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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission file number 1-5881
BROWN & SHARPE MANUFACTURING COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 050113140
State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
PRECISION PARK, 200 FRENCHTOWN ROAD, NORTH KINGSTOWN, RHODE ISLAND 02852
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code 401-886-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
CLASS A COMMON STOCK-PAR VALUE $1.00 NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12 (g) of the Act:
CLASS B COMMON STOCK - PAR VALUE $1.00
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
The aggregate market value (as calculated under the rules) of the voting common
stock held by non-affiliates of the Registrant was approximately $27,500,000 as
of March 14, 2000.
There were 13,283,988 Shares of Class A Common Stock and 503,897 Shares of Class
B Common Stock, each having a par value of $1.00 per share, outstanding as of
March 14, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents have been incorporated by reference in the following
parts of the Form 10-K: (1) Definitive Proxy Statement for the April 28, 2000
Annual Meeting incorporated by reference (to the extent specified) in Part III.
Portions of the Annual Report for the year ended December 31, 1999 are
incorporated by reference into Parts I and II.
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BROWN & SHARPE MANUFACTURING COMPANY
INDEX
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Page
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PART I
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Item 1 Business................................................................................... 3 - 13
General......................................................................................... 3
Repositioning Initiatives....................................................................... 4
Business Strategy............................................................................... 4 - 6
Metrology Industry.............................................................................. 6 - 8
MS Group........................................................................................ 8
PMI Division.................................................................................... 8 - 9
CM Division..................................................................................... 9
BSIS Division................................................................................... 9
Electronics Division............................................................................ 9
Sales and Distribution.......................................................................... 9 - 10
Engineering and Product Development............................................................. 10
Foreign Operations.............................................................................. 10
Raw Materials and Sources of Supply............................................................. 10 - 11
Patents, Licenses, Trademarks, and Proprietary Information...................................... 11
Environmental Matters........................................................................... 11
Employees....................................................................................... 11 - 12
Competition..................................................................................... 12
Backlog......................................................................................... 13
Significant Customers........................................................................... 13
Working Capital................................................................................. 13
Segment Information............................................................................. 13
Item 2 Properties................................................................................. 14
Item 3 Legal Proceedings.......................................................................... 15
Item 4A Executive Officers of the Registrant....................................................... 15 - 16
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters....................... 16
Item 6 Selected Financial Data.................................................................... 16
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................. 16
Item 7A Qualitative and Quantitative Disclosures About Market Risk................................. 16
Item 8 Financial Statements and Supplementary Data................................................ 16
Item 9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure....................................................................... 17
PART III
Item 10 Directors and Executive Officers of the Registrant......................................... 17
Item 11 Management Remuneration and Transactions................................................... 17
Item 12 Security Ownership of Certain Beneficial Owners and Management............................. 17
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 17 - 18
Signatures........................................................................................... 19
Directors............................................................................................ 20
Officers............................................................................................. 20
Investor Information................................................................................. 20 - 21
Financial Statement Schedules........................................................................ 22
Exhibit Index........................................................................................ 23 - 30
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PART I
ITEM 1 - BUSINESS
General
The Company, which was founded in 1833, is a leading designer, manufacturer, and
marketer of metrology products worldwide under numerous internationally
recognized brand names. Metrology is the science of the physical measurement of
objects using various precision instruments and equipment. The Company's high
precision products measure physical dimensions of, and inspect and verify
conformance to specifications of, components and products and are used in
manufacturing, quality control, and product development operations. The
Company's product line ranges from hand tools and instruments to customized
computer-controlled metrology systems which integrate hardware and software and
are augmented by service, training, and aftermarket support. The Company markets
its metrology products and services in North America, Europe, Asia, South
America, and the Middle East. Important end user markets for the Company's
products include the automotive, aerospace, industrial machinery, electronics,
and computer industries, and the Company's customers include Ford Motor Co.,
Daimler Chrysler, Toyota, General Motors, BMW, Boeing Co., Eastman Kodak Co.
Inc., International Business Machines Corp., Hewlett-Packard Co., General
Electric Co., Caterpillar Inc., United Technologies Corp., Motorola Inc.,
Phillips, Samsung, and Xerox Corp.
The Company's operations are conducted through five management units: Measuring
Systems, Precision Measuring Instruments, Custom Metrology, Brown & Sharpe
Information Systems and Electronics Division.
o The Measuring Systems Group ("MS"), which accounted for approximately 72%
of the Company's sales in 1999, manufactures and markets a wide range of
manual and computer-controlled, high precision Coordinate Measuring
Machines ("CMM") including "in-process" measuring systems under the Brown &
Sharpe, Brown & Sharpe--Wetzlar and Brown & Sharpe--DEA brand names.
Incorporated in the MS Group is After Market Services which offers its
customers services such as: software, parts, technical support, upgrade and
rebuilds, training and contract inspection. The Company estimates that it
has an installed base of over 24,000 CMMs worldwide.
o The Precision Measuring Instruments Division ("PMI"), which accounted for
approximately 23% of the Company's sales in 1999, manufactures a wide range
of mechanical and electronic measuring and inspection tools (including
height gauges, calipers, dial indicators, and micrometers) which are
marketed under the Brown & Sharpe, Tesa, Etalon, Interapid, Standard Gage,
Mauser, Mercer, and Roch brand names through more than 450 distributors and
catalog houses worldwide.
o The Custom Metrology Division ("CMD"), accounted for approximately 4% of
the Company's sales in 1999 and, until its reorganization in 1999, designed
and engineered specialty products and systems that provided customized
solutions for unique measurement or inspection problems primarily utilizing
non-contact technology now, primarily, manufacture only non-contact
"profile" machines for the measurement of shafts and round components, and
is expected to manufacture non-contact machines for the measurement of
airfoils later in 2000.
o Brown & Sharpe Information Systems ("BSIS"), is developing a software
system that will be universal to all of the Company's products.
o The Electronics Division, which consists of Brown & Sharpe Surface
Inspection Systems, was acquired in 1999, produces metrology tools for
electronics component manufacturers that focus on the detection and
classification of micron lever defects on a variety of surfaces as
companies with traditional dimensional measurement of industry products.
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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:
o Divestiture of Non-Core Operations. The divestiture of non-strategic
operations, including the machine tool, pump and hydraulics businesses, and
Technicomp, Inc. during 1997, which enabled the Company to focus on its
core metrology technologies and market distribution strengths.
o 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 include the
1994 acquisition of DEA. During 1997, the Company acquired the remaining
50% of its equity investee ASI, which developed measurement software and
provided training and services and other aftermarket support to
manufacturing industries and is now a significant part of MS' aftermarket
business, and a 50% ownership position in Metroptic Technologies Limited, a
joint venture located in Israel developing non-contact sensor technologies.
During 1999, the Company incorporated Brown & Sharpe's Surface Inspection
Systems to acquire substantially all of the assets and assume certain
liabilities of Display Inspection Systems, Inc. and Digital Data
Inspections Systems, LTD., which makes inspection products for the
electronics market. Later in 1999, the Company acquired a 60% interest in
QI Tech (subsequently named Brown & Sharpe/Qianshao located in the People's
Republic of China). The latter investment was entered into in order to
expand the Company's presence in the Asian market.
o 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, including the consolidation of all of
the PMI's manufacturing sites into one location in Renens, Switzerland. In
1999, the Company implemented a reorganization plan in which it implemented
a "Focused Factories" strategy for MS which consolidated production of
specific CMM products to a single manufacturing location. In 1999, the
Company also reorganized CMD by exiting certain unprofitable non-core
products to focus on non-contact products such as "Profile" machines and
machines used to measure airfoils. The Plan also included a reorganization
of the PMI division as discussed above. (See Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
Business Strategy
The Company is implementing its strategy based on the following elements:
o 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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o 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. 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 embedded 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.
o Enhance Existing and Develop New Software. The Company intends to emphasize
research and development of software systems and applications designed to
meet the evolving metrology needs of its end users. To that end, the
Company intends to leverage off its software development team of software
and applications engineers and technicians 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
is critical to the successful development of software that is linked with
computer aided engineering systems. To meet the needs of this growth
market, the Company formed BSIS in 1997. This subsidiary, with a common
Corporate vision, combines all the Company's software development expertise
under one roof. The Company's objective is to develop the next generation
of open architecture measurement software having more power and ease of use
than any product on the market. Incorporating the most accurate metrology
algorithms in the world, this new software will work effortlessly with
CAD/CAM systems to facilitate the inspection process. It will also provide
the user with powerful analysis tools to ensure overall process control.
o Leverage Worldwide Distribution Capability. Through its acquisitions, 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 1999 acquisition of Qianshao (60% owned) has given the
Company direct entry into the China CMM market. 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.
o Increase Aftermarket Sales and Services. The Company intends to increase
its focus on higher margin aftermarket sales and services, including
consulting services, calibration and rebuilding of CMMs, software upgrades,
and parts sales. The Company believes that the worldwide installed base of
CMMs, estimated at over 80,000 (including 24,000 of the Company's CMMs),
creates a significant demand for such aftermarket services.
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The Company believes that the level of customer service it provides, as measured
by third-party surveys of its customers, is superior to that of its principal
competitors, and expects to further strengthen its customer relationships
through enhanced aftermarket support and increased partnering efforts. The
Company's sales attributable to aftermarket sales and service in 1999 were
estimated to be approximately 36% of MS' net sales for the same period.
Metrology Industry
General
Metrology products and systems range from hand tools for simple 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.
Software has also become increasingly important in metrology solutions as
manufacturer's specifications have become tighter. The CMM software provides a
critical link between the computerized design and the manufacturing
environments. In addition, most large companies are starting to build worldwide
dimensional databases to store and evaluate the data gathered by CMMs.
Furthermore, potential software upgrades on the estimated 80,000 CMMs worldwide
open up a large market for new and dynamic software systems.
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
motor 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 automatically controlled by software systems that not
only compare the product to a manufacturer's CAD models, but when no CAD model
exists, also provide manufacturers with dimensions of the product to reverse
engineer the product and create a CAD model. CMMs are highly flexible machines
that can measure different products for a manufacturer without re-tooling or
other significant changes as opposed
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to fixed gages that are designed solely for a single feature of a single product
and also requires expensive and time-consuming retooling when the product design
changes. The price points of metrology products range from $100 for a caliper to
over $1.5 million for a sophisticated CMM such as those used to measure car and
truck bodies.
Markets
Participants in the metrology industry generally compete in one or more of six
broad product areas: (i) simple and relatively inexpensive tools that measure in
one dimension, such as calipers, dial gauges, micrometers, surface plates, and
transfer gauges; (ii) digital electronic height gauges of varying accuracies and
sizes; (iii) sophisticated special purpose metrology systems including fixed
gauges; (iv) general purpose and application-specific CMMs; (v) alternative
technologies such as vision tunnels or surface finish and geometry measurement;
and (vi) customized metrology solutions to specific metrology problems. The
Company competes in all of the foregoing product areas other than fixed gauges
and most of the alternative technologies.
Sales of simple metrology products and less sophisticated height gauges are
driven by price, brand, product innovation, ease of purchase, and effectiveness
of distribution. Products in this category are generally hand-held or relatively
small devices that permit a manufacturer to make measurements in one or
occasionally two dimensions. These products are generally inexpensive, providing
a cost-effective solution to simple metrology problems where the industrial
customer does not need the increased capabilities of fixed gauges, CMMs or
certain other sophisticated metrology systems. However, simple metrology
products are generally limited in terms of accuracy, flexibility and/or their
ability to collect data. Further, they are dependent upon skilled operators. The
market for simple metrology products is fragmented, with many regional
suppliers. End user markets for these products include most basic industries,
including the automotive, construction, industrial machinery, appliance, and
farm equipment industries.
Sales of fixed gauges have traditionally been driven by manufacturers' needs for
one, two, or three dimensional metrology on the factory floor. Products in this
category, typically more expensive than 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.
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Aftermarket sales are critical to manufacturers, as they are needed to insure
the continued operation of the CMM equipment after it has been installed.
Furthermore, AMS services can also be provided to competitors machines, which
offers additional growth potential and the ability to gain a competitive
advantage over its major competitors, all of whom do not currently offer such
services.
The Company believes that non-contact sensor technology will continue to play a
critical role in the future of the metrology industry. As manufacturers from
traditional industrial manufacturers to leading high-tech companies continue to
be driven by customers to produce smarter, faster, smaller and higher
performance products, the need for more sophisticated measuring devices to
enable production will increase. Sensor development, through the Company's R&D
efforts and joint ventures will play an important role in sales growth,
profitability, and retaining the Company's leadership in metrology.
MS Group
The MS Group, the largest of Brown & Sharpe's five units, accounted for
approximately 72% of Brown & Sharpe's sales in 1999. 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, Rhode Island; Wetzlar, Germany; and Turin, Italy
facilities. The primary end user markets for the Company's CMM products include
the automotive (including automotive suppliers), heavy transport, aerospace,
electronics, computer, industrial machinery, and medical industries.
MS Group products range from small, manually operated CMMs to large, high speed,
high precision automatic CMMs. In addition to these standard and
custom-configured CMMs, Brown & Sharpe also produces and sells high-speed
process control systems. The smallest machines can measure in a volume up to 400
x 350 x 300 mm and are priced at approximately $10 thousand, while the larger,
high speed, high accuracy CMMs with integrated software systems can cost over
$1.5 million. The MS Group also provides laser scanning and optically based
measuring machinery from microscopes to vision systems.
The Company believes that its "user-friendly" CMM application software gives it
a competitive advantage in the marketplace for CMMs. These proprietary software
products provide the MS Group's customers with an understandable, icon-based
inspection analysis capability, graphical user interfaces and outputs, and the
capability to network with manufacturing systems. The MS Group also provides its
customers with special software and systems that integrate the MS Group's
products with the customer's host information and communications network. In
addition to sales of CMMs, the MS Group provides aftermarket sales and service,
including calibration and rebuilding of CMMs, software upgrades and parts sales,
for Brown & Sharpe CMMs and competing CMMs. The Company's sales attributable to
aftermarket sales and services in 1999 were estimated to be approximately 36% of
MS Group sales for the same period. See Footnote 13 to the Consolidated
Financial Statements, which are incorporated by reference, for financial
information related to this business segment.
PMI Division
The principal products of Brown & Sharpe's PMI Division are precision measuring
tools and related instruments such as micrometers, dial indicators, calipers,
and electronic height gauges. PMI Division products accounted for approximately
23% of Brown & Sharpe's sales in 1999. The PMI Division's products have broader
applications and lower unit list prices (with a range of $100 to approximately
$13 thousand) than the prices of the MS Group's products. These tools and
instruments typically measure in
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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 were traditionally
manufactured at its plants in Rolle and Renens, Switzerland; Poughkeepsie,
New York; Leicester, St. Albans, and Plymouth, England; and Luneville, France.
In 1999, the Company announced the closing of its Leicester, St. Albans,
Torpoint and Luneville plants and consolidated its PMI manufacturing at its
Renens site. See Footnotes 3 and 13 to the Consolidated Financial Statements,
which are incorporated by reference, for financial information related to the
PMI restructuring and business segment, respectively. The Company also purchases
components and products from third parties located in various countries.
CM Division
The CM Division, headquartered in Telford, England, historically designed and
engineered highly customized and specialized solutions for metrology.
Profitability under this business strategy suffered as machines and projects
were "one-off" in nature. The unit underwent a major restructuring in the first
half of 1999. The division finalized its exit of the non-profitable
highly-customized business, to refocus on non-contact "Profile" machines for the
measurement of shafts or round components, while continuing to manufacture (i)
primary standard calibration instruments, used currently by 26 countries as
their standard for measurement; and (ii) Non-contact machines for the
measurement of airfoils (turbine and compressor airfoils). See Footnotes 3 and
13 to the Consolidated Financial Statements, which are incorporated by
reference, for financial information related to the CM restructuring and
business segment, respectively.
BSIS Division
BSIS was formed in 1997 to develop a single state of the art metrology operating
system which will replace and focus all software development in one place. See
Footnote 13 to the Consolidated Financial Statements, which are incorporated by
reference, for financial information related to this business segment.
Electronics Division
The Electronics Division, which was acquired in 1999, makes metrology tools for
high-tech electronics manufacturers that focus on the detection and
classification of micron level effects on a variety of surfaces. The Company's
products are based on a patented sensor technology known as "Black Beam
Interferometry" coupled with advanced software for defect classification. The
technology is currently being applied in disk drive and flat panel display
manufacturing. See Footnote 13 to the Consolidated Financial Statements, which
are incorporated by reference, for financial information related to this
business segment.
Sales and Distribution
The MS Group distributes its products primarily through a 100-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 19 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.
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In contrast to the MS Group, the PMI Division generally distributes its products
through international import companies, regional distributors, and catalog
houses throughout the world. As of December 31, 1999, the PMI Division utilized
in excess of 80 major distributors located in over 40 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 Company has no single customer which accounts for 10% or more of its
consolidated net sales; however, several well recognized major automotive
manufacturers (without regard to their suppliers) account for a significant
portion of the Company's net sales. The loss of a few of these major customers
would have a substantial effect upon the Company.
Engineering and Product Development
Brown & Sharpe's commercial success is dependent upon its ability to develop
products, enhancements, and applications that meet changing customer metrology
needs and anticipate and respond to technological changes. Brown & Sharpe
designs, develops, and refines its products internally through engineering
departments within its product groups and divisions. When it is more
cost-effective to do so, Brown & Sharpe purchases product designs or portions of
product designs from engineering subcontractors or acquires rights to such
designs through licensing arrangements. Brown & Sharpe also benefits from
research and development efforts which are subsidized by customer funds and, in
certain countries, by government research grants. Brown & Sharpe research,
development and manufacturing engineering activities are conducted in the United
States, Italy, Switzerland, Germany, the United Kingdom, Lithuania, and, until
the PMI restructuring implemented in January 2000, France.
The Company's current design and engineering focus is in the development of the
CMM "Global Machine," which will provide greater accuracy and speed, software
development, and non-contact metrology products. In 1999, Brown & Sharpe
invested $14.4 million, or 4.5% of its net sales during that period in product
design and manufacturing engineering. In 1997 and 1998, Brown & Sharpe expended
$15.5 million and $17.8 million, respectively, for product design, development,
refinement, and manufacturing engineering.
Foreign Operations
Brown & Sharpe manufactures and sells substantial amounts of its metrology
products in foreign countries. As of December 31, 1999, approximately 65% (based
on book values) of the Company's assets, 57% of the Company's sales (based on
customer location) and 65% of its employees were located outside the United
States. The Company's manufacturing operations are located in Italy,
Switzerland, Germany, England, and, until the PMI restructuring implemented in
January 2000, France, as well as in the United States. Brown & Sharpe's products
are sold in over 60 countries worldwide. See Footnote 13 to the Consolidated
Financial Statements, which are incorporated by reference, for financial
information related to foreign operations.
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.
8
<PAGE>
No alternative supplier for this class of electronic sensor probes, which are a
key component of substantially all of the Company's lower accuracy CMMs, is
currently available and developing an alternative source for the probes and
heads could take more than a year. Brown & Sharpe continues to explore means of
lowering production costs through selective outsourcing in situations where
Brown & Sharpe can achieve its high quality standards via subcontractors.
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.
Environmental Matters
The Company is not significantly affected by compliance with rules and
regulations promulgated under environmental laws since its manufacturing
processes do not produce, as a by-product, material amounts of waste, water
discharges, or air emissions deemed hazardous under such laws. However, the
Company is subject from time to time to environmental claims. See Note 16,
"Contingencies" of Notes to Consolidated Financial Statements in Item 8 of this
Annual Report.
Employees
At December 31, 1999, Brown & Sharpe had 2,216 employees, (as compared with
2,359 at December 31, 1998), including approximately 1,440 employees located
outside the United States. Brown & Sharpe considers its relations with its
employees to be good, although there can be no assurance that Brown & Sharpe's
cost-cutting efforts or other factors will not cause a deterioration in these
relations.
Approximately 433 of Brown & Sharpe's employees located at sites in the United
States, Italy, Switzerland, England, and France are covered by collective
bargaining agreements which expire at various times between December 31, 1999
and June 30, 2002. Brown & Sharpe expects that these collective bargaining
agreements will be renegotiated successfully prior to their expiration. However,
there can be no assurance that successor collective bargaining agreements will
be successfully negotiated, that negotiations will not result in work stoppages,
or that a work stoppage would not materially interfere with Brown & Sharpe's
ability to produce the products manufactured at the affected location.
In addition to the collective bargaining agreements that cover workers at
certain of Brown & Sharpe's foreign subsidiaries, it is customary for these
employees to be represented by various works or shop councils. These councils
are governed by applicable labor laws and are comprised of members who are
elected or appointed by the work force. Except for the top level of management,
these councils represent the entire work force at their location in its dealings
with senior management on matters affecting the work force or arising under the
relevant labor contracts in effect at the location.
9
<PAGE>
The following table sets forth the location of Brown & Sharpe's employees as of
December 31, 1999:
<TABLE>
<CAPTION>
Country Employees (1)
------- -------------
<S> <C>
China............................................... 123
France.............................................. 181
Germany............................................. 184
Israel.............................................. 30
Italy............................................... 379
Japan............................................... 26
Spain............................................... 21
Switzerland......................................... 364
United Kingdom...................................... 132
Mexico.............................................. 4
United States....................................... 772
------
TOTAL............................................... 2,216
======
</TABLE>
- ---------------
(1) Part-time employees are included on a full-time equivalent basis.
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. As a result, the Company experiences severe
pricing competition in connection with sales by its MS Group which can have an
adverse impact on the Company's net sales and margins. During periods when the
metrology industry suffers from over capacity, downward pricing pressure
experienced by the MS Group is likely to be more intense and the Company's
margins may be more severely impacted. In addition, certain of the Company's
competitors that have access to greater financial resources may be able to
withstand such pricing pressure more effectively than the Company. The MS Group
competes with Mitutoyo/MTI Corp., a subsidiary of Mitutoyo Solsakusho Co. Ltd.,
a Japan-based company, which is the largest supplier of metrology equipment and
products worldwide. In addition to Mitutoyo, the MS Group's main competitors are
Carl Zeiss, Inc., a subsidiary of Carl Zeiss-Stiftung AG, the Sheffield
Measurement Division of Giddings & Lewis, Inc., and LK Tool Co. Ltd.
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 Carl Mahr
Holding GmbH.
10
<PAGE>
Backlog
The Company's backlog of product orders was approximately $59 million at
year-end 1999, compared to approximately $72 million and $68 million at year-end
1998 and 1997, respectively.
All of the orders included in the Company's year-end 1999 backlog were requested
to be filled and completed within one year and are, subject to possible customer
cancellation, expected to be completed in 2000.
Significant Customers
The Company has no single customer which accounts for 10% or more of its
consolidated net sales; however, several well recognized major automotive
manufacturers (without regard to their suppliers) account for a significant
portion of the Company's net sales. The loss of a few of these major customers
would have a substantial effect upon the Company.
Working Capital
A substantial amount of working capital investment in inventory and accounts
receivable is required to operate the Company's businesses. Working capital was
approximately $9.7 million at year-end 1999 compared to approximately $111.8
million at year-end 1998. See the discussion of working capital in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of this Annual Report.
Segment Information
(Dollars in thousands)
The Company operates exclusively in the Metrology Business. See General in Item
1 for a further description of the Company's business. Sales to unaffiliated
customers from Europe are defined as sales of products that are primarily
assembled in a foreign country. Refer to "Financial Information by Business
Segment and Geographic Area" included in Footnote 13 of the Company's 1999
Annual Report, filed as an exhibit hereto, which is incorporated by reference.
11
<PAGE>
ITEM 2 - PROPERTIES
The following table sets forth certain information concerning Brown & Sharpe's
major operating facilities:
<TABLE>
<CAPTION>
Owned/ Approximate
Location Leased Principal Use Square Footage
-------- ------ ------------- --------------
<S> <C> <C> <C>
United States
N. Kingstown, Rhode Island Owned Manufacturing, Engineering, Sales,
and Administration 348,000 (1)
Poughkeepsie, New York Owned Manufacturing 58,000
Wixom, Michigan Leased Sales and Administration 37,600
Italy
Grugliasco Leased Assembly 107,000 (2)
Moncalieri Leased Manufacturing 70,000 (2)
Switzerland
Renens Owned Manufacturing, Engineering, Sales,
and Administration 139,000
Rolle Owned Manufacturing 51,000
Germany
Wetzlar Owned Manufacturing, Engineering, Sales,
and Administration 280,000
Ludwigsburg Leased Sales 15,000 (2)
United Kingdom
St. Albans Owned Manufacturing and Sales 36,000
Telford Owned Manufacturing, Engineering, Sales,
and Administration 32,000
Leicester Owned Manufacturing 14,000
Torpoint Leased Manufacturing, Sales, and Administration 5,000 (2)
France
Luneville Leased Manufacturing, Engineering, and Sales 77,100 (2)(3)
Villebon Leased Sales 18,000 (2)
Spain
Barcelona Leased Sales 9,000 (2)
China
Qingdao Leased Manufacturing, Engineering, Sales,
and Administration 34,000 (2)
</TABLE>
- ---------------
(1) Excludes approximately 412,000 square feet leased to unrelated parties.
(2) The leases in China, Grugliasco, Ludwigsburg, Torpoint, Luneville, Villebon
and Barcelona expire on June 30, 2000, December 31, 2002, September 30,
2003, August 18, 2001, March 23, 2003, October 20, 2001, and July 31, 2008,
respectively.
(3) Included in PMI's restructuring. (See Management's Discussion and Analysis
of Financial Condition and Results of Operations and see Footnote 3 to the
Consolidated Financial Statements, which are incorporated by reference.)
In addition, Brown & Sharpe leases smaller sales offices located in the
United States, Europe, and Asia. In the opinion of management, Brown &
Sharpe's properties are in good condition and adequate for Brown & Sharpe's
business as presently conducted.
12
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS
Other Environmental Matters
The nature of the Company's current operations are not significantly affected by
environmental laws, rules and regulations. However, because the Company and its
subsidiaries and predecessors have conducted heavy manufacturing operations in
the past, sometimes at facilities which have been divested or sold and often in
locations at which or adjacent to which, other industrial operations were
conducted, from time to time the Company is subject to environmental claims. As
with any such operations that involve the use, generation, and management of
hazardous materials, it is possible that practices, including practices that
were deemed acceptable by regulatory authorities in the past, may have created
conditions which could give rise to liability under current or future
environmental laws. Because the law in this area is developing rapidly,
including in many European countries, and such environmental laws are subject to
amendment and widely varying degrees of enforcement, the Company may be subject
to, and cannot predict with any certainty the nature and amount of, potential
environmental liability related to these operations or locations that it may
face in the future.
Litigation
Refer to Note 16 "Contingencies" of Notes to Consolidated Financial Statements
incorporated by reference in Item 8 of this Annual Report.
ITEM 4A - EXECUTIVE OFFICERS OF THE REGISTRANT
The following table summarizes information regarding Executive Officers of the
Company as of March 1, 2000:
<TABLE>
<CAPTION>
Name Age Positions Held During the Last Five Years
- ---- --- -----------------------------------------
<S> <C> <C>
Frank T. Curtin 65 President & Chief Executive Officer and a Director of the Company since May 2, 1995; from 1992 to
May 1995, Vice President, National Center for Manufacturing Sciences, a research and development
organization, Ann Arbor, MI.
Andrew C. Genor 57 Vice President & Chief Financial Officer since December 1, 1998; previously Chief Financial
Officer, Safety First from May 1998 through September 1998; previously Vice President, Chief
Financial Officer & Treasurer, Wyman-Gordon Company from November 1994 through March 1998;
previously Co-Founder, Chief Financial Officer & Chief Operating Officer, HNSX Super Computers
from January 1987 through April 1993.
Antonio Aparicio 49 Vice President & General Manager - Precision Measuring Instruments since September 1991.
Marcus Burton 41 Vice President & General Manager - Custom Metrology Division since January 1997; previously
Director of Strategic Planning - Brown & Sharpe Manufacturing Co. since July 1995; Managing
Director - Thomas Mercer Ltd. (a subsidiary) since June 1992.
Philip James 58 Group Vice President - Measuring Systems since September 1997; previously Executive Vice President
- International, Ingersoll Milling Machine Company since November 1993.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Name Age Positions Held During the Last Five Years
- ---- --- -----------------------------------------
<S> <C> <C>
Edward D. DiLuigi 53 Vice President & General Manager - Measuring Systems Americas since January 2000, previously Vice
President & General Manager Measuring Systems U.S.A. since June 1997; previously General Manager,
UNC Airwork, Aircraft Engine Services Division since July 1995; previously Vice President of
Operations, UNC Airwork since August 1992.
Christopher J. Garcia 43 Vice President - Software Product Development since January 1998; previously Vice President -
Marketing since November 1996; previously Vice President - Business Development since January 1991;
Vice President - Research and Development of Valisys Corporation since June 1994.
Alfred J. Corso 63 Controller and Principal Accounting Officer since June 1, 1995; previously Partner with Ernst &
Young LLP.
</TABLE>
To the best of the knowledge of the Registrant, none of the Executive Officers
has any family relationships with any of the others. Each Executive Officer
holds office until the first meeting of the Board of Directors following the
next Annual Stockholders' meeting and until his successor is elected or
appointed and qualified, unless he dies, resigns, is removed or replaced.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Refer to "Common Stock Market Prices and Dividends" included on Page F-35 of the
Company's 1999 Annual Report, filed as an exhibit hereto, which is incorporated
by reference.
ITEM 6 - SELECTED FINANCIAL DATA
Refer to "Selected Financial Data" on Page F-2 of the Company's 1999 Annual
Report, filed as an exhibit hereto, which is incorporated herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Refer to "Management Discussion and Analysis of Financial Condition and Results
of Operations" on Pages F-3 through F-11 of the Company's 1999 Annual Report,
filed as an exhibit hereto, which is incorporated herein by reference.
ITEM 7A - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to "Qualitative and Quantitative Disclosures About Market Risk" on Pages
F-10 of the Company's 1999 Annual Report, filed as an exhibit hereto, which is
incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to Consolidated Financial Statements and Report of Independent Auditors on
Pages F-12 through F-34 of the Company's 1999 Annual Report, filed as an exhibit
hereto, which are incorporated herein by reference.
14
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Refer to "Information With Respect to Nominees and Other Directors Continuing in
Office" on Pages 2 and 3 in the Company's definitive Proxy Statement for the
April 28, 2000 Annual Meeting which is incorporated herein by reference.
ITEM 11 - MANAGEMENT REMUNERATION AND TRANSACTIONS
Refer to "Executive Compensation" on Page 13 in the Company's Definitive Proxy
Statement for the April 28, 2000 Annual Meeting which is incorporated herein by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Refer to "Principal Shareholders" and "Stock Ownership of Directors and
Officers" on Pages 5 - 8 in the Company's Definitive Proxy Statement for the
April 28, 2000 Annual Meeting which are incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) List of Financial Statements and Financial Statement Schedules
The following consolidated financial statements of Brown & Sharpe Manufacturing
Co., Inc. and subsidiaries, included in the annual report of the registrant to
its shareholders for the year ended December 31, 1999, are incorporated by
reference in Item 8:
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Operations - Years ended December 31, 1999,
1998, and 1997
Consolidated Statements of Shareowners' Equity - Years ended December 31,
1999, 1998, and 1997
Consolidated Statements of Cash Flows - Years ended December 31, 1999,
1998, and 1997
Notes to Consolidated Financial Statements - December 31, 1999
15
<PAGE>
The following consolidated financial statement schedule of Brown & Sharpe
Manufacturing Co., Inc. and subsidiaries is included in Item 14(d):
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(3) The response to this portion of Item 14 is submitted as a separate
section of this report.
(b) No Form 8-K was filed during 1999.
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules - The response to this portion of Item 14 is
submitted as a separate section of this report.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BROWN & SHARPE MANUFACTURING COMPANY
(Registrant)
Date: March 24, 2000 By: /s/ Andrew C. Genor
-------------------
Andrew C. Genor
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Frank T. Curtin 3/24/00 /s/ Howard K. Fuguet 3/24/00
- ------------------------------------------------- --------------------------------------------
Frank T. Curtin Date Howard K. Fuguet Date
President, Chief Executive Officer Director
(Principal Executive Officer),
Chairman of the Board, and Director
/s/ J. Robert Held 3/24/00 /s/ John M. Nelson 3/24/00
- ------------------------------------------------- --------------------------------------------
J. Robert Held Date John M. Nelson Date
Director Director
/s/ Paul R. Tregurtha 3/24/00 /s/ Russell A. Boss 3/24/00
- ------------------------------------------------- --------------------------------------------
Paul R. Tregurtha Date Russell A. Boss Date
Director Director
/s/ Henry D. Sharpe, III 3/24/00 /s/ Roger E. Levien 3/24/00
- ------------------------------------------------- --------------------------------------------
Henry D. Sharpe, III Date Roger E. Levien Date
Director Director
/s/ Harry A. Hammerly 3/24/00 /s/ Richard M. Donnelly 3/24/00
- ------------------------------------------------- --------------------------------------------
Harry A. Hammerly Date Richard M. Donnelly Date
Director Director
/s/ Alfred J. Corso 3/24/00 /s/ Andrew C. Genor 3/24/00
- ------------------------------------------------- --------------------------------------------
Alfred J. Corso Date Andrew C. Genor Date
Controller Vice President and Chief Financial Officer
(Principal Accounting Officer)
</TABLE>
17
<PAGE>
DIRECTORS
Russell A. Boss, Chairman of the Board, A. T. Cross Company
Frank T. Curtin, Chairman, President & Chief Executive Officer, Brown & Sharpe
Manufacturing Company
Richard M. Donnelly, President, Donnelly Associates
Howard K. Fuguet, Partner, in the law firm of Ropes & Gray
Harry A. Hammerly, Former Executive Vice President, 3M Company
J. Robert Held, Consultant, Former President and Chief Executive Officer of
Chipcom Corporation
Roger E. Levien, Managing Partner, Levien Enterprises
John M. Nelson, Lead Director, TJX Companies, Inc.
Henry D. Sharpe, III, Vice President, Engineering Design Lab, LLC
Paul R. Tregurtha, Chairman of the Board and Chief Executive Officer, Mormac
Marine Group, Inc.
OFFICERS
Frank T. Curtin, President, Chief Executive Officer, and Chairman of the Board
Andrew C. Genor, Vice President, and Chief Financial Officer
Antonio Aparicio, Vice President & General Manager - Precision Measuring
Instruments
Marcus Burton, Vice President & General Manager - Custom Metrology
Phil James, Group Vice President - Measuring Systems
Edward D. DiLuigi, Vice President & General Manager, Measuring Systems -
Americas
Christopher J. Garcia, Vice President - Software Product Development
James W. Hayes, III, Secretary & Corporate Counsel
Alfred J. Corso, Controller
Les W. Sgnilek, Treasurer
INVESTOR INFORMATION
Annual Meeting: The Annual Meeting of Stockholders will be held April 28, 2000
at 10:00a.m. at the Corporate Offices
Corporate Offices: Precision Park, 200 Frenchtown Road, North Kingstown, RI
02852; Telephone (401) 886-2000
Form 10-K Report: A copy of the Company's Annual Report as filed with the
Securities and Exchange Commission is available upon request to the Secretary.
18
<PAGE>
Stock Listing: New York Stock Exchange; Symbol BNS
Transfer Agent and Registrar Common Stock: Bank of Boston, c/o Boston EquiServe,
L.P., Mail-Stop 45-02-64, P.O. Box 644, Boston, MA 02012-0644. They also can be
reached on the internet at the following address http://www.equiserve.com.
19
<PAGE>
BROWN & SHARPE MANUFACTURING COMPANY
Schedule II - Valuation and Qualifying Accounts
(dollars in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Foreign Balance at
Beginning Costs and Currency End of
Year Ended of Period Expenses Deductions Translation Period
- ---------- --------- -------- ---------- ----------- ------
(2) (1)
<S> <C> <C> <C> <C> <C>
December 31, 1999
Allowance for doubtful accounts $ 3,657 $ 1,826 $ 394 $(330) $ 4,759
December 31, 1998
Allowance for doubtful accounts $ 3,456 $ 1,639 $ 1,673 $ 235 $ 3,657
December 31, 1997
Allowance for doubtful accounts $ 3,226 $ 1,874 $ 1,358 $(286) $ 3,456
</TABLE>
(1) Adjustment resulting from translating allowance for doubtful accounts of
foreign subsidiaries at year-end exchange rates.
(2) Write-offs of uncollectible accounts.
20
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Number
------
<S> <C>
3.1 Joint Agreement of Merger between Brown & Sharpe Manufacturing
Company, incorporated in Rhode Island, and Brown & Sharpe
Manufacturing Company, the surviving corporation incorporated in
Delaware, filed as the only Exhibit to Form 8-K for the month of
January, 1969, and such is hereby incorporated by reference.
3.2 Amendment to Certificate of Incorporation, dated April 26, 1989,
filed as Exhibit 13 to Form 10-K for the period ending December
29, 1989, and such is hereby incorporated by reference.
3.3 Amendment to Certificate of Incorporation, Dated April 25, 1980,
filed as Exhibit 3.1 to Form 10-Q for the period ending June 28,
1980, and such is hereby incorporated by reference.
3.4 Amendment to Certificate of Incorporation dated April 24, 1987.
Exhibit 3.7 was filed as Exhibit 10.4 to Form 10-Q for the period
ended June 26, 1987, and such is hereby incorporated by reference.
3.5 Amendment to Certificate of Incorporation dated May 6, 1988 filed
as Exhibit 1 to Current Report on Form 8-K filed May 9, 1988 and
such is hereby incorporated by reference.
3.6 Certificate of Designation filed as Exhibit A to Exhibit 5 of
Amendment on Form 8 filed on March 6, 1989, and such is hereby
incorporated by reference.
3.7 Amendment to Certificate of Incorporation dated May 2, 1989.
Exhibit 3.7 was filed as Exhibit 3.7 to the Form 10-K for the year
ended December 30, 1989 and such is hereby incorporated by
reference.
3.8 By-laws of Brown & Sharpe Manufacturing Company, as amended
through July 29, 1994; previously filed as Exhibit 3.1 to the Form
10-Q for the quarter ended July 2, 1994 and such is hereby
incorporated by reference.
3.9 Amendments to By-laws of Brown & Sharpe Manufacturing Company, as
of September 28, 1994; previously filed as Exhibit 3 to the Form
10-Q for the quarter ended October 1, 1994 and such is hereby
incorporated by reference.
4.1 (Intentionally omitted)
*4.2 Note agreement dated November 10, 1997 between the Company and the
Prudential Insurance Company of America, U.S. Private Placement
Fund, Pruco Life Insurance Company, The Guardian Life Insurance
Company of America, Fort Dearborn Life Insurance Company,
Nationwide Life Insurance Company, Canada Life Insurance Company
of New York, Canada Life Insurance Company of America, and
Providentmutual Life and Annuity Company of America. Exhibit 4.2
was filed as Exhibit 4.2 to the Form 10Q for the quarter ended
June 30, 1999, and is hereby incorporated by reference.
+10.1 (Intentionally omitted)
+10.2 Amended 1983 Stock Option Plan, as amended through March 9, 1988.
Exhibit 10.2 was filed as Exhibit 10.2 to the Form 10-K for the
year ended December 31, 1988, and is hereby incorporated herein by
reference.
+10.3 Amendment dated December 29, 1990 to the Brown & Sharpe Amended
1983 Stock Option Plan. Exhibit 10.3 was filed as Exhibit 10.3 to
the Form 10-K for the year ended December 29, 1990 and such is
herein incorporated by reference.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
+10.4 Amendment No. 4 of the Restated Brown & Sharpe Employee Stock
Ownership and Profit Participation Plan and Trust Agreement, as
amended through December 21, 1990. Exhibit 10.4 was filed as
Exhibit 10.4 to the Form 10-K for the year ended December 29,
1990; and is hereby incorporated herein by reference.
10.5 (Intentionally omitted)
10.6 (Intentionally omitted)
+10.7 (Intentionally omitted)
+10.8 (Intentionally omitted)
+10.9 The Brown & Sharpe Savings and Retirement Plan for Management
Employees dated October 7, 1987.
10.10 The Brown & Sharpe Savings and Retirement Plan dated October 7,
1987.
+10.11 Amendment and Restatement of the Brown & Sharpe Employee Stock
Ownership and Profit Participation Plan and Trust Agreement dated
October 7, 1987.
Exhibits 10.9 through 10.11 were filed as Exhibits 10.2 through
10.4 respectively, to Form 10-Q for the period ended September 26,
1987 and such are hereby incorporated by reference.
10.12 (Intentionally omitted)
10.13 (Intentionally omitted)
10.14 (Intentionally omitted)
+10.15 Amendment dated February 23, 1989 to The Brown & Sharpe Savings
and Retirement Plan for Management Employees.
+10.16 Amendment No. 2, dated October 19, 1988, to The Brown & Sharpe
Savings and Retirement Plan for Management Employees.
+10.17 Amendment No. 3, dated February 23, 1989, to The Brown & Sharpe
Savings and Retirement Plan for Management Employees.
10.18 Amendment dated February 23, 1989 to The Brown & Sharpe Savings
and Retirement Plan.
10.19 Amendment No. 2, dated October 19, 1988, to The Brown & Sharpe
Savings and Retirement Plan.
10.20 Amendment No. 3, dated February 23, 1989, to The Brown & Sharpe
Savings and Retirement Plan.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
+10.21 Amendment dated February 23, 1989, to the Restated Brown & Sharpe
Employee Stock Ownership and Profit Participation Plan and Trust
Agreement.
+10.22 Amendment No. 2, dated October 19, 1988 to the Restated Brown &
Sharpe Employee Stock Ownership and Profit Participation Plan and
Trust Agreement.
+10.23 Amendment No. 3, dated February 23, 1989 to the Restated Brown &
Sharpe Employee Stock Ownership and Profit Participation Plan and
Trust Agreement.
Exhibits 10.15 through 10.23 were filed as Exhibits 10.19 through
10.26, respectively, to the Form 10-K for the year ended December
31, 1988, and are hereby incorporated herein by reference.
+10.24 Amended 1989 Equity Incentive Plan as amended through February 21,
1992. Exhibit 10.24 was filed as Exhibit 10.24 to the Form 10-K
for the year ended December 28, 1991 and such is hereby
incorporated by reference.
+10.25 Deferred Stock Equivalent Unit Contract dated September 3, 1987
between Brown & Sharpe Manufacturing Company and Paul R.
Tregurtha. Exhibit 10.25 was filed as Exhibit 10.24 to the Form
10-K for the year ended December 30, 1989 and such is herein
incorporated by reference.
+10.26 (Intentionally omitted)
+10.27 (Intentionally omitted)
+10.28 (Intentionally omitted)
+10.29 Amendment No. 4, dated October 20, 1989, to Brown & Sharpe Savings
and Retirement Plan for Management Employees. Exhibit 10.29 was
filed as Exhibit 10.26 to the Form 10-K for the year ended
December 30, 1989 and such is hereby incorporated by reference.
10.30 Amendment No. 4, dated October 30, 1989, to Brown & Sharpe Savings
and Retirement Plan. Exhibit 10.30 was filed as Exhibit 10.26 to
the Form 10-K for the year ended December 30, 1989 and such is
hereby incorporated by reference.
10.31 Amendment No. 5, dated September 7, 1990, of the Brown & Sharpe
Savings and Retirement Plan. Exhibit 10.31 was filed as Exhibit
10.30 to the Form 10-K for the year ended December 29, 1990 and
such is hereby incorporated by reference.
+10.32 Amendment No. 5, dated September 7, 1990, of the Brown & Sharpe
Savings and Retirement Plan for Management Employees. Exhibit
10.32 was filed as Exhibit 10.31 to the Form 10-K for the year
ended December 29, 1990 and such is hereby incorporated by
reference.
10.33 (Intentionally omitted)
+10.34 (Intentionally omitted)
+10.35 (Intentionally omitted)
+10.36 (Intentionally omitted)
+10.37 (Intentionally omitted)
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
+10.38 (Intentionally omitted)
+10.39 (Intentionally omitted)
+10.40 Amendment No. 5 of the Restated Brown & Sharpe Employee Stock
Ownership and Profit Participation Plan and Trust Agreement, as
amended through March 23, 1991.
+10.41 Employment/Severance Agreement dated April 23, 1992 between Brown
& Sharpe Manufacturing Company and Charles A. Junkunc.
+10.42 (Intentionally omitted)
+10.43 Amendment dated November 11, 1992 to 1989 Equity Incentive Plan as
amended through November 6, 1992.
Exhibits 10.38 through 10.43 were filed as Exhibits 10.38 through
10.43, respectively, to the Form 10-K for the year ended December
26, 1992, and are hereby incorporated by reference.
10.44 (Intentionally omitted)
10.45 (Intentionally omitted)
10.46 (Intentionally omitted)
10.47 (Intentionally omitted)
10.48 (Intentionally omitted)
10.49 (Intentionally omitted)
10.50 (Intentionally omitted)
10.51 Amendment No. 6, dated November 10, 1994, to Brown & Sharpe
Savings and Retirement Plan for Management Employees.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.52 Amendment No. 6, dated November 10, 1994, to Brown & Sharpe
Savings and Retirement Plan.
10.53 Amended Profit Incentive Plan, as amended through February 14,
1994.
10.54 Restated Supplemental Executive Retirement Plan dated January 23,
1995, filed as Exhibit 10.54 to Form 10-Q for the quarter ended
March 31, 1995, and is hereby incorporated by reference.
10.55 Amendment to the Equity Incentive Plan as of February 15, 1995,
filed as Exhibit 10.55 to Form 10-Q for the quarter ended March
31, 1995, and is hereby incorporated by reference.
10.56 Amendment No. 1 dated May 31, 1995 to the Brown & Sharpe Savings
and Retirement Plan for Management Employees. (1994 Restatement)
10.57 Amendment No. 2 dated May 31, 1995 to the Brown & Sharpe Savings
and Retirement Plan for Management Employees. (1994 Restatement)
10.58 Amendment No. 1 dated May 31, 1995 to the Brown & Sharpe Savings
and Retirement Plan. (1994 Restatement)
10.59 (Intentionally omitted)
10.60 Employment Agreement with Frank T. Curtin dated May 17, 1995.
Exhibits 10.56 through 10.60 were filed as Exhibits 10.56 through
10.60, respectively, to the Form 10-Q for the quarter ended June
30, 1995, and are hereby incorporated by reference.
10.61 Indemnity Agreement with Frank T. Curtin dated May 3, 1995.
10.62 Indemnity Agreement with Alfred J. Corso dated May 3, 1995.
10.63 (Intentionally omitted)
10.64 (Intentionally omitted)
10.65 (Intentionally omitted)
10.66 (Intentionally omitted)
10.67 (Intentionally omitted)
10.68 (Intentionally omitted)
10.69 (Intentionally omitted)
10.70 (Intentionally omitted)
10.71 (Intentionally omitted)
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.72 (Intentionally omitted)
10.73 Employment Agreement with Antonio Aparicio dated October 17, 1995.
10.74 (Intentionally omitted)
10.75 (Intentionally omitted)
10.76 Amendment to Employment Agreement with Frank T. Curtin dated as of
January 1, 1996.
Exhibits 10.69 through 10.76 were filed as Exhibits 10.69 through
10.76, respectively, to the Form S-1 dated October 9, 1996, and
are hereby incorporated by reference.
10.77 (Intentionally omitted)
10.78 (Intentionally omitted)
10.79 Indemnity Agreement with Harry A. Hammerly dated October 25, 1996.
10.80 Indemnity Agreement with John Robert Held dated October 25, 1996.
10.81 Indemnity Agreement with Roger E. Levien dated October 25, 1996.
10.82 Indemnity Agreement with Christopher J. Garcia dated January 1,
1998.
10.83 Indemnity Agreement with Marcus Burton dated January 1, 1998.
10.84 Employment Agreement dated May 29, 1997 with Edward D. DiLuigi.
10.85 Employment Agreement dated August 18, 1997 with Philip James.
Exhibits 10.84 and 10.85 were filed as Exhibits 10.84 through
10.85, respectively, to the Form 10-Q for the quarter ended
September 30, 1997, and are hereby incorporated by reference.
+10.86 Indemnity Agreement with Edward D. DiLuigi dated June 16, 1997.
+10.87 Indemnity Agreement with Philip James dated September 8, 1997.
+10.88 (Intentionally omitted)
+10.89 Supplemental Executive Retirement Plan dated February 13, 1998.
10.90 Rights Agreement dated as of February 13, 1998 ("Rights
Agreement") between the Company and BankBoston N.A., as Rights
Agent, filed as Exhibit 1 to Report on Form 8-K dated March 5,
1998, which is hereby incorporated by reference.
10.91 Form of Certificate of Designation with respect to the Series B
Participating Preferred Stock, par value $1.00 per share, of the
Company (filed as Exhibit A to the Rights Agreement, filed as
Exhibit A to Report on Form 8-K dated March 5, 1998), which is
hereby incorporated by reference.
+*10.92 Severance agreement between Brown & Sharpe Manufacturing Company
and Frank T. Curtin dated February 17, 1998.
+*10.93 Severance agreement between Brown & Sharpe Manufacturing Company
and Charles A. Junkunc dated February 17, 1998.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
+*10.94 Severance agreement between Brown & Sharpe Manufacturing Company
and Philip James dated February 17, 1998.
+*10.95 Severance agreement between Brown & Sharpe Manufacturing Company
and Antonio Aparicio dated February 17, 1998.
+*10.96 Severance agreement between Brown & Sharpe Manufacturing Company
and Marcus Burton dated February 17, 1998.
+*10.97 Severance agreement between Brown & Sharpe Manufacturing Company
and Edward D. DiLuigi dated February 17, 1998.
+*10.98 Severance agreement between Brown & Sharpe Manufacturing Company
and Christopher J. Garcia dated February 17, 1998.
+*10.99 (Intentionally omitted)
+*10.100 Severance agreement between Brown & Sharpe Manufacturing Company
and Alfred J. Corso dated February 17, 1998.
+*10.101 Severance agreement between Brown & Sharpe Manufacturing Company
and James W. Hayes, III dated February 17, 1998.
+*10.102 Severance agreement between Brown & Sharpe Manufacturing Company
and Les W. Sgnilek dated February 17, 1998.
+*10.103 Severance agreement between Brown & Sharpe Manufacturing Company
and Bryn Edwards dated February 17, 1998.
+*10.104 Severance agreement between Brown & Sharpe Manufacturing Company
and Kenneth Kirkendall dated February 17, 1998.
+*10.105 Severance agreement between Brown & Sharpe Manufacturing Company
and Fred Schutter dated February 17, 1998.
+*10.106 Key Employee's Long-Term Deferred Cash Incentive Plan as amended
through February 23, 1998.
+*10.107 Supplemental Executive Retirement Plan as amended February 13,
1998.
+*10.108 Senior Executive Supplemental Umbrella Pension Plan dated February
13, 1998.
Exhibits 10.92 through 10.108 were filed as Exhibits 10.92 through
10.108, respectively, to the Form 10-Q for the quarter ended June
30, 1998, and are hereby incorporated by reference.
+*10.109 Brown & Sharpe Manufacturing Company 1999 Equity Incentive Plan
dated February 12, 1999.
+*10.110 Amendment to Employment Contract for Frank T. Curtin dated
February 12, 1999.
Exhibits 10.109 and 10.110 were filed as Exhibits 10.109 and
10.110 to the Form 10-Q for the quarter ended June 30, 1999, and
are hereby incorporated by reference.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
+*10.111 Employment agreement with Philip James dated January 3, 2000.
+*10.112 Employment agreement with Edward D. DiLuigi dated January 3, 2000.
*13. 1999 Annual Report to Shareowners, filed for information of the
Commission except for those portion thereof which are expressly
incorporated by reference in this report.
*21. Subsidiaries of the Registrant.
*23. Consent of Independent Auditors - Ernst & Young LLP.
27 Financial Data Schedule for Fiscal Year ended December 31, 1999.
</TABLE>
* To obtain a copy of the Exhibits filed with this Annual Report on Form
10-K, refer to page 31.
+ This identifies management contracts or compensatory plans.
28
<PAGE>
Shareholders may obtain the following Exhibits filed with the 1999 Annual Report
on Form 10-K upon request. Charges will be made according to the following
schedule and payment should be made by either check or money order and should
accompany the request. The charge for all 1999 Exhibits is $27.66. Charges for
previously filed Exhibits incorporated by reference will be provided upon
request. Requests should be directed to: Secretary, Brown & Sharpe Manufacturing
Company, 200 Frenchtown Road, North Kingstown, Rhode Island 02852.
<TABLE>
<CAPTION>
Exhibit Pages Postage Total
- ------- ----- ------- -----
<S> <C> <C> <C> <C>
4.2 $50,000,000 Note Agreement dated November 10, 1997 66 $ 3.20 $ 19.70
10.109 Brown & Sharpe Manufacturing Company
1999 Equity Incentive Plan 13 $ .55 $ 3.81
10.110 Amendment to Employment Contract for Frank T. Curtin 1 $ .33 $ .58
10.111 Employment Agreement with Philip James 3 $ .33 $ 1.08
10.112 Employment Agreement with Edward DiLiugi 3 $ .33 $ 1.08
13. 1999 Annual Report to Shareowners
21. Subsidiaries of the Registrant 2 $ .33 $ .83
23. Consent of Independent Auditors
- Ernst & Young LLP 1 $ .33 $ .58
</TABLE>
29
<PAGE>
EXHIBIT 10.111
Employment Agreement
This Employment Agreement (the "Agreement") is entered into this 3rd day of
January, 2000 between Brown & Sharpe Manufacturing Company (the "Company"), with
its principal place of business at Precision Park, 200 Frenchtown Road, North
Kingstown, Rhode Island, and Philip James (the "Employee").
Recitals
A. The Employee has been continuously employed by the Company as an
executive officer of the Company on an at-will basis since August 18, 1997;
and
B. The Company and the Employee now desire to enter into an Employment
Agreement to provide the Employee with a fixed term of employment with the
Company.
NOW THEREFORE, in consideration of the mutual promises and agreements
contained herein the parties hereby agree as follows:
1. Employment. The Company agrees to continue to employ Employee, and
Employee agrees to continue his employment with the Company, subject to and
in accordance with the terms and conditions of this Agreement.
2. Term of Employment. Employee's term of employment will begin on
January 3, 2000, and will end on December 31, 2002.
3. Regular Compensation. The Company will pay Employee an annual base
salary as is in effect on January 3, 2000 in equal bi-monthly installments.
Future adjustments will be based on an annual performance review held at
the close of each fiscal year of the Company and is subject to review of
the Compensation and Nominating Committee of the Company's Board of
Directors.
4. Incentive Compensation and Benefits.
A. The Employee will participate in all existing and future
incentive compensation programs sponsored by the Company for senior
executive management including the Profit Incentive Plan, the Equity
Incentive Plans, and the Key Employee's Long Term Deferred
Compensation Incentive Plan.
B. The Employee will be entitled to participate in all Company
sponsored retirement plans, including those for senior executives, and
health and welfare including health insurance, group life and travel
accident insurance, disability income insurance, and executive
perquisite plans sponsored by the Company.
5. Employee's Title and Duties. The Company hires Employee as Group
Vice President, Measuring Systems. The position reports to BNS Chairman,
President, and CEO. Direct reports include Vice President & General
Manager, Measuring Systems - U.S.A. and Wetzlar, Germany; Vice President &
Managing Director - Brown & Sharpe DEA S.p.A.; General Manager - Brown &
Sharpe Aftermarket Services Inc.; Group Controller, Measuring Systems; and
General Managers of Commercial Operations for the Americas, Europe, and
Asia. The position is responsible for profitability and asset management
and management of all functions of the Measuring Systems Group worldwide.
The position is a member of the P & O Committee.
1
<PAGE>
6. Employee to Devote Full Time to Company's Business. Employee will
devote Employee's entire time, attention and energies to the business of
the Company and during the employment period, will not engage in any other
business activity, regardless of whether such activity is pursued for
profit, gain, or other pecuniary advantage. However, Employee is not
prohibited from making personal investments in any other businesses, as
long as these investments do not require Employee to participate in the
operation of the companies in which Employee invests.
7. Office Space and Executive Assistant. The Company will furnish the
Employee with a private office, executive assistant, and any other
facilities and services that are necessary for the performance of
Employee's executive duties and responsibilities suitable to Employee's
position.
8. Reimbursement of Expenses. Employee may incur reasonable expenses
for promoting Company's business, including expenses for entertainment,
travel, and similar items. The Company will reimburse Employee for all
reasonable business expenses after Employee presents an itemized account of
expenditures, together with receipts, vouchers and other supporting
documentation, subject to Company's approval.
9. Severance. In the event the Company terminates Employee's
employment without cause prior to expiration of the term of employment the
Company shall pay the Employee a severance amount, in addition to the base
salary payments due the Employee under the remaining unexpired term of
employment, equal to Employee's then current annual base salary in monthly
installments for a one year period following the date of termination
subject to the Employee not competing with any business of the Company or
its subsidiaries in any country in which the Company is then conducting its
business. In the event the Employee accepts employment with another
Employer during the one-year severance payment period the severance
payments hereunder will be subject to mitigation.
10. Cancellation on a Change of Control. This Employment Agreement
shall be cancelled and terminated upon the date of occurrence of a
change-in-control of the Company as defined in a "CIC" Agreement in effect
between the Employee and the Company. In such event the terms and
conditions in such CIC Agreement shall supersede and govern the terms and
conditions of employment of the Employee and the Company and the provisions
of this Employment Agreement shall become null and void.
11. Controversies. Any claim or controversy that arises out of or
relates to this Agreement, or the breach of it, will be determined in
accordance with the laws of the State of Rhode Island.
12. Waiver of Breach of Agreement. If either party waives a breach of
this Agreement by the other party, that waiver will not operate or be
construed as a waiver of later similar breaches.
13. Company May Assign Agreement. The Company's rights and obligations
under this Agreement will inure to the benefit of and be binding upon the
Company's successors and assigns.
14. Entire Agreement. This Agreement represents the entire
understanding between the Company and Employee concerning the employment
relationship and any oral changes or modifications will have no effect. It
may be altered only by a written agreement signed by the party against whom
enforcement of any waiver, change, modification, extension, or discharge is
sought.
2
<PAGE>
IN WITNESS WHEREOF, the parties have signed this Agreement on this 3rd day
of January, 2000.
Brown & Share Manufacturing Company
(the "Company")
By: /s/ Frank T. Curtin
-----------------------
Its: President and CEO
-----------------------
/s/ Philip James
-----------------------
Philip James
("Employee")
3
<PAGE>
EXHIBIT 10.112
Employment Agreement
This Employment Agreement (the "Agreement") is entered into this 3rd day of
January, 2000 between Brown & Sharpe Manufacturing Company (the "Company"), with
its principal place of business at Precision Park, 200 Frenchtown Road, North
Kingstown, Rhode Island, and Edward D. DiLuigi (the "Employee").
Recitals
A. The Employee has been continuously employed by the Company as an
executive officer of the Company on an at-will basis since June 30, 1997;
and
B. The Company and the Employee now desire to enter into an Employment
Agreement to provide the Employee with a fixed term of employment with the
Company.
NOW THEREFORE, in consideration of the mutual promises and agreements
contained herein the parties hereby agree as follows:
1. Employment. The Company agrees to continue to employ Employee, and
Employee agrees to continue his employment with the Company, subject to and
in accordance with the terms and conditions of this Agreement.
2. Term of Employment. Employee's term of employment will begin on
January 3, 2000, and will end on December 31, 2002.
3. Regular Compensation. The Company will pay Employee an annual base
salary as is in effect on January 3, 2000 in equal bi-monthly installments.
Future adjustments will be based on an annual performance review held at
the close of each fiscal year of the Company and is subject to review of
the Compensation and Nominating Committee of the Company's Board of
Directors.
4. Incentive Compensation and Benefits.
A. The Employee will participate in all existing and future
incentive compensation programs sponsored by the Company for senior
executive management including the Profit Incentive Plan, the Equity
Incentive Plans, and the Key Employee's Long Term Deferred
Compensation Incentive Plan.
B. The Employee will be entitled to participate in all Company
sponsored retirement plans, including those for senior executives, and
health and welfare including health insurance, group life and travel
accident insurance, disability income insurance, and executive
perquisite plans sponsored by the Company.
5. Employee's Title and Duties. The Company hires Employee as Vice
President and General Manager, Measuring Systems, Americas.
Responsibilities include full responsibility for all activities of the
Measuring Systems Americas Division with the primary objective of improving
customer satisfaction, development of new products, growth of revenues,
decrease costs, improve profitability and assure on-time delivery of
products that meet specified quality standards. The position will work
closely with, and engage in joint projects where appropriate, with the
General Managers of all B & S Divisions and work closely on overall
long-range planning and strategy for the Measuring Systems business and the
Company.
1
<PAGE>
6. Employee to Devote Full Time to Company's Business. Employee will
devote Employee's entire time, attention and energies to the business of
the Company and during the employment period, will not engage in any other
business activity, regardless of whether such activity is pursued for
profit, gain, or other pecuniary advantage. However, Employee is not
prohibited from making personal investments in any other businesses, as
long as these investments do not require Employee to participate in the
operation of the companies in which Employee invests.
7. Office Space and Executive Assistant. The Company will furnish the
Employee with a private office, executive assistant, and any other
facilities and services that are necessary for the performance of
Employee's executive duties and responsibilities suitable to Employee's
position.
8. Reimbursement of Expenses. Employee may incur reasonable expenses
for promoting Company's business, including expenses for entertainment,
travel, and similar items. The Company will reimburse Employee for all
reasonable business expenses after Employee presents an itemized account of
expenditures, together with receipts, vouchers and other supporting
documentation, subject to Company's approval.
9. Severance. In the event the Company terminates Employee's
employment without cause prior to expiration of the term of employment the
Company shall pay the Employee a severance amount, in addition to the base
salary payments due the Employee under the remaining unexpired term of
employment, equal to Employee's then current annual base salary in monthly
installments for a one year period following the date of termination
subject to the Employee not competing with any business of the Company or
its subsidiaries in any country in which the Company is then conducting its
business. In the event the Employee accepts employment with another
Employer during the one-year severance payment period the severance
payments hereunder will be subject to mitigation.
10. Cancellation on a Change of Control. This Employment Agreement
shall be cancelled and terminated upon the date of occurrence of a
change-in-control of the Company as defined in a "CIC" Agreement in effect
between the Employee and the Company. In such event the terms and
conditions in such CIC Agreement shall supersede and govern the terms and
conditions of employment of the Employee and the Company and the provisions
of this Employment Agreement shall become null and void.
11. Controversies. Any claim or controversy that arises out of or
relates to this Agreement, or the breach of it, will be determined in
accordance with the laws of the State of Rhode Island.
12. Waiver of Breach of Agreement. If either party waives a breach of
this Agreement by the other party, that waiver will not operate or be
construed as a waiver of later similar breaches.
13. Company May Assign Agreement. The Company's rights and obligations
under this Agreement will inure to the benefit of and be binding upon the
Company's successors and assigns.
14. Entire Agreement. This Agreement represents the entire
understanding between the Company and Employee concerning the employment
relationship and any oral changes or modifications will have no effect. It
may be altered only by a written agreement signed by the party against whom
enforcement of any waiver, change, modification, extension, or discharge is
sought.
2
<PAGE>
IN WITNESS WHEREOF, the parties have signed this Agreement on this 3rd day
of January, 2000.
Brown & Share Manufacturing Company
(the "Company")
By: /s/ Frank T. Curtin
-----------------------
Its: President and CEO
-----------------------
/s/ Edward D. DiLuigi
-----------------------
Edward D. DiLuigi
("Employee")
3
<PAGE>
EXHIBIT 13
Financial Highlights
- --------------------------------------------------------------------------------
(dollars in millions, except per share data)
1999 1998 1997
---- ---- ----
For the year
Sales $323.3 $339.0 $329.8
Operating (Loss) Profit $(33.4) $ 20.5 $ (1.9)
Net (Loss) Income $(42.9) $ 11.9 $ (9.2)
Per Share:
Basic $(3.19) $ 0.89 $(0.69)
Diluted $(3.19 ) $ 0.88 $(0.69)
At year end
Backlog $ 59.0 $ 72.0 $ 68.0
Total Assets $302.2 $317.8 $296.6
Total Short- and Long-Term Borrowings $110.1 $ 74.7 $ 76.1
Shareowners' Equity $ 71.5 $129.7 $114.0
Per Share $ 5.29 $ 9.65 $ 8.55
Number of Employees 2,216 2,359 2,409
<PAGE>
Financial Section
- --------------------------------------------------------------------------------
Brown & Sharpe Manufacturing Company
Contents
Selected Financial Data....................................................F-2
Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................F-3
Consolidated Statements of Operations......................................F-12
Consolidated Balance Sheets................................................F-13
Consolidated Statements of Cash Flows......................................F-14
Consolidated Statements of Shareowners' Equity.............................F-15
Notes to Consolidated Financial Statements.................................F-16
Report of Independent Auditors.............................................F-34
Common Stock Market Prices and Dividends...................................F-35
F-1
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(dollars in thousands, except per share data,
number of shareowners, and employees) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Operations for the year:
Sales $ 323,300 $339,030 $ 329,760 $342,684 $322,950
Operating (loss) profit $ (33,364) $ 20,509 $ (1,906) $ 16,169 $ 12,347
Percent (10.3)% 6.1% (0.6)% 5.0% 3.8%
Net (loss) income $ (42,874) $ 11,929 $ (9,164) $ 7,432 $ 2,868
Average shares outstanding
(thousands) 13,456 13,387 13,257 9,670 8,773
Per common share:
Basic $ (3.19) $ 0.89 $ (0.69) $ 0.77 $ 0.33
Diluted $ (3.19) $ 0.88 $ (0.69) $ 0.75 $ 0.33
At year-end:
Backlog $ 59,000 $ 72,000 $ 68,000 $ 66,000 $ 72,000
Assets $ 302,177 $317,778 $ 296,593 $309,229 $290,600
Current ratio 1.05:1 2.12:1 2.18:1 1.88:1 1.55:1
Long-term debt, including
current maturity $ 69,030 $ 74,705 $ 76,062 $ 68,497 $ 74,007
Total notes payable
and long-term debt $ 110,140 $ 74,705 $ 76,062 $ 69,206 $102,068
Equity $ 71,534 $129,655 $ 113,966 $136,502 $ 82,332
Per share $ 5.29 $ 9.65 $ 8.55 $ 10.34 $ 9.44
Long-term debt ratio .491 .366 .400 .334 .473
Shareowners of record 1,013 1,200 1,943 2,104 4,400
Employees 2,216 2,359 2,409 2,383 2,373
</TABLE>
(1) The 1999 and 1997 operating losses include a $38,268 and $16,220
restructuring charge, respectively. See Note 3 to the Consolidated
Financial Statements for additional information. In addition to the
restructuring charge, the 1997 net loss includes a $1,346 loss arising from
the sale of the Company's wholly-owned subsidiary, Technicomp, Inc., and a
$1,224 gain resulting from an exchange of shares of common stock, which
were held for investment.
(2) Net income for 1995 includes a $640 adjustment relating to a revaluation of
a 1994 foreign denominated liability recorded at an incorrect foreign
exchange rate.
F-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company currently operates entirely in the metrology industry through
five business segments: the MS Division ("MSD"), which manufactures and markets
manual and computer-controlled, high precision coordinated measuring machines
("CMMs"), accounted for approximately 72% of the Company's sales in 1999; the
PMI Division ("PMI"), which manufactures mechanical and electronic measuring and
inspection tools, accounted for approximately 23% of the Company's sales in
1999; and the Custom Metrology Division ("CMD"), which, until its reorganization
in 1999, designed and engineered specialty metrology products and systems
primarily utilizing non-contact technologies and, in 1999, is dedicated to the
production and development of non-contact technology, accounts for approximately
4% of the Company's sales in 1999. Brown & Sharpe Information Systems ("BSIS")
develops measuring software and the Electronics Division ("ED"), which was
acquired in 1999, designs and manufactures surface inspection systems, accounted
for the remaining 1% of the Company's 1999 sales. MSD sales include revenue from
aftermarket sales and service for CMMs, which the Company estimates, during
1999, comprised approximately 36% of total MSD sales. Approximately 57% of the
Company's sales in 1999 were located outside the United States (based upon the
location of customers who are situated within the market areas assigned to
subsidiaries located outside of the United States).
During 1999, the Company implemented a reorganization plan in which it
reorganized each of its significant operating divisions. A portion of the plan
provided for the reorganization of the manufacturing and administrative
operations of PMI by consolidating all of its European manufacturing sites into
one location in Renens, Switzerland. The PMI reorganization eliminated four
factories in Europe and consolidated administrative functions, which provided
greater production and administrative efficiencies. The 1999 reorganization plan
also included a strategy for MSD in which a focus factory mission was
implemented, which enabled each factory to function as a center of excellence
with a goal of taking advantage of product strengths in each of the
manufacturing sites. The plan also provided for the reorganization of the R&D,
selling, and service areas. Finally, the Company also reorganized CMD located in
Telford, England by exiting certain non-core products and eliminating operating
cost that was related to those products (see Note 3).
As a result of the 1999 restructuring, the Company recorded restructuring
charges, net of taxes, totaling $36,798 ($2.73 per share). The 1999
restructuring charge, as well as the 1997 charge discussed below, included costs
associated with involuntary employee termination benefits for employees,
writedowns of inventory to net realizable value, writedowns of impaired fixed
assets and certain intangible assets to fair value, and other restructuring
costs, such as legal expenses, lease cancellations, travel, etc. The inventory
adjustment of $12.4 million in 1999 ($5.4 million in 1997) has been classified
in cost of goods sold. The Company paid $8.1 million in restructuring costs in
1999, $1.2 million of which applied to the 1997 reorganization, and expects to
pay $10.7 million in 2000 and $1.1 million thereafter.
In 1997, the Company also implemented a reorganization plan in which it
restructured certain of its European operations, along with other less
significant changes in other parts of the world. As a result of the
restructuring, the Company recognized a charge in 1997 amounting to $16,220
($1.22 per share). See Note 3 for further information.
Forward Looking Statements
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" as well as other portions of this document contain
forward looking statements concerning the Company's operations, economic
performance and financial condition. Such statements are subject to various
risks and uncertainties, including those set forth in "Risk Factors," and
actual performance could differ materially from that currently anticipated by
the Company. In addition, this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
included elsewhere in this Annual Report.
F-3
<PAGE>
RESULTS OF OPERATIONS
Sales
Sales for 1999 were $323.3 million compared with sales in 1998 of $339.0
million, which is 4.6% below the 1998 level. The 1999 sales would have been $5.1
million higher than reported in 1999, if foreign denominated sales had been
translated at 1998 foreign exchange rates. The reduced U.S. dollar value of 1999
foreign sales, which results from translating the 1999 foreign denominated sales
at the lower 1999 exchange rates, is due to the continued strength of the U.S.
dollar. When the 1999 sales are translated at 1998 exchange rates, the 1999
sales amount to $328.4, a $10.6 million decrease from 1998 levels. The $10.6
million sales decrease in 1999 sales was caused by a $4.3 million and $9.4
million decrease, respectively, in the MS and PMI divisions, offset by a $1.9
million increase for the electronics business, which was acquired in 1999, and a
$1.2 million increase in CMD sales.
The $4.3 million decrease in MSD sales was primarily due to an approximate
$16.5 million decrease in the sales of certain of the smaller CMMs and $3
million decrease in the sales of more fully configured CMMs, offset by an
increase of approximately $15.2 million in aftermarket revenue, due to increased
sales of upgrades and software.
Sales for PMI were down $9.4 million due to decreased sales volume in the
United States caused by stock reduction and consolidation of U.S. catalog
distributors, reduced sales in the United Kingdom due to restructuring, and a
slowdown in the Asian and South American markets. Sales for CMD were up $1.2
million due to increased sales of its profile machines which measure shafts and
round components.
Sales for 1998 were $339.0 million compared with 1997 sales of $329.8
million, which is 2.8% higher than the 1997 level. The 1998 sales would have
been $2.9 million higher than reported in 1998, if foreign denominated sales had
been translated at 1997 foreign exchange rates. The reduced U.S. dollar value of
1998 foreign sales, which results from translating the 1998 foreign denominated
sales at the lower 1998 exchange rates, is due to the continued strength of the
U.S. dollar. When the 1998 sales are translated at 1997 exchange rates, the 1998
sales amount to $341.9 million, a $12.1 million increase over 1997. The $12.1
million sales increase resulted from a $14.8 million and $2.4 million increase,
respectively, in the MS and CM Divisions' sales, offset by a $3.7 million
decrease in PMI Division sales and by a $1.4 million decrease in Technicomp
Inc.'s sales, which was disposed of in the third quarter of 1997.
The $14.8 million increase in MSD sales was primarily due to an increase of
approximately $13.6 million of aftermarket services revenue and an increase of
$1.2 million in machine shipments. Approximately $3.7 million of the $13.6
million increase in aftermarket service revenue is due to the inclusion of sales
of Automation Software, Inc. ("ASI"), which were not included in 1997 results
prior to its acquisition in July 1997. The remaining $9.9 million increase was
due, primarily, to increased sales for retrofits and upgrades, spare parts, and
software partially offset by decreased revenues for other aftermarket products.
Of the $1.2 million increase in machine sales, approximately $6.8 million was
from additional sales of smaller CMMs offset by decreased sales of $5.6 million
for larger, more fully configured CMMs.
Sales for the CM Division increased $2.4 million due to increased sales of
can gauging machines. Offsetting the increased sales in the MS Division and CM
Division were decreased sales in the PMI Division amounting to $3.7 million. The
decreased PMI Division sales resulted from decreased sales in the United States
arising from customer consolidation with resulting inventory reductions,
partially offset by increased sales volume in the European market, specifically
Switzerland, Germany, and Spain.
F-4
<PAGE>
Earnings (Loss)
The Company's net loss for 1999 was $42.9 million. The loss included, as
discussed above, $36.8 million of restructuring charges, net of taxes. Excluding
the effect of the restructuring charges, 1999 would have incurred a $6.1 million
net loss, which compared with $11.9 million net income for the same period in
1998.
The Company had an operating loss of $33.4 million in 1999, which included
$38.3 million of restructuring charges. Excluding the effect of the
restructuring charge, 1999 operating profit would have been $4.9 million, which
is $15.6 million lower than 1998. The gross margin for 1999 was $88.4 million,
which included $12.4 million of the $38.3 million restructuring charges. When
the $12.4 million restructuring adjustment is excluded from cost of goods sold,
the 1999 gross margin amounts to $100.8 million, which is 31.2% of 1999 sales.
This compares with a 1998 gross margin of $115.0 million, which is 33.9% of 1998
sales. The $14.2 million decrease in gross margin is due to lower margins of
$11.5 million and $4.8 million for the MS and PMI Divisions, respectively,
offset by higher margins of $1.5 million and $0.6 million for the CM and
Electronics Divisions, respectively. MSD gross profit is down due to lower
margins for CMMs due to reduced absorption arising from reduced sales of the
smaller, less configured machines, and the incurrence of certain costs, such as
training, that were necessary to grow the aftermarket business. PMI's gross
margin is down due to lower absorption arising from lower sales volume.
Selling, general and administrative expenses (SG&A) in 1999 were up $1.8
million. If 1999 SG&A expenses were translated at 1998 exchange rates, the 1999
SG&A expenses would be $4.6 million higher than 1998. $2.2 million of this
increase is due to the recording of expenses of the new companies acquired
during the year. The remainder of the $2.4 million is due to various reasons,
including costs to complete the installation of a new management information
system to support MSD sales activity and increased pension costs, that were
partially offset by reduced agents' commissions, as well as certain other costs.
Research and development expenses decreased by $1.3 million in 1999,
because costs for the next generation software achieved the technological
feasibility stage of development which required the capitalization of $3 million
of these development costs and, therefore, were not recorded as development
expense as in the prior year.
Results in 1999 included a $2.4 million tax provision as compared to $3.4
million in 1998. The $2.4 million tax provision is net of a $3.8 million
provision for the pretax operating loss offset by a $1.4 million benefit
relating to the restructuring charge. The 1999 tax provision results from local
taxes in Italy that cannot be offset by net operating loss benefits and an
increase in the valuation allowance for deferred tax assets that was partially
offset by the $1.4 million tax benefit noted above. Most of the tax benefit from
the $40.5 million pretax loss was not recognized, due to the uncertainty of the
ultimate realization of the tax benefits.
The Company realized a $11.9 million net profit in 1998. This compares with
a 1997 net loss of $9.2 million, which included $16.2 million of restructuring
expenses, as well as, $0.1 million loss due to the disposition of certain
non-strategic assets. Excluding the effect of the restructuring expenses and
non-strategic asset disposition, 1997 would have realized $7.1 million of net
income, which compares with $11.0 million in 1998 after adjustment of $0.9
million for a restructuring benefit recorded in 1998.
The Company realized a $20.5 million operating profit in 1998, including a
$0.9 million benefit resulting from adjustment of restructuring reserves
recorded in 1997. This compares with a $1.9 million operating loss in 1997,
which included $16.2 million of restructuring expenses discussed above.
Excluding the effect of the restructuring charge, 1997 operating profit would
have been $14.3 million. The $5.3 million improvement in 1998 operating profit
over 1997 operating profit, excluding restructuring charges and benefits
recorded in 1997 and 1998, respectively, is due to increased gross margin and
expense reductions in 1998.
F-5
<PAGE>
The gross margin for 1998 was $115.0 million, which is 33.9% of sales,
compared with a gross margin for 1997 of $105.4 million, which included $5.3
million of the $16.2 million restructuring expenses. The $5.3 million charge was
a result of adjustments for inventory levels that exceed expected requirements
resulting from the Company's reorganization plan discussed above. When the $5.3
million inventory adjustment is excluded from cost of goods sold, the 1997 gross
margin is $110.7 million, which is 33.6% of 1997 sales. The $4.3 million
increase in 1998 gross margin is due to higher margins amounting to $4.9 million
and $0.6 million for the MS and CM Divisions, respectively, offset by a
decreased margin of $1.2 million from the Technicomp Division sold in 1997. The
increased gross profit of $4.9 million for the MS Division was due to reduced
costs for the highly configured CMMs produced by the Company's European
operations, resulting, partially, from the restructuring actions initiated in
1997, as well as increased sales in 1998 for the higher margin aftermarket
products. The higher gross margin for the CM Division was due to improved
overhead absorption arising from increased shipments, which was offset by a $1.2
million decrease in the Technicomp's gross margins due to the disposition of
Technicomp in 1997.
Selling, general, and administrative expenses ("SG&A") for 1998 were 25.0%
of sales as compared to 26.5% for 1997. SG&A expenses in 1998 were $2.4 million
lower than 1997. SG&A expenses for 1998 translated at 1997 exchange rates were
$0.8 million higher than the $84.9 million reported for the year. After
adjustment for 1997 foreign exchange rates, 1998 SG&A expenses were $1.6 million
lower than 1997 SG&A expenses. The major reasons for the decrease are due to
lower payroll and payroll related expenses, some of which related to the
restructuring discussed above, and travel and entertainment expenses, partially
offset by increased agents' commissions.
Research and development expense increased $1.3 million in 1998 due to
increased investment in software development by Brown & Sharpe Information
Systems, Inc.
Results in 1998 included a $3.4 million tax provision, which resulted in a
22% effective tax rate. The 22% effective tax rate in 1998 is primarily due to
an income tax provision in one foreign jurisdiction and local income taxes in
Italy that cannot be offset by net operating loss benefits, offset by the
recognition of net operating loss benefits in other tax jurisdictions.
Liquidity and Capital Resources
The Company is obligated under a $50 million private placement of senior
notes with principal payments due from November 2001 to November 2007 (now
classified as short-term because the Company has breached financial ratio
covenants in the senior note agreement), as well as long-term debt amounting to
$19.0 million, including a $4.9 million mortgage which was refinanced in
February 2000. The Company also has a $30 million three year syndicated
multi-currency revolving Credit Agreement with four banks, which expires in
November 2000. 65% of the shares of certain of the Company's foreign
subsidiaries are pledged as security for the lender under the private placement
and the $30 million line of credit (the "Senior Lenders"). In addition to the
$30 million revolving Credit Agreement, the Company has $31.1 million in lines
of credit with various banks located outside of the United States. At December
31, 1999, the Company had borrowed $27.4 million and $13.7 million under the
revolving Credit Agreement and foreign lines of credit, respectively. During
1999, the Company breached certain financial covenants relating to the debt to
EBITDA ratio, debt to net worth and the interest coverage ratio. The Company's
Senior Lenders granted waivers curing the financial covenant defaults incurred
under its note and loan agreements through the end of 1999. In addition,
borrowing rates under these lending agreements with its principal lenders were
increased, and these lending agreements were amended to add covenants requiring
the Company to grant the Senior Lenders a security interest in its U.S. assets
and to complete a refinancing acceptable to the lenders by January 31, 2000. As
of February 29, 2000, the Company had not completed the refinancing of its
senior debt and was in violation of its note and loan agreements. Management and
a Special Committee of three independent directors are working, subject to
definitive approval from the full Board of Directors ("Board") on the
transaction, to agree upon and complete a financing transaction to remedy the
Company's present default situation with respect to the loan covenants in its
senior note and loan agreements and to resolve its existing liquidity problem.
Management has also been conducting discussions with its Senior Lenders to
obtain another waiver to extend the period to complete the refinancing of the
Company.
F-6
<PAGE>
At February 29, 2000, the Company has $37.2 million of cash on hand and has
been meeting its normal cash needs. However, the Company is, as a result of
recent amendments to its loan agreements, prohibited from further borrowing
under its foreign credit lines. There can be no assurance that the lenders will
continue to make additional funds available to the Company under the revolving
credit ($2.6 million was available for additional borrowing under the Credit
Agreement) or that the Company will be able to complete a financing transaction
in an amount and upon terms, including the reset of its financial covenants,
satisfactory to Senior Lenders, including the application of the proceeds of any
such new financing to the partial payment of its existing debt under the Note
Agreement and under the Credit Agreement (subject to being reborrowed under the
revolving Credit Agreement on the terms specified in the Credit Agreement as to
be amended). Until the financial covenants have been reset and the defaults
cured, the Company has classified the $50 million obligation as a current
liability. During this period of discussion with its lenders, the Company is
instituting additional cash management procedures. If the Company's negotiations
with the party or parties who might provide either additional capital or other
sources of financing and parallel negotiations with its present set of lenders
under the Note Agreement and lenders under the Credit Agreement are not
successful with respect to the timely issuance of the new financing and
resetting the financial covenants under the various noted loan documents, the
Company plans to seek other alternative financing. However, it is not possible
to predict whether any such alternative arrangements could be negotiated on
satisfactory terms.
Cash Flow
Net cash provided by operations in 1999 and 1998 was $15.3 million and
$17.4 million, respectively. For the year ended December 31, 1999, the net loss
of $42.9 million was decreased by depreciation and other non-cash items of $55.8
million, including restructuring charges of $30.5 million and further decreased
by a reduction in working capital of $2.4 million. For the year ended December
31, 1998, net income of $11.9 million was increased by depreciation and other
non-cash items of $15.5 million and reduced by an increase in working capital of
$10.0 million.
Net cash used in investment transactions in 1999 and 1998 was $24.0 million
and $21.9, respectively. Capital expenditures in 1999 and 1998 amounted to $9.1
million and $17.2 million, respectively. In 1999, the Company invested in
acquisitions amounting to $9.2 million. In 1999, it also provided an additional
$2.2 million to its equity investee, invested $0.7 million in marketable
securities to fund a defined benefit plan, and invested $3.0 million in
internally developed software costs. During 1998, $5.8 million was spent to
upgrade its management information systems and classified with capital
expenditures.
Cash provided by financing transactions was $37.7 million during 1999
compared to cash used in financing transactions of $2.1 million in the same
period in 1998. Financial transactions during 1999 consisted of an increase of
$41.8 million in short-term borrowings, offset by principal payments of
long-term debt of $4.1 million. Financing transactions during the same period in
1998 consisted of $2.9 million of principal payments of long-term debt offset by
$0.3 million due to the exercise of stock options.
Working Capital
Working capital decreased from $111.8 million at December 31, 1998 to $9.7
million at December 31, 1999, principally due to a reclassification of $50
million of senior long-term debt to currently payable as discussed above in the
section on liquidity and capital resources and an increase of $41.1 million in
short-term borrowings. In 1999, reductions in accounts receivable and
inventories amounting to $35.6 million were offset by a $24.4 million increase
in cash, while current liabilities in 1999, excluding current maturities of
short and long-term debt, increased $4.2 million and accounts for the remaining
effect of the change in working capital.
Product Design and Manufacturing Engineering
The Company invested $14.4 million, or 4.5% of sales, $17.8 million, or
5.3% of sales, $15.5 million, or 4.7% of sales in 1999, 1998 and 1997,
respectively, for product design and manufacturing engineering.
F-7
<PAGE>
RISK FACTORS
Indebtedness and Liquidity
As set forth in "Management's Discussion & Analysis - Liquidity and Capital
Resources," during 1999, the Company breached certain financial ratio covenants.
The Company received waivers curing the defaults through the end of 1999;
however, due to its inability to complete a financing transaction, the Company,
as of February 29, 2000, is in violation of its note and loan agreements with
its Senior Lenders. There can be no assurance the Company will be able to
complete a financing transaction which will remedy the present default situation
and the Company's existing liquidity problem acceptable to Senior Lenders or
will be able to negotiate amendments on satisfactory terms to the Note Agreement
with its private placement lenders and to the Credit Agreement with its
revolving credit lenders. The Company expects that the terms of the financing
transaction will either call for issuance of equity securities in a private
placement (more likely) or possibly subordinated debt with warrants to purchase
shares of common stock of the Company. If the Company is unable to complete a
financing transaction with equity (or subordinated debt with warrants) and its
parallel negotiations with both sets of its present Senior Lenders are not
successful in resolving these issues, the Company plans to seek other
alternative financing. However, it is also not possible to predict whether any
such alternative arrangements could be negotiated on satisfactory terms. For
additional details, see "Management's Discussion & Analysis - Liquidity and
Capital Resources" elsewhere in this Report and Notes 2 and 11 to the
consolidated financial statements elsewhere in this Report, all of which are
hereby incorporated by reference.
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. The Company experiences significant pricing
competition in connection with sales by its MS Group which can have an adverse
impact on the Company's sales and margins. During periods when the metrology
industry suffers from over capacity, downward pricing pressure experienced by
the MS Group is likely to be more intense and the Company's margins may be more
severely impacted. In addition, certain of the Company's competitors have access
to greater financial resources and may be able to withstand such pricing
pressure more effectively than the Company. Accordingly, there can be no
assurance that the MS Group will be able to continue to compete effectively
against existing competitors or new competitors, especially during periods of
over capacity.
The market for the PMI Division's products is fragmented and the PMI
Division competes with a large number of competitors, including the market
leader in this area, primarily on the basis of the strength of its third-party
distribution network, price and product innovation. New competitors from
emerging industrialized countries with lower production costs than the Company's
represent a significant competitive challenge to the Company. As a result, the
PMI Division's continued success and profitability will be dependent on its
ability to continue to develop cost-effective sourcing and innovative products.
Cyclicality of End User Markets
The primary end user markets for the Company's products, which include the
aerospace, heavy transport and automotive (including automotive suppliers)
industries, experience cyclicality in connection with recessionary periods
affecting these industries in the various geographic areas.
As a consequence, the prices of and margins for the Company's products have
been and are likely to continue to be adversely impacted by decreases in capital
spending by such end user markets during recessionary periods. In addition,
because the PMI Division sells primarily through distributors, the PMI Division
is likely to experience significant declines in sales volumes during
recessionary periods because catalog houses and distributors typically reduce
purchases of the Company's products at the onset of such recessionary periods
even more than the decline in their end user markets' demands would dictate, in
order to reduce their inventories. There can be no assurance that the Company
will be able to operate profitably during any recessionary downturn.
F-8
<PAGE>
Foreign Operations
As of December 31, 1999, approximately 65% (based on book values) of the
Company's assets, 57% of the Company's sales (based on customer location) and
65% 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.
In addition, the widespread geographic locations of the Company's
facilities and operations make it more difficult for the Company to coordinate
its financial and operating reporting and oversee its operations and employees.
In response to these difficulties, the Company has taken various personnel and
procedural actions to improve its reporting and operating procedures. While the
Company believes that these actions have resulted in satisfactory financial and
operational reporting and oversight for its present business, additional system
revisions may be needed if the Company should experience a further increase in
the number of foreign facilities.
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 materially adverse
effect on the Company.
Technology
As the size of some components measured by metrology products decreases and
the required speed and precision of such measurements increases, the Company's
products may become obsolete unless the Company develops more sophisticated
software and metrology systems. Although the Company's strategy is to focus
research and development in the area of software development and non-contact
technologies, there can be no assurance that the Company will be successful in
competing against new technologies or competitors, some of whom may not now
participate in the metrology industry.
Dependence on Limited Number of Key Personnel
The success of the Company is dependent to a significant extent upon the
continuing services of a limited number of key executives of the senior
management team. Loss of the services of one or more of these senior executives
could have a materially adverse effect on the Company.
F-9
<PAGE>
Implementation of Company Strategy
The 1999 restructuring initiatives focus on three areas: (i) eliminating
unprofitable products in the CMD operation and reducing their breakeven point;
(ii) closing high cost or duplicate PMI factories and outsourcing manufacturing
where appropriate, and (iii) creating focused factories and eliminating
overlapping products in the MS Group. Key elements of the Company's business
strategy for 2000 include the start of realization of the planned benefit of the
1999 restructuring and completion of the development and market introduction of
new products, which leverage off of the Company's proprietary technology and
expertise, including metrology tools for electronic component manufacturers, to
be sold by a unit acquired by the Company in 1999 and non-contact sensor
technology products and focusing, through the Company's subsidiary, Brown &
Sharpe Information Systems Inc. ("BSIS"), on software development to have a
single metrology operating platform which will be utilized on Brown & Sharpe
equipment and on equipment of other metrology manufacturers. There can be no
assurances that the Company will be able to achieve its planned objectives from
the 1999 restructuring or the new products under development.
Qualitative and Quantitative Disclosure About Market Risk
The Company has no derivative financial instruments or derivative commodity
instruments but does have outstanding long-term debt. Substantially all of its
long-term debt is fixed rate obligations. An increase in interest rates would
not significantly increase interest expense or cash flows due to the fixed
nature of the debt obligations, and a 10% change in interest rates would not
result in a material change in the fair value of its debt obligations.
A portion of the Company's consolidated long-term debt consists of
obligations of certain of its foreign subsidiaries, which are denominated in the
currencies of the countries in which these subsidiaries are located. The Company
does not hedge these foreign denominated debt obligations, since all of the
foreign debt is payable in the functional currencies of these foreign
subsidiaries. Since there is no foreign currency exchange risk related to the
debt obligations of these foreign subsidiaries, net income and net cash flows
are not affected by changes in the foreign exchange rates of these obligations,
and a 10% increase in the foreign exchange rates of these debt obligations would
not have a material effect on the Company's financial position.
Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer equipment
and software and devices with embedded technology that are time-sensitive may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
During the last several years, the Company has spent approximately $1.3
million to address issues related to the Y2K problem. Most of these costs were
expensed as incurred and were funded by cash flow from operations. As of
December 31, 1999, the Company had completed all aspects of its Y2K readiness
program and, through February 29, 2000, the Company has not experienced any
significant problems related to the Y2K issue.
F-10
<PAGE>
European Monetary Union
Effective January 1, 1999, eleven of fifteen member countries of the
European Union ("EU") established fixed conversion rates between their existing
sovereign currencies and a common currency, the "Euro." During a transition
period from January 1, 1999 to June 30, 2002, non-cash transactions may be
denominated in either Euros or the existing currencies of the EU participants
from January 1, 1999 to January 1, 2002. After January 1, 2002, all non-cash
transactions must be denominated in Euro. Euro currency will not be issued until
January 1, 2002, and on June 30, 2002, all national currencies of the EU
participating countries will become obsolete.
The Company has significant operations in several of the EU countries that
will convert, or that may convert, to the Euro. The introduction of the Euro may
present substantial risks to the Company for its operations located in the EU
participating countries. These risks include competitive implications of
conversion resulting from harmonization of pricing policies and practices in our
European operations; possible increased costs associated with the conversion;
and the ability to modify existing information systems on a timely basis, if at
all, as well as the ability to absorb the costs associated with the systems'
modifications, if required.
The Company has established various policies to be implemented during the
transition period. The Company has taken a position on pricing policy.
Essentially, Euro pricing will be provided if requested by customers; otherwise,
pricing will continue in legacy currencies. This pricing policy will apply to
both Euro and non-Euro countries. For accounting purposes, the Company will
treat the Euro as any other currency while maintaining its accounts records in
legacy currency. All affected locations have been contacted about their ability
to manage the required triangulation when converting from one legacy currency to
another. Although the present accounting systems do not handle triangulation,
the calculation is being done using commercial software. All of the Company's
banks are providing dual statements and can accept and make payments in both
legacy currency and Euro.
Some of the Company's current business operating software is not Euro
compliant. Two of the operations will acquire a software patch which will make
the software Euro compliant. Another operation is purchasing operating software
which is Euro compliant. The Company believes it will be completely Euro
compliant by the mandatory conversion date.
F-11
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Sales $ 323,300 $ 339,030 $ 329,760
Cost of goods sold (Note 3) 234,875 223,999 224,351
Research and development expense 9,195 10,523 9,180
Selling, general and administrative expense 86,736 84,895 87,288
Restructuring charge (benefit) (Note 3) 25,858 (896) 10,847
--------- --------- ---------
Operating (loss) profit (33,364) 20,509 (1,906)
Interest expense 7,534 6,164 6,380
Other income, net 374 949 1,044
--------- --------- ---------
(Loss) income before income taxes (40,524) 15,294 (7,242)
Income tax provision 2,350 3,365 1,922
--------- --------- ---------
Net (loss) income $ (42,874) $ 11,929 $ (9,164)
========= ========= =========
Net (loss) income per common share (Note 9):
Basic $ (3.19) $ 0.89 $ (0.69)
========= ========= =========
Diluted $ (3.19) $ 0.88 $ (0.69)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 36,643 $ 12,290
Accounts receivable, net of allowances for doubtful accounts
of $4,759 and $3,657 88,300 103,780
Inventories 68,310 88,391
Prepaid expenses and other current assets 5,553 6,857
--------- ---------
Total current assets 198,806 211,318
Property, plant and equipment:
Land 6,510 6,797
Buildings and improvements 35,465 43,919
Machinery and equipment 94,011 96,070
--------- ---------
135,986 146,786
Less-accumulated depreciation 88,667 93,293
--------- ---------
47,319 53,493
Goodwill, net 11,145 7,961
Other assets (Note 10) 44,907 45,006
--------- ---------
$ 302,177 $ 317,778
========= =========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Notes payable to banks $ 41,110 $ --
Accounts payable 41,916 42,153
Accrued expenses and income taxes 52,504 48,045
Current portion of long-term debt 53,585 9,272
--------- ---------
Total current liabilities 189,115 99,470
Long-term debt (Note 11) 15,445 65,433
Long-term liabilities (Note 12) 26,083 23,220
Commitments and Contingencies (Notes 8 and 16) -- --
Shareowners' Equity:
Preferred stock, $1 par value; authorized 1,000,000 shares; none issued -- --
Common stock:
Class A, par value $1; authorized 30,000,000 shares;
issued 13,010,623 shares in 1999 and 12,926,385 in 1998 13,011 12,926
Class B, par value $1; authorized 2,000,000 shares;
issued 504,414 shares in 1999 and 507,809 in 1998 504 508
Additional paid-in capital 113,085 112,508
Retained earnings (deficit) (44,234) (1,360)
Accumulated, other comprehensive (loss) income (10,377) 5,528
Treasury stock; 42,592 shares in 1999 and 1998, at cost (455) (455)
--------- ---------
Total shareowners' equity 71,534 129,655
--------- ---------
$ 302,177 $ 317,778
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH PROVIDED BY OPERATIONS:
Net (Loss) Income $(42,874) $ 11,929 $ (9,164)
Adjustment for Noncash Items:
Provision (benefit) for restructuring 30,506 (896) 16,220
Depreciation and amortization 13,039 11,132 11,443
Pension charges 6,257 3,609 959
Deferred income taxes 3,691 1,035 1,655
Termination indemnities 1,134 336 865
Other noncash items 1,123 246 (1,793)
Changes in Working Capital:
Decrease (increase) in accounts receivable 7,154 (1,224) (2,605)
Decrease (increase) in inventories 3,644 (6,051) (4,671)
Decrease (increase) in prepaid expenses
and other current assets 1,064 (181) 982
(Decrease) increase in accounts payable
and accrued expenses (9,463) (2,574) 761
-------- -------- --------
Net Cash Provided by Operations 15,275 17,361 14,652
INVESTMENT TRANSACTIONS:
Acquisition of equity investee -- -- (3,000)
Acquisitions, net of cash acquired (9,241) -- --
Capital expenditures (9,144) (17,160) (11,989)
Other investing activities (5,633) (4,764) (7,170)
-------- -------- --------
Net Cash Used in Investment Transactions (24,018) (21,924) (22,159)
FINANCING TRANSACTIONS:
Increase (decrease) in short-term debt 41,822 -- (709)
Proceeds from issuance of long-term debt -- 591 27,810
Principal payments of long-term debt (4,109) (2,938) (18,260)
Other financing transactions -- 278 619
-------- -------- --------
Net Cash Provided by (Used in) Financing Transactions 37,713 (2,069) 9,460
Effect of Exchange Rate Changes on Cash (4,617) (1,536) (1,653)
CASH AND CASH EQUIVALENTS:
Increase (decrease) during the year 24,353 (8,168) 300
Beginning balance 12,290 20,458 20,158
-------- -------- --------
Ending balance $ 36,643 $ 12,290 $ 20,458
======== ======== ========
Supplementary Cash Flow Information:
Interest paid $ 6,703 $ 3,856 $ 4,887
======== ======== ========
Taxes paid $ 2,386 $ 1,975 $ 1,241
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated,
Common Other
Stock Additional Retained Comprehensive
$1 Par Paid-In Earnings Income Treasury Unearned Total
Value Capital (Deficit) (Loss) Stock Compensation Equity
----- ------- --------- ------ ----- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
December 31, 1996 $ 13,207 $110,737 $ (4,125) $ 17,175 $(455) $(37) $ 136,502
Net Loss -- -- (9,164) -- -- -- (9,164)
Foreign Currency
Translation
Adjustment -- -- -- (14,572) -- -- (14,572)
Comprehensive
Loss (23,736)
Restricted Stock
Transactions -- -- -- -- -- 37 37
ESOP Contribution 32 416 -- -- -- -- 448
Stock Options
Exercised 96 619 -- -- -- -- 715
-------- -------- -------- -------- ----- ---- ---------
Balance
December 31, 1997 13,335 111,772 (13,289) 2,603 (455) -- 113,966
-------- -------- -------- -------- ----- ---- ---------
Net Income -- -- 11,929 -- -- -- 11,929
Foreign Currency
Translation
Adjustment -- -- -- 2,925 -- -- 2,925
Comprehensive
Income 14,854
ESOP Contribution 52 458 -- -- -- -- 510
Stock Options
Exercised 47 278 -- -- -- -- 325
-------- -------- -------- -------- ----- ---- ---------
Balance
December 31, 1998 13,434 112,508 (1,360) 5,528 (455) -- 129,655
-------- -------- -------- -------- ----- ---- ---------
Net Loss -- -- (42,874) -- -- -- (42,874)
Foreign Currency
Translation
Adjustment -- -- -- (15,905) -- -- (15,905)
Comprehensive
Loss (58,779)
ESOP Contribution 81 577 -- -- -- -- 658
-------- -------- -------- -------- ----- ---- ---------
Balance
December 31, 1999 $ 13,515 $113,085 $(44,234) $(10,377) $(455) $-- $ 71,534
======== ======== ======== ======== ===== ==== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE>
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 surface
inspection 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% partially-owned
affiliates are accounted for on the equity method.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
principally on a last-in, first-out (LIFO) basis for all domestic inventories
and principally on a first-in, first-out (FIFO) basis for inventories outside
the United States. Provision is made to reduce slow-moving and obsolete
inventories to net realizable values. Current FIFO cost exceeds the LIFO value
of inventories by approximately $12,532 and $10,383 at December 31, 1999 and
1998, respectively. Year-end inventories valued under the LIFO method were
$17,991 in 1999 and $19,640 in 1998.
The composition of inventory at year end was as follows:
1999 1998
------- -------
Parts, raw materials and supplies $29,591 $38,511
Work in progress 14,274 20,515
Finished goods 24,445 29,365
------- -------
$68,310 $88,391
======= =======
Property, Plant and Equipment
Property, plant and equipment is carried at cost and is 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
$9,468, $7,624, and $8,864 in 1999, 1998, and 1997, 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, 1999, land and
buildings with a net book value of $15,974 were pledged as collateral for
mortgage loans of $14,491.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill and Other Assets
Goodwill, which is net of accumulated amortization of $4,700 in 1999 and $4,030
in 1998, is being amortized on a straight-line basis over periods ranging from 7
to 20 years. In 1999 and 1998, the Company reduced goodwill $250 and $714,
respectively, to reflect a reduction of a deferred tax liability recorded as
part of a purchase price adjustment for a business combination occurring in
prior years. Amortization expense amounted to $670 in 1999, $583 in 1998, and
$591 in 1997.
Other assets include software and software development costs, along with certain
intangible assets, which are being amortized on a straight-line basis over
periods ranging from 3 to 10 years. Amortization expense for these assets was
$2,901, $2,925, and $1,988 in 1999, 1998, and 1997, respectively. Accumulated
amortization for these assets was $13,902 in 1999 and $11,001 in 1998.
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 "accumulated other comprehensive income."
There were no forward exchange contracts outstanding at December 31, 1999 and
1998. A transaction gain of $47 was recorded in 1999 while transaction losses of
$508 and $443 were recorded in 1998, and 1997, respectively.
Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with high credit
quality financial institutions which invest primarily in U.S. Government
instrumentalities, commercial paper of prime quality, certificates of deposit,
and bankers acceptances guaranteed by banks or savings and loan associations
which are members of the FDIC. Concentrations of credit risk with respect to
trade receivables are limited due to the Company's large number of customers and
their dispersion across many different industries and countries worldwide. At
December 31, 1999, the Company had no significant concentrations of credit risk.
Stock Incentive Plans
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees" (see Footnote
7 for further details).
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.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash on hand and deposits in banks
with a maturity of three months or less. The carrying amount of cash and cash
equivalents approximates fair value.
Advertising Cost
The Company expenses advertising costs as incurred. Advertising expense for the
three years ended December 31, 1999 was $4.1 million, $4.3 million, and $3.2
million, respectively.
2. GOING CONCERN
In 1999, the Company incurred a net loss amounting to $42.9 million, which
included restructuring charges amounting to $36.8 million (see Note 3). In
addition to the operating loss, the Company also incurred a loss amounting to
$15.9 million arising from the translation of the balance sheets of its foreign
subsidiaries, which are denominated in foreign currencies. This loss was
recorded as Other Comprehensive Loss and classified in shareowners' equity. The
aggregate effect of the 1999 loss from operations and the loss arising from
foreign translation reduced the Company's net worth at December 31, 1999 by
$58.8 million.
The 1999 operating results caused the Company to violate certain of its loan
covenants with several banks who had provided the Company with a $30 million,
three-year syndicated, multi-currency revolving credit facility, which had a
$27.4 million balance outstanding at December 31, 1999, and with its private
placement lenders who had provided $50 million of long-term financing in 1997
(see Note 11). The 1999 operating loss caused the Company to violate the debt to
EBITDA ratio and debt to net worth ratio covenants, as well as certain other
covenants. In November 1999, the Company's lenders granted waivers curing the
financial covenant defaults incurred under its loan agreements through the end
of 1999. The lending agreements were also amended at that time to add certain
other covenants, including a requirement that the Company complete a
subordinated debt financing acceptable to the lenders by January 31, 2000. The
Company was unable to complete a refinancing by January 31, 2000 and is in
violation of this loan covenant. As of February 29, 2000, the Company has not
obtained a waiver for this violation and is in discussions with the lenders to
obtain another waiver to extend the period to complete the refinancing of the
Company.
Over the past several months, management has been investigating various
refinancing alternatives, including a possible sale of equity securities. The
Company's Board of Directors ("Board") established a Special Committee of three
independent directors to oversee, evaluate, and work with management and the
Company's advisors to pursue and complete, subject to approval by the full
Board, a financing transaction to remedy the Company's default situation with
respect to the loan covenants.
At February 29, 2000, the Company had $37.2 million of cash on hand and has been
meeting its normal cash needs. In addition, management plans to generate
sufficient cash to meet its expected cash requirements in 2000 by reducing
accounts receivable and inventory levels, as well as by enforcing strict cash
management procedures. However, the refinancing of its capital structure in
2000, the availability of adequate liquidity throughout the year, the
negotiation of acceptable loan covenants with its existing lenders, as well as
any possible future lenders, and complying with the terms of its financing
agreements are essential for the Company to continue as a going concern. If the
Company is unable to refinance its debt with equity or subordinated debt and its
negotiations with both sets of its lenders are not successful in resolving these
issues, the Company plans to seek other alternative financing. However, it is
not possible to predict whether any such alternative arrangements could be
negotiated on satisfactory terms.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The financial statements do not
include any adjustments relating to the recoverability and classification of
assets or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
3. RESTRUCTURING CHARGE
During 1999, the Company implemented a plan in which it reorganized each of its
significant operating divisions. A portion of the plan provided for the
reorganization of the manufacturing and administrative operations of its
Precision Measuring Instruments Division ("PMI") by consolidating all of PMI's
European manufacturing sites into one location in Renens, Switzerland and was
designed to provide for greater production and administrative efficiencies. The
PMI reorganization eliminated four factories in Europe. The 1999 reorganization
plan also included a strategy for the Measuring Systems Division ("MSD") in
which a focus factory mission would be implemented, where each factory would
function as a center of excellence with a goal of taking advantage of product
strengths in each of the manufacturing sites. The MSD plan also provided for
cost improvements in the R&D, selling, and service areas. Finally, the Company
also reorganized the Custom Metrology Division ("CMD") located in Telford,
England by exiting certain non-core products and eliminating operating cost that
was related to those products.
As a result of the 1999 Corporate-wide restructuring, the Company recorded
restructuring charges totaling $36,798 ($2.73 per share). The 1999 restructuring
charge, as well as the 1997 charge discussed below, included costs associated
with involuntary employee termination benefits for employees (429 in 1999 and
160 in 1997), writedowns of inventory to net realizable value, writedowns of
impaired fixed assets and certain intangible assets to fair value, and other
restructuring costs.
In 1997, the Company also implemented a reorganization plan in which it
restructured certain of its European operations, along with other less
significant changes in other parts of the world. As a result of the
restructuring, the Company recognized a charge in 1997 amounting to $16,220
($1.22 per share).
The following is an analysis of the restructuring charges and reserves from
January 1, 1997 to December 31, 1999.
<TABLE>
<CAPTION>
Employee Fixed Asset
Termination and
Benefits(2) Inventory Intangible Other Total
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ -- $ -- $ -- $ -- $ --
1997 Charges 7,550 5,373 1,647 1,650 16,220
-------- -------- ------- ------- --------
Balance December 31, 1997 7,550 5,373 1,647 1,650 16,220
Utilized (4,029) (1,663) (1,647) (1,432) (8,771)
Other (882)(1) -- -- -- (882)
-------- -------- ------- ------- --------
Balance at December 31, 1998 2,639 3,710 -- 218 6,567
1999 Charges 11,420 12,409 8,767 5,672 38,268
Utilized (7,299) (6,572) (6,485) (798) (21,154)
-------- -------- ------- ------- --------
Balance at December 31, 1999 $ 6,760(3) $ 9,547 $ 2,282 $ 5,092 $ 23,681
======== ======== ======= ======= ========
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) Includes an $896 reversal for employee termination benefits arising from
changes in final settlement allowances with certain employees due to
conditions arising in 1998. The remainder of the adjustment is due to
foreign exchange.
(2) Personnel reductions amounted to 257 in 1999 and 159 in 1998.
(3) Future cash payments relating to employee termination benefits, leases, and
other restructuring costs amount to $10.7 million in 2000, $0.3 million in
2001 and $0.8 million thereafter.
4. BUSINESS COMBINATION
During 1999, management entered into two separate transactions that were
intended to extend the Company's core methodology expertise into new markets. In
June, the Company incorporated Brown & Sharpe's Surface Inspection Systems
("SIS") to acquire substantially all of the assets and assume certain
liabilities of Display Inspection Systems, Inc. and Digital Data Inspection
Systems, Ltd. for cash amounting to $5.4 million. This acquisition was entered
into to expand the Company's presence in the electronics market. In August, the
Company acquired a 60% interest in QI Tech (subsequently named Brown &
Sharpe/Qianshao, "BSQ") located in the People's Republic of China for cash
amounting to $3.8 million. The BSQ investment was entered into in order to
expand the Company's presence in the Asian market. Both of these transactions
were accounted for using the purchase method of accounting with the operating
results of these companies included in the Company's consolidated results of
operations beginning on the date of acquisition.
The excess of cost over the estimated value of net assets acquired in these
acquisitions was allocated to goodwill, which amounted to $3 million, and will
be amortized on a straight-line basis over 20 years. The SIS allocation is
preliminary. The Company is determining the fair value of SIS' acquired
inventories and selected other assets. Management expects to determine the
actual values of inventories and other assets at a later date.
The unaudited pro forma consolidated results of operations, assuming the above
acquisitions had been made at January 1, 1998, is as follows:
December 31
1999 1998
---- ----
Sales $325,357 $342,829
Net (loss) income (42,452) 9,768
Net (loss) income per common share:
Basic $ (3.15) $ 0.73
Diluted $ (3.15) $ 0.72
5. INCOME TAXES
(Loss) income before income taxes consisted of the following:
1999 1998 1997
-------- -------- -------
Domestic $(18,106) $ (4,418) $ 2,693
Foreign (22,418) 19,712 (9,935)
-------- -------- -------
(Loss) income before
income taxes $(40,524) $ 15,294 $(7,242)
======== ======== =======
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table reconciles the income tax provision (benefit) at the U.S.
statutory rate to that in the financial statements:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Taxes computed at 34% $(13,778) $ 5,200 $(2,462)
Goodwill amortization 106 106 68
Local foreign tax 1,474 1,267 --
Additional tax on foreign income -- 789 191
State taxes (net) 73 99 123
Net operating losses and other losses 970 (4,389) (1,423)
Restructuring charge 10,513 -- 5,117
Valuation allowance recorded for deferred tax asset 3,106 -- --
Other (net) (114) 293 308
-------- ------- -------
Income tax provision $ 2,350 $ 3,365 $ 1,922
======== ======= =======
</TABLE>
The income tax provision (benefit) consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ (2,482) $ 1,355 $ 578
State 110 150 186
Foreign 1,031 825 (497)
-------- ------- -------
(1,341) 2,330 267
Deferred:
Federal 2,933 (1,663) 1,278
Foreign 758 2,698 377
-------- ------- -------
3,691 1,035 1,655
-------- ------- -------
Income tax provision $ 2,350 $ 3,365 $ 1,922
======== ======= =======
</TABLE>
Provision has not been made for U.S. taxes on $57,800 of cumulative
undistributed earnings of foreign subsidiaries as those earnings are intended to
be permanently reinvested.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the Company's deferred tax assets and liabilities as of
December 31, 1999 and 1998 are as follows:
1999 1998
------- -------
Deferred tax assets:
Inventory reserves $ 5,457 $ 5,539
Warranty expense 800 521
Allowance for doubtful accounts 708 505
Depreciation 1,350 1,383
Tax credit and loss carryforwards 34,911 40,980
Other 12,069 7,645
------- -------
Gross deferred assets 55,295 56,573
Less valuation allowance 51,676 48,197
------- -------
Deferred tax asset $ 3,619 $ 8,376
======= =======
Deferred tax liabilities:
Pension expense $ 2,167 $ 2,167
Inventory reserves 1,720 1,311
Depreciation 1,600 1,746
Other 1,671 3,251
------- -------
Deferred tax liability $ 7,158 $ 8,475
======= =======
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. Certain acquired tax loss carryforwards amounting to $3,053, which
were recognized in the December 31, 1998 balance sheet expired in 1999. These
tax loss carryforwards and the recorded valuation allowance relating to the
carryforwards amounting to $3,053 were reduced in 1999. In addition, in 1999,
the Company recorded a $6,532 increase in the valuation allowance to reflect
management's uncertainty regarding the realization of previously recognized tax
loss carryforwards in another tax jurisdiction and certain other deferred tax
assets. The recognition of any future tax benefits resulting from the reduction
of $6,347 of the valuation allowance will reduce any goodwill related to the DEA
acquisition remaining at the time of such reduction.
For income tax purposes, the Company has operating loss and capital loss
carryforwards of $6,400 and $400, respectively, in the U.K., operating loss and
capital loss carryforwards of $8,400 and $3,700, respectively, in the U.S. and
net operating loss carryforwards of $100, $42,000, $7,700, $4,900, and $8,700,
respectively, in Switzerland, Germany, France, Japan, and Italy. The French,
Japanese, and Italian carryforwards expire between 2000 and 2005. The Swiss loss
carryforward expires in 2001, the U.S. capital loss carryforward expires in 2002
and 2003 and the U.S. net operating loss carryforward expires in 2018 and 2019.
There is no time limit for the U.K. and German carryforwards.
During 1998, the Italian Fiscal Authorities completed its examination of the
Company's Italian income tax returns for the 1996 through 1997 fiscal years. The
Company's allowance for the assessments, which resulted from this examination,
was sufficient to absorb the additional tax assessment.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. OTHER INCOME AND EXPENSE
Other income (expense), net includes:
<TABLE>
<CAPTION>
1999 1998 1997
----- ------- -------
<S> <C> <C> <C>
Interest income $ 901 $ 1,106 $ 928
Equity interest in net loss of less than
50% owned investments (865) (566) (21)
Gain on sale of fixed assets 27 18 21
Other (expense) income 311 391 116
----- ------- -------
$ 374 $ 949 $ 1,044
===== ======= =======
</TABLE>
Operating results in 1997 also reflected a $1,346 loss resulting from the
disposal of its wholly-owned subsidiary, Technicomp, Inc., and a $1,224 gain
resulting from an exchange of common stock held for investment in an unrelated
business for shares of common stock of a publicly traded company. The Company
sold its interest in the publicly traded company in 1998 and realized a loss
amounting to $228.
7. INCENTIVE AND RETIREMENT PLANS
The Company has for many years utilized stock options and other stock-based
awards as part of its overall management incentive compensation programs. The
current Plan, the 1989 Equity Incentive Plan ("the '89 Plan"), as amended,
expired February 24, 1999. On February 12, 1999, the Company adopted the 1999
Equity Incentive Plan ("the '99 Plan").
Stock Incentive Plans
Under the provisions of the Company's 1999 Equity Incentive Plan ("the '99
Plan") and the 1989 Equity Incentive Plan ("the '89 Plan"), which has expired
and under which no further awards may be granted, a variety of stock and stock
based incentive awards, including stock options are available to be granted to
eligible key employees of the Company and its subsidiaries. The Plans permit 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. Options
were granted in 1999 under the '99 Plan and in 1989 under the '89 Plan to
purchase a total of 803,200 shares for seven-year and 463,320 shares for
ten-year terms, respectively, of Class A Common Stock granted at exercise prices
between $2.375 and $7.938 per share. All of the options granted in 1999 become
fully exercisable after September 30, 2006 (the "Vesting Date") except, however,
that options for up to one-third of the shares shall become exercisable and vest
on and after each of the dates that the Company's thirty-day average closing
share price reaches $10.00, $15.00 and $20.00, respectively, at any time prior
to the Vesting Date. The majority of options granted in 1998 and prior become
50% exercisable after two years and 25% after three and four years from the date
of the award. The exercise price for shares covered by options awarded under the
'99 and '89 Plans is 100% of the market value on the date such options are
granted. The aggregate amount of shares of Class A or Class B Common Stock,
including options, which may be awarded under the '99 and '89 Plans are
1,800,000 and 1,525,000 shares, respectively. Including forfeiture, 1,031,800
shares of Class A Common Stock remain available, at December 31, 1999 for
issuance under the '99 Plan in connection with future awards.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Option activity during the past three years is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- -------------------------
Options Weighted-Average Options Weighted-Average Options Weighted-Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding -
beginning of year 1,244 $ 10.05 904 $ 9.69 714 $ 7.92
Granted 803 2.51 464 10.12 406 12.58
Exercised - - (47) 6.84 (96) 7.43
Forfeited or canceled (39) 12.04 (77) 10.73 (120) 9.54
----- ----- ----
Outstanding -
end of year 2,008 $ 7.16 1,244 $ 10.05 904 $ 9.69
===== ===== ====
Exercisable at
end of year 760 $ 9.57 367 $ 9.54 380 $ 7.14
Weighted-average
fair value of
options granted
during the year $ 1.10 $ 3.73 $ 4.65
</TABLE>
Exercise prices for options outstanding as of December 31, 1999 ranged from
$2.375 to $14.125. The weighted-average remaining contractual life of those
options is 6.68 years.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1999,
1998, and 1997, respectively: risk-free interest rates of 5.92%, 5.4%, and 6.0%;
volatility factors of the expected market price of the Company's common stock of
45%, 35%, and 34%; and a weighted-average expected life of the option of 4.25
years. No dividend yield was utilized due to the fact that the Company does not
anticipate that it will pay dividends in the foreseeable future.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
1999 1998 1997
---- ---- ----
Pro forma net (loss) income $(43,934) $10,884 $(9,869)
Pro forma (loss) earnings per share:
Basic and diluted $ (3.26) $ 0.81 $ (0.74)
Profit Incentive Plan
Under the provisions of the Company's Amended Profit Incentive Plan as
originally approved in 1979, awards of cash could be made as bonuses to certain
management employees. Plan awards provisions under the Plan in the amounts of
$1,152, $2,194, and $2,293 were made in 1999, 1998, and 1997, respectively,
based on performance objectives for the respective year.
Long-Term Deferred Cash Incentive Plan
The Brown & Sharpe Key Employee's Long-Term Deferred Cash Incentive Plan (the
"LTDCIP") provides long-term deferred incentive compensation to key executive
employees of the Company with award credits being established, subject to
certain vesting requirements, in unfunded LTDCIP accounts for each LTDCIP
participant. For 1997 an award pool calculated at 6% of adjusted annual pre-tax
income (as defined in the LTDCIP) was shared by LTDCIP participants, pro rata
based on annual participant salaries. The LTDCIP was amended in 1998 to provide
that beginning in 1998 participant award opportunities are individually
determined by the Compensation and Nominating Committee of the Board of
Directors administering the LTDCIP as a percentage of adjusted annual pre-tax
profit. The 1999, 1998, and 1997 consolidated financial statements contain
provisions resulting from awards made under this Plan of $231, $222, and $462,
respectively.
Savings Plans
The Company has 401(k) stock bonus and thrift savings plans for U.S. employees,
which include retirement income features consisting of employer contributions
and employee tax deferred contributions. Contributions under all plans are
invested in professionally managed portfolios and Company stock. The savings
plans' expense for the three years ended December 31, 1999 was $1,994, $1,858,
and $1,468, respectively.
Stock Ownership Plan
Under the provisions of the Company's Employee Stock Ownership Plan (ESOP), the
Company may make contributions of common stock or cash to purchase common stock
from the Company or otherwise, to be held in trust for employees meeting certain
eligibility requirements until the employees reach retirement age. The ESOP may
also borrow funds to purchase common shares, in which event the Company would
contribute amounts as necessary to pay down the indebtedness. ESOP expense was
$704 in 1999, $657 in 1998, and $510 in 1997. At December 31, 1999, 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-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Retirement Plans
The Company has a defined contribution retirement plan covering employees in its
Swiss subsidiary and defined benefit retirement plans covering substantially all
employees in its U.K. and German subsidiaries, as well as, beginning in 1998, a
Senior Executive Supplemental Umbrella Pension Plan covering certain key
employees of the parent company in the United States. The Defined Contribution
Plan expense for the three years ended December 31, 1999 was $1,148, $1,249, and
$1,027, respectively.
The defined benefit plans provide benefits based on years of service and
employee compensation. Retirement costs under the plans are compiled based on
the projected unit credit actuarial method.
The following is an analysis of change in benefit obligation, change in plan
assets, weighted-average assumptions, and components of net periodic benefit
cost for the three years ended December 31, 1999.
<TABLE>
<CAPTION>
Pension Benefits
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 33,344 $ 23,940 $ 23,267
Prior service cost -- 2,871 --
Service cost 2,580 2,329 894
Interest cost 2,058 2,070 1,698
Plan participants' contributions 357 392 201
Amendments 189 -- --
Foreign exchange (loss) gain (1,459) 463 (1,578)
Actuarial (gain) loss (1,273) 2,916 702
Benefits paid (1,391) (1,637) (1,244)
-------- -------- --------
Benefit obligation at end of year 34,405 33,344 23,940
======== ======== ========
Change in plan assets
Fair value of plan assets at beginning of year 29,624 26,505 24,518
Actual return on plan assets 3,412 4,616 4,115
Foreign exchange (loss) gain (789) 140 (884)
Benefits paid (900) (1,637) (1,244)
-------- -------- --------
Fair value of plan assets at end of year 31,347 29,624 26,505
======== ======== ========
(Unfunded) funded status (3,058) (3,720) 2,565
Unrecognized net actuarial loss (4,941) (1,934) (2,818)
Unrecognized prior service cost 324 3,237 401
-------- -------- --------
(Accrued) prepaid benefit cost $ (7,675) $ (2,417) $ 148
======== ======== ========
<CAPTION>
Pension Benefits
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 2,580 $ 2,329 $ 894
Interest cost 2,058 2,070 1,698
Expected return on plan assets (3,418) (4,078) (3,678)
Amortization of prior service cost 4,694 2,509 1,636
Recognized net actuarial loss (461) (470) (464)
-------- -------- --------
Net periodic benefit cost $ 5,453 $ 2,360 $ 86
======== ======== ========
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Weighted-average assumptions as of December 31
Discount rate 7.00% 6.83% 7.25%
Expected return on plan assets 7.00% 6.50% 8.00%
Rate of compensation increase 4.50% 4.50% 5.00%
</TABLE>
The amortization of prior service cost increased in 1999 due to a change in
estimate of years of service expected to be rendered in the future by certain
participants in the United States plan.
8. RENTAL EXPENSE AND LEASE COMMITMENTS
At December 31, 1999, the Company was obligated under operating leases expiring
on various dates. Rental expense for the three years ended December 31, 1999 was
$6,093, $6,222, and $6,347, respectively. Annual rental commitments under
noncancelable leases pertaining principally to buildings and equipment at
December 31, 1999 are $4,744, $4,138, $2,144, $1,173, and $613 for the years
2000 through 2004, and aggregate to $3,202 for all years subsequent to 2003.
9. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted (loss)
earnings per share:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
Numerator:
Net (Loss) Income $(42,874) $11,929 $ (9,164)
Denominator for Basic Earnings Per Share:
Weighted-Average Shares 13,456 13,387 13,257
Effect of Dilutive Securities:
Employee Stock Options -- 138 134
-------- ------- --------
Denominator for Diluted Earnings Per Share:
Weighted-Average Shares and Assumed Conversions 13,456 13,525 13,391
======== ======= ========
Basic (Loss) Earnings Per Share $ (3.19) $ 0.89 $ (0.69)
======== ======= ========
Diluted (Loss) Earnings Per Share $ (3.19) $ 0.88 $ (0.69)
======== ======= ========
</TABLE>
Diluted loss per share is the same as basic loss per share in 1999 and 1997
because the computation of diluted earnings per share would have an antidilutive
effect on loss per share.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. OTHER ASSETS
1999 1998
------- -------
Enterprise resource planning $ 3,914 $ 9,473
Other internal use software costs 3,763 3,551
Demonstration equipment 10,138 12,146
Developed software 3,562 594
Prepaid pension 5,897 5,831
Equity investments 6,527 4,948
Other 11,106 8,463
------- -------
$44,907 $45,006
======= =======
11. LONG-TERM DEBT
Long-term debt consisted of the following:
1999 1998
------- -------
8.79% term loan $50,000 $50,000
Mortgages at rates ranging from 4.25% to 9.22% 14,491 18,917
Notes payable, due various dates with interest rates
ranging from 2.06% to 12.36% 4,539 5,788
------- -------
69,030 74,705
Less: current installments 53,585 9,272
------- -------
Total long-term debt $15,445 $65,433
======= =======
The $50 million term loan is a private placement of senior notes with principal
payments due from November 2001 to November 2007. During 1999, the Company
breached certain financial covenants, including the debt to EBITDA ratio, which
is the most restrictive covenant in its senior note agreement and its revolving
credit agreement. The Company's lenders granted waivers curing the financial
covenants defaults incurred under these agreements through the end of 1999. In
addition, borrowing rates under the Company's lending agreement were increased
for the private placement, and the lending agreements were amended to add
covenants to require the Company to grant the lenders a security interest in
certain of its United States assets with a carrying value amounting to $50.4
million at December 31, 1999, and to complete a financing transaction acceptable
to the Senior Lenders. The Company had previously pledged as security 65% of the
shares of certain foreign subsidiaries under the original agreement.
As of February 29, 2000, the Company had not yet completed the financing and is
in violation of the loan agreement with the private placement lenders, as well
as the lenders under the $30 million line of credit referred to in Note 2.
Management and a Special Committee of three independent directors are working
together, subject to definitive approval of the transaction from the Board of
Directors, to agree on and complete a financing transaction to remedy the
Company's default situation with respect to the loan covenant agreement and to
resolve its existing liquidity problem. Management is also conducting
discussions with its existing lenders to obtain another waiver to extend the
period to complete the refinancing of the Company. Because the senior notes at
February 29, 2000 are in default with respect to certain financial ratio
covenants, the $50 million senior notes have been classified as a current
liability. If the Company is unable to complete a financing transaction with
equity (or subordinated debt with warrants) and its parallel negotiations with
both sets of its present Senior Lenders are not successful in resolving these
issues, the Company plans to seek other alternative financing. However, it is
also not possible to predict whether any such alternative arrangements could be
negotiated on satisfactory terms.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Annual maturities of long-term debt are as follows: 2000--$53,585; 2001--$6,903;
2002--$2,659; 2003--$1,654; 2004--$1,745; and $2,484 thereafter. Interest rates
on long-term debt averaged approximately 7.7% in 1999 and 7.1% in 1998.
The revolving credit facility and the 8.7% senior notes require the Company to
comply with certain covenants, the most restrictive of which is debt to EBITDA
ratio. The carrying amount of long-term debt approximates fair value.
12. LONG-TERM LIABILITIES
Long-term liabilities consisted of the following:
1999 1998
------- -------
Unfunded accrued pension cost $13,152 $ 8,248
Termination indemnities 7,167 9,685
Deferred income taxes 3,280 3,264
Other long-term liabilities 2,484 2,023
------- -------
$26,083 $23,220
======= =======
13. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA
Segment Information
The Company operates exclusively in the Metrology Business and conducts its
business through the Measuring Systems Group ("MS"), Precision Measuring
Instruments Division ("PMI"), Custom Metrology Division ("CM"), Brown & Sharpe
Information Systems ("BSIS") and Electronics Division ("ED"). See Note 1 for a
further description of the Company's business.
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------------------
MS PMI CM ED BSIS TOTALS
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers $ 234,298 $ 75,762 $ 11,328 $ 1,912 $ - $ 323,300
Intersegment revenues 16 293 150 - - 459
Interest expense (income) (86) 1,562 1,671 703 1,745 5,595
Depreciation and amortization 3,949 3,348 373 38 77 7,785
Equity in net (income) of investees
accounted for by the equity method (279) - - - - (279)
Restructuring charge 10,705 17,180 7,849 - - 35,734
Segment profit (loss) 1,832 (16,033) (10,556) (2,970) (5,123) (32,850)
Pension and defined contribution
charges 333 1,148 - - - 1,481
Termination indemnity 1,133 - - - - 1,133
Segment assets 153,925 58,799 12,708 8,472 3,828 237,732
Investment in equity method investees 1,763 - - - - 1,763
Expenditures for segment assets 4,143 3,596 68 20 77 7,904
</TABLE>
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------
MS PMI CM BSIS TOTALS
<S> <C> <C> <C> <C> <C>
Revenues from external customers $242,230 $ 86,515 $ 10,285 $ - $ 339,030
Intersegment revenues 575 650 1,883 - 3,108
Interest expense 3,264 2,036 1,673 - 6,973
Depreciation and amortization 6,600 3,742 483 59 10,884
Equity in net (income) of investees
accounted for by the equity method (75) - - - (75)
Restructuring benefit 896 - - - 896
Segment profit (loss) 17,509 5,216 (3,587) (5,154) 13,984
Pension and defined contribution charges (benefit) 532 1,249 (345) - 1,436
Termination indemnity 1,037 - - - 1,037
Segment assets 190,553 73,660 15,422 1,465 281,100
Investment in equity method investees 1,384 - - - 1,384
Expenditures for segment assets 3,213 3,936 644 283 8,076
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------------
ALL
MS PMI CM BSIS OTHER TOTALS
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers $230,031 $ 90,503 $ 7,800 $ - $ 1,426 $ 329,760
Intersegment revenues 62 706 1,167 - - 1,935
Interest expense 3,158 1,641 456 - - 5,255
Depreciation and amortization 7,234 3,204 462 10 - 10,910
Equity in net loss of investees
accounted for by the equity method 21 - - - - 21
Restructuring charge 16,007 213 - - - 16,220
Segment profit (loss) (10,012) 6,637 (2,688) (951) (160) (7,174)
Pension and defined
contribution charges (benefit) 471 1,027 (385) - - 1,113
Termination indemnity 540 - - - - 540
Segment assets 177,309 63,014 12,949 35 - 253,307
Investment in equity method investees 1,285 - - - - 1,285
Expenditures for segment assets 6,168 1,711 318 35 - 8,232
</TABLE>
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
RECONCILIATION OF SELECTED ITEMS
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Total revenues for reportable segments $ 323,759 $ 342,138 $ 330,269
Other revenues -- -- 1,426
Elimination of intersegment revenues (459) (3,108) (1,935)
--------- --------- ---------
Total Consolidated Revenues $ 323,300 $ 339,030 $ 329,760
========= ========= =========
PROFIT OR LOSS
Total (loss) profit for reportable segments $ (32,850) $ 13,984 $ (7,174)
Other (loss) -- -- (160)
Unallocated amounts:
Restructuring charge (2,534) -- --
Interest expense (1,891) -- --
Interest income 901 1,106 928
Other income (expense) (4,150) 204 (836)
--------- --------- ---------
Profit (Loss) Before Income Taxes $ (40,524) $ 15,294 $ (7,242)
========= ========= =========
ASSETS
Total assets for reportable segments $ 237,732 $ 281,100 $ 253,307
Other assets 64,445 36,678 43,286
--------- --------- ---------
Consolidated Totals $ 302,177 $ 317,778 $ 296,593
========= ========= =========
</TABLE>
Geographic Area
The following is a summary by geographic area of revenues from customers and
long-lived assets.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES
United States $139,128 $141,305 $133,018
Italy 22,502 22,630 21,204
Germany 41,460 41,575 43,247
France 20,619 25,397 26,010
United Kingdom 21,272 22,675 23,196
Switzerland 8,051 8,896 7,711
Other 70,268 76,552 75,374
-------- -------- --------
$323,300 $339,030 $329,760
======== ======== ========
LONG-LIVED ASSETS
United States $ 47,208 $ 41,150 $ 31,370
Italy 9,529 11,538 13,633
Germany 11,151 15,214 14,698
France 2,297 3,981 3,186
United Kingdom 16,320 18,146 15,832
Switzerland 13,094 14,560 13,900
Other 3,772 1,871 1,045
-------- -------- --------
$103,371 $106,460 $ 93,664
======== ======== ========
</TABLE>
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenues are attributed to countries based upon the location of customers who
are situated within the market areas assigned to subsidiaries located in the
respective countries.
The Company has no single customer who accounts for 10% or more of its
consolidated net sales; however several well-recognized major automotive
manufacturers account for a significant portion of the Company's net sales.
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 the Certificate of Incorporation and
by law, the Class B Common Stock has ten votes per share, and the Class B Common
Stock is convertible into Class A Common Stock on a one-for-one basis, and can
be transferred in Class B form only to specified transferees, generally members
of a shareowner's family and certain others affiliated with a shareowner. During
1999 and 1998, 3,395 and 5,256 shares, respectively, were converted from Class B
Common Stock to Class A Common Stock.
The Company has reserved a total of 3,024,500 shares of Class A Common Stock for
future issuance under certain benefit and stock incentive plans.
15. PREFERRED STOCK PURCHASE RIGHTS
On February 13, 1998, the Board approved a new Rights Plan and declared a
dividend of one purchase right (a "Right") for every outstanding share of the
Company's Class A Common Stock and Class B Common Stock to be distributed on
March 9, 1998 to stockholders of record as of the close of business on that
date. The Rights expire on February 13, 2008 or upon the earlier redemption of
the Rights, and they are not exercisable until a distribution date on the
occurrence of certain specified events. This Plan replaces a substantially
similar Rights Plan and Rights distributed in connection with such Plan adopted
by the Company on March 23, 1988, which by its terms expired in March of 1998.
Each Right entitles the holder to purchase from the Company one one-hundredth of
a share of Series B Participating Preferred Stock, $1.00 par value per share, at
a price of $40.00 per one one-hundredth of a share, subject to adjustment. The
Rights will, on the distribution date, separate from the Common Stock and become
exercisable ten days after a person has acquired beneficial ownership of 20% or
more of the outstanding shares of Common Stock of the Company or commencement of
a tender or exchange offer that would result in any person owning 20% or more of
the Company's outstanding Common Stock.
Each holder of a Right will in such event have the right to receive shares of
the Company's Class A Common Stock having a market value of two times the
exercise price of the Right, which has been set at $40.00; and in the event that
the Company is acquired in a merger or other business combination, or if more
than 25% of its assets or earning power is sold, each holder of a Right would
have the right to receive common stock of the acquiring company with a market
value of two times the exercise price of the Right. Following the occurrence of
any of these events, any Rights that are beneficially owned by any acquiring
person will immediately become null and void. The Company, by a majority vote of
the Board, may redeem the Rights at a redemption price of $.01 per Right.
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. CONTINGENCIES
The Company is a defendant in a variety of legal claims that arise in the normal
course of business. Based upon the information presently available to
Management, the Company believes that any liability for these claims would not
have a material effect on the Company's results of operations or financial
condition.
17. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
<S> <C> <C> <C> <C>
Sales $ 82,414 $ 81,652 $ 72,712 $ 86,522
Gross profit 21,171 24,712 21,834 20,708
Net income (loss) (15,047) (8,554) (2,511) (16,762)
Earnings per common share:
Basic $ (1.12) $ (0.63) $ (0.19) $ (1.24)
Diluted $ (1.12) $ (0.63) $ (0.19) $ (1.24)
<CAPTION>
1998
------------------------------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
<S> <C> <C> <C> <C>
Sales $ 83,456 $ 85,898 $ 75,427 $ 94,249
Gross profit 27,860 27,830 24,840 34,501
Net income 1,782 2,392 1,112 6,643
Earnings per common share:
Basic $ 0.13 $ 0.18 $ 0.08 $ 0.50
Diluted $ 0.13 $ 0.18 $ 0.08 $ 0.49
</TABLE>
The results of operations for the fourth quarter of 1998 includes an $896
benefit resulting from adjustment of certain employee termination benefit
reserves recorded as part of the 1997 restructuring charge in Note 3.
F-33
<PAGE>
Report of Independent Auditors
To the Shareholders and Directors
of Brown & Sharpe Manufacturing Company
We have audited the accompanying consolidated balance sheets of Brown & Sharpe
Manufacturing Company as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareowners' equity, and cash flows for
each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Brown & Sharpe
Manufacturing Company at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that Brown &
Sharpe Manufacturing Company will continue as a going concern. As more fully
described in Note 2, the Company has an operating loss and has not complied with
certain covenants of loan agreements. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments to reflect the possible future effects
of the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
ERNST & YOUNG LLP
Providence, Rhode Island
February 4, 2000, except for
Notes 2 and 11, as to which
the date is February 29, 2000
F-34
<PAGE>
COMMON STOCK MARKET PRICES AND DIVIDENDS
The Class A Common Stock is listed on the New York Stock Exchange with a symbol
"BNS." At December 31, 1999, the Company had approximately 1,013 shareowners of
record of its Common Stock.
Fiscal Year High Low
----------- ---- ---
1999
4th Quarter $ 4.06 $ 2.00
3rd Quarter 5.38 1.88
2nd Quarter 6.06 4.81
1st Quarter 8.50 4.75
1998
4th Quarter $ 9.19 $ 6.63
3rd Quarter 11.88 7.50
2nd Quarter 15.50 11.88
1st Quarter 12.38 8.94
No dividends have been paid by the Company since 1990. Dividend payments have
been suspended in order to conserve cash. Also, payment of dividends are
currently permitted, but the Company has to meet certain covenants under an
existing loan agreement. Dividend payments prior to September 30, 1997 were not
permitted due to an existing loan facility.
F-35
<PAGE>
EXHIBIT 21
BROWN & SHARPE MANUFACTURING COMPANY
SUBSIDIARIES OF THE REGISTRANT
Subsidiaries of the Registrant as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Percentage of
Jurisdiction Voting Power
of Owned by the
Name of Subsidiary Incorporation Registrant
------------------ ------------- ----------
<S> <C> <C>
Borel & Dunner, Inc. Michigan 100%
Brown & Sharpe Aftermarket Services, Inc. Delaware 100%
Brown & Sharpe S.A. Roch * France 100%
Mauser Prazisions Messmittel GmbH Germany 100%
Brown & Sharpe S.p.A. ** DEA and its subsidiaries: Italy 100%
Brown & Sharpe S.A. DEA Spain 100%
Brown & Sharpe S.A. DEA France 100%
Brown & Sharpe KK Japan 100%
Brown & Sharpe International Capital
Corporation and its subsidiaries: Delaware 100%
Brown & Sharpe Messtechnik G.m.b.H. Germany 100%
Brown & Sharpe S.A. Tesa and its subsidiaries: Switzerland 100%
P. Roch, S.a.R.L. Switzerland 100%
Tesa - Brown & Sharpe S.A. France 100%
Brown & Sharpe PMI KK Japan 100%
Brown & Sharpe Group Ltd.* and its subsidiaries: United Kingdom 100%
White Lodge Financial Limited United Kingdom 100%
Brown & Sharpe Ltd. United Kingdom 100%
Mercer - Brown & Sharpe Ltd. United Kingdom 100%
Brown & Sharpe Qianshao Technology Co. China 60%
</TABLE>
1
<PAGE>
EXHIBIT 21
(continued)
BROWN & SHARPE MANUFACTURING COMPANY
SUBSIDIARIES OF THE REGISTRANT
Subsidiaries of the Registrant as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Percentage of
Jurisdiction Voting Power
of Owned by the
Name of Subsidiary Incorporation Registrant
------------------ ------------- ----------
<S> <C> <C>
Brown & Sharpe Qianshao Trading Co. China 75%
Brown & Sharpe Surface Inspection Systems, Inc. California 70%
Brown & Sharpe Surface Inspection Systems, Inc. Israel 100%
Brown & Sharpe Information Systems, Inc. Delaware 100%
</TABLE>
* Owned 71.3% by Brown & Sharpe International Capital Corporation and 28.7%
by Tesa, S.A.
** Owned 85.0% by Brown & Sharpe Manufacturing Company and 15.0% by Brown &
Sharpe International Capital Corporation.
2
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Brown & Sharpe Manufacturing Company of our report dated February 4, 2000
(except for Notes 2 and 11, as to which the date is February 29, 2000), included
in the 1999 Annual Report to Shareholders of Brown & Sharpe Manufacturing
Company.
Our audits also included the financial statement schedule of Brown & Sharpe
Manufacturing Company listed in Item 14(a). This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We also consent to the incorporation by reference in Registration Statements
(Form S-8 Nos. 2-33676, 2-56821, 2-77219, 2-77575, 2-83637, 2-97935, 33-17831,
33-23601, 33-23603, 33-30927, 33-54496, 333-07733, and 333-91367) pertaining to
employee benefit plans, of Brown & Sharpe Manufacturing Company of our report
dated February 4, 2000 (except for Notes 2 and 11, as to which the date is
February 29, 2000), with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) for the year ended December 31, 1999.
ERNST & YOUNG LLP
Providence, Rhode Island
March 24, 2000
1
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> DEC-31-1999
<CASH> 36,643
<SECURITIES> 0
<RECEIVABLES> 83,059
<ALLOWANCES> (4,759)
<INVENTORY> 68,310
<CURRENT-ASSETS> 198,806
<PP&E> 135,986
<DEPRECIATION> 88,667
<TOTAL-ASSETS> 302,177
<CURRENT-LIABILITIES> 189,115
<BONDS> 0
0
0
<COMMON> 13,515
<OTHER-SE> 58,019
<TOTAL-LIABILITY-AND-EQUITY> 302,177
<SALES> 323,300
<TOTAL-REVENUES> 323,300
<CGS> 234,875
<TOTAL-COSTS> 356,664
<OTHER-EXPENSES> (374)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,534
<INCOME-PRETAX> (40,524)
<INCOME-TAX> 2,350
<INCOME-CONTINUING> (42,874)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42,874)
<EPS-BASIC> (3.19)
<EPS-DILUTED> (3.19)
</TABLE>
