock subject to
outstanding stock options which are exercisable within 60 days of the date
of this Prospectus.
(9) Finmeccanica owns beneficially and of record and has the power to vote or
direct the vote and to dispose or direct the disposition of 3,450,000
shares of Class A Common Stock. The Class A Common Stock was acquired in
connection with the acquisition by the Company of the DEA metrology
business on September 28, 1994. Approximately 63% of Finmeccanica's stock
is owned by Istitutto per la Ricostruzione Industriale S.p.A., a joint
stock company ("IRI"), all of whose stock is held by the Ministry of the
Treasury of the Republic of Italy, therefore, Finmeccanica and IRI are
deemed to share the voting and investment power with respect to the shares
held by Finmeccanica. See "Certain Transactions."
49
<PAGE>
CERTAIN TRANSACTIONS
DEA ACQUISITION
A substantial change in ownership of the Common Stock of the Company
occurred in connection with the acquisition by the Company and its wholly
owned subsidiary, Brown & Sharpe International Capital Corporation, on
September 28, 1994 of all the stock of DEA and its related metrology business
headquartered in Turin, Italy, from Finmeccanica. DEA was purchased pursuant
to the provisions of the Acquisition Agreement dated as of June 10, 1994
between the Company and Finmeccanica, as amended (the "DEA Acquisition
Agreement"). The purchase price for DEA was paid by the Company to
Finmeccanica at the closing through the issuance of 3,450,000 shares of Class
A Common Stock.
Under the terms of the Shareholders Agreement, Finmeccanica was granted the
right to nominate for election to the Board following the acquisition of DEA
three out of ten members of the Company's Board of Directors and to have one
of such directors sit on the Executive Committee of the Company's Board of
Directors. Pursuant to the Shareholders Agreement, three Finmeccanica
nominees, Messrs. Albareto, de Benedictis and Cannatelli, were elected to the
Company's Board of Directors on October 28, 1994. Pursuant to the Shareholders
Agreement, when Henry D. Sharpe, Jr. ceases to be a Director of the Company,
Finmeccanica will thereafter be entitled to designate two nominees for
election to the Company's Board of Directors, and a third nominee, who may not
be an employee of Finmeccanica but must be an experienced executive or advisor
to industrial businesses, subject to approval (not to be unreasonably
withheld) by the Company's Board of Directors. In any event, Finmeccanica is
entitled to two nominees to the Company's Board of Directors for so long as it
owns at least 1,250,000 shares of Class A Common Stock and one nominee to the
Company's Board of Directors for so long as it owns at least 375,000 shares of
Class A Common Stock.
Under the terms of a letter agreement dated as of September 28, 1994 between
Henry D. Sharpe, Jr., Chairman of the Board, and Finmeccanica, Mr. Sharpe has
agreed to vote all shares of Common Stock as to which he has sole voting power
in favor of the Finmeccanica nominees standing for election to the Board of
Directors. The Shareholders Agreement provides that Finmeccanica will vote its
shares of Class A Common Stock in favor of the election as directors of all
nominees selected by the Board of Directors of the Company.
The Shareholders Agreement also provides Finmeccanica with certain rights
and obligations with respect to its ownership of shares of Class A Common
Stock. Finmeccanica is prohibited from acquiring any shares of Common 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 occurrence of certain specified events.
The Agreement also provides pre-emptive rights to Finmeccanica for so long as
it owns at least 862,500 shares of Class A Common Stock, such that the Company
may not issue any shares of 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, without first offering to Finmeccanica the right to purchase that
percentage of the Company's equity securities such that Finmeccanica's
percentage ownership of the Company's Common Stock on a fully diluted basis
(as defined in the Shareholders Agreement) remains constant. Finmeccanica has
waived such rights with respect to the shares of Class A Common Stock to be
issued in the Offering.
In addition, Finmeccanica is prohibited from selling any of the Company's
equity securities to any third party until September 24, 1996 and, thereafter,
Finmeccanica may sell securities to a third party only after offering the
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
"Securities Act")).
In addition, Finmeccanica has certain demand and "piggyback" registration
rights granted under the Shareholders Agreement. If, at any time after
September 28, 1996, the holders of 25% of the shares covered by the
Shareholders Agreement demand registration, the Company will be required to
file a registration statement
50
<PAGE>
covering the resale of such shares. In addition, if the Company files a
registration statement, Finmeccanica may request that its shares be included
in the registration statement. Finmeccanica is participating in the Offering
as a Selling Stockholder.
Upon completion of the Offering, Finmeccanica's rights under the
Shareholders Agreement, including the right to nominate directors, will
terminate.
Prior to completion of the DEA acquisition and entering into the
Shareholders Agreement, the Company amended the Rights Plan pursuant to
authority reserved in the underlying agreement to exclude Finmeccanica from
the definition of an "Acquiring Person" under the Rights Plan for so long as
it does not own shares of Class A Common Stock other than those acquired in
connection with the DEA acquisition and as provided in the Shareholders
Agreement. As a result of the amendment, the exercisability of the Rights of
the holders of Class A Common Stock and Class B Common Stock created under the
Rights Plan was not triggered. See "Risk Factors--Potential Effect of Anti-
Takeover Provisions."
In addition, on March 24, 1994, the Company acquired all but .2% of the
stock of Roch and all of the stock of Mauser from Diehl GmbH & Co. of
Nurnberg, Germany ("Diehl") pursuant to the terms of a Stock Purchase and
Transfer Agreement dated March 24, 1994. The purchase price for Roch was paid
by the Company to Diehl at the closing through the issuance of 175,000 shares
of Class A Common Stock, subject to certain post closing adjustments. As a
result of those post closing adjustments, Diehl surrendered 19,000 shares of
Class A Common Stock to the Company in August 1996. Diehl also has a
contingent right (the "Contingent Stock Right"), which expires on March 24,
1999, to receive an additional 50,000 shares of Class A Common Stock in the
event that the closing price of the Class A Common Stock on the New York Stock
Exchange equals or exceeds $15.00 per share for any 30 business days (whether
or not consecutive) during any 12 month period. In addition, Diehl was granted
certain demand and "piggyback" registration rights with respect to its shares
of Class A Common Stock. Diehl's demand registration rights, exercisable
during the period commencing March 24, 1996 and ending March 24, 1997, permit
it to demand that its shares be covered by a registration statement provided
that the demand is for at least 100,000 shares and subject to the discretion
of the Board of Directors. Diehl's "piggyback" registration rights expired on
March 24, 1996; however, Diehl is participating in the Offering as a Selling
Stockholder.
RELATED PARTY TRANSACTIONS AND AGREEMENTS
On September 28, 1994, in connection with the acquisition of DEA, the
Company entered into a Credit Support Agreement with Finmeccanica (the "Credit
Support Agreement"), pursuant to which Finmeccanica issued unconditional
payment guarantees to Banca Commerciale Italiana, New York Branch, and
Istituto Bancarios San Paolo di Torino, New York Branch, with respect to their
extension of two three-year term loans to the Company in the aggregate amount
of $25.0 million bearing interest at a floating rate of LIBOR plus 0.60% with
interest payable quarterly and the entire principal amount of such loans due
on September 28, 1997. The Company paid Finmeccanica a one-time fee of
$800,000 upon entering into the Credit Support Agreement. In the event
Finmeccanica is required to pay such banks any amounts under its guarantees,
subject to the prior repayment by the Company of any amounts due in respect of
certain senior indebtedness (as defined in the Credit Support Agreement),
Finmeccanica will be entitled to reimbursement from the Company of any such
amounts paid by Finmeccanica under its guarantees. That Agreement provides
that as long as the Finmeccanica guarantees remain outstanding, the Company
will not, with certain exceptions, create any liens on the accounts receivable
or inventory of DEA or its subsidiaries or permit DEA and its subsidiaries to
have any debt to any other financial institutions other than certain permitted
indebtedness. In connection with Finmeccanica's entering into the Credit
Support Agreement, DEA also furnished a payment guarantee to Finmeccanica.
Following its acquisition by the Company, DEA continued to be a lessee under
a lease agreement with the Elsag Bailey Division of Finmeccanica with respect
to DEA's principal headquarters facility located in Moncalieri, Italy and the
DEA sales and support facility in Madrid, Spain. The lease of the Italian
property expires on December 31, 1997, and the minimum annual rent under such
lease is approximately Lire 1,400
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million or approximately $840,000, subject to adjustment as provided in the
lease. The lease of the Spanish property expires on January 4, 1998 at an
annual rent of Pesetas 30,600 million or approximately $200,000. The Company
believes that the terms of such leases have been and will be comparable to
those which could be obtained from third parties.
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 non-competition
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 non-
competition 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 represented to Brown & Sharpe that it has no present intention of
acquiring any such company.
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 for up to $10.0 million (less the first $500,000)
resulting from the inaccuracy of representations and warranties covering
matters relating to their respective businesses, financial statements,
material contracts, compliance with law and other items customary in
transactions of this type, breach of non-fulfillment 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 exceed limits provided for in the purchase
price provisions of the DEA Acquisition Agreement. The DEA Acquisition
Agreement also provided that, prior to the closing, Finmeccanica was required
to assume or discharge all indebtedness for borrowed money of DEA other than
an amount of indebtedness net of cash in excess of Lire 0.8 billion, to remain
outstanding on and after the closing, which amount was to be determined as of
July 31, 1994 pursuant to a formula in the DEA Acquisition Agreement.
The Company entered into an agreement with Finmeccanica on December 18, 1995
amending the DEA Acquisition Agreement to eliminate a post-closing Purchase
Price Adjustment provision and substituting an agreement of the parties that a
Purchase Price Adjustment shall be payable to the Company by Finmeccanica in
the amount of Lire 2,100 million without interest (approximately $1.38 million
as of December 18, 1995). The agreed amount is to be paid by Finmeccanica in
the form of a waiver of rent due Finmeccanica on the DEA Moncalieri, Italy
facility referenced above through December 31, 1997, the date of expiration of
the lease, and is subject to reduction if the premises are vacated after June
30, 1996 by an amount equal to the per diem amount of rent due from July 1,
1996 to the date the premises are vacated by DEA. The Company presently
expects to vacate the premises by December 31, 1996. Except for their
relationship to Finmeccanica by virtue of their executive positions with such
company or its affiliates, none of Messrs. Albareto, de Benedictis or
Cannatelli, who are directors of the Company, have any direct or indirect
interest in any of the foregoing transactions.
DESCRIPTION OF CAPITAL STOCK
As of June 30, 1996, the authorized capital stock of the Company consists of
1,000,000 shares of Preferred Stock, $1.00 par value, per share; 15,000,000
shares of Class A Common Stock, $1.00 par value, per share, and 2,000,000
shares of Class B Common Stock, $1.00 par value, per share. At August 31, 1996
there were issued and outstanding 8,199,989 shares of Class A Common Stock and
519,436 shares of Class B Common Stock and no shares of Preferred Stock. In
addition, 665,997 shares of Class A Common Stock were reserved as of August
31, 1996 for issuance upon exercise of outstanding options under the Company's
stock plans and 214,386 additional shares of Class A Common Stock were
reserved for issuance upon the future grant of options or other
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awards under the Company's stock plans. At August 31, 1996, 519,436 shares of
Class A Common Stock were reserved for issuance upon the conversion of the
outstanding shares of Class B Common Stock and an aggregate of 533,333 shares
of Class A Common Stock were reserved for issuance upon conversion of the
Company's 9 1/4% Convertible Subordinated Debentures Due 2005 at $26.25 per
share, subject to antidilution provisions. Also at August 31, 1996, 50,000
shares of Class A Common Stock were reserved for issuance upon exercise of
Diehl's Contingent Stock Right. The Class A Common Stock is listed on the New
York Stock Exchange. The following summary of certain provisions of the Class
A Common Stock and the Class B Common Stock and the Preferred Stock of the
Company does not purport to be complete and is subject to, and qualified in
its entirety by, the Certificate of Incorporation and By-laws which are
included as exhibits to the Registration Statement of which this Prospectus
forms a part and by the provisions of applicable law.
PREFERRED STOCK
As of June 30, 1996, the Company is authorized to issue up to 1,000,000
shares of Preferred Stock, $1.00 par value, none of which has been issued. The
Board of Directors is empowered to provide from time to time for the issuance
of one or more series of Preferred Stock without further stockholder action
and to designate various terms and provisions with respect to each such series
whether issued or not, including without limitation, the dividend rate,
redemption price, terms of any sinking fund, conversion rights, if any, voting
rights, if any, and rights of the holders upon liquidation. The effect of the
issuance of any shares of Preferred Stock upon the rights of holders of the
Common Stock may not be determined until the Board of Directors specifies the
rights of the holders of such Preferred Stock. However, such effects may
qualify or limit the rights of holders of the Common Stock and might include,
among other things, restricting dividends on the Common Stock, diluting the
voting power of the Common Stock, impairment of the liquidation rights of the
Common Stock and delaying or preventing a change in control of the Company
without further action by the stockholders. The Company has no present plans
to issue any shares of Preferred Stock. In March 1988, in connection with the
Rights Plan, the Company designated a new series of Preferred Stock comprised
of 170,000 shares of Series A Participating Preferred Stock. No shares of
Series A Participating Preferred Stock have been issued. When issued, shares
of Series A Participating Preferred Stock will have 100 votes per share. No
distributions can be made to holders of shares of stock ranking junior, either
as to dividends or upon liquidation or winding up, to the Series A
Participating Preferred Stock unless prior thereto the holders of the Series A
Participating Preferred Stock shall have received $100 per share plus an
amount equal to accrued and unpaid dividends to the date of such payment.
Following such payment, no additional distributions can be made to the holders
of Series A Participating Preferred Stock unless the holders of Common Stock
shall have received a per share "common adjustment" payment based on a formula
adjustment.
COMMON STOCK
Shares of authorized but unissued Class A Common Stock and Class B Common
Stock may be issued from time to time by the Board of Directors without
further stockholder action except as required by applicable law, the
Certificate of Incorporation or the rules of the New York Stock Exchange. In
that connection, the rules of the New York Stock Exchange presently do not
prohibit the issuance of the previously authorized but unissued Class B Common
Stock and such issuance will generally be permitted subject to consultation
with the Exchange.
Shares of Class A Common Stock are entitled to one vote per share on all
matters on which they are entitled to vote. Shares of Class B Common Stock are
entitled to ten votes per share on all matters on which they are entitled to
vote, except as otherwise provided by law or the 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 as otherwise provided by law
and except that the Class A Common Stock, voting as a class with the holders
of shares of any series of Preferred Stock entitled to vote, elects one-third
(rounded down, if necessary, to the nearest whole number, but in any event at
least one), of the directors elected in each year, and except as otherwise
required by law. The Certificate of Incorporation also provides that the
favorable vote of the holders of at least 80% of the outstanding shares of
capital stock of the Company entitled to vote is required to effect certain
mergers or acquisition transactions with an interested person owning 10% or
more of any class of the Company's securities
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entitled to vote for the election of directors. The By-laws provide for a
classified Board of Directors, consisting of three classes of directors, one
class of which is elected each year for a three-year term. The issuance of
additional shares of Class B Common Stock would dilute further the voting
power of the Class A Common Stock, including the shares of Class A Common
Stock sold in the Offering.
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. Dividends may be declared upon and paid to holders of Common Stock by
the Board of Directors out of funds legally available therefor.
Holders of Common Stock have no pre-emptive or other prescriptive rights or
conversion privileges (other than the conversion of Class B Common Stock into
Class A Common Stock on a share-for-share basis described below and except for
certain rights to acquire newly issued shares of Class A Common Stock or
Derivative Securities granted to Finmeccanica under the Shareholders
Agreement) and no redemption rights. All presently issued shares of Common
Stock are fully paid and nonassessable, and the shares of Class A Common Stock
to be issued upon completion of the Offering will be fully paid and
nonassessable.
Shares of Class B Common Stock are not transferable except to permitted
transferees as defined in the Certificate of Incorporation; however, such
shares are convertible at all times into Class A Common Stock on a share-for-
share basis and are transferable thereafter. All shares of Class B Common
Stock may be converted into shares of Class A Common Stock by the Continuing
Directors (as defined in the Certificate of Incorporation) at any time.
In the event of any liquidation, dissolution, or winding up of the affairs
of the Company, the assets of the Company remaining after provision for
payment of creditors, and after provision for payment of any liquidation
preference of any preferred stock that may be issued and outstanding, shall be
distributed pro rata solely among the holders of the Common Stock.
The Common Stock does not have cumulative voting rights, which means that
the holders of the voting stock entitled to cast more than 50% of the votes
cast for the election of Directors can elect 100% of the Directors to be
elected at any meeting if they choose to do so, and, in such event, the
holders of the remaining stock entitled to cast less than 50% of the votes for
the election of Directors will not be able to elect any person or persons to
the Board of Directors.
RIGHTS PLAN
On March 23, 1988, the Company adopted a Rights Plan which provided that
holders of Common Stock would receive three quarters of a Right to purchase
Series A Participating Preferred Stock. Each Right entitles the holder thereof
to purchase from the Company one one-hundredth of a share of Series A
Participating Preferred Stock (subject to adjustment), at an exercise price of
$55 (subject to adjustment), ten business days after a party acquires 20% of
the Company's Common Stock, or the commencement of a tender or exchange offer
(excluding, for these purposes, Finmeccanica so long as Finmeccanica does not
beneficially own shares of Common Stock other than the 3,450,000 shares of
Class A Common Stock acquired by Finmeccanica in the DEA acquisition and such
additional shares as Finmeccanica may purchase in accordance with its pre-
emptive rights under the Shareholders Agreement). Upon completion of the
Offering, the Shareholders Agreement will terminate. These Rights may be
redeemed by the Company at a price of $0.03 per Right; if not, the holder is
entitled to purchase, at the exercise price of the Right, an equity interest
in the acquiring party having a market value of two times the exercise price.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the DGCL. Section
203 prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless: (i) the Board of Directors approves, prior to
such date, either the proposed business combination or the proposed
acquisition of stock which resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction which results in the
stockholder becoming an interested stockholder, the interested stockholder
acquires at least 85% of those shares of the voting stock of the corporation
which are not held by directors, officers or certain employee stock plans; or
(iii) on or subsequent to that date, the business combination with the
interested stockholder is approved by the Board of Directors and also approved
at a
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stockholders' meeting by the affirmative vote of the holders of at least two-
thirds of the outstanding shares of the corporation's voting stock other than
shares held by the interested stockholder. A "business combination" includes
mergers, asset sales and other transactions resulting in a financial benefit
to the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns,
or within three years owned, 15% or more of the corporation's voting stock.
The By-laws provide for the division of the Board of Directors into three
classes as nearly equal in size as possible with staggered three-year terms.
See "Management." Under the DGCL, directors of a classified board may be
removed only for cause by the affirmative vote of the holders of a majority of
the shares of capital stock of the Company entitled to vote at an election of
directors. Under the By-laws, any vacancy on the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the Board, may
be filled by vote of a majority of the Directors then in office. The
classification of the Board of Directors and the limitations on the removal of
Directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.
The Certificate of Incorporation provides that any action required or
permitted to be taken by the stockholders of the Company at an annual meeting
or special meeting of stockholders may not be taken by written action in lieu
of a meeting. The By-laws provide that special meetings of the stockholders
may only be called by the Chairman of the Board, the President of the Company
or by a majority of Directors then in office or by vote of the Board of
Directors. The foregoing provisions could have the effect of delaying until
the next stockholders' meeting stockholder actions which are favored by the
holders of a majority of the outstanding voting securities of the Company.
These provisions may also discourage another person or entity from making a
tender offer for the Company's Common Stock, because such person or entity,
even if it acquired a majority of the outstanding voting securities of the
Company, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders' meeting,
and not by written consent.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or by-laws, unless either the corporation's
certificate of incorporation or by-laws, as the case may be, requires a
greater percentage. The Certificate of Incorporation requires the affirmative
vote of the holders of at least 80% of the shares of capital stock of the
Company issued and outstanding and entitled to vote to amend or repeal the
restriction therein against the taking of action by written consent of the
stockholders and the provisions, described above, requiring the vote of the
holders of 80% of the shares of capital stock for certain mergers and
acquisitions. The By-laws require the affirmative vote of three-quarters of
the Directors then in office or holders of at least two-thirds of the shares
of capital stock of the Company issued and outstanding and entitled to vote to
amend or repeal the By-laws.
The Certificate of Incorporation contains certain provisions permitted under
the DGCL relating to the liability of directors. The provisions eliminate a
director's liability for monetary damages for a breach of fiduciary duty,
except in certain circumstances involving wrongful acts, such as the breach of
a director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. Further, the By-laws contain
provisions to indemnify the Company's Directors and officers to the fullest
extent permitted by the DGCL. The Company believes that these provisions
assist the Company in attracting and retaining qualified individuals to serve
as directors.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Boston EquiServe.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, and assuming no conversions of shares of
Class B Common Stock into shares of Class A Common Stock after August 31,
1996, the Company will have a total of 12,720,425 shares of Common Stock
issued and outstanding, including 12,200,989 shares of Class A Common Stock
and 519,436 shares of Class B Common Stock. Of these shares, a total of
11,880,989 shares of Class A Common Stock
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(including the 7,286,000 shares offered hereby, assuming no exercise of the
Underwriters' over-allotment option, and the 519,436 shares of Class A Common
Stock issuable upon conversion of all outstanding shares of Class B Common
Stock) will be freely tradable without restriction or registration under the
Securities Act by persons other than "affiliates" of the Company, as defined
in the Securities Act (who would be required to sell under Rule 144 under the
Securities Act). The remaining 320,000 shares of Class A Common Stock
outstanding upon completion of the Offering will be "restricted securities" as
that term is defined by Rule 144 (the "Restricted Shares"). The Restricted
Shares were issued and sold by the Company in a private transaction in
reliance upon exemptions from registration under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least two years (including the holding period of any prior owner except
an affiliate), including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares of Class A Common Stock that does not exceed the greater of one percent
of the number of shares of Class A Common Stock then outstanding
(approximately 122,009 shares upon completion of the Offering) or the average
weekly trading volume of the Class A Common Stock during the four calendar
weeks preceding the filing of a Form 144 with respect to such sales. Sales
under Rule 144 are also subject to certain manner of sale provisions and
notice requirements, and to the availability of current public information
about the Company. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least three
years (including the holding period of any prior owner except an affiliate),
would be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. Rule 144 also provides that affiliates who are
selling shares that are not Restricted Shares must nonetheless comply with the
same restrictions applicable to Restricted Shares with the exception of the
holding period requirement. The Commission has proposed an amendment to Rule
144 which would reduce the holding period required for shares subject to Rule
144 to become eligible for sale in the public market from two years to one
year, and from three years to two years in the case of Rule 144(k).
The Company and certain officers, directors and stockholders of the Company
who beneficially own 1,083,408 shares of Class A Common Stock (including
options to acquire 80,000 shares of Class A Common Stock, 1,048 shares of
Common Stock held pursuant to the ESOP and the SARP for distribution and
60,200 shares of Common Stock held pursuant to the EIP), have agreed for a
period of 180 days after the date of this Prospectus not to issue, register
for sale, offer, sell (or contract to sell) or otherwise dispose of any shares
of Class A Common Stock (or any security convertible into or exercisable or
exchangeable for any shares of Class A Common Stock) or grant any options or
warrants to purchase Class A Common Stock (other than: (i) Class A Common
Stock sold in the Offering; and in the case of the Company (ii) Class A Common
Stock issued upon exercise of options to purchase Class A Common Stock that
are issued and outstanding on the date of this Prospectus; (iii) issuances of
shares of Class A Common Stock upon conversions of shares of Class B Common
Stock; and (iv) issuances of Class A Common Stock pursuant to Diehl's
Contingent Stock Right) without the prior written consent of Donaldson, Lufkin
& Jenrette Securities Corporation ("DLJ"). DLJ may, in its sole discretion and
at any time without notice, release all or any portion of the securities
subject to these Lock-up Agreements.
As of the date of this Prospectus, options to purchase a total of 647,000
shares of Class A Common Stock pursuant to the EIP were outstanding with a
weighted average exercise price of $7.643 per share; an additional 124,700
shares of Class A Common Stock were available for future awards under the EIP.
As of the date of this Prospectus, options to purchase an additional 17,997
shares of Class A Common Stock under the 73 Plan were outstanding with a
weighted average exercise price of $12.588 per share. As of August 31, 1996,
505,923 shares of Class A Common Stock and 218,807 shares of Class B Common
Stock were held by the ESOP and the SARP for distribution to employees of the
Company upon their termination of employment in accordance with the terms
thereof. Holders of outstanding options to acquire 129,332 shares of Common
Stock will be subject to restrictions on resale for 180 days following the
date of this Prospectus pursuant to the Lock-up Agreements. In addition,
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certain executive officers of the Company to whom 7,551 shares of Common Stock
currently held pursuant to the ESOP and the SARP may be distributed upon
termination of employment, will enter into Lock-up Agreements restricting
resales of any such shares of Common Stock for 180 days following the date of
this Prospectus. The Company has filed registration statements on Form S-8
pursuant to which shares issued upon the exercise of all outstanding options
to purchase Common Stock and shares issued as awards of restricted stock are
freely tradeable (subject to compliance with Rule 144 for affiliates), and
shares distributable to employees from the ESOP and the SARP upon their
termination of employment are also freely tradeable (subject to compliance
with Rule 144 for affiliates).
No predictions can be made as to the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Class A Common Stock. Nevertheless, sales of substantial
amounts of such shares in the public market, or the perception that such sales
could occur, could materially and adversely affect the market price of the
Class A Common Stock and could impair the Company's future ability to raise
capital through an offering of its equity securities. See "Risk Factors--
Shares Eligible for Future Sale."
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general summary of certain United States federal income
and estate tax consequences expected to result under current law from the
purchase, ownership, sale or other taxable disposition of the Class A Common
Stock by a "Non-United States Holder." For the purpose of this summary, a
"Non-United States Holder" is any person or entity that is, for United States
federal income tax purposes, a foreign corporation, a non-resident alien
individual, a foreign partnership or a non-resident fiduciary of a foreign
estate or trust as such terms are defined in the Internal Revenue Code of 1986
as amended and in effect (the "Code"). This summary does not deal with all
aspects of United States federal income and estate taxation that may be
relevant to Non-United States Holders in light of their personal circumstances
and does not address foreign, state and local tax consequences. Furthermore,
this summary is based on current provisions of the Code and administrative and
judicial interpretations as of the date hereof, all of which are subject to
change, possibly with retroactive effect. Prospective foreign investors are
urged to consult their tax advisors regarding the United States federal,
state, local and non-United States income and other tax consequences of
purchasing, owning and disposing of Class A Common Stock.
DIVIDENDS
The Company does not expect to pay dividends on its Class A Common Stock in
the forseeable future. See "Dividend Policy." Dividends paid to a Non-United
States Holder of Class A Common Stock that are not effectively connected with
the conduct by the Non-United States Holder of a trade or business within the
United States will be subject to United States federal income tax, which
generally will be withheld at a rate of 30% of the gross amount of the
dividend unless the rate is reduced by an applicable income tax treaty. Under
current United States Treasury regulations, dividends paid to an address in a
country other than the United States are presumed to be paid to a resident of
such country for purposes of the withholding discussed above (unless the payor
has knowledge to the contrary) and, under the current interpretation of United
States Treasury regulations, for purposes of determining the applicability of
a tax treaty rate. However, under proposed United States Treasury regulations
not currently in effect, a Non-United States Holder of Class A Common Stock
who wishes to claim the benefit of an applicable treaty rate would be required
to satisfy certain certification and other requirements. Dividends paid to a
Non-United States Holder of Class A Common Stock that are effectively
connected with a United States trade or business conducted by such Non-United
States Holder are taxed at the graduated rates applicable to United States
citizens, resident aliens and domestic corporations, and are not subject to
withholding tax if the Non-United States Holder gives an appropriate statement
to the Company or its paying agent in advance of the dividend payment.
In addition to the graduated tax described above, effectively connected
dividends received by a Non-United States Holder that is a corporation may
also be subject to an additional branch profits tax at a rate of 30% (or such
lower rate as may be specified by an applicable income tax treaty).
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DISPOSITION OF CLASS A COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax or withholding on any gain recognized upon the sale or
other disposition of Class A Common Stock unless: (i) such gain is effectively
connected with the conduct in the United States of a trade or business of the
Non-United States Holder, or if a tax treaty applies, the gain is attributable
to a United States permanent establishment (in either case, the branch profits
tax also may apply if the Non-United States Holder is a corporation); (ii) in
the case of Non-United States Holders who are non-resident alien individuals
and hold the Class A Common Stock as a capital asset, such individuals are
present in the United States for 183 or more days in the taxable year of
disposition and either (a) the individual has a "tax home" in the United
States for United States federal income tax purposes or (b) the gain is
attributable to an office or other fixed place of business of the individual
in the United States; (iii) the Class A Common Stock constitutes a United
States real property interest by reason of the Company's status as a "United
States real property holding corporation" ("USRPHC") for federal income tax
purposes at any time within the shorter of the five-year period preceding such
disposition or such Non-United States Holder's holding period for such Class A
Common Stock; or (iv) the Non-United States Holder is an individual who is a
former citizen of the United States who lost such citizenship within the
preceding ten-year period (or former long-term permanent resident of the
United States who relinquished U.S. residency on or after February 6, 1995)
whose loss of citizenship or permanent residency status had as one of its
principal purposes the avoidance of United States tax. If a Non-United States
Holder falls under clause (i), (iii) or (iv) above, the holder will be taxed
on the net gain derived from the sale under the graduated United States
federal income tax rates that are applicable to United States citizens,
resident aliens and domestic corporations as the case may be and may be
subject to withholding under certain circumstances (and, with respect to
corporate Non-United States Holders, may also be subject to the branch profits
tax described above.) If an individual Non-United States Holder falls under
clause (ii) above, the holder generally will be subject to United States
federal income tax at a rate of 30% on the gain derived from the sale and may
be subject to withholding under certain circumstances. In the case of an
individual Non-United States Holder to whom (iii) applies, a tax rate no lower
than the graduated rates used for alternative minimum tax purposes will be
imposed on the Non-United States Holder's net gains recognized from the
disposition of United States real property interests for the taxable year.
The Company does not expect that it will become a USRPHC for federal income
tax purposes. The Company will qualify as a USRPHC if the fair market value of
its United States real property interests equals 50 percent or more of the
aggregate fair market value of the Company's worldwide real property interests
and any other assets of the Company used or held for use in a trade or
business. If the Class A Common Stock is regularly traded on an established
securities market (the Class A Common Stock is listed on the New York Stock
Exchange), however, it will be treated as a United States real property
interest only in the case of a Non-United States Holder who owns 5 percent or
more of the value of the outstanding Class A Common Stock during the five-year
period preceding the holder's disposition of such Class A Common Stock or, if
shorter, the Non-United States Holder's holding period for such Class A Common
Stock. Generally, if the Company constitutes a USRPHC, gain realized from the
disposition of Class A Common Stock by a Non-United States Holder will be
subject to United States withholding tax equal to 10 percent of the amount
realized on the sale. However, gain realized by a Non-United States Holder
will not be subject to withholding so long as during the calendar year in
which the disposition occurs the Class A Common Stock of the Company is
regularly traded on an established securities market.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In the event the Company decides, contrary to its present intent, to pay
dividends with respect to its Class A Common Stock, then, generally, the
Company must report annually to the United States Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the
amount, if any, of tax withheld. See "Dividend Policy." A similar report is
sent to the holder. Pursuant to tax treaties or other agreements, the United
States Internal Revenue Service may make its reports available to tax
authorities in the recipient's country of residence. These information-
reporting requirements apply regardless of whether withholding was reduced or
eliminated by an applicable tax treaty or because the dividends were
effectively connected with a United States trade or business.
58
<PAGE>
Dividends paid to a Non-United States Holder that are subject to the 30% or
reduced treaty rate of withholding tax previously discussed will be exempt
from United States backup withholding tax. Otherwise, backup withholding of
United States federal income tax at a rate of 31% may apply to dividends paid
to Non-United States Holders that are not "exempt recipients" and that fail to
provide certain information regarding their foreign status in the manner
required by the Code and applicable United States Treasury Department
regulations.
Generally, United States information reporting and backup withholding will
not apply to a payment of disposition proceeds if the payment is made outside
the United States through a non-U.S. office of a non-U.S. broker. However,
information reporting requirements (but not backup withholding) will apply to
a payment of disposition proceeds outside the United States through an office
outside the United States of a broker that is (a) a United States person, (b)
a controlled foreign corporation for United States federal income tax purposes
or (c) a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding the
payment (or for such part of the period during which the foreign broker had
been in existence) was effectively connected with the conduct of a United
States trade or business, unless such broker has documentary evidence in its
files of the owner's foreign status and has no actual knowledge to the
contrary. The payment of the proceeds of the disposition of Class A Common
Stock to or through the United States office of a broker is subject to
information reporting and backup withholding at a rate of 31% unless the
holder certifies its non-United States status in accordance with applicable
certification procedures or otherwise establishes an exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the United
States Internal Revenue Service.
These withholding, backup withholding and information reporting rules are
under review by the United States Treasury, and their application to the Class
A Common Stock could be changed prospectively by future regulations. On April
15, 1996, the IRS issued proposed Treasury Regulations concerning the
withholding of tax and reporting for certain amounts paid to non-resident
individuals and foreign corporations. The proposed regulations would, among
other changes, eliminate the presumption under current regulations with
respect to dividends paid to addresses outside the United States. See
"Dividends." The proposed Treasury Regulations, if adopted in their present
form, would be effective for payments made after December 31, 1997.
Prospective purchasers of Class A Common Stock should consult their tax
advisors concerning the potential adoption of such Treasury Regulations and
the potential effect on the Class A Common Stock.
FEDERAL ESTATE TAXES
An individual Non-United States Holder who owns, or is treated as owning,
Class A Common Stock at the time of his or her death or has made certain
lifetime transfers of an interest in Class A Common Stock will be required to
include the value of such Class A Common Stock in his gross estate for United
States federal estate tax purposes, unless an applicable estate tax treaty
provides otherwise. Estates of non-resident aliens are generally allowed a
statutory credit which generally has the effect of offsetting the United
States federal estate tax imposed on the first $60,000 of the taxable estate.
59
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, dated the
date of this Prospectus (the "Underwriting Agreement"), among the Company, the
Selling Stockholders and DLJ and CS First Boston Corporation, as
representatives (the "Representatives") of the several Underwriters
(collectively, the "Underwriters"), the Underwriters have severally agreed to
purchase from the Company and the Selling Stockholders, the respective number
of shares of Class A Common Stock set forth in the table below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...... 2,608,000
CS First Boston Corporation.............................. 2,608,000
Bear, Stearns & Co. Inc. ................................ 90,000
Alex. Brown & Sons Incorporated.......................... 90,000
Dean Witter Reynolds Inc. ............................... 90,000
Dillon, Read & Co. Inc. ................................. 90,000
Goldman, Sachs & Co. .................................... 90,000
Hambrecht & Quist LLC.................................... 90,000
Lazard Freres & Co. LLC.................................. 90,000
Merrill Lynch & Co. ..................................... 90,000
J.P. Morgan Securities Inc. ............................. 90,000
Morgan Stanley & Co. Incorporated........................ 90,000
Oppenheimer & Co., Inc. ................................. 90,000
PaineWebber Incorporated................................. 90,000
Prudential Securities Incorporated....................... 90,000
Robertson, Stephens & Company LLC........................ 90,000
Schroder Wertheim & Co. Incorporated..................... 90,000
Smith Barney Inc. ....................................... 90,000
Adams, Harkness & Hill, Inc. ............................ 45,000
Arnold and S. Bleichroeder, Inc. ........................ 45,000
Barclay Investments Inc. ................................ 45,000
Barrington Capital Group, L.P. .......................... 45,000
The Chicago Corporation.................................. 45,000
Dain Bosworth Incorporated............................... 45,000
Gruntal & Co., Incorporated.............................. 45,000
C.L. King & Associates, Inc. ............................ 45,000
Ladenburg, Thalmann & Co. Inc. .......................... 45,000
McDonald & Company Securities, Inc. ..................... 45,000
Needham & Company, Inc. ................................. 45,000
Parker/Hunter Incorporated............................... 45,000
Tucker Anthony Incorporated.............................. 45,000
H.C. Wainwright & Co., Inc. ............................. 45,000
---------
Total.................................................. 7,286,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Class A Common
Stock offered hereby are subject to approval of certain legal matters by
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all the shares of the Class A Common Stock offered hereby
(other than the shares of the Class A Common Stock covered by the over-
allotment option described below) if any are taken.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the Class A Common
Stock to the public initially at the price to the public set forth on the
cover page of this Prospectus and to certain dealers (who may include the
Underwriters) at such price less a concession not to exceed $0.42 per share.
The Underwriters may allow, and such dealers may reallow, a concession not to
60
<PAGE>
exceed $0.10 per share to any other Underwriter and certain other dealers.
After the initial public offering of the Class A Common Stock, the offering
price and other selling terms may be changed by the Underwriters.
The Company and Finmeccanica have granted to the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
aggregate of 1,092,900 additional shares of Class A Common Stock solely to
cover over-allotments at the public offering price set forth on the cover page
of this Prospectus less underwriting discounts and commissions. The
Underwriters may exercise such option from time to time solely for the purpose
of covering over-allotments, if any, incurred in connection with the sale of
shares offered hereby. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite such Underwriter's name in the preceding table bears
to the total number of shares offered in the Offering.
The Underwriting Agreement also provides that the Company and the Selling
Stockholders will indemnify the Underwriters and their controlling persons
against certain liabilities and expenses, including liabilities under the
Securities Act, or contribute to payments the Underwriters may be required to
make in respect thereof.
No document issued in connection with the Offering may be passed on to any
person in the United Kingdom unless that person is of a kind described in
Article 9(3) of the Financial Services Act 1986 (Investment Advertisement)
(Exemptions) Order 1988. In addition, each Underwriter has informed the
Company that: (i) it is not carrying on an investment business in the United
Kingdom in contravention of Section 3 of the Financial Services Act 1986 (the
"UKFSA"); (ii) it has not offered or sold, and it will not offer or sell, in
the United Kingdom, by means of this Prospectus, any amendment or supplement
hereto or any other document, any of the shares of Class A Common Stock
offered hereby other than to persons whose ordinary business it is to buy or
sell shares or debentures, whether as principal or agent (except in
circumstances that do not constitute an offer to the public within the meaning
of the Companies Act of 1985 of Great Britain); (iii) subject to Part V of the
UKFSA, it will not issue or cause to be issued in the United Kingdom any
advertisement offering the shares of Class A Common Stock offered hereby which
is a primary or secondary offer within the meaning of the UKFSA except in
compliance with the provisions applicable under the UKFSA; (iv) it has not
issued or caused to be issued and it will not issue or cause to be issued in
the United Kingdom any investment advertisement within the meaning of the
UKFSA relating to the shares of Class A Common Stock offered hereby to any
person in the United Kingdom who does not fall within Article 9(3) of the
Financial Services Act 1986 (Investment Advertisement) (Exemptions) Order
1988; and (v) it has complied and will comply with all applicable provisions
of the UKFSA with respect to anything done by it in relation to the shares of
the Class A Common Stock offered hereby in, from or otherwise involving the
United Kingdom.
No action has been taken in any jurisdiction by the Company or the
Underwriters that would permit a public offering of Class A Common Stock
offered pursuant to the Offering in any jurisdiction where action for that
purpose is required, other than the United States. The distribution of this
Prospectus and the offering or sale of Class A Common Stock offered hereby may
not be offered or sold, directly or indirectly, and neither this Prospectus
nor any other offering material or advertisements in connection with the Class
A Common Stock may be distributed or published, in or from any jurisdiction,
except under circumstances that will result in compliance with applicable
rules and regulations of any such jurisdiction. Such restrictions may be set
out in applicable Prospectus Supplements. Persons into whose possession this
Prospectus comes are required by the Company and the Underwriters to inform
themselves about and to observe any applicable restrictions. This Prospectus
does not constitute an offer of, or an invitation to subscribe for purchase,
any shares of Class A Common Stock and may not be used for the purpose of an
offer to, or solicitation by, anyone in any jurisdiction or in any
circumstances in which such offer or solicitation is not authorized or is
unlawful.
The Company and certain officers, directors and stockholders of the Company
who beneficially own 1,083,408 shares of Class A Common Stock (including
options to acquire 80,000 shares of Common Stock, 1,048 shares of Common Stock
held pursuant to the ESOP and the SARP for distribution and 60,200 shares of
Common Stock held pursuant to the EIP), have agreed for a period of 180 days
after the date of this Prospectus
61
<PAGE>
not to issue, register for sale, offer, sell (or contract to sell) or
otherwise dispose of any shares of Class A Common Stock (or any security
convertible into or exercisable or exchangeable for any shares of Class A
Common Stock) or grant any options or warrants to purchase Class A Common
Stock (other than: (i) Class A Common Stock sold in the Offering; and in the
case of the Company (ii) Class A Common Stock issued upon exercise of options
to purchase Class A Common Stock that are issued and outstanding on the date
of this Prospectus; (iii) issuances of shares of Class A Comon Stock upon
conversions of shares of Class B Common Stock; and (iv) issuances of Class A
Common Stock pursuant to Diehl's Contingent Stock Right) without the prior
written consent of DLJ.
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered by the Company
hereby will be passed upon for the Company by Ropes & Gray, Boston,
Massachusetts. Howard K. Fuguet, who is a director of the Company, is a
partner of Ropes & Gray. Mr. Fuguet owns 1,000 shares of Class A Common Stock.
Certain legal matters in connection with the Offering will be passed upon for
the Underwriters by Latham & Watkins, New York, New York.
EXPERTS
The consolidated financial statements of the Company at December 31, 1995
and for the year ended December 31, 1995 appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of the Company at December 31, 1994
and December 25, 1993 and for the two years ended December 31, 1994 included
in this Prospectus have been audited by Coopers & Lybrand L.L.P., independent
accountants, as stated in their report appearing in this Prospectus, and have
been so included in reliance upon such reports of such firm given upon their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports and other information with the
Commission. The Company has furnished and intends to furnish reports to its
stockholders, which will include financial statements audited by its
independent accountants, and such other reports as it may determine to furnish
or as required by law, including Section 13(a) and 15(d) of the Exchange Act.
Reports, proxy statements and other information may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 and the Commission's regional
offices located at Seven World Trade Center, 13th Floor, New York, New York
10048 and at Citicorp Center, 500 West Madison, Suite 1400, Chicago, Illinois
60661. Copies of such materials also may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Class A Common Stock of the Company is listed on the New
York Stock Exchange. Reports and other information concerning the Company may
be inspected at the National Association of Securities System Dealers, Inc.,
1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement (which
term shall include all amendments, exhibits, schedules and supplements
thereto) on Form S-1 under the Securities Act with respect to the Class A
Common Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission, to which Registration
Statement reference is hereby made. Statements made in this Prospectus as to
the contents of any contract, agreement or
62
<PAGE>
other document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is hereby made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Registration Statement
and the exhibits thereto, may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the Commission's Regional Offices at Seven
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may
be obtained at the prescribed rates from the Public Reference Section of the
Commission at Washington, D.C. In addition, the Company is required to file
electronic versions of these documents with the Commission through the
Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) System.
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission; the address of such site is
http://www.sec.gov.
63
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ANNUAL FINANCIAL STATEMENTS OF THE COMPANY:
Report of Ernst & Young LLP............................................... F-2
Report of Coopers & Lybrand L.L.P......................................... F-3
Consolidated Statements of Operations--Years ended December 25, 1993 and
December 31, 1994 and 1995............................................... F-4
Consolidated Balance Sheets--December 31, 1994 and 1995................... F-5
Consolidated Statements of Cash Flows--Years ended December 25, 1993 and
December 31, 1994 and 1995............................................... F-6
Consolidated Statements of Shareowners' Equity--Years ended December 25,
1993 and
December 31, 1994 and 1995............................................... F-7
Notes to Consolidated Financial Statements................................ F-8
UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE COMPANY:
Consolidated Statements of Operations--Quarters ended June 30, 1995 and
1996..................................................................... F-23
Consolidated Statements of Operations--Six Months ended June 30, 1995 and
1996..................................................................... F-23
Consolidated Balance Sheets--June 30, 1995 and 1996....................... F-24
Consolidated Statements of Cash Flows--Six Months ended June 30, 1995 and
1996..................................................................... F-25
Notes to Interim Consolidated Financial Statements........................ F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareowners and Directors of Brown & Sharpe Manufacturing Company:
We have audited the accompanying consolidated balance sheet of Brown &
Sharpe Manufacturing Company as of December 31, 1995, and the related
consolidated statements of operations, shareowners' equity, and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Brown & Sharpe Manufacturing Company at December 31, 1995, and the
consolidated results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Providence, Rhode Island
February 14, 1996, except as to
Note 8, as to which the date
is August 27, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners and Directors of Brown & Sharpe Manufacturing Company:
We have audited the accompanying consolidated balance sheet of Brown &
Sharpe Manufacturing Company as of December 31, 1994 and the related
consolidated statements of operations, shareowners' equity, and cash flows for
the years ended December 25, 1993 and December 31, 1994. 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 31, 1994, and the consolidated
results of its operations and its cash flows for the years ended December 25,
1993 and December 31, 1994, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 29, 1995
F-3
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 25, 1993 AND DECEMBER 31, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Net sales........................................ $159,518 $209,369 $328,031
Cost of goods sold............................... 110,841 142,776 221,729
Selling, general and administrative expense...... 48,073 68,473 94,902
Restructuring expense............................ -- 4,169 336
-------- -------- --------
Operating profit (loss)........................ 604 (6,049) 11,064
Interest expense................................. 5,100 6,575 9,129
Other income, net................................ 2,880 689 688
-------- -------- --------
Income (loss) before income taxes.............. (1,616) (11,935) 2,623
Income tax provision............................. 800 2,400 697
-------- -------- --------
Net income (loss).............................. $ (2,416) $(14,335) $ 1,926
======== ======== ========
Primary and fully diluted income (loss) per
common share.................................... $ (0.49) $ (2.37) $ 0.22
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 6,676 $ 6,262
Accounts receivable, net of allowances for doubtful
accounts of $3,103 and $3,030........................... 108,234 113,579
Inventories.............................................. 88,639 88,558
Deferred income taxes.................................... 2,000 3,322
Prepaid expenses and other current assets................ 5,981 5,436
-------- --------
Total current assets................................... 211,530 217,157
Property, plant and equipment:
Land..................................................... 6,858 7,141
Buildings and improvements............................... 33,124 37,447
Machinery and equipment.................................. 85,583 95,482
-------- --------
125,565 140,070
Less-accumulated depreciation.............................. 80,210 87,183
-------- --------
45,355 52,887
Goodwill, net.............................................. 1,875 11,529
Other assets............................................... 13,514 13,827
-------- --------
$272,274 $295,400
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Notes payable and current installments of long-term
debt.................................................... $ 22,398 $ 45,229
Accounts payable......................................... 36,896 44,936
Accrued expenses and income taxes........................ 49,353 39,423
-------- --------
Total current liabilities.............................. 108,647 129,588
Long-term debt............................................. 70,215 56,839
Other long-term liabilities................................ -- 6,310
Deferred income taxes...................................... 1,737 2,765
Unfunded accrued pension cost.............................. 5,035 5,823
Termination indemnities.................................... 7,715 8,218
Shareowners' Equity:
Preferred stock, $1 par value; authorized 1,000,000
shares; none issued..................................... -- --
Common stock:
Class A, par value $1; authorized 15,000,000 shares;
issued 8,122,086 shares in 1994 and 8,195,795 in 1995... 8,122 8,196
Class B, par value $1; authorized 2,000,000 shares;
issued 534,821 shares in 1994 and 522,575 in 1995....... 535 523
Additional paid-in capital............................... 66,412 66,863
(Deficit) earnings employed in the business.............. (9,958) (8,032)
Cumulative foreign currency translation adjustment....... 14,530 18,926
Treasury stock; 7,492 shares in 1994 and 23,592 shares in
1995, at cost............................................. (151) (270)
Unearned compensation...................................... (565) (349)
-------- --------
Total shareowners' equity.............................. 78,925 85,857
-------- --------
$272,274 $295,400
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 25, 1993 AND DECEMBER 31, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATIONS:
Net Income (Loss).................................. $(2,416) $(14,335) $ 1,926
Adjustment for Noncash Items:
Depreciation and amortization.................... 6,355 6,743 11,010
Pension credits and charges...................... 269 212 1,369
Deferred income taxes............................ 500 (1,900) 376
Gain on sale of operations....................... (2,182) -- --
Termination indemnities.......................... -- -- 331
Deferred compensation............................ 55 213 216
Changes in Working Capital:
Accounts receivable.............................. (8,204) (15,912) (4,324)
Inventories...................................... 957 7,103 (7,389)
Prepaid expenses and other current assets........ 323 1,001 1,208
Accounts payable and accrued expenses............ (1,455) 6,693 (4,798)
------- -------- --------
Net Cash (Used in) Operations.................. (5,798) (10,182) (75)
------- -------- --------
INVESTMENT TRANSACTIONS:
Capital expenditures............................... (4,399) ( 8,929) (12,054)
Proceeds from dispositions......................... 599 3,456 2,096
Proceeds from sale of operations................... 8,700 -- --
Cash equivalent pledged............................ (6,078) 6,078 --
Other investing activities......................... (563) (1,988) (445)
------- -------- --------
Net Cash (Used in) Investment Transactions..... (1,741) (1,383) (10,403)
------- -------- --------
FINANCING TRANSACTIONS:
Increase (decrease) in short-term debt............. 5,810 (16,420) 10,915
Proceeds from issuance of long-term debt........... -- 33,500 --
Principal payments of long-term debt............... (1,000) (1,661) (3,444)
Other financing transactions....................... -- 353 (600)
------- -------- --------
Net Cash Provided by Financing Transactions.... 4,810 15,772 6,871
------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............ 183 375 3,193
------- -------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) during the year................ (2,546) 4,582 (414)
Beginning balance.................................. 4,640 2,094 6,676
------- -------- --------
Ending balance..................................... $ 2,094 $ 6,676 $ 6,262
======= ======== ========
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid...................................... $ 4,942 $ 6,223 $ 8,004
======= ======== ========
Taxes paid......................................... $ 1,158 $ 1,496 $ 2,598
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 25, 1993 AND DECEMBER 31, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(DEFICIT) 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 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................ -- -- (14,335) -- -- --
Acquisitions............ 3,625 20,413 -- -- -- --
Treasury Stock
Transactions........... -- -- -- -- 12 --
Restricted Stock
Awards................. 10 (8) -- -- -- 213
ESOP Contribution....... 42 297 -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- 5,136 -- --
------ ------- -------- ------- ----- -----
Balance December 31,
1994................... 8,657 66,412 (9,958) 14,530 (151) (565)
------ ------- -------- ------- ----- -----
Net Income.............. -- -- 1,926 -- -- --
Treasury Stock
Transactions........... -- -- -- -- (119) --
Restricted Stock
Awards................. -- 153 -- -- -- 216
ESOP Contribution....... 62 298 -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- 4,396 -- --
------ ------- -------- ------- ----- -----
Balance December 31,
1995................... $8,719 $66,863 $ (8,032) $18,926 $(270) $(349)
====== ======= ======== ======= ===== =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Brown & Sharpe Manufacturing Company is a multinational manufacturer of
metrology products, which include manual and computer-controlled, high
precision machines; mechanical and electronic measuring and inspection tools;
and specialty products and systems. The principal markets for its products are
North America, Europe, Asia, South America and the Middle East. The primary
end user markets for its products are the automotive, aerospace, industrial
machinery, electronics and computer industries.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and all subsidiaries. Intercompany transactions have been eliminated from the
consolidated financial statements. Investments in 20% to 50% part-owned
affiliates are accounted for on the equity method.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Company's fiscal year ended on the last day of the calendar
year in 1995 and 1994 and the last Saturday in December 1993. Results for 1995
and 1993 include 52 weeks, while 1994 had 53 weeks.
INVENTORY VALUATION
Inventories are stated at the lower of cost or market. Cost is determined on
a last-in, first-out (LIFO) basis for all domestic inventories in 1995 (40% of
cost in 1994) and principally on a first-in, first-out (FIFO) basis for
inventories outside the United States. Provision is made to reduce slow-moving
and obsolete inventories to net realizable values. Current FIFO cost exceeds
the LIFO value of inventories by approximately $12,473 and $12,293 at December
31, 1994 and 1995, respectively. Year-end inventories valued under the LIFO
method were $7,231 in 1994 and $16,081 in 1995. During 1993 and 1994,
quantities for certain segments of the LIFO inventories were reduced. The
reductions resulted in liquidation of LIFO quantities carried at lower costs
prevailing in prior years compared with the cost of current purchases, the
effect of which decreased net loss by $749 ($0.15 per share) and $631 ($0.10
per share) in 1993 and 1994, respectively.
The composition of inventory at year-end was as follows:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Parts, raw materials and supplies........................ $42,665 $39,857
Work in progress......................................... 17,069 15,906
Finished goods........................................... 28,905 32,795
------- -------
$88,639 $88,558
======= =======
</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. Depreciation
expense was $5,862, $6,442,
F-8
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and $8,980 in 1993, 1994, and 1995, respectively. Repair and maintenance costs
are charged against income while renewals and betterments are capitalized as
additions to the related assets. Retirements, sales and disposals of assets
are recorded by removing the cost and accumulated depreciation from the asset
and accumulated depreciation accounts with any resulting gain or loss
reflected in income. At December 31, 1995, land and buildings with a book
value of $19,973 were pledged as collateral for mortgage loans of $26,800.
GOODWILL
Goodwill, which is net of accumulated amortization of $154 in 1994 and $771
in 1995, is being amortized on a straight-line basis over periods ranging from
7 to 20 years.
OTHER ASSETS
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Prepaid pension.............................................. $ 5,106 $ 4,673
Equity investments........................................... 1,956 2,492
Other........................................................ 6,452 6,662
------- -------
$13,514 $13,827
======= =======
</TABLE>
REVENUE RECOGNITION
The Company records revenue upon shipment other than for long-term
contracts, upon rendering of service for installation and training, and
ratably over the contract period for service contracts. Sales under long-term
contracts are recorded using the percentage of completion method, wherein
costs and estimated gross margin are recorded as sales during the period the
work is being performed. Estimated gross margin is based on the total contract
sales value and the most recent estimate of total costs. When the current
contract estimate indicates a loss, a provision is made for the total
anticipated loss.
FOREIGN CURRENCY
Assets and liabilities of those subsidiaries located outside the United
States whose cash flows are primarily in local currencies are translated at
year-end exchange rates, and income and expense items are translated at
average monthly rates. Translation gains and losses are accounted for in a
separate shareowners' equity account "cumulative foreign currency translation
adjustment."
There were no forward exchange contracts outstanding at December 31, 1994
and 1995. Transaction gains were recorded in 1993, 1994, and 1995 of $157,
$1,064, and $601, respectively. Transaction gains in 1995 includes an
adjustment, which increased the gain, amounting to $640 ($0.07 per share),
after taxes, relating to a revaluation of a 1994 foreign denominated liability
that was incorrectly recorded at historical, rather than current, foreign
exchange rate in the Company's consolidated financial statements issued in
prior years. Prior year financial statements were not restated due to the
immaterial effect on the previously-issued financial statements.
CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and trade receivables. The Company places its temporary cash
investments with high credit quality financial institutions and, by policy,
limits the amount of credit exposure to any one financial institution.
Concentrations of credit risk with respect to trade receivables are limited
due to the Company's large number of customers and their dispersion across
many different industries and countries worldwide. At December 31, 1995, the
Company had no significant concentrations of credit risk.
F-9
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK INCENTIVE PLANS
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees," and intends
to continue to do so.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company does not provide postretirement or postemployment benefits as
contemplated by SFAS 106 and SFAS 112, respectively, and accordingly these
statements have no impact upon the Company's financial position or results of
operations.
INCOME TAXES
The Company provides for income taxes under the provisions of SFAS No. 109
"Accounting for Income Taxes." SFAS No. 109 requires an asset and liability
based approach in accounting for income taxes.
Deferred income tax assets and liabilities are recorded to reflect the tax
consequences on future years of temporary differences of revenue and expense
items for financial statement and income tax purposes. Valuation allowances
are provided against assets which are not likely to be realized. Federal
income taxes are not provided on the unremitted earnings of foreign
subsidiaries since it has been the practice and is the intention of the
Company to continue to reinvest these earnings in the business outside the
United States.
NET INCOME (LOSS) PER SHARE
Net income per share is computed based on the weighted average number of
shares of common stock and common stock equivalents outstanding during each
year, while net loss per share is based only on the weighted average number of
shares of common stock. Common stock equivalents are additional shares which
may be issued upon the exercise of dilutive stock options using the average
market price of the Company's common stock during the year for primary
earnings per share and market price at the end of the year for fully diluted
earnings per share. Conversion of the convertible subordinated debentures (see
Note 6) was not assumed in the 1995 computation of fully diluted net income
(loss) per share because such conversion was antidilutive. Shares used to
compute net income (loss) per share were 4,969,543 in 1993, 6,057,090 in 1994,
and 8,772,748 in 1995.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of cash on hand, deposits in banks,
and short-term marketable securities with a maturity at acquisition of three
months or less.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company has not yet adopted Statement of Financial Accounting Standards
(FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which is effective for the Company's
1996 fiscal year. The Company does not anticipate that the Statement will have
a material effect on the statement of operations or financial position upon
adoption.
RECLASSIFICATIONS
Prior to 1996, agents' commissions were netted against net sales. Effective
January 1, 1996, the Company elected to classify agents' commissions as
selling, general and administrative expense. As a result, net sales and
selling, general and administrative expense have been adjusted for prior
periods. The effect of such reclassification was to increase net sales and
selling, general and administrative expense by $2,756, $4,809, and
F-10
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$7,685 for the years ended December 25, 1993 and December 31, 1994 and 1995,
respectively. Also effective January 1, 1996, miscellaneous income was
reclassified from net sales to other income. The effect of this
reclassification was to decrease net sales and increase other income by $273,
$440 and $553 for the years ended December 25, 1993 and December 31, 1994 and
1995, respectively. Certain other amounts reported in 1993 and 1994 have been
reclassified to conform with the 1995 presentation.
2. ACQUISITIONS
DEA
Brown & Sharpe Manufacturing Company, together with its subsidiary Brown &
Sharpe International Capital Corporation, acquired on September 28, 1994, the
stock of DEA S.p.A., an Italian corporation, and its related metrology
business from Finmeccanica S.p.A., an Italian corporation, for 3,450,000
shares of Class A Common Stock with a market value amounting to $22,856. In
addition, the Company incurred professional accounting, legal, and other costs
of $2,301 in conjunction with the acquisition which have been accounted for as
part of the purchase price. The acquisition has been accounted for as a
purchase. Accordingly, the Company's consolidated balance sheet at October 1,
1994 included the assets and liabilities of DEA S.p.A. and its subsidiaries.
The Company's consolidated statements of operations and cash flows includes
the results of operation of DEA S.p.A. and its subsidiaries commencing October
2, 1994.
The DEA purchase agreement provided for a post-closing adjustment to the
purchase price based upon the final valuation of the acquired assets and
assumed liabilities which occurred in 1995. No such adjustment was made.
However, differences in final valuation calculations resulted in a settlement
whereby Finmeccanica S.p.A. waived lease payments of approximately $1,000 for
a DEA facility leased from Finmeccanica. (See Note 12.)
Because DEA was acquired late in 1994 and was a complex worldwide operation
that required a comprehensive review of asset values and liabilities and a
significant part of the study had to take into consideration the integration
of DEA into the Measuring Systems Group, the final assessment of asset values,
restructuring the manufacturing and marketing organization, and making other
necessary changes was not completed until the third quarter of 1995. The
determination of the final fair values resulted in adjustments consisting of
changes from initially determined values as of September 28, 1994 amounting to
an increase in goodwill; property, plant and equipment; deferred income taxes;
and other assets amounting to $10,360, $4,142, $1,800, and $1,044,
respectively, and a decrease in inventory and accounts receivable amounting to
$12,582 and $1,175, respectively. Adjustments to other balance sheet amounts
were individually not significant.
As a result of the adjustments to the preliminary 1994 estimates, net income
for 1995 increased approximately $350 ($0.04 per share).
ROCH
Brown & Sharpe Manufacturing Company through its subsidiary Brown & Sharpe
International Capital Corporation purchased, on March 24, 1994, the stock of
the French company Ets. Pierre Roch S.A. ("Roch") and its German affiliate,
Mauser Prazisions--Messmittel GmbH ("Mauser"). The business is headquartered
in Luneville, France which is its sole manufacturing site. The German
operation is a sales office. These operations were purchased from Diehl GmbH &
Co. of Nurnberg, Germany ("Diehl").
The purchase price was 175,000 shares of Brown & Sharpe Class A Common
Stock, subject to certain post closing adjustments and the right to receive an
additional 50,000 shares of such stock in the event the Company's Class A
Common Stock attains a market price of $15 or more per share for a total of 30
days or more during any twelve month period within the five years following
the purchase. The purchase price was determined through negotiation by the
parties subject to adjustment based on specified closing balance sheet
changes. The
F-11
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
final purchase price adjustment has not yet been made. Negotiations to
finalize the amount of the adjustment are expected to be complete by June of
1996.
The acquisition has been accounted for by the purchase method of accounting,
and accordingly, the purchase price has been allocated to assets acquired and
liabilities assumed based on an estimate of their fair values at the date of
acquisition.
PRO FORMA COMBINED (UNAUDITED)
The Company's unaudited Pro Forma combined results of operations for the
years ended December 25, 1993 and December 31, 1994 assuming the acquisition
of DEA and Roch occurred at the beginning of 1993, are as follows:
<TABLE>
<CAPTION>
1993 1994
<S> <C> <C>
Net sales............................................... $282,225 $277,216
Net income (loss)....................................... $ 8,924 $(11,441)
Primary and fully diluted net income (loss) per common
share.................................................. $ 1.08 $ (1.89)
</TABLE>
3. RESTRUCTURING CHARGES
Results of operations for 1995 include restructuring charges of $336 ($0.03
per share) compared with 1994 which include charges of $4,169 ($0.69 per
share). These charges consist principally of Brown & Sharpe employee severance
and Brown & Sharpe sales offices closing costs of $336 and $2,348 for 1994 and
1995, respectively, associated with integrating Brown & Sharpe's existing
operations with those of DEA mainly outside the U.S. Other cash costs of
integrating DEA were incurred but were accounted for as part of the purchase
price accounting of the acquisition. Also, costs of $1,821 were recorded for
1994 severance of 38 employees and property, plant, and equipment and
inventory write-offs due to a plant closing in Switzerland arising from the
acquisition of Roch, which is discussed in Note 2. Of these costs, $420 was
paid in 1994 and $3,202 in 1995. The balance $547 represents non-cash costs.
4. INCOME TAXES
Income (loss) before income taxes consisted of the following:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Domestic........................................ $ 1,394 $ (1,338) $(4,850)
Foreign......................................... (3,010) (10,597) 7,473
------- -------- -------
Income (loss) before income taxes............. $(1,616) $(11,935) $ 2,623
======= ======== =======
</TABLE>
The following table reconciles the income tax provision (benefit) at the
U.S. statutory rate to that in the financial statements:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Taxes computed at 34%................................ $ (491) $(4,058) $ 892
Goodwill amortization................................ -- -- 158
Additional tax on foreign income..................... -- 1,459 113
Alternative minimum and state taxes.................. 200 250 31
Net operating losses and other losses................ 1,091 4,749 (636)
Other (net).......................................... -- -- 139
------ ------- -----
Income tax provision............................... $ 800 $ 2,400 $ 697
====== ======= =====
</TABLE>
F-12
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The income tax provision (benefit) consisted of the following:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Current:
Federal........................................... $ 500 $ 3,250 $ (996)
State............................................. 300 250 31
Foreign........................................... 500 800 1,286
------ ------- ------
1,300 4,300 321
------ ------- ------
Deferred:
Federal........................................... -- (1,000) 996
Foreign........................................... (500) (900) (620)
------ ------- ------
(500) (1,900) 376
------ ------- ------
Income tax provision................................ $ 800 $ 2,400 $ 697
====== ======= ======
</TABLE>
Provision has not been made for U.S. taxes on $39,000 of cumulative
undistributed earnings of foreign subsidiaries as those earnings are intended
to be permanently reinvested.
The components of the Company's deferred tax assets and liabilities as of
December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Deferred tax assets:
Inventory reserves........................................ $ 2,429 $ 8,553
Warranty expense.......................................... 400 928
Provision for doubtful accounts........................... 300 226
Depreciation.............................................. 3,044 1,722
Tax credit and loss carryforwards......................... 37,600 46,293
Other..................................................... 404 4,827
------- -------
Gross deferred assets................................... 44,177 62,549
Less valuation allowance.................................... 38,100 53,590
------- -------
Deferred tax asset...................................... $ 6,077 $ 8,959
======= =======
Deferred tax liabilities:
Pension expense........................................... $ 1,542 $ 1,542
Inventory reserves........................................ 1,196 1,665
Depreciation.............................................. 2,752 2,288
Other..................................................... 324 2,907
------- -------
Deferred tax liability.................................. $ 5,814 $ 8,402
======= =======
</TABLE>
A valuation allowance has been established due to the uncertainty of
realizing certain tax credit and loss carryforwards and a portion of the other
deferred tax assets. The valuation allowance has been increased by $15,490
during 1995. The recognition of any future tax benefits resulting from the
elimination of $21,300 of the valuation allowance will reduce any goodwill
remaining at the time of such elimination.
For income tax purposes, the Company has operating loss and capital loss
carryforwards of $2,000 and $3,500, respectively, in the U.K. and net
operating loss carryforwards of $26,700, $38,500, $5,000, and $22,700,
respectively, in Switzerland, Germany, France, and Italy. The Swiss, French,
and Italian carryforwards expire between 1996 and 2001. There is no time limit
for the U.K. and German carryforwards.
F-13
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's domestic income tax return for the 1993 fiscal year is under
examination by the Internal Revenue Service. The Company believes it has made
adequate provision for assessments (if any) which may arise as a result of
this audit.
5. SHORT-TERM BORROWINGS
Outstanding short-term borrowings were $19,193 at December 31, 1994 and
$28,061 at December 31, 1995. Substantially all domestic assets of the Company
are pledged as collateral. Certain borrowing agreements contain covenants
which, among other things, require the Company to maintain certain financial
ratios and restricts the payment of dividends.
Amounts outstanding under Brown & Sharpe's lines of credit, excluding the
Facility, are generally payable on demand, and certain of the lines extended
to Brown & Sharpe's foreign subsidiaries are secured by other assets. The
Facility provides for demand borrowings based on a percentage of eligible
domestic accounts receivable and finished and certain other inventory and, is
secured by substantially all domestic assets. At December 31, 1995, Brown &
Sharpe had borrowings of $28.1 million under all short term lines of credit
compared to total availability at that date of $74.1 million under the lines
of credit. Certain of the domestic and foreign lines of credit provide
availability of borrowing capacity and funds only to the degree of
availability of certain kinds of eligible receivables. At December 31, 1995,
$17.6 million of the total lines of credit were restricted to foreign eligible
receivables and also to certain foreign countries, of which $16.5 million was
available for future use.
No compensating balances were required at December 31, 1994 and 1995. A
credit line of $3,261 in the U.K. is collateralized by the assets in that
country, and the Company has also guaranteed borrowings up to $776. The
weighted average interest rates on short-term borrowings were 7.3% and 7.7% in
1994 and 1995, respectively.
6. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
9 1/4% convertible subordinated debentures due December,
2005......................................................... $15,000 $14,000
Mortgages at rates ranging from 7.75% to 8.75%................ 27,619 26,800
Notes payable, due September 28, 1997 with quarterly interest
of Libor plus 0.60%.......................................... 25,000 25,000
Notes payable, due various dates with interest rates ranging
from 2.10% to 12.39%......................................... 5,801 8,207
------- -------
73,420 74,007
Less: current installments.................................... 3,205 17,168
------- -------
Total long-term debt........................................ $70,215 $56,839
======= =======
</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 with the final $5,000
payable at maturity. At December 31, 1995, 533,333 shares of Class A Common
Stock were reserved for issuance upon conversion of these debentures. Annual
maturities of long-term debt are as follows: 1996--$17,168; 1997--$30,888;
1998--$3,359; 1999--$8,493; 2000--$2,351; and $11,748 thereafter. Interest
rates on long- term debt average approximately 9% in 1995.
F-14
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The $25,000 notes payable are guaranteed by Finmeccanica in connection with
the acquisition of DEA. In return, the Company's reimbursement obligation is
secured by a guarantee by DEA pursuant to an agreement between DEA and
Finmeccanica.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company values the financial instruments as required by Statement of
Financial Accounting Standards No. 107. The carrying amounts of cash and cash
equivalents, short-term debt, and long-term variable-rate debt approximates
fair value. The fair value of the Company's 9 1/4% subordinated debentures
approximates $14,000 based on the quoted market prices.
8. CONTINGENCIES
On April 7, 1995, the U.S. Court of Appeals for the District of Columbia
Circuit rendered a decision on the second appeal by the International
Association of Machinists and Aerospace Workers (the "IAM") of a supplemental
decision and order of the National Labor Relations Board ("NLRB") reaffirming
an April 1986 decision of the NLRB dismissing reinstated unfair labor practice
charges brought against the Company by the IAM in September 1982. These
charges arose out of a strike which began at the Company's Rhode Island
operations in October 1981. Although the NLRB had previously upheld dismissal
of the reinstated unfair labor practice charges, the Appeals Court in its 1995
decision stated that the NLRB failed to articulate and apply a judicially
acceptable standard to determine whether certain evidence offered, and
characterized by the IAM as being newly discovered, was material and of
sufficient nature to justify tolling the statute of limitations so as to
permit the filing of the reinstated unfair labor practice charges. Based on
the foregoing, the Court vacated the judgment of the NLRB favorable to the
Company and remanded the case back to the NLRB for further proceedings to
determine these evidentiary issues and their effect on the application of the
statute of limitations to the reinstated unfair labor practice charges. On
August 16, 1996, the NLRB issued a second supplemental decision and order
finding in favor of the Company on the issue presented and dismissed the IAM
complaint. Management of the Company and its counsel believe that, should the
IAM appeal, an appeal is not likely to be successful and that a finding of
liability against the Company in this matter is remote.
The Company is involved in a lawsuit which arose out of an environmental
proceeding in which the United States Environmental Protection Agency ("EPA")
identified Brown & Sharpe as a potentially responsible party ("PRP") at a
waste disposal site (the "Site") in Rhode Island listed on the EPA's National
Priority List for clean-up and future monitoring remedial action under the
Superfund legislation. While the Company's proportionate share of the total
waste contributed to the Site was minimal in volume and toxicity, the EPA
nevertheless issued an Administrative Order against the Company and other PRPs
to clean up the Site. Subsequently, the Company was permitted by the EPA to
settle its liability at such Site in exchange for releases from the EPA and
the State of Rhode Island and contribution protection from claims of any third
parties who may have liability at the Site. On January 2, 1991, a group of
non-settling major PRPs at the Site brought suit in the Federal District Court
in Rhode Island against all of the settling parties, including the Company, to
recover a portion of their past and anticipated future costs of performing the
clean-up remedy. The Court entered a summary judgment in favor of the Company
and other settling parties on October 30, 1992. The non-settling group of
major PRP's appealed that ruling and have subsequently brought suit against
the EPA seeking to have the settlements of the de minimis settling parties set
aside. The Company is vigorously defending this lawsuit and believes that the
release and contribution protection obtained from the EPA in connection with
settlement of its liability at the Site will ultimately bar the cost-recovery
claim.
On March 1, 1995, the Company received a notice from the State of New York
asserting a claim against it, along with a group of approximately ten other
companies, to recover costs incurred by the New York State
F-15
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Department of Environmental Conservation to clean up a waste disposal site in
Poughkeepsie, NY. The State has alleged that the Company's former subsidiary,
Standard Gage Company, Poughkeepsie, NY, which was merged with and into the
Company, contributed hazardous waste to the site for disposal and that the
Company is a potentially responsible party as the surviving corporation to the
merger. The total claim asserted by the State against all parties is
approximately $500, and it has expressed a willingness to settle its claim
with all PRP's receiving the notice. The Company is continuing to investigate
the basis for this claim and estimates that any potential loss it might incur
as a result of any involvement or settlement at this site would not be
material.
The Company is also involved in several product liability claims and
lawsuits which are incidental to the conduct of its business, the potential
liability for which is adequately covered by insurance or reserves established
for such contingencies. The Company is contesting or defending these claims
and suits and management believes that the ultimate liability, if any,
resulting from these matters will not have a material effect on the Company's
financial position.
9. INCENTIVE AND RETIREMENT PLANS
STOCK INCENTIVE PLANS
Under the provisions of the Company's 1989 Equity Incentive Plan (the
"EIP"), as amended on May 3, 1995 to increase by 500,000 the number of shares
authorized for delivery in connection with awards, a variety of stock and
stock based incentive awards, including stock options and restricted and
unrestricted stock, are available to be granted to eligible key employees of
the Company and its subsidiaries. The EIP permits the granting of stock
options which qualify as incentive stock options under the Internal Revenue
Code and non-statutory options which do not so qualify. During 1995, there
were no awards of restricted stock, and during 1994, a total of 10,000 shares
of restricted Class A Common Stock utilizing newly issued shares were made
under the EIP. Since the inception of the EIP, 102,300 restricted shares of
Class A Common Stock have been awarded net of forfeitures. The awards of
restricted stock vest over a five year period with 25% of the award vesting at
the end of the 2nd and 3rd years and 50% at the end of the 5th year with the
unvested shares being subject to forfeiture if the recipient's employment is
terminated. Unearned compensation in the amount of $349 is being amortized to
expense over the forfeiture lapsing period for these awards of restricted
stock. In 1994 and 1995, options to purchase a total of 145,000 and 528,000
shares, respectively, during ten year periods of Class A Common Stock were
granted at exercise prices between $6.50 and $10.75 per share. The options
granted in 1995 become exercisable either with respect to 50% of the award
after 2 years and 25% after 3 and 4 years from the date of the award or 50% of
the award after 2 years and 50% after 3 years from the date of the award. The
options granted in 1994 were exercisable at any time after the date of the
awards. The exercise price for shares covered by options awarded under the EIP
is 100% of the market value on the date such options are granted. The
aggregate amount of shares of Class A Common Stock, including options, which
may be awarded under the EIP is 875,000 shares and the amount of shares of
Class A Common Stock including forfeitures remaining available for issuance
under the EIP in connection with future awards is 124,700 shares.
No further options or other awards may be granted under the Company's
Amended 1973 Stock Option Plan (the "73 Plan"). The exercise price for shares
of Class A Common Stock covered by outstanding options under the 73 Plan is
100% of the market value on the dates such options were granted. Options
granted under the 73 Plan became exercisable one year after the date of grant
and expire at the end of ten years. On December 31, 1995, options for 17,997
shares of Class A Common Stock were outstanding and exercisable at prices
between $12.94 and $17.86. Option activity under both the EIP and 73 Plan
during the past three years is summarized as follows:
F-16
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES PRICE RANGE
<S> <C> <C>
Outstanding December 26, 1992......................... 145,192 $10.25 - $17.86
Forfeited or canceled............................... (21,666) 10.78 - 12.13
-------
Outstanding December 25, 1993......................... 123,526 10.25 - 17.86
Granted............................................. 145,000 6.50
Forfeited or canceled............................... (50,529) 12.47 - 13.10
-------
Outstanding December 31, 1994......................... 217,997 6.50 - 17.86
Granted............................................. 528,000 6.75 - 10.75
Forfeited or canceled............................... (80,000) 6.50 - 16.38
-------
Outstanding December 31, 1995......................... 665,997 6.50 - 17.86
=======
</TABLE>
PROFIT INCENTIVE PLAN
Under the provisions of the Company's Amended Profit Incentive Plan as
originally approved in 1979, awards of cash and supplemental awards of
restricted shares of restricted common stock valued at 100% of market on the
date of grant vesting ratably over a five year period and subject to
forfeiture conditions, could be made as bonuses to certain management
employees. Following an amendment of the Plan in 1994, the Plan feature
providing for awards of stock was eliminated resulting in the Plan being a
cash only bonus Plan. Plan awards provisions under the Plan in the amounts of
$601, $310 and $1,157 were made in 1993, 1994, and 1995, respectively, and
there were no awards of stock made in 1993, 1994 or 1995.
LONG-TERM DEFERRED CASH INCENTIVE PLAN
In February 1996, the Board of Directors approved "The Brown & Sharpe Key
Employee Long-Term Deferred (unfunded) Cash Incentive Plan" (the "LTDCIP"),
which was effective for 1995. The LTDCIP provides for deferred cash payments
upon retirement or termination of employment, subject to vesting three years
after the end of the year for which it is earned. Annual total plan awards are
calculated at 6% of adjusted pretax income and shared by the plan participants
(currently eight key executives of the Company) pro rata based on annual
salary paid. The 1995 consolidated financial statements contain a provision
amounting to $200.
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 1993, 1994, and 1995 was $705, $793, and $941,
respectively.
STOCK OWNERSHIP PLAN
Under the provisions of the Company's Employee Stock Ownership Plan (ESOP),
the Company may make contributions of common stock or cash to purchase common
stock from the Company or otherwise, to be held in trust for employees meeting
certain eligibility requirements until the employees reach retirement age. The
ESOP may also borrow funds to purchase common shares, for which the Company
will contribute amounts as necessary to pay down the indebtedness. ESOP
expense was $327 in 1993, $360 in 1994, and $433 in 1995. At December 31,
1995, there were no unallocated shares of Class A Common Stock and Class B
Common Stock held in the ESOP as all shares were allocated to participants'
accounts.
F-17
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
RETIREMENT PLANS
The Company's subsidiaries have a defined contribution retirement plan
covering employees in Switzerland and two defined benefit retirement plans
covering employees in the U.K. and Germany, which includes substantially all
employees. Retirement plan expense net of pension income for 1993, 1994, and
1995 was $1,223, $1,593, and $1,369, 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 9.0% at the
end of 1994 and 8.0% at the end of 1995, a long-term return on assets of 10.0%
in 1993, 8.0% in 1994, and 9.0% in 1995, and annual wage increases of 8.0% at
the end of 1994 and 7.0% at the end of 1995. Retirement costs accrued are
funded.
The German plan's actuarial assumptions used a settlement rate of 7.5% and
7.0% at the end of 1994 and 1995 and an annual wage increase of 4.5% at the
end of 1994 and 1995. 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 25, 1993 and December 31, 1994 and
1995:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Service cost-benefits earned..................... $ 664 $ 797 $ 823
Interest cost on projected benefit obligations... 743 943 1,263
Return on plan assets, net....................... (1,200) 1,007 (3,049)
Net amortization and deferral.................... (345) (2,948) 909
------- ------- -------
Net periodic pension income.................... $ (138) $ (201) $ (54)
======= ======= =======
</TABLE>
The plan has assets in excess of the accumulated benefit obligations. Plan
assets include investments in equity securities, corporate and government debt
securities, and cash equivalents. The following table presents a
reconciliation of the funded status of the plan at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Vested and accumulated benefit obligation............... $(16,311) $(12,012)
======== ========
Projected benefit obligation............................ $(18,420) $(15,126)
Plan assets at fair value............................... 31,290 20,726
-------- --------
Funded status........................................... 12,870 5,600
Unrecognized portion of net assets...................... (7,764) (927)
-------- --------
Prepaid pension......................................... $ 5,106 $ 4,673
======== ========
</TABLE>
F-18
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following items are the components of net periodic pension cost for the
unfunded German plan for the years ended December 25, 1993 and December 31,
1994 and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Service cost-benefits earned......................... $112 $ 97 $ 107
Interest cost on projected benefit obligations....... 295 316 372
---- ------- -------
Net periodic pension cost............................ $407 $ 413 $ 479
==== ======= =======
Vested and accumulated benefit obligation............ $(3,330) $(4,700)
======= =======
Projected benefit obligation......................... $(4,617) $(5,519)
Unrecognized net gain................................ (418) (304)
------- -------
Unfunded accrued pension cost........................ $(5,035) $(5,823)
======= =======
</TABLE>
10. RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense was $4,855, $5,694, and $10,762 in 1993,
1994, and 1995, respectively.
11. OTHER INCOME AND EXPENSE
Other income (expense), net includes:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Interest income........................................... $ 266 $468 $540
Gain (loss) on sale of fixed assets....................... 44 (284) (90)
Gain on sale of operations................................ 2,182 -- --
Other income.............................................. 388 505 238
------ ---- ----
$2,880 $689 $688
====== ==== ====
</TABLE>
12. RENTAL EXPENSE AND LEASE COMMITMENTS
At December 31, 1995, the Company was obligated under operating leases
expiring on various dates. Rental expense was $3,845, $4,157, and $9,767, in
1993, 1994, and 1995, respectively. Annual rental commitments under
noncancelable leases pertaining principally to buildings and equipment at
December 31, 1995 are $6,919, $3,706, $2,200, $1,028, and $858 for the years
1996 through 2000, and aggregate to $4,391 for all years subsequent to 2000.
In addition, DEA is the lessee under a lease agreement with the Elsag Bailey
Division of Finmeccanica with respect to its principal headquarters facility
located in Moncalieri, Italy. The lease expires on December 31, 1997, and the
annual rental amount under such lease is approximately $861. (See Note 2.)
Expenditures under this lease after DEA's scheduled vacating of the facility
in September 1996 has been waived by Finmeccanica as part of the purchase
price adjustment settlement.
F-19
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA
SEGMENT INFORMATION
The Company operates exclusively in the Metrology Business. See Note 1 for a
further description of the Company's business. European sales to unaffiliated
customers are defined as sales of products that are primarily assembled in a
foreign country.
<TABLE>
<CAPTION>
1993 1994 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
GEOGRAPHIC AREA:
Sales to Unaffiliated Customers From:
United States................................ $ 80,857 $ 93,061 $128,482
Europe....................................... 78,661 116,308 199,549
-------- -------- --------
$159,518 $209,369 $328,031
======== ======== ========
Transfers Between Geographic Areas:
United States................................ $ 4,040 $ 3,144 $ 3,870
Europe....................................... 12,365 19,288 33,713
-------- -------- --------
$ 16,405 $ 22,432 $ 37,583
======== ======== ========
Operating Profit (Loss):
United States................................ $ 5,151 $ 1,303 $ 492
Europe....................................... (4,547) (7,352) 10,572
-------- -------- --------
$ 604 $ (6,049) $ 11,064
======== ======== ========
Identifiable Assets:
United States................................ $ 39,521 $ 74,252 $ 77,726
Europe....................................... 118,178 191,346 211,412
Corporate.................................... 8,172 6,676 6,262
-------- -------- --------
$165,871 $272,274 $295,400
======== ======== ========
</TABLE>
14. COMMON STOCK
Both classes of common stock have equal rights upon liquidation. Class A
Common Stock may not receive less cash dividends per share than Class B Common
Stock, nor may such dividends be less frequent. The Class A Common Stock has
one vote per share. Except as otherwise provided by law, the Class B Common
Stock has ten votes per share, and the Class B Common Stock is convertible
into Class A Common Stock on a one-for-one basis, and can be transferred in
Class B form only to specified transferees, generally members of a
shareowner's family and certain others affiliated with a shareowner. During
1994 and 1995, 12,783 shares and 12,246 shares, respectively, were converted
from Class B Common Stock to Class A Common Stock.
During 1995, 16,100 shares were put into the treasury from a forfeiture of
restricted stock award. In 1994, 584 treasury shares were issued to a former
director as a final payment under a Directors' deferred compensation plan.
15. PREFERRED STOCK PURCHASE RIGHTS
On March 23, 1988, the Company distributed a dividend of one purchase right
for each outstanding share of Common Stock. Until the occurrence of specified
events, the rights are represented by the associated common stock
certificates. Following the distribution of the Class B Common Stock on June
10, 1988, and until the
F-20
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
occurrence of specified events, each certificate representing a share of Class
A Common Stock or Class B Common Stock also represents three-quarters of a
right. Each right entitles the shareowner to buy from the Company one-
hundredth of a share of Series A Participating Preferred Stock at an exercise
price of $55 per right. The rights become exercisable ten days after a 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 $0.03 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 any person becomes a 20% shareowner, each
right will entitle its holder (other than a 20% shareowner) to purchase, at
the right's then exercise price, shares of Class A Common Stock having a
market value of two times the exercise price.
Prior to the DEA acquisition and entering into the Shareholders Agreement
between the Company and Finmeccanica, the Company amended the Rights Agreement
between it and the First National Bank of Boston dated March 9, 1988 pursuant
to authority reserved in such agreement to exclude Finmeccanica from the
definition of an "Acquiring Person" under the Rights Agreement so long as it
does not own shares of Class A Common Stock other than those acquired in
connection with the DEA acquisition and as provided in the Shareholders
Agreement.
16. COMMITMENT
At December 31, 1995, the Company had entered into a commitment to construct
a building in Telford, England. This building, which is to be completed in
1996, will increase the capacity of its Custom Metrology Division. The
building is estimated to cost approximately $3,800.
17. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1994
--------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
<S> <C> <C> <C> <C>
Net sales........................... $37,140 $43,717 $40,864 $87,648
Gross profit........................ 11,200 14,320 12,254 28,819
Net income (loss)................... (2,874) (1,368) (4,615) (5,478)
Earnings (loss) per common share.... $ (0.57) $ (0.26) $ (0.86) $ (0.63)
1995
--------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
Net sales........................... $75,868 $82,481 $78,571 $91,111
Gross profit........................ 24,957 25,218 24,308 31,819
Net income (loss)................... (1,455) 1,045 220 2,116
Earnings (loss) per common share.... $ (0.17) $ 0.12 $ 0.03 $ 0.24
</TABLE>
In 1994, the Company changed its method of accounting from the completed
contract method to the percentage-of-completion accounting method for its
large machinery construction contracts for its European operation. The effect
of this was that net income for the first quarter of 1994 was increased by
$164 ($0.03 per share), net income for the second quarter of 1994 was
decreased by $573 ($0.11 per share) and net income in the third quarter of
1994 was increased by $154 ($0.03 per share).
F-21
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the second quarter of 1995, the Company increased its inventory valuation
reserves which decreased net income $1,300 ($0.15 per share). In the third
quarter of 1995, the Company made adjustments to the preliminary 1994
estimates of fair values of the assets and liabilities of DEA S.p.A. for the
purpose of purchase price accounting for the DEA acquisition. As a result of
these adjustments, net income for the third quarter of 1995 increased by
$1,171 ($0.13 per share). The aggregate effect of 1995 year-end adjustments
was to increase fourth quarter net income by $940 ($0.11 per share), after
taxes, which, primarily, resulted from an adjustment to inventory valuation
allowances that were necessary to record inventory at locations outside the
United States at FIFO cost. In addition, as discussed in greater detail in
Note 1, the 1995 fourth quarter also includes an adjustment amounting to $640
($0.07 per share), after taxes, relating to a revaluation of 1994 foreign
denominated liabilities.
F-22
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------- --------------------
1995 1996 1995 1996
<S> <C> <C> <C> <C>
Net sales............................ $ 82,481 $ 89,835 $ 158,349 $ 166,113
Cost of sales........................ 57,263 62,017 108,174 113,693
Selling, general and administrative
expense............................. 21,971 23,015 46,580 45,104
Restructuring charges................ 117 -- 247 --
--------- --------- --------- ---------
Operating profit..................... 3,130 4 ,803 3,348 7,316
Interest expense..................... 2,224 2,476 3,948 4,553
Other income (loss), net............. 139 (65) 390 169
--------- --------- --------- ---------
Income (loss) before income taxes.... 1,045 2,262 (210) 2,932
Income tax provision................. -- 408 200 528
--------- --------- --------- ---------
Net income (loss).................... $ 1,045 $ 1,854 $ (410) $ 2,404
========= ========= ========= =========
Primary and fully diluted income
(loss) per common share:
Net income (loss) per share.......... $ 0.12 $ 0.21 $ (0.05) $ 0.27
========= ========= ========= =========
Weighted average shares outstanding
and common stock equivalents during
the period.......................... 8,705,241 8,889,803 8,691,487 8,884,156
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 6,571 $ 4,226
Accounts receivable, net of allowances for
doubtful accounts of $3,995 and $3,175.......... 101,238 114,251
Inventories...................................... 98,950 96,983
Deferred income taxes, less $38,100 valuation
allowance....................................... 2,000 3,996
Prepaid expenses and other current assets........ 8,615 5,313
-------- --------
Total current assets........................... 217,374 224,769
Property, plant and equipment:
Land............................................ 7,293 6,892
Buildings and improvements...................... 37,052 42,214
Machinery and equipment......................... 96,296 91,440
-------- --------
140,641 140,546
Less-accumulated depreciation.................. 91,063 86,946
-------- --------
49,578 53,600
--
Goodwill, net...................................... -- 11,269
Other assets....................................... 15,001 13,014
-------- --------
$281,953 $302,652
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current installments of long-
term debt....................................... $ 41,677 $ 38,539
Accounts payable................................. 43,552 49,543
Accrued expenses and income taxes................ 42,248 38,842
-------- --------
Total current liabilities...................... 127,477 126,924
Long-term debt................................... 59,732 67,973
Other long-term liabilities...................... -- 5,749
Deferred income taxes............................ 1,355 2,765
Unfunded accrued pension cost.................... 5,863 5,703
Termination indemnities.......................... 7,821 8,668
SHAREOWNERS' EQUITY:
Preferred stock, $1 par value; authorized
1,000,000 shares................................ -- --
Common stock:
Class A, par value $1; authorized 15,000,000
shares; issued 8,187,412 shares in 1995 and
8,241,798 shares in 1996....................... 8,187 8,242
Class B, par value $1; authorized 2,000,000
shares; issued 530,958 shares in 1995 and
520,219 shares in 1996......................... 531 520
Additional paid in capital....................... 66,863 67,248
Earnings employed in the business................ (10,366) (5,628)
Cumulative foreign currency translation
adjustment...................................... 15,217 14,985
Treasury stock: 23,592 shares in 1995 and 1996 at
cost............................................ (270) (270)
Unearned compensation............................ (457) (227)
-------- --------
Total shareowners' equity...................... 79,705 84,870
-------- --------
$281,953 $302,652
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30
-------------------
1995 1996
<S> <C> <C>
CASH PROVIDED BY (USED IN) OPERATIONS:
Net income (loss)......................................... $ (410) $ 2,404
Adjustment for Noncash Items:
Depreciation and amortization............................. 4,094 3,962
Deferred income taxes..................................... -- --
Unfunded pension.......................................... 208 218
Deferred compensation..................................... 108 122
Termination indemnities................................... 46 159
Changes in Working Capital:
(Increase) Decrease in accounts receivable................ 9,699 (4,908)
Increase in inventories................................... (4,431) (11,463)
Increase in prepaid expenses and other current assets..... (2,424) (486)
Increase (decrease) in accounts payable and accrued
expenses................................................. (3,866) 5,207
-------- ---------
Net Cash (Used in) Provided by Operations............... 3,024 (4,785)
-------- ---------
INVESTMENT TRANSACTIONS:
Capital expenditures...................................... (3,933) (5,425)
Other investing activities................................ 646 356
-------- ---------
Cash (Used in) Investment Transactions.................... (3,287) (5,069)
-------- ---------
FINANCING TRANSACTIONS:
Increase in short-term debt............................... 6,200 4,444
Proceeds from issuance of long-term debt.................. -- 2,963
Principal payments of long-term debt...................... (1,222) (1,593)
Other financing activities................................ 395 428
-------- ---------
Cash Provided by Financing Transactions................... 5,373 6,242
-------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................... (5,215) 1,576
-------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) during the period..................... (105) (2,036)
Beginning balance......................................... 6,676 6,262
-------- ---------
Ending balance............................................ $ 6,571 $ 4,226
======== =========
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid............................................. $ 3,811 $ 4,158
======== =========
Taxes paid................................................ $ 1,633 $ 262
======== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the quarter and
half year period ended June 30, 1996 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto of Brown & Sharpe included elsewhere in this Prospectus.
2. Prior to 1996, agents' commissions were netted against net sales.
Effective January 1, 1996, the Company elected to classify agents' commissions
as selling, general and administrative expense. As a result, net sales and
selling, general and administrative expense have been adjusted for prior
periods. The effect of such reclassification was to increase net sales and
selling, general and administrative expense by $1,613 and $330 for the
quarters ended June 30, 1995 and 1996, respectively, and $3,490 and $657 for
the six months ended June 30, 1995 and 1996, respectively.
3. The composition of inventory is as follows:
<TABLE>
<CAPTION>
JUNE JUNE
30, 30,
1995 1996
<S> <C> <C>
Parts, raw materials, and supplies....................... $42,790 $39,988
Work in process.......................................... 20,644 20,116
Finished goods........................................... 35,516 36,879
------- -------
$98,950 $96,983
======= =======
</TABLE>
4. Income taxes include provisions for federal, foreign and state income
taxes and is based on the Company's estimate of effective income tax rates for
the full year. The current tax provision for the first half of 1995 and 1996
is $200 and $408, respectively.
5. Primary and fully diluted earnings per share for the quarter and half
year ended June 30, 1996 is based upon the weighted average number of common
shares outstanding and common stock equivalents. For the quarter and half year
ended June 30, 1995, earnings (loss) per share was based upon the weighted
average number of common shares outstanding since inclusion of common stock
equivalents would be antidilutive.
6. On April 7, 1995, the U.S. Court of Appeals for the District of Columbia
Circuit rendered a decision on the second appeal by the International
Association of Machinists and Aerospace Workers (the "IAM") of a supplemental
decision and order of the National Labor Relations Board ("NLRB") reaffirming
an April 1986 decision of the NLRB dismissing reinstated unfair labor practice
charges brought against the Company by the IAM in September 1982. These
charges arose out of a strike which began at the Company's Rhode Island
operations in October 1981. Although the NLRB had previously upheld dismissal
of the reinstated unfair labor practices charges, the Appeals Court in its
1995 decision stated that the NLRB failed to articulate and apply a judicially
acceptable standard to determine whether certain evidence offered and
characterized by the Union as being newly discovered was material and of such
a nature to justify tolling the statute of limitations so as to permit the
filing of the reinstated unfair labor practice charges. The Court vacated the
judgment of the NLRB favorable to the Company and remanded the case back to
the NLRB for further proceedings to determine these evidentiary issues and
their effect on the application of the statute of limitations to the
reinstated unfair labor practice charges. On August 16, 1996, the NLRB issued
a second supplemental decision and order finding in favor of the Company on
the issue presented and dismissed the IAM complaint. Management of the Company
and its counsel believe that should the IAM appeal, an appeal is not likely to
be successful and that a finding of liability against the Company in this
matter is remote.
F-26
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. As discussed in Footnote 2 to the Consolidated Financial Statements for
the year ended December 31, 1995, the purchase agreement to acquire Ets.
Pierre Roch S.A. and Mauser Prazisions-Messmittel GmbH ("Roch") provided for
adjustments to the purchase price based on a post-closing final balance sheet
and other adjustments. On July 5, 1996, the Company concluded an agreement on
these adjustments with Diehl GmbH & Co. ("Diehl"), the seller of Roch, in
which Diehl returned 19,000 shares of Brown & Sharpe Class A Common Stock.
F-27
<PAGE>
[Photos of the Company's products measuring various manufactured components.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDER-
WRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY, THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 14
Market for Class A Common Stock.......................................... 14
Dividend Policy.......................................................... 15
Capitalization........................................................... 15
Selected Consolidated Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 25
Management............................................................... 38
Principal and Selling Stockholders....................................... 47
Certain Transactions..................................................... 50
Description of Capital Stock............................................. 52
Shares Eligible for Future Sale.......................................... 55
Certain United States Tax Consequences to Non-United States Holders...... 57
Underwriting............................................................. 60
Legal Matters............................................................ 62
Experts.................................................................. 62
Additional Information................................................... 62
Index to Consolidated Financial Statements............................... F-1
</TABLE>
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7,286,000 SHARES
[LOGO]
CLASS A COMMON STOCK
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PROSPECTUS
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DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CS FIRST BOSTON
OCTOBER 10, 1996
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