ITEM 1 - BUSINESS - -----------------
THE BUSINESS OF THE COMPANY
General
Since the summer of 1999, there has been an Event of Default under the Company's Revolving Credit Agreement with its banks, and the Company has not been permitted to borrow any additional amount under the Revolving Credit Agreement since that date. Also, as previously reported, since the summer of 1999, there has been an Event of Default under the Company's privately placed senior note agreements. As has been the case, since the summer of 1999 with the prior and continuing Event of Default under the note agreements, the noteholders may at any time declare the notes to be immediately due and payable and may resort to collateral securing the Company's obligations to the noteholders under the note agreements and related collateral agreements.
As a result of the Company's unfavorable financial condition and after investigating alternative financial strategies, the Company entered into agreements to sell substantially all assets of the Company, subject to approval by its stockholders, including:
. the sale under the Acquisition Agreement for cash to Hexagon AB ("Hexagon"), a Swedish corporation, in Stockholm, Sweden, of substantially all of the business assets of the Company and assumption by Hexagon of substantially all of the Company's liabilities (the "Metrology Business").
. the sale for cash of the Company's North Kingstown facility to the buyer under the North Kingstown Sales Agreement.
In addition, management plans to sell, at a later date, the Company's real estate (Gravel Pit) adjacent to Heathrow Airport in the United Kingdom. The Company plans to make a series of cash distributions to its stockholders upon completion of the sale of the Metrology Business; North Kingstown Facility; and Gravel Pit. The Company will continue to operate its software development business, Brown & Sharpe Information Systems, which is described below.
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 three management units: Measuring Systems (which includes the former Custom Metrology Division), the Precision Measuring Instruments and Brown & Sharpe Information Systems.
. The Measuring Systems Division ("MS Division" or "MSD"), which accounted for approximately 74% of the Company's sales in 2000, 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 Division is Aftermarket 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 25,000 CMMs worldwide. In the third quarter of 2000, Custom Metrology Division ("CMD"), which previously was operated as a separate division, was included in the MS Division. As a result, the MS Division also produces non-contact "profile" machines for the measurement of shafts and round components.
. The Precision Measuring Instruments ("PMI") Division, which accounted for approximately 26% of the Company's sales in 2000, 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.
. Brown & Sharpe Information Systems ("BSIS"), is an early software development business focused on the commercialization and introduction of measuring software. BSIS did not have any revenues in 2000. In the event that the Company closes the sale to Hexagon under the Acquisition Agreement, BSIS will be the only active operation of the Company.
Repositioning Initiatives
Over the past several years, the Company has undertaken a series of divestitures, acquisitions and other strategic initiatives which have repositioned the Company from its historical origins as a machine tool manufacturer into a leader in the field of metrology. These repositioning initiatives included:
. Divestiture of Non-Core Operations. The divestiture of non-strategic operations, including the machine tool, pump and hydraulics businesses, and Technicomp, Inc. during 1997, which enabled the Company to focus on its core metrology technologies and market distribution strengths.
. 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's metrology business headquartered in Italy. 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. 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.
. 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 to focus on non-contact products such as "Profile" machines and, in 2000, by including CMD in the MSD.
. During the second quarter of 2000, the Board approved the decision to sell the stock or assets of the Company's Electronics Division. The Electronics Division consisted of Brown & Sharpe Surface Inspection Systems, a business which was acquired in 1999, and produced metrology tools for electronics component manufacturers that focused on the detection and classification of micron level defects on a variety of surfaces. The Company has discontinued the Electronics Division primarily because the market for its products did not materialize and because of the cash needs of its operations. The Electronics Division assets are an Excluded Asset under the Acquisition Agreement with Hexagon. The Company is selling the assets of the Electronics
Division under an agreement reached on February 13, 2001. This agreement calls for the Company to receive cash consideration of approximately $2,000,000, before minority interest and post-closing adjustments. In the third quarter of 2000, the Company decided to discontinue the development of non-contact sensor technology and stopped the funding, as one of the owners of a 50/50 joint venture formed in 1999 with Metroptic Technology in Israel, of projects for the development of new non-contact metrology technology. The decision to stop funding of the joint venture was made primarily because of the continued cash needs of the project, the lack of a completed product to date, and the greater development period than had been contemplated. See Note 5 to the Consolidated Financial Statements for financial information related to discontinuance of operations of Electronics Division and the stopping of the funding of the Metroptic Joint Venture.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 in this Annual Report.
Proposed Sale of Substantially All Assets of the Company
On November 16, 2000, the Company entered into the Acquisition Agreement with Hexagon, pursuant to which the Company would sell substantially all of its assets to Hexagon. Under a Purchase and Sale Agreement dated as of March 2, 2001 with Precision Park Partners, a commercial buyer, the Company will sell its North Kingstown, Rhode Island manufacturing facility, known as Precision Park, for a cash purchase price of $15.5 million.
Business Strategy
As noted, the Company proposes to sell substantially all of its assets, including the sale of substantially all assets to Hexagon pursuant to the Acquisition Agreement and the sale to Precision Park Partners LLC of its North Kingstown Facility under the North Kingstown Sales Agreement and, later in this year, or possibly in 2002, the Company plans to sell its Heathrow, United Kingdom real estate. The Company proposes to make cash distributions to stockholders (the initial distribution of which would be made as soon as practical following the Closing under the Acquisition Agreement) and subsequent cash distributions to the stockholders upon the sale of the North Kingstown Facility and upon the further sale of the Heathrow, United Kingdom real estate, which has been an operating gravel pit, on dates and in amounts as finally determined by the Board of Directors. Until the completion of the sale to Hexagon, the Company is focused on that transaction while continuing to implement its business strategy based on the following elements described below. In the event that the Company is unable to complete the sale to Hexagon, the Company plans to seek other strategic alternatives, including another sale or merger in order to satisfy its senior secured lenders who, at any time, may resort to collateral, consisting of substantially all of the Company's assets and significant pledges of stock of its subsidiaries, to remedy the Company's inability to pay its loans to the senior lenders, which have been in default since 1999.
In the event that the proposed sale to Hexagon is completed, the Company's business strategy will be substantially different from the elements described below since, while BSIS has not yet been material to the business of the Company, it will be the only active operation of the Company following the completion of the sale to Hexagon.
. Continue Cost Improvements. The Company intends to continue to implement measures designed to reduce its product costs through: (i) standardizing product designs worldwide; (ii) increasing the cost-effectiveness of product designs; (iii) outsourcing components and products; (iv) increasing supplier partnering; and (v) focusing on core manufacturing processes. The Company also intends to streamline its sales, marketing, and general and administrative processes in an effort to reduce selling, general and administrative expenses as a percentage of sales.
. Develop New Products and End User Markets. The Company's goal is to increase net sales by expanding penetration of served industrial end user markets and by capitalizing on high growth end user markets where metrology needs are growing rapidly. 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.
. 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.
. 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.
. 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 82,000 (including 25,000 of the Company's CMMs), creates a significant demand for such aftermarket services. The Company believes that the level of customer service it provides, as measured by third-party surveys of its customers, is superior to that of its principal competitors, and expects to further strengthen its customer relationships through enhanced aftermarket support and increased partnering efforts. The Company's sales attributable to aftermarket sales and service in 2000 were estimated to be approximately 32% of MS Division's 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 82,000 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 meter or the unit of measurement for the wavelength of light). Increasingly, metrology systems must incorporate a mix of traditional contact and newer non- contact technologies because of reduced part sizes and the great diversity of new materials used in manufactured products. Metrology systems are purchased by customers regardless of their need for additional production capacity because of ever-increasing quality requirements and the need to reduce product costs.
Metrology products serve a broad range of measurement requirements. The simplest metrology products include devices such as calipers, dial gauges, micrometers, surface plates, and height gauges. These are generally inexpensive hand-held tools that measure in one dimension to within an accuracy of between two (80 millionths of an inch) and 25 microns (1/100th of an inch). Fixed gauges are often more expensive devices that inspect and verify in one to three dimensions to within an accuracy of between one and 25 microns and are typically used where manufacturers need to measure a single, uniform product at a high rate of speed. Fixed gauges tend to make simple, comparative measurements of products in a manufacturing process. CMMs are more sophisticated, complex machines that use a variety of technologies to measure in three dimensions to an accuracy of between 0.5 and 100 microns. These technologies range from advanced probes that physically "contact" the product being measured to highly sophisticated non-contact vision, optical, laser and scanning probes that collect precise data without touching the product being measured. While some CMMs are manually operated, most are now 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 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.
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, aftermarket 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 Division
The MS Division, the largest of the Company's three units, accounted for approximately 74% of the Company's sales in 2000. The MS Division is headquartered in North Kingstown, Rhode Island and manufactures and markets CMMs. MS Division products sold under the Brown & Sharpe name are manufactured at the Company's North Kingstown Facility, Wetzlar, Germany, Turin, Italy facilities and also in its Telford, United Kingdom 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 Division products range from small, manually operated CMMs to large, high speed, high precision automatic CMMs. In addition to these standard and custom- configured CMMs, the Company 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 Division 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 Division'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 Division also provides its customers with special software and systems that integrate the MS Division's products with the customer's host information and communications network. In addition to sales of CMMs, the MS Division 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 2000 were estimated to be approximately 32% of the MS Division's sales for the same period.
The MS Division now produces non-contact "Profile" machines for the measurement of shafts or round components, and manufactures primary standard calibration instruments, used currently by 26 countries as their standard for measurement.
See Note 14 to the Consolidated Financial Statements for financial information related to this business segment in Item 8 of this Annual Report.
PMI Division
The principal products of the Company'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 26% of the Company's sales in 2000. The PMI Division's products have broader applications and lower unit list prices (with a range of $100 to approximately $13,000) than the prices of the MS Division's products. These tools and instruments typically measure in one or two dimensions, and are often used in comparative measuring where an unknown part or dimension is
compared to a previously measured part or dimension. Some PMI Division products also include systems and application software for measuring and statistical process control. The Company believes that the primary end user markets for the products of the PMI Division are the automotive, aerospace, metal processing, and defense industries, although the 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 closed its Leicester, St. Albans, Torpoint and Luneville plants and consolidated its PMI manufacturing at its Renens site. See Notes 4 and 14 to the Consolidated Financial Statements for financial information related to the restructuring and to the business segment, respectively. The Company also purchases components and products from third parties located in various countries.
BSIS Division
BSIS was formed in December 1997. At that time, BSIS's primary mission was to consolidate the several independent software development groups of Brown & Sharpe into a single global software development organization which would provide next generation metrology software applications for the various Metrology Business units. As its secondary mission, BSIS was to establish and execute a software business strategy, which would ultimately lead to the formulation of a software business that could spin-off as an independent business separated from the metrology manufacturing businesses. Accordingly, BSIS is now focused on the commercialization and introductions of its new XactMeasue Measuring Software, in development for approximately three years. Following the completion of the proposed sale to Hexagon, the Company will continue in the business of developing measuring software through its controlled subsidiary, BSIS (in which Hexagon has committed to invest a total of $7 million over the next three years) which will be renamed Xygent after the Closing under the Acquisition Agreement, and BSIS will be the only active operation of the Company following the sale to Hexagon. See Note 14 to the Consolidated Financial Statements for financial information related to this business segment.
Sales and Distribution
The MS Division distributes its products primarily through a 107-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 Division 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, the Company provides in-depth training to its customers at 25 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 Division.
In contrast to the MS Division, the PMI Division generally distributes its products through international import companies, regional distributors, and catalog houses throughout the world. As of December 31, 2000, 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
The Company'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. The Company 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, the Company purchases product designs or portions of product designs from engineering subcontractors or acquires rights to such designs through licensing arrangements. The Company 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 which was 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 2000, the Company invested $15.5 million, or 5.5% of its net sales during that period in product design and manufacturing engineering. In 1998 and 1999, the Company expended $17.8 million and $14.4 million, respectively, for product design, development, refinement, and manufacturing engineering.
Foreign Operations
The Company manufactures and sells substantial amounts of its metrology products in foreign countries. As of December 31, 2000, approximately 71% (based on book values) of the Company's assets, 59% of the Company's sales (based on customer location) and 68% 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 which was implemented in January 2000, France, as well as in the United States. Brown & Sharpe's products are sold in over 60 countries worldwide. See Note 14 to the Consolidated Financial Statements for financial information related to foreign operations in Item 8 of this Annual Report.
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 the Company), but has not experienced any significant difficulty in meeting delivery obligations because of its reliance on any such single supplier. In addition, the Company currently purchases substantially all of its externally sourced low to medium accuracy electronic touch trigger sensor probes and heads from a publicly held United Kingdom company which is the dominant supplier of such sensor probes to CMM manufacturers.
No alternative supplier for this class of electronic sensor probes, which are a key component of substantially all of the Company's lower accuracy CMMs, is currently available and developing an alternative source for the probes and heads could take more than a year. The Company continues to explore means of lowering production costs through selective outsourcing in situations where the Company 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 17 to the Consolidated Financial Statements for financial information related to contingencies in Item 8 of this Annual Report.
Employees
At December 31, 2000, the Company had 2,106 employees (as compared with 2,216 at December 31, 1999), including approximately 1,422 employees located outside the United States. The Company considers its relations with its employees to be good, although there can be no assurance that the Company's cost-cutting efforts or other factors will not cause a deterioration in these relations.
Approximately 426 of the Company'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 before June 30, 2002. The Company 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 the Company's ability to produce the products manufactured at the affected location.
In addition to the collective bargaining agreements that cover workers at certain of the Company'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.
The following table sets forth the location of the Company's employees as of December 31, 2000:
Country Employees (1) ------- ------------
China 151 France 79 Germany 191 Israel 28 Italy 372 Japan 24 Spain 24 Switzerland 417 United Kingdom 128 Mexico 8 United States 684 ----- Total 2,106 =====
(1) Part-time employees are included on a full-time equivalent basis.
Competition
The Company's MS Division 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 Division also faces indirect competition from other types of metrology firms such as manufacturers of fixed gauging systems. The primary industries to which the MS Division 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 Division 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 Division 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 Division 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 Division'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.
Backlog
The Company's backlog of product orders was approximately $132.1 million at year-end 2000 (on a SAB 101 basis), compared to approximately $59 million and $72 million at year-end 1999 and 1998, respectively.
All of the orders included in the Company's year-end 2000 backlog were requested to be filled and completed within one year and are, subject to possible customer cancellation, expected to be completed in 2001.
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 negative $29.9 million at year-end 2000 compared to approximately positive $9.7 million at year-end 1999. See the discussion of working capital in "Management's Discussion and Analysis of Financial Condition and Results of Operations" elsewhere in this Annual Report.
Segment Information
The Company operates exclusively in the Metrology Business. See "Business of the Company--General" 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. See also "Financial Information by Business Segment and Geographic Area" included in Note 14 to the Consolidated Financial Statements in Item 8 of this Annual Report.
ITEM 2
ITEM 2 - PROPERTIES - -------------------
PROPERTIES
The following table sets forth certain information concerning the Company's major operating facilities:
PROPERTIES (continued)
The following table sets forth certain information concerning the Company's major operating facilities:
(1) Excludes approximately 412,000 square feet leased to unrelated parties. (2) The leases in China, Grugliasco, Ludwigsburg, Torpoint, Luneville, Villebon, Barcelona and Wixom expire on December 31, 2001, December 31, 2002, September 30, 2003, August 18, 2001, March 23, 2003, October 20, 2001, July 31, 2008, and November 30, 2001, respectively. (3) Included in PMI's restructuring. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations" elsewhere in this Annual Report and also Note 4 to the Consolidated Financial Statements.)
In addition, the Company leases smaller sales offices located in the United States, Europe, and Asia. In the opinion of management, the Company's properties are in good condition and adequate for Brown & Sharpe's business as presently conducted.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS - --------------------------
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
See Note 17 "Contingencies" to Consolidated Financial Statements in Item 8 of this Annual Report.
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS - -----------------------------------------------------------------------------
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, 2000, the Company had approximately 1,043 shareowners of record of its Common Stock.
Fiscal Year High Low
4th Quarter $5.13 $2.75 3rd Quarter 4.25 2.00 2nd Quarter 3.25 1.56 1st Quarter 3.25 1.56
4th Quarter $4.06 $2.00 3rd Quarter 5.38 1.88 2nd Quarter 6.06 4.81 1st Quarter 8.50 4.75
No dividends have been paid by the Company since 1990. Payment of dividends are not permitted because the Company breached certain financial loan covenants in its senior note agreement and its revolving credit agreement. For further information, refer to the "Liquidity and Capital Resources" section of Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA - --------------------------------
The following selected data should be reviewed in conjunction with Part II, Item 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS -------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company currently operates entirely in the metrology industry through three business segments: the MS Division ("MSD"), which manufactures and markets manual and computer-controlled, high precision coordinated measuring machines ("CMMs") and designs and engineers specialty metrology products, which accounted for approximately 74% of the Company's sales in 2000; the PMI Division ("PMI"), which manufactures and distributes mechanical and electronic measuring and inspection tools, accounted for all of the remaining 26% of the Company's sales in 2000; and Brown & Sharpe Information Systems ("BSIS"), which develops measuring software. Approximately 59% of the Company's sales in 2000 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 breached certain financial covenants relating to the debt to EBITDA ratio, debt to net worth and interest coverage ratios under its $30 million line of credit with four banks and a $50 million private placement of senior notes, which caused this debt to become due upon demand. During 2000 the Company pursued various financial alternatives to resolve the Company's liquidity problems and unfavorable financial situation. After conducting discussions with various potential investors and acquirors, on November 16, 2000, the Company entered into an Acquisition Agreement with Hexagon A.B. ("Hexagon") of Stockholm, Sweden, in which Hexagon will purchase substantially all of Brown & Sharpe's worldwide Metrology Business for $160 million in cash, plus an additional cash payment of $10 million, based on the Company's year 2000 defined Metrology Business operating profit agreed upon by the Company and Hexagon, and further adjusted up or down (a downward adjustment is expected) for the difference between cash at the closing date at its foreign subsidiaries and these subsidiaries' short-term and long-term borrowings. The Metrology Business is essentially composed of the MS Division (which includes the former Custom Metrology Division) and the PMI Division. Hexagon will also acquire an interest in BSIS Inc., the Company's software development business.
In 2000 due to the Company's extremely tight cash position and unfavorable operating results of certain of its investments, the Company took steps to conserve its cash in order to meet the needs of its core business. Certain of these steps included the curtailment of the activities of its Electronics Division, which designed and manufactured surface inspection systems, and discontinuance of the development of non-contact sensor technology. The decision to curtail the activities of the Electronics Division resulted in a loss in 2000 amounting to $11.1 million, including a $6.2 million charge for impaired assets, and was reported as a discontinued operation. On February 13, 2001 the Company entered into an Asset Purchase Agreement to sell the Electronics Division for $2 million. The termination of the development of the non-contact technology resulted in a loss in 2000 amounting to $5.8 million, which consisted of a write-off of certain assets dedicated to the development of the non-contact technology amounting to $1.2 million and a $4.6 million write-off as a worthless investment of its joint venture, Metroptic Technologies Ltd., which was a corporation dedicated to the development of the non-contact technology.
Effective January 1, 2000 the Company adopted SEC "Staff Accounting Bulletin No. 101--Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 clarifies generally accepted accounting principles regarding the timing of revenue recognition. Prior to the adoption of SAB 101, the Company recognized revenue on the sale of its machines when the machine was shipped to the customer and the title had passed to the customer, although the Company often had a further obligation to install the machine, and the customers had not yet finally accepted the performance of the machine. Since the Company had a long record of success in installing its machines and obtaining customer acceptance of the machines, revenue was recognized prior to the final customer acceptance but after the passage of title. Based upon the new guidelines of SAB 101, the Company changed its revenue recognition method and now recognizes revenue upon the final acceptance by the customer, rather than upon the passage of title to the customer. The effect of adopting SAB 101 was to decrease 2000 sales $8.5 million and increase the 2000 net loss $4.4 million ($.32 per share). In addition, the results of the operations for the year-ended December 31, 2000 includes a charge, net of a $.6 million tax benefit, of $27.4 million for the cumulative effect of an accounting change to reflect the adoption of SAB 101.
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.
Results of Operations
Sales
Sales for 2000 were $280 million compared with sales in 1999 of $321.4 million, which is 12.9% below the 1999 level. The 2000 sales would have been $15.3 million higher than reported, if foreign denominated sales had been translated at 1999 foreign exchange rates. The reduced U.S. dollar value of 2000 foreign sales is due to the continued strength of the U.S. dollar. As discussed above, the Company recorded in 2000 a reduction in sales of $8.5 million due to the implementation of SAB 101, all of which applies to the more fully configured CMMs manufactured and distributed by MSD. When the 2000 sales are translated at 1999 exchange rates and adjusting for the effect of SAB 101, 2000 sales amount to $303.8 million or a $17.6 million decrease from 1999 levels. The $17.6 million sales decrease in 2000 sales was caused by an $18.2 million decrease in the MS Division, offset by a $.6 million increase for PMI, which occurred due to increased activity in its Asian market.
The $18.2 million decrease in MSD sales was due to a $17 million decrease in aftermarket revenue and a net decrease in machine sales made up of approximately an $8.1 million increase in the sales of certain of the smaller CMMs offset by a $9.3 million decrease in the sales of more fully configured CMMs. Approximately $4 million of the increase in smaller machines in 2000 was due to the inclusion of a full year of shipments of products manufactured and distributed by Brown & Sharpe--Qianshao, a 60% owned subsidiary, located in the People's Republic of China, which was acquired in August 1999, and included in the 1999 results beginning on September 1, 1999. Another $1.5 million of the increase in shipments of smaller machines in 2000 was due to increased shipments in Europe using existing software that gained greater market acceptance in 2000. Sales of more fully configured machines were down in 2000, due to decreased shipments of sheet metal products to the automobile industry. Sales for the aftermarket business in 2000 were lower than 1999, primarily due to a decrease in sales of upgrades and software, which were higher in 1999 when customers appeared to focus on Y2K problems.
Sales for 1999 were $321.4 million compared with sales in 1998 of $339 million, which is 5.2% below the 1998 level. The 1999 sales would have been $5.1 million higher than reported in 1998, 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 $326.5 million, a $12.5 million decrease from 1998 levels. The $12.5 million sales decrease in 1999 sales was caused by a $3.1 million and $9.4 million decrease, respectively, in the MS and PMI Divisions.
The $3.1 million decrease in MSD sales was primarily due to an approximate $15.3 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.
Net Loss
The Company incurred a net loss in 2000 amounting to $57.3 million. The 2000 results include the following one-time charges:
The adoption of SAB 101, discontinued operations and non-contact sensor technology write-off were previously discussed above in the Overview Section. The $3.6 million charge for costs incurred for services relate to activity in 2000 in connection with attempts to refinance the overall capital structure of the Company. The $4 million restructuring benefit relates to a $1.7 million gain on the sale of a factory that had been previously used by the PMI operation located in the United Kingdom that was restructured in 1999. The $2.3 million balance of the $4 million restructuring benefit results from a decision that was made, subsequent to the implementation of the MSD restructuring plan, not to vacate a facility located in Italy, due to a substantial reduction in the lease payments offered by the Lessor of the real estate in which the future lease payments had been reserved as part of the restructuring ($.6 million), and a write-down of leasehold improvements for this location ($.5 million); a sublease of another rental property ($.5 million); and adjustments for severance arrangements in three countries arising from actual severance payments varying from amounts estimated on the dates of the implementation of the restructuring plans ($.7 million).
The restructuring benefit was recognized in 2000 because the events occurred during 2000 and were not known in the year of the restructuring.
The 1997 restructuring plan is completed, and the 1999 plan is completed at all locations except for a small number of employees in Italy who will be leaving in the first half of 2001. At December 31, 2000, the Company was obligated to make $2.8 million in severance payments to certain employees who have already been terminated under the plans. $2.1 million of the severance payments will be paid in 2001, and the remaining $.7 million of severance payments will be paid in almost equal amounts in 2002 and 2003. In addition, the Company is obligated at December 31, 2000 to pay $1.5 million for leases and other costs related to the 1999 restructuring plan, nearly all of which will be paid in 2001. See Note 4 of the Consolidated Financial Statements for further information.
After adjusting for the $44.5 million in one-time charges, the 2000 net loss amounted to $12.8 million. $4.4 million of the $12.8 million loss is caused by the reversal of profit attributable to the $8.5 million in sales that were not recognized in 2000 due to the adoption of SAB 101. The resulting adjusted 2000 loss of $8.4 million compares with a $6.1 million loss in 1999, excluding the effect of $36.8 million, net of tax benefits, of restructuring charges incurred in 1999. The following discussion will compare the 2000 operating results, excluding the impact of SAB 101 and the other one-time charges discussed above, with the 1999 operating results, excluding the effect of the 1999 restructuring charges.
The Company incurred a $2.2 million operating loss in 2000, which compared with a 1999 operating profit of $6.4 million. The 2000 gross margin was $93.5 million, which is 33.4% of sales, and compares with a 1999 margin of $100.2 million, which is 31.2% of sales. After adjusting the 2000 gross margin to reflect 1999 foreign exchange rates, the 2000 gross margin was $102.7 million (35.6% of 2000 sales). The $2.5 million improvement in 2000 gross margin is a result of a $5 million improvement in PMI's gross margin offset by a $2.5 million decrease in MSD's gross margin. MSD's reduced margin is due to the reduced sales of the higher margin aftermarket services product offering, arising from reduced upgrades and software sales that were partially offset by improved margins in the former Custom Metrology ("CM") Division, which was combined with MSD's operations in 2000. The former CM Division's improved profitability in 2000 results from the 1999 restructuring effort in which the CM Division operation essentially now produces one product after the restructuring, resulting in greater efficiencies and improved profitability. The gross margins of the remaining MS product offerings were comparable to prior year amounts. PMI's 2000 increase in gross margin was achieved despite flat sales volume, after giving effect to the 1999 foreign exchange rates. The improved margins are a result of the restructuring program implemented during 1999 and early 2000 and reflects the benefits of concentration of production facilities, reducing the breakeven point, and successful outsourcing of product offerings.
Selling, general, and administrative expenses ("SG&A") were 28.4% of sales as compared to 26.4% in 1999. SG&A expenses for 2000 are $5.6 million lower than 1999. If 1999 foreign exchange rates had been used to translate SG&A expenses for 2000, 2000 SG&A expenses would have been $2.2 million lower than the same period for 1999. 2000 includes a full year of expenses incurred by Brown & Sharpe-Qianshao, which was acquired in 1999 and not included in the entire 1999 results, which increased SG&A in 2000 approximately $2.4 million. Adjusting for the effect of foreign translation and the previously mentioned acquisition, 2000 SG&A expenses decreased approximately $4.6 million. The decrease for 2000 results from various offsetting events. Pension expense in 2000 decreased approximately $5 million due to a provision in 1999 that was not required in 2000 for certain key executives who were participants in the Company's Senior Executive Supplemental Umbrella Pension Plan, who became fully vested in 1999 and eligible to receive these benefits at that time. Salaries and related costs were $2.3 million lower than 1999 reflecting the savings from the 1999 restructurings. Offsetting the savings noted above were additional SG&A costs in 2000 amounting to $2.9 million for foreign exchange losses and $1.6 million for increased sales commissions.
Research and development increased from $8.8 million in 1999 to $11.7 million in 2000. $2.3 million of the $2.9 million increase is attributable to the termination of the capitalization of software development expenses of the Company's software development subsidiary, BSIS Inc. When BSIS's development activities reached the technological feasibility stage, it began to capitalize its software production costs incurred to code and test its software product. Due to the extended testing period, the Company ceased capitalizing BSIS software development costs in 2000 because of the uncertainty of the recoverability of the additional costs incurred in 2000. Management also evaluated the net realizable value of the $3.4 million of capitalized software development costs at December 31, 2000 and concluded that the carrying value at December 31, 2000 was recoverable based upon expected revenues that would result from the sales of the software product.
Interest expense in 2000 was $1.6 million higher than in 1999 due to increased average borrowing and higher interest rates in 2000 resulting from the Company's adverse financial position.
Results in 2000 included a $2.8 million tax provision as compared to $2.4 million in 1999. The higher tax provision in 2000 results from higher taxable income in certain jurisdictions that could not be offset by tax benefits in other jurisdictions.
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 $31.9 million in 1999, which included $38.3 million of restructuring charges. Excluding the effect of the restructuring charge, 1999 operating profit would have been $6.4 million, which is $14.1 million lower than 1998. The gross margin for 1999 was $87.8 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 $100.2 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 $14.8 million decrease in gross margin was due to lower margins of $10 million and $4.8 million for the MS and PMI 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 was down due to lower absorption arising from lower sales volume.
Selling, general, and administrative expenses ("SG&A") in 1999 and 1998 were approximately the same. If 1999 SG&A expenses were translated at 1998 exchange rates, the 1999 SG&A expenses would be $4.7 million higher than 1998. $.5 million of this increase is due to the recording of expenses of the new companies acquired during the year. The remainder of the $4.2 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 $1.7 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.
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 and because of the non-payment default discussed below, a $1.1 million mortgage note on property located in the United Kingdom, which are classified as current liabilities, as well as other long-term debt amounting to $10.8 million. The Company also has a $30 million three-year syndicated multi-currency revolving Credit Agreement with four banks, which had a maturity and termination date of November 10, 2000 and was amended as of February 7, 2001 to extend the maturity date to April 30, 2001, or at an earlier date if the Acquisition Agreement between the Company and Hexagon AB is terminated. At the date of this Annual Report, only $27.4 million is available of the $30 million under the line of credit. 65% of the shares of certain of the Company's foreign subsidiaries were pledged as security for the lenders under the $50 million private placement and the $30 million line of
credit (collectively the "Senior Lenders"). In addition to the $30 million revolving Credit Agreement, the Company has $17.8 million in lines of credit with various banks located outside of the United States. At December 31, 2000, the Company had borrowed $27.4 million and $11.6 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 ratios. The Company's Senior Lenders granted waivers curing the financial covenant defaults incurred under the Company's note and revolving credit agreements through the end of 1999. In addition, in November 1999, borrowing rates under these senior lending agreements with its Senior 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 (with a carrying value amounting to $50.4 million at December 31, 1999) and to complete a refinancing acceptable to the lenders by January 31, 2000. As of the date of this Annual Report, this refinancing had not occurred.
Thus, as previously reported, since the summer of 1999, there has been an Event of Default under its Revolving Credit Agreement with its banks, and the Company has not been permitted to borrow any additional amount under the Revolving Credit Agreement since that date. Also as previously reported, since the summer of 1999, there has been an Event of Default under its privately placed senior note agreements. As has been the case since the summer of 1999 with the prior and continuing Event of Default under the note agreements, the noteholders may at any time declare the notes to be immediately due and payable and may resort to collateral securing the Company's obligations to the noteholders under the note agreements and related collateral agreements.
In June 2000, the Company engaged Chase Securities Inc. to pursue various strategic alternatives, including a possible sale or merger of the Company. This decision described in a June 2000 press release was made by the Board of Directors following the termination of the due diligence process that the Company had recently been engaged in with private equity investors that had been considering making a substantial equity investment in the Company. In addition, the Company had considered internal restructuring on its own, including the sale of one or more units or selling a minority (or majority) interest in certain non-core units that would increase the Company's cash position and improve liquidity. However, there was no guarantee that a strategic transaction would be completed or that any of the other transactions described above would be completed and would be sufficient to meet the Company's financial needs or that the Senior Lenders would not declare the bank obligations and/or the notes to be immediately due and payable and have resort to the collateral securing the Company's obligations, in which event bankruptcy reorganization may be one of the possible consequences.
At February 1, 2001, the Company had $20.8 million of cash on hand and has been meeting its normal cash needs. Included in the $20.8 million of cash at February 1, 2001, is $3.7 million of its 60% owned subsidiary, Qingdao Brown & Sharpe Qianshao Technology Company Limited, PRC, and 75% owned subsidiary, Qingdao Brown & Sharpe Qianshao Trading Company Limited, PRC, which are located in the People's Republic of China. Cash balances in China are subject to currency exchange controls which limit the China subsidiaries' ability to make loans and advances to the Company. In addition, three of the Company's wholly- owned European subsidiaries with cash balances amounting to $11.9 million at February 1, 2001, have borrowing with local banks which restrict payments of loans or advances to the Company by the subsidiaries. In addition, as a practical matter, the business realities of the Company's operations through subsidiaries in foreign countries, with credit lines of such subsidiaries from foreign banks, restrict the ability of the Company to make long-term transfers of cash in foreign countries into the United States. The Company is, as a result of 1999 amendments to its agreements with the Senior Lenders, prohibited from further borrowing. Until the financial covenants have been reset and the defaults cured or waived, the Company has classified the $50 million Senior Note obligation, as well as its $1.1 million mortgage in the United Kingdom, as a current liability. During this period of discussion with its lenders, the Company is instituting additional cash management procedures. If the transaction with Hexagon is not completed, the Company must seek other strategic alternatives, including sale or merger of the Company, in order to satisfy its Senior Lenders because the Company is unable to pay its loans if they are called and bankruptcy reorganization may be one of the possible consequences.
If the sale of the Metrology Business, as described elsewhere in this Annual Report, occurs in 2001, the Company will pay all of its obligations due under the $50 million private placement of senior notes and the $27.4 million Revolving Credit Agreement with four banks, as well as have the Buyer of the Metrology Business assume the remaining $11.6 million of foreign bank debt. The Metrology sale is expected to leave the Company debt free, except for liabilities associated with a defined benefit plan and several changes in control contracts amounting to $18 million and certain other liabilities related to the assets retained by the Company. In addition, the Company expects to realize approximately $1.5 million, after $.5 million payment to a minority shareholder, from the sale of its Electronics Business. The Company expects that it would have $52 million in cash that would be available for distribution to its shareholders.
Although the Company's allowance for doubtful accounts increased from 5.4% of accounts receivable at December 31, 1999 to 12.7% at December 31, 2000, the Company's credit policies and business practices did not change significantly from the prior year. The adoption of SAB 101, as discussed above, required the Company to recognize revenue in 2000 at a later date than was required by the Company's revenue recognition policy in 1999. $8.8 million of 2000 shipments that were not recognized as revenue in 2000, due to the Company's newly adopted revenue recognition policy, were deferred and will be recognized as revenue in a later period. If the Company had not changed its revenue recognition policy, accounts receivable at December 31, 2000 would have been $77.9 million, and the allowance for doubtful accounts would have been 5.7% of accounts receivable.
Cash Flow
Net cash used in operations in 2000 was $.3 million compared with net cash provided by operations in 1999 of $15.3 million. For the year ended December 31, 2000, the net loss of $57.3 million was decreased by depreciation and amortization amounting to $11.6 million and other non-cash items, including $27.4 million for SAB 101; $12.0 million for impaired assets; restructuring benefits of $2.3 million; and other non-cash items amounting to $4.7 million. Cash flows from working capital in 2000 increased $3.6 million after adjusting for the effect of SAB 101. For the year ended December 31, 1999, the net loss of $42.9 million was decreased by depreciation and other non-cash items of $54.9 million, including restructuring charges of $30.5 million, depreciation and amortization of $13 million, pension charges of $5.5 million, and other non-cash items amounting to $5.9 million. Working capital in 1999 decreased $3.2 million.
Net cash used in investment transactions in 2000 and 1999 was $2.3 million and $24.0 million, respectively. Capital expenditures in 2000 and 1999 amounted to $6.1 million and $9.1 million, respectively, as the Company curtailed spending and investment transactions in 2000. During 2000, the Company sold real estate in the United Kingdom previously used by its restructured PMI Division for cash amounting to $3.8 million. In 1999, the Company invested in acquisitions amounting to $9.2 million. In 1999, it also provided an additional $1.9 million to its equity investor Metroptic Technologies Ltd., invested $.7 million in marketable securities to fund a defined benefit plan, and invested $3.0 million in internally developed software costs.
Cash used in financing transactions was $4.8 million during 2000 compared with cash provided by financing transactions of $37.7 million in the same period in 1999. Financing transactions during 2000 consisted of principal payments of long-term debt and short-term debt. Financing transactions during the same period in 1999 consisted of an increase of $41.8 million in short-term borrowings offset by $4.1 million of principal payments of long-term debt.
Working Capital
Working capital decreased from $9.7 million at December 31, 1999 to a negative working capital of $29.9 million at December 31, 2000. When December 31, 1999 foreign exchange rates are used to translate the December 31, 2000 balance sheet, working capital decreased to a negative $29.7 million. After using the December 31, 1999 foreign exchange rates to translate the December 31, 2000 balance sheet, cash and accounts receivable decreased $8.5 million and $49.9 million, respectively, and inventory increased $28.4 million. Accounts payable and accrued expenses increased $17.8 million. The adoption of
SAB 101 in 2000 with the associated reversal of approximately $67.5 million of sales caused accounts receivable to decrease $42.8 million and inventories to increase $34.7 million, while accrued expenses increased $22.7 million for cash advances received for the $67.5 million of sales. After adjusting for the effect of the adoption of SAB 101 and using 1999 foreign exchange rates, 2000 working capital decreased $12.4 million. The $12.4 million decrease results from a $7.1 million and $6.9 million decrease for accounts receivable and inventory, respectively, and a $4.9 million decrease in accounts payable and accrued expenses. Offsetting these decreases was a $.7 million increase in prepaid expenses and other current assets, which included $2 million for a refund of Federal income taxes. Current assets also increased $5.9 million due to the reclassification of $2 million of assets of the Electronics Division and $3.9 million for the net book value of the North Kingstown facility, which are being sold. The decreases in accounts receivable and inventory in 2000 was a result of intensified efforts to convert the investment in these assets to cash in response to the Company's cash requirements, particularly in the United States, due to the Company's financial problems discussed above. Although management emphasized cash management throughout 2000, the Company used $9.4 million of the $36.6 million of cash on hand at December 31, 1999. In addition $2.5 million of inventory at December 31, 1999, that was acquired as a result of the purchase of the Electronics Division, was adjusted to reflect the fair value of the inventory at the acquisition date and contributed to the change in inventory from 1999 to 2000.
Product Design and Manufacturing Engineering
The Company invested $15.5 million, or 5.5% of sales; $14.4 million, or 4.5% of sales; and $17.8 million, or 5.3%, in 2000, 1999, and 1998, respectively, for product design and manufacturing engineering.
RISK FACTORS PRIOR TO SALE OF SUBSTANTIALLY ALL ASSETS
Following the completion of the proposed sale to Hexagon, the Company will continue in the business of developing measuring software through its controlled subsidiary, BSIS, which will be renamed Xygent after the Closing under the Acquisition Agreement, and BSIS will be the only active operation of the Company. The Risk Factors set forth below assume no sale to Hexagon.
Indebtedness and Liquidity
As set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources", during 1999 and continuing in 2000, the Company breached certain financial ratio covenants. The Company received waivers curing the defaults through the end of 1999. In addition, 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 subordinated debt financing acceptable to the lenders by January 31, 2000. The Company was unable to complete a subordinated debt financing acceptable to the lenders by January 31, 2000. On February 7, 2001, the Company's lenders granted waivers curing the requirements that the Company complete a subordinated debt financing and amended the maturity date of the revolving credit facility to be the earlier of the completion of the sale to Hexagon or April 30, 2001. However, the Company continues to be in violation of financial ratio covenants in its note and loan agreements with its senior lenders and is also in default on its payment of its $27.4 million line of credit under its Revolving Credit Agreement. As a result, the Company has not been permitted to borrow any additional amount under the Revolving Credit Agreement. In addition, the Company's senior lenders may at any time declare the Company's loans and notes due and payable and may have to resort to the collateral securing those obligations, in which even bankruptcy reorganization may be one of the possible consequences.
The Company proposes to sell substantially all of its assets, including the sale of substantially all of its metrology assets to Hexagon pursuant to the Acquisition Agreement between the Company and Hexagon and the sale to Precision Park Partners LLC of the North Kingstown Facility under the North Kingstown Sales Agreement 1: To Approve the Sale of Substantially All of the Assets, Including (a) the Acquisition Agreement between the Company and Hexagon and the Related (b) the North Kingstown Sales Agreement and (c) the Cash Distribution to Stockholders in Amounts to Be Determined By the Board of Directors elsewhere in this Annual Report. There can be no assurance that the Company will complete these transactions. In the event that these transactions are not completed, there can be no assurance the Company will be able to complete a financing transaction which will remedy the present default situation, extend the maturity of its obligations under the revolving credit, and remedy the Company's existing indebtedness and liquidity problem, acceptable to the senior lenders or will be able to negotiate amendments on satisfactory terms to the Note Agreement with its private placement lenders and to the Revolving Credit Agreement (and an extension thereof) with its revolving credit lenders. In such an event, the Company expects that the terms of any such financing transaction will 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 such a financing transaction in a satisfactory amount (and the Company was unable to do so from December 1999 through June 2000 and no such financing transaction is now under consideration) and if its parallel negotiations with both sets of its present senior lenders are not successful in resolving these issues under the Note Agreement and the Revolving Credit Agreement (and they have not been successful prior hereto), the Company must seek some form of strategic transaction alternative, including a sale or merger of the Company. Indeed, in the event that the Company is unable to complete the sale to Hexagon, the Company plans to seek other strategic alternatives, including another sale or merger, in order to satisfy its senior secured lenders who, at any time, may resort to collateral, consisting of substantially all the Company's assets and the substantial pledges of stock of its subsidiaries, to remedy the Company's inability to pay its loans to the senior lenders, in which event bankruptcy reorganization may be one of the possible consequences. However, it is also not possible to predict whether any such strategic alternative arrangements could be negotiated on satisfactory terms sufficient to resolve the Company's defaults under the agreements with its senior lenders and its present indebtedness and liquidity problem. For additional details, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources", elsewhere in this Annual Report, and Note 3 of the Consolidated Financial Statements and "Risk Factors--Recent History of Losses".
Recent History of Losses
The Company reported a 12.9% decrease in revenue for fiscal 2000 as compared to fiscal 1999. Net losses for fiscal 2000 and 1999, respectively, were $57.3 million and $42.9 million. Continued negative operating results could adversely impact the Company's relationships with customers, vendors and employees, as well as its liquidity, its ability to return to compliance with respect to the financial ratio covenants in its Senior Note Agreement and Revolving Credit Agreement. Such results would adversely impact its extension of the Revolving Credit Agreement and its ability to return to compliance with respect to the financial ratio covenants in its Senior Note Agreement and Revolving Credit Agreement (neither of which is likely) as well as its continued listing of the Class A Stock on the New York Stock Exchange. (See "Risk Factors--Possible Delisting on the New York Stock Exchange".) The Company received a report from its independent auditors for the year ended December 31, 2000 (as it had for the year ended December 31, 1999) containing an explanatory paragraph stating that the Company's operating loss and noncompliance with certain covenants of loan agreements (see "Risk Factors--Indebtedness and Liquidity") raise substantial doubt about the Company's ability to continue as a going concern. Management's plans to continue as a going concern relies heavily on its ability to raise additional equity financing, or alternatively, on its ability to complete the proposed sale under the Acquisition Agreement to Hexagon and to sell its North Kingstown Facility under the North Kingstown Sale Agreement (with retention of some of the net proceeds of such sales for the operations of the Company and of its controlled subsidiary BSIS). To Approve the Sale of Substantially All of the Assets, Including (a) the Acquisition Agreement between the Company and Hexagon and the Related Transactions, (b) the North Kingstown Sales Agreement and (c) the Cash Distribution to Stockholders in Amounts to Be Determined By the Board of Directors elsewhere in this Annual Report. However, there can be no guarantee that such sales and other matters will be satisfactorily concluded.
Competition
The Company's MS Division 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 Division also faces indirect competition from other types of metrology firms such as manufactures of fixed gauging systems. The primary industries to which the MS Division 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 Division, 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 Division 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. Competitive pressures on pricing have intensified and the competition for orders has increased, which is in part responsible for the recent lack of growth in orders and shipments of the MS Division. Accordingly, there can be no assurance that the MS Division 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, especially during any recessionary downturn.
Foreign Operations
As of December 31, 2000, approximately 71% (based on book values) of the Company's assets, 59% of the Company's sales (based on customer location) and 68% 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 other business factors in foreign countries that may restrict the Company's ability to transfer cash from one foreign country to another of the United States and social (labor) programs.
In addition, the wide-spread geographic locations of the Company's facilities and operations make it more difficult for the Company to coordinate its financial and operating reporting and oversee its operations and employees. While the Company believes it has 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 manufacturer's. No alternative supplier for this class of electronic sensor probes, which are a key component of substantially all of the Company's lower accuracy CMMs, is currently available and developing an alternative source for the probes and heads could take more than a year. Although adequate supplies of such probes and heads for at least several months is potentially available from current inventories of the Company and its customers, any reductions or interruptions in supply or material increases in the price of electronic sensor probes purchased from the Supplier could cause the Company to suffer disruptions in the operation of its business or incur higher than expected costs, which could have a material adverse effect on the Company.
Technology
As the size of some components measured by metrology products decreases and the required speed and precision of such measurements increases, the Company's products may become obsolete unless the Company develops more sophisticated software and metrology systems. Although the Company's strategy is to focus research and development in the area of software development, 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
On April 28, 2000, Kenneth Kermes, then a newly-elected Director, became President and CEO, replacing Frank Curtin, who retired. The success of the Company is dependent to a significant extent upon the continuing services of a limited number of key executives of the senior management team. Loss of the services of one or more of these senior executives could have a material adverse effect on the Company's operations and its financial condition.
Implementation of Company Operating Strategy
The 1999 restructuring initiatives focus on two areas: (i) closing high cost or duplicate PMI factories and outsourcing manufacturing where appropriate, and (ii) creating focused factories and eliminating overlapping products in the MS Division. Key elements of the Company's business strategy for 2000 included the start of realization of the planned benefit of the 1999 restructuring and focusing, through the Company's subsidiary, 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 software products under development.
Possible Delisting on the New York Stock Exchange
The Company's Class A Stock is currently traded on the New York Stock Exchange. There are a number of qualitative and quantative requirements for maintenance of listing on the New York Stock Exchange. While the New York Stock Exchange has not formally indicated that the Company has triggered any of the quantative tests, the Company did receive a letter from the New York Stock Exchange indicating that, based on a review of the Company's stock, the Company was close to triggering one of the quantative factors. No assurance can be made whether the Company can continue to maintain its current listing. In the event that the Company's Class A Stock is delisted by the New York Stock Exchange, the Company may not be able to have its shares listed on another stock exchange.
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 (loss) 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.
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. One of the operating companies has installed a software patch which will make the software Euro compliant. The installation is currently being tested for compliance. Another operation has purchased operating software which is Euro compliant. The Company believes it will be completely Euro compliant by the mandatory conversion date.
Risk Factors Relating to BSIS (After the Sale to Hexagon)
The operations of the Company following the closing of the sale to Hexagon will consist primarily of the operations of BSIS, which is subject to a variety of risks and special considerations as set forth immediately below. See also "Forward Looking Statements" elsewhere in this Annual Report.
ITEM 7A
ITEM 7A - -QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------
Refer to "Qualitative and Quantitative Disclosures About Market Risk" on Pages 29 and 30 of this Annual Report.
ITEM 8
ITEM 8 - -FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------
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, 2000 and 1999, and the related consolidated statements of operations, shareowners' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, 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 3, 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 3. 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.
As discussed in Note 2 to the financial statements, in 2000 the Company changed its method of accounting for revenue recognition.
/s/ ERNST & YOUNG LLP
Providence, Rhode Island February 15, 2001
BROWN & SHARPE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000, 1999, and 1998 (dollars in thousands, except per share data)
The accompanying notes are an integral part of the financial statements.
BROWN & SHARPE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999 (dollars in thousands, except per share data)
The accompanying notes are an integral part of the financial statements.
BROWN & SHARPE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999, and 1998 (dollars in thousands)
The accompanying notes are an integral part of the financial statements.
BROWN & SHARPE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
For the Years Ended December 31, 2000, 1999, and 1998 (dollars in thousands)
The accompanying notes are an integral part of the financial statements.
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and 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 until its discontinuance in 2000 (see Note 5), 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.
Certain account balances for prior years have been reclassified to conform with the 2000 presentation.
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 $15,380 and $12,532 at December 31, 2000 and 1999, respectively. Year-end inventories valued under the LIFO method were $32,779 in 2000 and $17,991 in 1999.
The composition of inventory at year end was as follows:
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $7,511, $9,468 and $7,624 in 2000, 1999, and 1998, 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, 2000, land and buildings with a net book value of $13,777 were pledged as collateral for mortgage loans of $11,509.
Goodwill and Other Assets
Goodwill, which is net of accumulated amortization of $5,374 in 2000 and $4,700 in 1999, is being amortized on a straight-line basis over periods ranging from 7 to 20 years. In 1999, the Company reduced goodwill $250 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 $674 in 2000 and $670 in 1999, and $583 in 1998.
Other assets includes 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 $2,543, $2,901, and $2,925, in 2000, 1999, and 1998, respectively. Accumulated amortization for these assets was $16,445 in 2000 and $13,902 in 1999.
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 loss."
There were no forward exchange contracts outstanding at December 31, 2000 and 1999. A transaction gain of $47 was recorded in 1999 while transaction losses of $2,786 and $508 were recorded in 2000 and 1998, 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. 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, 2000 and 1999, the Company had no significant concentrations of credit risk.
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Incentive Plans
The Company accounts for its stock compensation arrangements under the provisions of APB 25, "Accounting for Stock Issued to Employees" (see Footnote 8 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.
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, 2000 was approximately $3,800, $4,100, and $4,300, respectively.
2. ACCOUNTING CHANGE
In 2000, the Company adopted SEC Staff Accounting Bulletin No. 101 ("SAB 101"). As a result of adopting SAB 101, the Company changed the way it recognizes revenue for machines sold to customers. Prior to the adoption of SAB 101, the Company recognized revenue when the machines were shipped and title passed to the customer. Effective as of January 1, 2000, the Company recognizes revenue for machines sold to customers once the performance of machines is accepted by the customers. The effect of applying this change in accounting principle was to decrease 2000 sales $8,500 and increase the 2000 net loss by $4,400 ($0.32 per share). In addition, the results of operations for the year ended December 31, 2000 includes a charge of $27,401 (net of an income tax benefit of $600), or $2.00 per share.
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Adopting this new method of revenue recognition for 2000, 1999 and 1998, would have produced the following pro forma results:
3. GOING CONCERN
In 2000, the Company incurred a net loss amounting to $57,309, which included the cumulative effect of a change in accounting principle amounting to $27,401 (see Note 2). In addition to the operating loss, the Company also incurred a loss amounting to $3,786 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 2000 net loss and the loss arising from foreign translation reduced the Company's net worth at December 31, 2000 by $61,095.
The 1999 operating results caused the Company to violate certain of its loan covenants with several banks who had provided the Company with a $30,000, three-year syndicated, multi-currency revolving credit facility, which had a $27,400 balance outstanding at December 31, 2000, and with its private placement lenders who had provided $50,000 of long-term financing in 1997 (see Note 12). 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. On February 7, 2001, the Company's lenders granted waivers curing the requirements that the Company complete a subordinated debt financing and amended the maturity date of the revolving credit facility to be the earlier of the completion of the sale to Hexagon or April 30, 2001.
On November 16, 2000, the Company entered into an Acquisition Agreement with Hexagon, A.B. of Stockholm, Sweden, in which Hexagon will purchase substantially all of the Company's world-wide Metrology Business. The Company will retain ownership of its software development business, BSIS, which is focused on the commercialization of new metrology software, and certain real estate in the United States and the United Kingdom. The purchase price for the Metrology Business is $160,000 in cash plus an additional contingent cash payment of up to $20,000, based on the operating profit of its Metrology Business (as defined) for the year ended December 31, 2000, subject to an adjustment up or down depending on the net cash position (net of indebtedness) of the subsidiaries being transferred to Hexagon at the closing. Hexagon will also pay $2,500 at closing and an additional $4,500 over three years after the closing to acquire a minority interest in BSIS.
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company intends to pay off at the closing all of the Company's outstanding debt to its banks and private placement lenders. The Company will also retain various liabilities which it will settle shortly after the closing. The Company expects to use a substantial amount of the net proceeds to fund a distribution to its shareowners.
The transaction is subject to shareowner approval and a meeting to vote on the transaction is expected to be held in March or April 2001. If the shareowners do not approve the transaction, the Company must seek other strategic alternatives, including sale or merger of the Company in order to satisfy its senior lenders because the Company is unable to pay its loans if they are called and bankruptcy reorganization could be one of the possible consequences.
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.
4. 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 total charge related to the PMI Division amounted to approximately $17,200 during 1999. 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. MSD's portion of the total restructuring charge was approximately $10,700. 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. The restructuring charge applicable to CMD amounted to approximately $7,900. Total charges for Corporate were approximately $2,500.
As a result of the 1999 Corporate-wide restructuring, the Company recorded restructuring charges totaling $36,798 net of a $1,470 tax benefit ($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 (415 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).
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2000, the Company realized a net gain of approximately $1,800 arising from the sale of real estate located in the United Kingdom that was closed as a result of the 1999 restructuring of the PMI division.
The 1997 restructuring plan is completed and the 1999 plan is completed at all locations except for a small number of employees in Italy will be leaving in the first half of 2001.
The following is an analysis of the restructuring charges and reserves for each plan:
1997 Restructuring
1999 Restructuring
(1) Includes a $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 121 in 2000, 257 in 1999 and 159 in 1998.
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) Future cash payments relating to employee termination benefits amount to $364 in 2001, $238 in 2002 and $365 thereafter. (4) Future cash payments relating to employee termination benefits, leases, and other restructuring costs amount to $3,140 in 2001, $134 in 2002 and $51 thereafter. (5) Includes a $137 reversal for employee termination benefits arising from changes in final settlement allowances with certain employees that were different from the amounts expected to be paid at the accrual date. (6) Includes a $600 reversal for employee termination benefits due to the resignation of certain employees before the Company became obligated to pay these individuals. (7) Represents a reversal of $483, $565, and $472 for leasehold improvements, lease commitments and the sublease of rental property, respectively, as a result of a decision in 2000 to not vacate a plant that was included in the 1999 restructuring plan.
5. BUSINESS COMBINATION AND DISCONTINUANCE
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 $5,400. This acquisition was entered into to expand the Company's presence in the electronics market (see below). In August 1999, 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 $3,800. 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 $3,000, and will be amortized on a straight-line basis over 20 years.
The unaudited pro forma consolidated results of operations, assuming the above acquisitions had been made at January 1, 1998, is as follows:
In the second quarter of 2000, the Board of Directors approved a plan to discontinue the Electronics Division (ED). As a result of a study to determine the future of ED, management concluded that the carrying value of ED exceeded the fair value of these assets and recorded a $7,600 charge to adjust the carrying value of the impaired assets to fair value. A charge amounting to $1,100 was recorded in operating results to record inventory at net realizable value. In February 2001, the Company entered into an agreement to sell ED. Under the terms of the agreement, the Company is expecting to receive cash consideration of approximately $2,000, subject to post-closing adjustments.
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The results of operations of ED have been classified as discontinued operations and prior periods have been restated. The results of discontinued operations do not reflect any interest expense or management fees allocated by the Company. Selected results for ED are as follows:
Assets and liabilities, excluding intercompany amounts of ED included in the consolidated statements of financial position, are as follows:
In the third quarter of 2000, management decided to discontinue the development of noncontact sensor technology. As a result of this decision, the Company wrote-off its investment in its joint venture, Metroptic Technology, Ltd. and certain other costs that were dedicated to the development of the noncontact technology and incurred a charge amounting to $5,800. This investment was part of the MS segment.
Assets held for sale or disposition at December 31, 2000, are comprised of land and building in North Kingstown, RI of $3,630 and current assets of ED of $3,313. In addition, real estate with a net book value of $414, which is available for sale, is classified in property, plant and equipment.
6. INCOME TAXES
(Loss) income from continuing operations before income taxes and the cumulative effect of a change in accounting principle consisted of the following:
BROWN & SHARPE MANUFACTURING COMPANY
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:
The income tax provision (benefit) from continuing operations before the cumulative effect of the change in accounting principle consisted of the following:
Provision has not been made for U.S. taxes on $59,635 of cumulative undistributed earnings of foreign subsidiaries as those earnings are intended to be permanently reinvested.
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the Company's deferred tax assets and liabilities as of December 31, 2000 and 1999 are as follows:
A valuation allowance has been established due to the uncertainty of realizing certain tax credit and loss carryforwards and a portion of the other deferred tax assets. The Company recorded a $16,655 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 $5,827 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 $100, respectively, in the U.K., operating loss and capital loss carryforwards of $25,800 and $3,700, respectively, in the U.S. and net operating loss carryforwards of $32,000, $8,800, $5,100, and $5,500, respectively, in Germany, France, Japan, and Italy. The French, Japanese, and Italian carryforwards expire between 2001 and 2006. The U.S. capital loss carryforward expires in 2002 and 2003 and the U.S. net operating loss carryforward expires in 2018 and 2020. There is no time limit for the U.K. and German carryforwards.
The Internal Revenue Service is currently examining the U.S. income tax returns through 1998. The Company believes it has adequately provided for any additional tax assessment.
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. OTHER INCOME AND EXPENSE
Other income (expense), net from continuing operations includes:
8. 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 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 2000 under the `99 Plan to purchase a total of 236,000 shares for a seven-year term, of Class A Common Stock granted at exercise prices between $1.875 and $2.375 per share. A total of 221,000 of options granted in 2000 become fully exercisable after April 28, 2007; the remaining 15,000 of options granted in 2000 become fully exercisable after July 31, 2007 (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 exercise price for Shares covered by options awarded under the `99 Plan were 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 Plan are 1,800,000. Including forfeiture, 919,300 shares of Class A Common Stock remain available at December 31, 1999 for issuance under the `99 Plan in connection with future awards.
All options granted under the `99 Plan and the `89 Plan become vested upon a stockholder vote to sell substantially all assets of the Company.
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Option activity during the past three years is summarized as follows:
Exercise prices for options outstanding as of December 31, 2000 ranged from $1.875 to $14.125. The weighted-average remaining contractual life of those options is 6.10 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 SFAS No. 123, "Accounting for Stock-Based Compensation" (FAS 123), 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 FAS 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 2000, 1999, and 1998, respectively: risk-free interest rates of 5.0%, 5.9%, and 5.4%, volatility factors of the expected market price of the Company's common stock of 128%, 45%, and 35%, 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.
BROWN & SHARPE MANUFACTURING COMPANY
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:
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 $1,659, $1,152, and $2,194, were made in 2000, 1999, and 1998, 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 2000, 1999, and 1998, consolidated financial statements contain provisions resulting from awards made under this Plan of $(149), $231, and $222, 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, 2000 was $2,052, $1,994, and $1,858, 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 $0 in 2000, $704 in 1999, and $657 in 1998. In lieu of a contribution to the ESOP, the Board of Directors approved an additional 2% contribution to each participant of the Savings Plan during 2000. At December 31, 2000, 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.
BROWN & SHARPE MANUFACTURING COMPANY
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, 2000 was $1,089, $1,148, and $1,249, 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 the 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, 2000.
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
9. RENTAL EXPENSE AND LEASE COMMITMENTS
At December 31, 2000, the Company was obligated under operating leases expiring on various dates. Rental expense for the three years ended December 31, 2000 was $4,707, $6,093, and $6,222, respectively. Annual rental commitments under noncancelable leases pertaining principally to buildings and equipment at December 31, 2000 are $4,521, $3,261, $2,316, $1,319, and $678 for the years 2001 through 2005, and aggregate to $3,573 for all years subsequent to 2005.
10. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted (loss) earnings per share:
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Diluted loss per share is the same as basic loss per share in 2000 and 1999 because the computation of diluted earnings per share would have an antidilutive effect on loss per share.
11. OTHER ASSETS
During 2000, other includes the following: Capitalized leases--$800, deferred pension assets--$700; capitalized debt cost--$800 and miscellaneous--$200.
During 1999, other includes the following: Capitalized leases--$1,600, deferred pension assets--$1,400, capitalized debt cost--$900 and miscellaneous-- $400.
12. SHORT-TERM AND LONG-TERM DEBT
Long-term debt consisted of the following:
The $50,000 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 $50,400 at December 31, 1999 and to complete a subordinated debt financing acceptable to the lenders by January 31, 2000. The Company was unable to complete a subordinated financing acceptable to the lenders by January 31, 2000. On February 7, 2001, the Company's lenders granted waivers curing the requirements that the Company complete a subordinated debt financing and amended the maturity date of the revolving credit facility to be the earlier of the completion of the sale to Hexagon or April 30, 2001.
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On November 16, 2000, the Company entered into an Acquisition Agreement with Hexagon, A.B. (see Note 3). Upon the consummation of that transaction, the Company intends to pay off all outstanding debt to its banks and private placement lenders. The transaction is subject to shareowner approval and a meeting to vote on the transaction is expected to be held in March or April, 2001. If the shareowners do not approve the transaction, it is not possible to predict whether any alternative arrangement could be implemented or what action, if any, the Company's banks and private placement lenders may take.
Annual maturities of long-term debt are as follows: 2001--$54,404; 2002-- $5,900; 2003--$1,411; 2003--$1,498; 2005--$458; and $1,505 thereafter. Interest rates on long-term debt averaged approximately 7.93% in 2000 and 7.7% in 1999.
The revolving credit facility and the 8.79% senior notes require the Company to comply with certain covenants, the most restrictive of which is debt to EBITDA ratio. The Company presently is in violation of this covenant. The carrying amount of long-term debt approximates fair value.
Short-term debt consists of the following:
The United States short-term debt is payable on demand and, as discussed above, is in violation of certain loan covenants. The short-term debt of the foreign subsidiaries all represent overdraft borrowings and are due upon demand. The Company's foreign subsidiaries made payments on certain of their short-term debt in 2000 amounting to $1.6 million. The remaining $.6 million decrease in short-term borrowings of foreign subsidiaries is due to the use of lower foreign exchange rates used to translate 2000 foreign short-term debt than the comparable rates used in 1999.
13. LONG-TERM LIABILITIES
Long-term liabilities consisted of the following:
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA
Segment Information
The Company operates exclusively in the Metrology Business and has historically conducted 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"). During 2000, the Company discontinued the Electronics Division (see Note 5 for further details) and began evaluating operating decisions based on the MS and CM segments on a combined basis. Accordingly, all prior periods presented have been restated to reflect the revised MS segment and discontinuance of the ED segment. See Note 1 for a further description of the Company's business.
BROWN & SHARP MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
RECONCILIATION OF SELECTED ITEMS
Geographic Area The following is a summary by geographic area of revenues from customers and long-lived assets.
BROWN & SHARP MANUFACTURING COMPANY
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 which 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.
15. COMMON STOCK
Both classes of common stock have equal rights upon liquidation. Class A Common Stock may not receive less cash dividends per share than Class B Common Stock, nor may such dividends be less frequent. The Class A Common Stock has one vote per share. Except as otherwise provided by 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 2000 and 1999, 2,711 and 3,395 shares, respectively, were converted from Class B Common Stock to Class A Common Stock.
The Company has reserved a total of 919,300 shares of Class A Common Stock for future issuance under certain benefit and stock incentive plans.
16. PREFERRED STOCK PURCHASE RIGHTS
On February 13, 1998, the Board approved a new Rights Plan and declared a dividend 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.
BROWN & SHARP MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
17. COMMITMENTS AND 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.
In connection with the transaction entered into with Hexagon, A.B. of Stockholm, Sweden on November 16, 2000, the Company must settle, shortly after the transaction is consummated, liabilities which were not accruable at December 31, 2000 of approximately $9,900 relating to accelerated obligations under a defined benefit plan and several change in control contracts with management employees.
18. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The activity in the Company's allowance for doubtful accounts is as follows:
__________________ (1) Adjustment resulting from translating allowance for doubtful accounts of foreign subsidiaries at year-end exchange rates. (2) Write-offs of uncollectible accounts.
BROWN & SHARP MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
19. QUARTERLY DATA (UNAUDITED)
(1) During the fourth quarter of 2000, the Company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. Pursuant to Financial Accounting Standards Board Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, effective January 1, 2000, the Company recorded the cumulative effect of the accounting change and accordingly, the quarterly information for the first three quarters of 2000, which had been previously reported, has been restated. No restatement of 1999 information was necessary. (2) In the third quarter of 2000, management decided to discontinue the development of noncontact sensor technology. As a result of this decision, the Company wrote-off its investment in its joint venture, Metroptic, Ltd. and certain other costs that were dedicated to the development of the noncontact technology and incurred a charge of $5,800. (3) Relates to the pending sale of the Company's Electronics Division. See Note 5 for further details.
BROWN & SHARPE MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURES ---------------------
None
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------
The following table summarizes information regarding directors of the Company as of March 1, 2001:
PART III (continued)
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued) - -----------------------------------------------------------------------
The following table summarizes information regarding Executive Officers of the Company as of March 1, 2001:
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.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION - --------------------------------
Information with respect to this item is incorporated by reference herein to information contained under the heading "Item 1 - Election of Directors," subheadings "Nominees for Election," and "Section 16(a) Security Ownership of Certain Beneficial Owners And Management" in the definitive 2001 Proxy Statement.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
I. Security Ownership of Certain Beneficial Owners
Set forth below, as of February 15, 2001 are the persons or groups known to the Company who beneficially own, under the applicable rules and regulations of the Securities and Exchange Commission, more than 5% of any class of the Company's voting securities.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ (continued) - ----------
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (continued)
(1) Fiduciary Trust Company International, a bank, by virtue of various investment management contracts and trust agreements with members of the Sharpe family, including Henry D. Sharpe, III, a Director, holds the shares of Class A and Class B Stock in the Table. See Footnote (2) below. (2) Various members of the family of Henry D. Sharpe, Jr. (father of Henry D. Sharpe III) beneficially own an aggregate of 635,686 shares of common stock of the Company comprised of 476,766 shares of Class A Stock and 158,920 shares of Class B Stock of the Company. These holdings amount to 3.6% and 32.0%, respectively, of each class of stock and represent 11.4% of the combined voting power of the Class A Stock and Class B Stock. The table includes (a) an aggregate of 168,076 shares of Class A Stock and 56,024 shares of Class B Stock held by Henry D. Sharpe, Jr.'s wife and children, including Henry D. Sharpe, III, a Director of the Company, and by trusts, of which they are beneficiaries under agreements with Fiduciary Trust Company International and under which they each have sole voting and dispositive power with respect to their shares and with respect to which Mr. Sharpe, Jr. disclaims beneficial ownership; (b) 120 shares of Class A Stock and 40 shares of Class B Stock held by the Sharpe Family Foundation, a charitable foundation, held by Fiduciary Trust Company International with whom Mr. Sharpe, Jr. shares voting power and with respect to which beneficial ownership is disclaimed; (c) 7,200 shares of Class A Stock and 2,400 shares of Class B Stock as to which Henry D. Sharpe, Jr. has neither voting nor dispositive power but as to which he is a beneficiary under a trust established under the will of Henry D. Sharpe, Sr.; and (d) 308,570 shares
of Class A Stock and 102,856 shares of Class B Stock held by Fiduciary Trust Company International as to which Henry D. Sharpe, Jr. has sole voting and dispositive power. (3) Messrs. DiLuigi and Genor are Executive Officers of the Company and serve as co-Trustees of the Brown & Sharpe Employee Stock Ownership and Profit Participation Plan (the "ESOP"). The Table includes (i) 802,968 shares of Class A Stock and 166,063 shares of Class B Stock held by the ESOP, which are deemed to be beneficially owned by each of the foregoing persons, but as to all of which ESOP shares, except, with respect to their own vested shares of Class A Stock and Class B Stock in such plan, they disclaim beneficial ownership; and (ii) shares of Class A Stock issuable upon exercise of stock options held by such Executive Officers. (See II. Security Ownership of Management Footnote (3) and Aggregated Options Table.) (4) Putnam Fiduciary Trust Company acts as Trustee of the Brown & Sharpe Savings and Retirement Plan and the Brown & Sharpe Savings and Retirement Plan for Management Employees (together referred to as the "SARP"), substantially similar tax qualified 401-K savings plans covering the Company's U.S. employees, and in that capacity shares voting power with respect to the shares of Class A Stock and Class B Stock with and subject to direction from participants in the SARP as to all of which shares Putnam disclaims beneficial ownership. (5) Merrill Lynch & Co. Inc. is a parent holding company and Merrill Lynch Special Value Fund, Inc. is a subsidiary of such company, and such companies, as registered investment advisors, share voting and dispositive control over such shares with certain clients. (6) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment advisor, has sole voting and dispositive control over such shares and is deemed to have beneficial ownership of the reported shares, all of which shares are held in portfolios of DFA Investment Dimensions Group Inc., a registered open-end investment company, or in series of the DFA Investment Trust Company, a Delaware business trust, or the DFA Group Trust and DFA Participation Group Trust, investment vehicles for qualified employee benefit plans, as to all of which Dimensional Fund Advisors Inc. serves as investment manager. Dimensional disclaims beneficial ownership of all such shares. (7) Gabelli Asset Management, Inc. ("Gabelli"), has sole voting and dispositive control over such shares and is deemed to have beneficial ownership of the reported shares, all of which are held in portfolios of Gabelli Funds, LLC, a registered investment advisor, or in GAMCO Investors, Inc., a registered investment advisor, or in Gabelli Associates Limited, a British Virgin Islands corporation, or in Gabelli Associates Fund, a New York limited partnership, or in Gabelli Fund LDC, a British Virgin Islands Company. Gabelli disclaims beneficial ownership of all such shares.
II. Security Ownership of Management
The following table and accompanying footnotes set forth certain information about the beneficial ownership of the Company's Class A Stock and Class B Stock as of February 15, 2001 by the Directors, the top five Executive Officers and all Directors and Executive Officers as a group.
* Less than one percent (1%)
II. Security Ownership of Management (continued)
(1) See Footnote (2) I. Security Ownership of Certain Beneficial Owners. (2) See Footnote (3) I. Security Ownership of Certain Beneficial Owners. (3) With respect to Executive Officers who are not Directors, includes (i) 46,200 shares of Class A Stock directly owned by two of the Executive Officers and as to which they have sole voting and investment power; (ii) 41,412 vested shares of Class A Stock and 4,593 vested shares of Class B Stock in the aggregate as to which certain Executive Officers have shared voting power as participants in the SARP and ESOP; and (iii) for Messrs. Sharpe, Nelson, Fuguet, Boss, Held, Kermes, James, Aparicio, Genor and DiLuigi includes 4,000, 54,000, 4,000, 4,000, 4,000, 150,000, 150,000, 123,000, 90,000 and 80,000 shares, respectively, of Class A Stock and 180,000 shares of Class A stock for three other Executive Officers, which are subject to stock options presently exercisable or exercisable within sixty (60) days of the expected date of mailing of this Proxy Statement, granted to such Executive Officers pursuant to the Company's 1989 Equity Incentive Plan and 1999 Equity Incentive Plan.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------------------------------------------------------
Howard K. Fuguet, is a Director and is also a Partner in the law firm of Ropes & Gray which provides legal services to the Company.
PART IV -------
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - --------------------------------------------------------------------------
(a) (1) and (2) List of Financial Statements and Financial Statement Schedules
Financial Statements filed in Item 8 of this Annual Report:
Consolidated Statements of Operations - Years ended December 31, 2000, 1999, and 1998
Consolidated Balance Sheets - December 31, 2000 and 1999
Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999, and 1998
Consolidated Statements of Shareowners' Equity - Years ended December 31, 2000, 1999, and 1998
Notes to Consolidated Financial Statements - December 31, 2000
Schedules Omitted.
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because they are not required, are not inapplicable, or the information is included in the financial statements.
(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 2000.
(c) Exhibits - The response to this portion of Item 14 is submitted as a separate section of this report.
(d) Financial Statement Schedules - No financial statement schedules were filed for the year ended December 31, 2000.
SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BROWN & SHARPE MANUFACTURING COMPANY (Registrant)
Date: March 28, 2001 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.
Exhibit Index -------------
Number - ------
3.1 Joint Agreement of Merger between Brown & Sharpe Manufacturing Company, incorporated in Rhode Island, and Brown & Sharpe Manufacturing Company, the surviving corporation incorporated in Delaware, filed as the only Exhibit to Form 8-K for the month of January, 1969, and such is hereby incorporated by reference.
3.2 Amendment to Certificate of Incorporation, dated April 26, 1989, filed as Exhibit 13 to Form 10-K for the period ending December 29, 1989, and such is hereby incorporated by reference.
3.3 Amendment to Certificate of Incorporation, Dated April 25, 1980, filed as Exhibit 3.1 to Form 10-Q for the period ending June 28, 1980, and such is hereby incorporated by reference.
3.4 Amendment to Certificate of Incorporation dated April 24, 1987. Exhibit 3.7 was filed as Exhibit 10.4 to Form 10-Q for the period ended June 26, 1987, and such is hereby incorporated by reference.
3.5 Amendment to Certificate of Incorporation dated May 6, 1988 filed as Exhibit 1 to Current Report on Form 8-K filed May 9, 1988 and such is hereby incorporated by reference.
3.6 Certificate of Designation filed as Exhibit A to Exhibit 5 of Amendment on Form 8 filed on March 6, 1989, and such is hereby incorporated by reference.
3.7 Amendment to Certificate of Incorporation dated May 2, 1989. Exhibit 3.7 was filed as Exhibit 3.7 to the Form 10-K for the year ended December 30, 1989 and such is hereby incorporated by reference.
3.8 By-laws of Brown & Sharpe Manufacturing Company, as amended through July 29, 1994; previously filed as Exhibit 3.1 to the Form 10-Q for the quarter ended July 2, 1994 and such is hereby incorporated by reference.
3.9 Amendments to By-laws of Brown & Sharpe Manufacturing Company, as of September 28, 1994; previously filed as Exhibit 3 to the Form 10-Q for the quarter ended October 1, 1994 and such is hereby incorporated by reference.
4.1 (Intentionally omitted)
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 Provident Mutual Life and Annuity Company of America. Exhibit 4.2 was filed as Exhibit 4.2 to the Form 10-Q 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.
+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.
+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)
+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.
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)
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.
+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.
+10.111 Employment agreement with Philip James dated January 3, 2000.
+10.112 Employment agreement with Edward D. DiLuigi dated January 3, 2000.
*10.113 Amendment Number 1, dated October 28, 1999, to the Note Agreement 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 Provident Mutual Life and Annuity Company of America.
*21. Subsidiaries of the Registrant.
*23. Consent of Independent Auditors - Ernst & Young LLP.
* These current year Exhibits are located in Exhibit number sequence beneath the attached blue paper.
+ This identifies management contracts or compensatory plans.