<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-22529
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inTEST Corporation
- -----------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2370659
- --------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
2 Pin Oak Lane, Cherry Hill, New Jersey 08003
- ---------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (856) 424-6886
------------------
Indicate by check X whether the registrants: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Number of shares of Common Stock, $.01 par value, outstanding as of September
30, 1999:
6,536,034
<PAGE>
inTEST CORPORATION
INDEX
PART 1. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998 1
Consolidated Statements of Earnings (unaudited) for the
three months and nine months ended September 30, 1999 and 1998 2
Consolidated Statements of Comprehensive Earnings
(unaudited) for the three months and nine months
ended September 30, 1999 and 1998 3
Consolidated Statement of Stockholders' Equity (unaudited)
for the nine months ended September 30, 1999 4
Consolidated Statements of Cash Flows (unaudited) for the
nine months ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements (unaudited) 6 -11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 22-23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Securities Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1999 1998
--------- --------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 9,689 $ 8,468
Trade accounts and notes receivable, net of allowance for
doubtful accounts of $169 and $168, respectively 6,960 3,275
Inventories 3,359 2,521
Deferred tax asset 245 245
Refundable domestic and foreign income taxes - 658
Other current assets 314 137
------- -------
Total current assets 20,567 15,304
------- -------
Machinery and equipment:
Machinery and equipment 2,265 1,690
Leasehold improvements 297 223
------- -------
2,562 1,913
Less: accumulated depreciation (1,335) (1,078)
------- -------
Net machinery and equipment 1,227 835
------- -------
Other assets 214 195
Goodwill 6,525 6,884
------- -------
Total assets $28,533 $23,218
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,882 $ 969
Accrued expenses 1,348 1,023
Domestic and foreign income taxes payable 989 -
------- -------
Total current liabilities 5,219 1,992
------- -------
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
no shares issued or outstanding - -
Common stock, $0.01 par value; 20,000,000 shares authorized;
6,536,034 shares issued and outstanding 65 65
Additional paid-in capital 16,647 16,647
Retained earnings 6,576 4,570
Accumulated other comprehensive earnings (expense) 26 (56)
------- -------
Total stockholders' equity 23,314 21,226
------- -------
Total liabilities and stockholders' equity $28,533 $23,218
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 1 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C>
Net revenues $10,097 $ 4,449 $21,392 $15,238
Cost of revenues 4,554 2,118 9,811 6,453
------- ------- ------- -------
Gross margin 5,543 2,331 11,581 8,785
------- ------- ------- -------
Operating expenses:
Selling expense 1,346 862 3,167 2,281
Research and development expense 880 483 2,245 1,338
General and administrative expense 1,191 726 3,072 1,902
------- ------- ------- -------
Total operating expenses 3,417 2,071 8,484 5,521
------- ------- ------- -------
Operating income 2,126 260 3,097 3,264
------- ------- ------- -------
Other income (expense):
Interest income 89 111 240 377
Interest expense (17) (1) (17) (3)
Other 44 (10) 69 2
------- ------- ------- -------
Total other income 116 100 292 376
------- ------- ------- -------
Earnings before income taxes 2,242 360 3,389 3,640
Income tax expense 901 133 1,383 1,351
------- ------- ------- -------
Net earnings $ 1,341 $ 227 $ 2,006 $ 2,289
======= ======= ======= =======
Net earnings per common share-basic $0.21 $0.04 $0.31 $0.38
Weighted average common shares
outstanding-basic 6,536,034 6,311,849 6,536,034 6,046,107
Net earnings per common share-diluted $0.20 $0.04 $0.30 $0.38
Weighted average common and common
share equivalents outstanding-diluted 6,626,342 6,317,578 6,606,902 6,055,217
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 2 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------ -----------------
1999 1998 1999 1998
------- ------- ------ ------
<S> <C> <C> <C> <C>
Net earnings $1,341 $ 227 $2,006 $2,289
Foreign currency translation adjustments 168 19 82 (42)
------ ------ ------ ------
Comprehensive earnings $1,509 $ 246 $2,088 $2,247
====== ====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 3 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(In thousands, except share data)
(Unaudited except Balance, December 31, 1998)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
----------------- Paid-In Retained Comprehensive Stockholders'
Shares Amount Capital Earnings Earnings(Expense) Equity
--------- ------ ---------- -------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 6,536,034 $ 65 $16,647 $ 4,570 $ (56) $21,226
Net earnings - - - 2,006 - 2,006
Other comprehensive earnings - - - - 82 82
--------- ---- ------- ------- ----- -------
Balance, Sept. 30, 1999 6,536,034 $ 65 $16,647 $ 6,576 $ 26 $23,314
========= ==== ======= ======= ===== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 4 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Sept. 30,
-----------------
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 2,006 $ 2,289
Adjustments to reconcile net earnings to net cash:
Depreciation and amortization 620 303
Foreign exchange (gain)loss (15) 6
Changes in assets and liabilities:
Trade accounts and notes receivable, net (3,612) 1,507
Inventories (836) (134)
Refundable domestic and foreign income taxes 663 (352)
Other current assets (178) (94)
Accounts payable 1,917 (70)
Domestic and foreign income taxes payable 989 (1,482)
Accrued expenses 323 (415)
------- -------
Net cash provided by operating activities 1,877 1,558
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of machinery and equipment (651) (165)
Acquisition of business, net of cash acquired - (4,629)
Other long-term assets (7) (21)
------- -------
Net cash used in investing activities (658) (4,815)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal debt repayments - (215)
------- -------
Net cash used in financing activities - (215)
------- -------
Effects of exchange rates on cash 2 (12)
------- -------
Net cash provided by all activities 1,221 (3,484)
Cash and cash equivalents at beginning of period 8,468 12,035
------- -------
Cash and cash equivalents at end of period $ 9,689 $ 8,551
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 5 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1999 and for the three months and
nine months ended September 30, 1999 and 1998 is unaudited)
(In thousands, except for share data)
(1) NATURE OF OPERATIONS
inTEST Corporation (the "Company") designs, manufactures and markets
docking hardware, test head manipulators and tester interfaces used by
semiconductor manufacturers during the testing of wafers and packaged
devices. The Company also designs and markets related automatic test
equipment interface products.
The consolidated entity is comprised of inTEST Corporation (parent) and
seven 100% owned subsidiaries: inTEST Limited (Thame, UK), inTEST
Kabushiki Kaisha (Kichijoji, Japan), inTEST PTE, Limited (Singapore),
inTEST Sunnyvale Corp. (Delaware), inTEST Investments, Inc. (a Delaware
holding company), inTEST IP Corp.(a Delaware holding company) and inTEST
Licensing Corp. (a Delaware holding company).
The Company manufactures its products in the U.S.,U.K. and Singapore
(where the company commenced manufacturing during September 1999).
Marketing and support activities are conducted worldwide from the
Company's facilities in the U.S., U.K., Japan and Singapore.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated upon consolidation. The
preparation of 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
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
- 6 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interim Financial Reporting
---------------------------
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of
normally recurring adjustments) necessary to present fairly the
financial position, results of operations, and changes in cash flows
for the interim periods presented.
Certain footnote information has been condensed or omitted from these
financial statements. Therefore, these financial statements should be
read in conjunction with the consolidated financial statements and
and accompanying footnotes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
Net Earnings Per Common Share
-----------------------------
Basic earnings per common share is computed by dividing net earnings by
the weighted average common shares outstanding during each period.
Diluted earnings per common share is computed by dividing net income by
the weighted average common and common share equivalents outstanding
during each period. Common share equivalents include dilutive stock
options using the treasury stock method.
As discussed in Note 3, pro forma earnings per common share information
for the three months and nine months ended September 30, 1998 includes
certain adjustments to reflect results as if the acquisition of inTEST
Sunnyvale Corp. (f/k/a TestDesign Corporation) had occurred on January 1,
1998.
New Accounting Pronouncements
-----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivatives and Hedging Activities, which
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company plans to adopt this
Statement, as required. The adoption of this Statement is not expected
to have a material affect on the results of operations, financial
condition or long-term liquidity of the Company.
- 7 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(3) PRO FORMA STATEMENT OF EARNINGS INFORMATION
On August 3, 1998, the Company acquired all of the outstanding capital
stock of TestDesign Corporation ("TestDesign"), a privately held
California corporation (the "Acquisition"). Subsequent to the
Acquisition, the Company changed the name of TestDesign to inTEST
Sunnyvale Corp. TestDesign is engaged in the design and manufacture of
tester interfaces used by the semiconductor industry. The purchase
price was $4.4 million in cash and 625,000 shares of the Company's
common stock (subject to certain adjustments). Although the Company's
common stock had a market price of $4.75 per share on the closing date
of the transaction, all of the 625,000 shares issued in connection with
the Acquisition are subject to legal restrictions on transfer and have
been valued at a 10% discount to the market price of the shares. In
addition, the Company incurred transaction costs of approximately
$425,000 in completing the Acquisition. The following is an allocation
of the purchase price:
<TABLE>
<S> <C>
Cash payment $4,400
Transaction costs 425
625,000 common shares at $4.28 2,672
------
7,497
Estimated fair value of identifiable assets
acquired net of liabilities assumes 1,650
------
Goodwill to be amortized over 15 years $5,847
======
</TABLE>
The Acquisition has been accounted for as a purchase and the results of
operations of the acquired business have been included in the Company's
consolidated financial statements since the date of the Acquisition.
The following unaudited pro forma information presents a summary of
consolidated results of operations for the Company and TestDesign for the
three months and nine months ended September 30, 1998 as if the
Acquisition had occurred on January 1, 1998:
- 8 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(3) PRO FORMA STATEMENT OF EARNINGS INFORMATION (Continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30, 1998 Sept 30, 1998
------------------ ----------------
<S> <C> <C>
Pro forma net revenues $ 4,817 $19,498
Pro forma net earnings 144 2,173
Pro forma net earnings per
common share-diluted $ 0.02 $ 0.33
</TABLE>
(4) SEGMENT INFORMATION
The various products the Company designs, manufactures and markets,
which include docking hardware, test head manipulators and tester
interfaces, are considered by management to be a single operating
segment. Included in this segment are products the Company designs
and markets which are manufactured by third parties, which include
high performance test sockets and interface boards. The Company
operates its business worldwide and divides the world into three
geographic operating segments: North America, Asia-Pacific and Europe.
The North America segment includes the Company's manufacturing, design
and service facilities in New Jersey and California; the Asia-Pacific
segment includes the Company's design and service facilities in
Singapore and Japan; and the Europe segment includes the Company's
manufacturing, design and service facility in the UK.
- 9 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(4) SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30, Sept 30,
------------------ -----------------
1999 1998 1999 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues from unaffiliated customers:
North America $ 7,589 $2,748 $15,852 $ 9,918
Asia-Pacific 1,596 1,049 3,979 3,879
Europe 912 652 1,561 1,441
------- ------ ------- -------
$10,097 $4,449 $21,392 $15,238
======= ====== ======= =======
Affiliate sales or transfers from:
North America $ 442 $ 179 $ 1,074 $ 742
Asia-Pacific - - - -
Europe 290 56 724 323
------- ------ ------- -------
$ 732 $ 235 $ 1,798 $ 1,065
======= ====== ======= =======
Operating income (loss):
North America $ 1,579 $ (63) $ 2,200 $ 2,292
Asia-Pacific 26 47 230 421
Europe 521 276 667 551
------- ------ ------- -------
$ 2,126 $ 260 $ 3,097 $ 3,264
======= ====== ======= =======
Earnings before income taxes:
North America $ 1,641 $ 28 $ 2,387 $ 2,620
Asia-Pacific 77 47 321 444
Europe 524 285 681 576
------- ------ ------- -------
$ 2,242 $ 360 $ 3,389 $ 3,640
======= ====== ======= =======
Net earnings (loss):
North America $ 972 $ (5) $ 1,402 $ 1,684
Asia-Pacific (21) 6 62 137
Europe 390 226 542 468
------- ------ ------- -------
$ 1,341 $ 227 $ 2,006 $ 2,289
======= ====== ======= =======
</TABLE>
-10-
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(5) LEGAL PROCEEDINGS
As reported in the Company's prior periodic reports filed with the
Securities and Exchange Commission during 1999, on November 18, 1998
the Company and its subsidiary inTEST IP Corp. (which holds title to
all Company intellectual property) filed suit against Reid-Ashman
Manufacturing, Inc. for infringement of a United States patent held by
the Company. The matter is presently in the discovery stage. In
addition, the parties are pursuing court facilitated mediation.
- 11 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
- --------
The Company designs, manufactures and markets docking hardware, test
head manipulators and tester interfaces, which are used with automatic
test equipment ("ATE") by semiconductor manufacturers during the testing of
wafers and packaged devices. The Company also designs and markets related ATE
interface products including high performance test sockets and interface
boards. The Company's products are designed to improve the utilization and
cost-effectiveness of ATE (including testers, wafer probers and device
handlers) during the testing of linear, digital and mixed signal integrated
circuits ("ICs").
The Company's revenues are substantially dependent upon the demand for
ATE by semiconductor manufacturers and, therefore, fluctuate generally as a
result of cyclicality in the semiconductor manufacturing industry. During the
past several years, the demand for ATE by the semiconductor industry exhibited
a high degree of cyclicality. 1996 represented a year of sequential quarterly
declines in orders for and sales of the Company's products due to a reduced
level of semiconductor manufacturing activity which caused cutbacks in
semiconductor manufacturers' capital budgets. 1997 marked a turnaround in the
semiconductor industry, which was evidenced by renewal in demand for ATE and
related equipment, which resulted in sequential quarterly increases in orders
for and sales of the Company's products. 1998, like 1996, represented a year
of sequential quarterly declines in orders for and sales of the Company's
products, however, to a more significant degree than in 1996. During 1998,
worldwide demand for ICs fell dramatically due to excess inventory of older IC
designs, and slower transition to new IC designs resulting from softening
demand for end user products. In addition, the economic downturns in many
world economies, especially those in Southeast Asia and Japan, exacerbated the
semiconductor industry downturn. The combination of these conditions
contributed to a reduced demand for products manufactured by semiconductor
manufacturers, which in turn significantly reduced their need for new or
additional ATE equipment.
1999, like 1997, marked a turnaround in the semiconductor industry.
During the first nine months of 1999, the Company has seen significant
quarterly increases in the level of orders for its products ("bookings").
Bookings were $7.2 million for the quarter ended March 31, 1999, $10.7 million
for the quarter ended June 30, 1999, and a record $13.1 million for the
quarter ended September 30, 1999. As a result of the increased booking
activity, the Company's backlog increased from $3.4 million at December 31,
1998 to a record $11.4 million at September 30, 1999. During the same period
the Company experienced a significant increase in its net revenues, which grew
from $3.8 million for the quarter ended December 31, 1999 to a record $10.1
million for the quarter ended September 30, 1999. The increase in the
Company's bookings, net revenues and backlog reflects the increased demand for
ATE by semiconductor manufacturers resulting from increased worldwide demand
for ICs combined with back end ATE capacity constraints caused by the
significantly reduced capital spending during 1998. While bookings and
- 12 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
backlog are calculated on the basis of firm orders, no assurance can be given
that customers will purchase the equipment subject to such orders. As a
result, the Company's bookings for any period and backlog at any particular
date are not necessarily indicative of actual sales for any succeeding period.
Results of Operations
- ---------------------
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30,1998:
Net Revenues. Net revenues were a record $10.1 million for the quarter
ended September 30, 1999 compared to $4.4 million for the same period in 1998,
an increase of $5.6 million or 127%. The significant increase in net revenues
over the comparable prior period is principally the result of the
aforementioned turnaround in the demand for ATE in 1999 compared to 1998.
Gross Margin. Gross margin increased to 55% for the quarter ended
September 30, 1999 compared to 52% for the comparable period in 1998. The
improvement in gross margin was primarily the result of better absorption of
fixed manufacturing costs by higher net revenue levels. The improvement in
the gross margin was offset by the increase in manufacturing costs associated
with the acquisition of inTEST Sunnyvale, which was acquired on August 3, 1998
(the "Acquisition").
Selling Expense. Selling expense was $1.3 million for the quarter ended
September 30, 1999 compared to $862,000 for the same period in 1998, an
increase of $484,000 or 56%. The increase was attributable to several factors
including the salary expense of new sales and marketing staff, increased
expenditures for travel, increased commission expenses for external sales
representatives resulting from the higher sales levels, increased advertising
costs and higher levels of freight expenses.
Research and Development Expense. Research and development expense was
$880,000 for the quarter ended September 30, 1999 compared to $483,000 for the
same period in 1998, an increase of $397,000 or 82%. The increase was
attributable to the additional salary expense of inTEST Sunnyvale engineering
and technical staff coupled with an increase in the Company's total number of
engineering and technical staff. In addition, expenditures for research and
development materials and travel expenses associated with new product
development comprised a significant portion of the increase as compared to the
prior comparable period.
General and Administrative Expense. General and administrative expense
was $1.2 million for the quarter ended September 30, 1999 compared to $726,000
for the same period in 1998, an increase of $465,000 or 64%. The increase was
primarily attributable to legal costs related to the Company's patent
infringement suit, costs to maintain existing patents and file for new patents
worldwide, accruals for incentive compensation for certain executive officers
and the additional salary and other administrative costs of inTEST Sunnyvale.
- 13 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
In addition, administrative salary expense increased due to both staffing
increases and salary increases for existing staff, as well as increases in
investor relations expenses and the amortization of goodwill resulting from
the Acquisition.
Income Tax Expense. Income tax expense increased to $901,000 for the
quarter ended September 30, 1999 from $133,000 for the comparable period in
1998, an increase of $768,000. The Company's effective tax rate was 40% for
the third quarter of 1999 compared to 37% for the same period in 1998. The
increase in the effective tax rate is primarily the result of goodwill
amortization related to the Acquisition, which is not deductible for tax
purposes, and a higher effective tax rate in Japan, caused by certain
recurring expenses which are not deductible for tax purposes, which was
compounded by the reduced profitability of the Company's Japanese operations
in 1999 compared to 1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Net Revenues. Net revenues were $21.4 million for the nine months ended
September 30, 1999 compared to $15.2 million for the same period in 1998, an
increase of $6.2 million or 40%. The significant increase in net revenues
over the comparable prior period is a result of the aforementioned turnaround
in demand for ATE in 1999 compared to 1998, as well as the Acquisition of
inTEST Sunnyvale.
Gross Margin. Gross margin declined to 54% for the nine months ended
September 30, 1999 compared to 58% for the comparable period in 1998. The
reduction in gross margin was primarily the result of the additional fixed
costs of manufacturing and direct labor costs of inTEST Sunnyvale.
Selling Expense. Selling expense was $3.2 million for the nine months
ended September 30, 1999 compared to $2.3 million for the same period in 1998,
an increase of $886,000 or 39%. The increase was attributable to several
factors including the additional salary expense of inTEST Sunnyvale sales
staff and new sales and marketing staff, increased expenditures for travel,
higher levels of warranty replacement expenses and increased advertising costs
offset by a reduction in commission expenses for external sales
representatives.
Research and Development Expense. Research and development expense was
$2.2 million for the nine months ended September 30, 1999 compared to $1.3
million for the same period in 1998, an increase of $907,000 or 68%. The
increase was attributable to the additional salary expense of inTEST Sunnyvale
engineering and technical staff coupled with an increase in the number of
engineering and technical staff and higher levels of travel expenses which
were offset in part by reductions in spending on research and development
materials in 1999 as compared to 1998.
- 14 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
General and Administrative Expense. General and administrative expense
was $3.1 million for the nine months ended September 30, 1999 compared to $1.9
million for the same period in 1998, an increase of $1.2 million or 62%. The
increase was primarily attributable to legal costs related to the Company's
patent infringement suit, costs to maintain existing patents and file for new
patents worldwide and the amortization of goodwill resulting from the
Acquisition. In addition, there were increases in administrative salary
expense due to staffing increases and salary increases for existing staff,
accruals for incentive compensation for certain executive officers and
communications expense.
Income Tax Expense. Income tax expense remained constant at $1.4 million
for the nine months ended September 30, 1999 and 1998. The Company's
effective tax rate was 41% for the first nine months of 1999 compared to 37%
for the same period in 1998. The increase in the effective tax rate is
primarily the result of goodwill amortization related to the Acquisition,
which is not deductible for tax purposes, and a higher effective tax rate in
Japan, caused by certain recurring expenses which are not deductible for tax
purposes, which was compounded by the reduced profitability of the Company's
Japanese operations in 1999 compared to 1998.
Liquidity and Capital Resources
- -------------------------------
Net cash provided from operations for the nine months ended September 30,
1999 was $1.9 million. Accounts receivable increased $3.6 million from
December 31, 1998 to September 30, 1999 due to the increase in sales activity
during the first nine months of 1999. Inventories increased $836,000 as a
result of materials purchases for future product shipments. Refundable
domestic and foreign income taxes decreased $663,000 due to a refund of excess
Federal taxes paid during 1998. Other current assets increased $178,000,
primarily as a result of increases in prepaid expenses. Accounts payable
increased $1.9 million due to the higher production levels during the first
nine months of 1999. Accrued expenses increased $323,000 primarily as a
result of the increased sales activity and staffing additions and their
related expense accruals. Domestic and foreign income taxes payable increased
$989,000 as a result of the refund of excess Federal taxes received during the
first quarter and the accrual of income taxes on the earnings for the first
nine months of 1999.
Purchases of machinery and equipment were $651,000 for the nine months
ended September 30, 1999, which consisted primarily of improvements to the
Company's facilities in the United States and, to a lesser extent, the UK.
The Company began the renovation of its UK manufacturing facility during the
second quarter and plans to spend approximately $200,000 during the fourth
quarter of 1999 to complete the renovations and to purchase a coordinate
measuring machine for this facility. During the third quarter of 1999, the
Company increased its domestic fabrication capacity through the addition of a
- 15 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
machining operation in Cherry Hill. The Company estimates the costs to
acquire equipment for this new machining operation at between $600,000 and
$800,000; approximately $200,000 of this amount was spent during the third
quarter of 1999. The Company commenced manufacturing operations at its
Singapore facility late in the third quarter of 1999 and does not foresee
significant capital expenditures related to this operation.
The Company believes that existing cash and cash equivalents, its $1.5
million unused line of credit and the anticipated net cash provided from
operations will be sufficient to satisfy the Company's cash requirements
including those of its new subsidiary for the foreseeable future. However,
additional acquisitions may require additional equity or debt financing to
meet working capital requirements or capital expenditure needs. The Company
does not anticipate that it will pay dividends in the foreseeable future.
Year 2000
- ---------
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year.
Computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations, a
temporary inability to process transactions, send invoices, or engage in
normal business activities.
Currently, the Company has a program in process to analyze potentially
affected business and process systems and replace or correct all non-
compliant critical business and process systems that it will require in the
new millennium. Prior to the acquisition of inTEST Sunnyvale, the Company
had completed its review and testing of its then existing systems and
determined that they were Year 2000 compliant. The Company has identified
those systems of inTEST Sunnyvale which were not yet Year 2000 compliant and
has converted them to systems which are Year 2000 compliant. The Company
completed the system modifications at inTEST Sunnyvale during the third
quarter of 1999.
The products that the Company has sold and currently sells are not
date-sensitive, and therefore the Company believes its product related
exposures are low.
In conjunction with the Company's Year 2000 effort, all suppliers that
are critical to the function of the Company are being surveyed to ensure
readiness and non-disruption to the Company supply chain. The Company relies
on subcontractors for fabrication and certain other processes performed on
its products and utilizes third-party network equipment and software products
which may or may not be Year 2000 compliant. In addition, the Company relies
on utility and telecommunications suppliers to operate its businesses
- 16 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
worldwide. The Company has sent questionnaires to these critical suppliers
to determine the extent to which the Company's operations are exposed to
failure of Year 2000 issues. The Company has received responses from
virtually all of its domestic suppliers and is still awaiting responses from
many of its foreign suppliers. The Company has identified new critical raw
materials and fabrication suppliers to replace those which cannot demonstrate
Year 2000 compliance before the end of the fourth quarter of 1999. There can
be no assurance that the Company will be successful in its efforts to identify
and resolve any Year 2000 issues involving its suppliers or to continue
receiving products and services from these suppliers if Year 2000 problems
were to materialize. The failure to resolve these issues could result in the
shut-down of some or all of the Company's operations, which would have a
material adverse effect on the Company.
The total expense of the Company's Year 2000 effort is currently
estimated at less than $100,000 for the identification and remediation of
any Year 2000 problems related to the Company's internal systems. If
required modifications to existing software and hardware are not made, or
are not completed in a timely manner, the Year 2000 issue could have a
material impact on the operations of the Company. There can be no assurance
that the costs to remediate any Year 2000 problems which may be identified in
the future will not exceed the Company's current estimate or that the Company
will be able to resolve these issues in a timely manner. The expenses of the
Year 2000 project are being funded through operating cash flows.
The Company does not currently have any information concerning Year
2000 compliance status of its customers. If any of the Company's significant
customers and suppliers do not successfully and in a timely manner achieve
Year 2000 compliance, and as a result of such non-compliance such customers
operations are disrupted, shut-down or otherwise impacted, the Company's
business or operations could be adversely affected. There can be no
assurance that another company's failure to ensure Year 2000 capability would
not have an adverse effect on the Company.
The Company has not yet developed a comprehensive contingency plan to
address situations which it believes to be beyond its control (i.e. such as
utilities and telecommunications). There can be no assurance that the
Company will be able to develop a contingency plan that will adequately
address issues that may arise in the Year 2000. The failure of the Company to
successfully resolve such issues could result in a shutdown of some or all of
the Company's operations, which would have a material adverse effect on the
Company.
International Operations
- ------------------------
Revenues generated by the Company's foreign subsidiaries were 26% and
35% of consolidated revenues for the nine months ended September 30, 1999 and
1998, respectively. The Company anticipates that revenues generated by the
- 17 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Company's foreign subsidiaries will continue to account for a significant
portion of consolidated revenues in the foreseeable future. These revenues
generated by the Company's foreign subsidiaries will continue to be subject
to certain risks, including changes in regulatory requirements, tariffs and
other barriers, political and economic instability, an outbreak of
hostilities, foreign currency exchange rate fluctuations, potentially adverse
tax consequences and the possibility of difficulty in accounts receivable
collection. The Company cannot predict whether quotas, duties, taxes or
other charges or restrictions will be implemented by the United States or any
other country upon the importation or exportation of the Company's products
in the future. Any of these factors or the adoption of restrictive policies
could have a material adverse effect on the Company business, financial
condition or results of operations.
Revenues denominated in foreign currencies were 16% and 26% of
consolidated revenues for the nine months ended September 30, 1999 and 1998,
respectively. Although the Company operates its business such that a
significant portion of its product costs are denominated in the same currency
that the associated sales are made in, there can be no assurance that the
Company will not be adversely impacted in the future due to its exposure to
foreign operations. Revenues denominated in currencies other than U.S.
dollars expose the Company to currency fluctuations, which can adversely
affect results of operations.
The portion of the Company's consolidated revenues that were derived
from sales to the Asia Pacific region were 19% and 26% for the nine months
ended September 30, 1999 and 1998, respectively. Countries in the Asia
Pacific region, including Japan, have experienced economic instability
resulting in weaknesses in their currency, banking and equity markets.
Although the past economic instability in the Asia Pacific region has not
materially adversely affected the Company's order backlog, balance sheet, or
results of operations to date, there can be no assurance that continued
economic instability will not in the future have a material adverse affect on
demand for the Company's products and its consolidated results of operations.
Cautionary Statement Regarding Forward Looking Statements
- ---------------------------------------------------------
This Report contains certain statements of a forward-looking nature
relating to future events, such as statements regarding the Company's plans
and strategies or future financial performance. Such statements can be
identified by the use of forward-looking terminology such as "believes",
"expects", "may", "will", "should" or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by
discussions of strategy that involve risks and uncertainties. Investors and
prospective investors are cautioned that such statements are only projections
and that actual events or results may differ materially from those expressed
in any such forward-looking statements. In addition to the factors described
- 18 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
in this Report, the Company's actual consolidated quarterly or annual
operating results have been affected in the past, or could be affected in the
future, by additional factors, including, without limitation: changes in
business conditions and the economy, generally; the ability of the Company to
obtain patent protection, and enforce its patent rights, for existing and
developing proprietary technologies; the ability of the Company to integrate
successfully businesses, technologies or products which it may acquire; the
effect of the loss of, or reduction in orders from, a major customer; and
competition from other manufacturers of docking hardware, test head
manipulators, tester interfaces and related ATE interface products.
- 19 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to currency exchange rate risk in the normal
course of its business. The Company employs risk management strategies
including the use of forward exchange rate contracts to manage this exposure.
The Company's objective in managing currency exchange risk is to minimize the
impact of significant currency exchange rate fluctuations primarily in the
Japanese Yen. The Company's Japanese operations expose its earnings to
changes in currency exchange rates because its Japanese subsidiary makes
its sales in Japanese Yen and purchases its sales inventory in U.S. dollars.
Forward exchange rate contracts are used to establish a fixed conversion rate
between the Japanese Yen and the U.S. dollar so that the level of the
Company's gross margin from sales in Japan is not negatively impacted from
significant movements in the Japanese Yen to U.S. dollar exchange rate. The
Company purchases forward exchange rate contracts on a monthly basis in the
amounts necessary to pay the U.S. dollar denominated obligations of its
Japanese subsidiary. As of September 30, 1999, there were no forward exchange
rate contracts outstanding.
It is the Company's policy to enter into forward exchange rate contracts
only to the extent necessary to achieve the desired objectives of management
in limiting the Company's exposure to significant fluctuations in currency
exchange rates. The Company does not hedge all of its currency exchange rate
risk exposures in a manner that would completely eliminate the impact of
changes in currency exchange rates on its net earnings. The Company does not
expect that its results of operations or liquidity will be materially
affected by these risk management activities.
The notional amounts of the Company's forward exchange rate contracts
are used only to satisfy current payments to material vendors to be exchanged
and are not a measure of the Company's credit risk or its future cash
requirements. Exchange risk related to forward exchange rate contracts is
limited to movement in the exchange rates that would provide a more favorable
exchange rate than that locked in the forward contract and forward contract
amounts purchased in excess of the amount needed by the Company to satisfy
its obligations. The Company manages that rate risk by limiting the size of
the forward contracts purchased to the known amount of obligations due and
not purchasing forward contracts with settlement dates beyond 30 days. The
Company believes that the risk of loss due to exchange rate fluctuations is
remote and that any losses would not be material to its financial condition
or results of operations.
- 20 -
<PAGE>
inTEST CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As reported in the Company's prior periodic reports filed with the
Securities and Exchange Commission during 1999, on November 18, 1998
the Company and its subsidiary inTEST IP Corp. (which holds title to
all Company intellectual property) filed suit against Reid-Ashman
Manufacturing, Inc. for infringement of a United States patent held by
the Company. The matter is presently in the discovery stage. In
addition, the parties are pursuing court facilitated mediation.
- 21 -
<PAGE>
inTEST CORPORATION
PART II. OTHER INFORMATION (Continued)
Item 2. Changes in Securities and Use of Proceeds
On June 17, 1997, the Company's Registration Statement on
Form S-1 covering the Offering of 2,275,000 shares of the
Company's Common Stock, Commission file number 333-26457,
was declared effective. The Offering commenced on
June 20, 1997, managed by Janney Montgomery Scott, Inc.
and Needham & Company, Inc. as representatives of the
several underwriters named in the Registration Statement
(the "Underwriters").
Of the 2,275,000 shares sold pursuant to the Offering,
1,820,000 shares were sold by the Company and 455,000 were sold
by certain selling stockholders (the "Selling Stockholders").
In addition, the Underwriters exercised an over-allotment option
to purchase an additional 341,250 shares of the Company's Common
Stock from the Selling Stockholders. The total price to the
public for the shares offered and sold by the Company and the
Selling Stockholders was $13,650,000 and $5,971,875,
respectively.
The amount of expenses incurred for the Company's account in
connection with the Offering are as follows:
<TABLE>
<S> <C>
Underwriting discounts and commissions: $1,023,750
Finders' fees: None
Expenses paid to or for the Underwriters: 16,650
Other expenses: 954,758
----------
Total expenses: $1,995,158
==========
</TABLE>
All of the foregoing expenses were direct or indirect payments
to persons other than (i) directors, officers or their
associates; (ii) persons owning ten percent (10%) or more of the
Company's Common Stock; or (iii) affiliates of the Company.
The net proceeds of the Offering to the Company (after deducting
the foregoing expenses) was $11,654,842. From the effective
date of the Registration Statement, the net proceeds have been
used for the following purposes:
- 22 -
<PAGE>
inTEST CORPORATION
PART II. OTHER INFORMATION (Continued)
Item 2. Changes in Securities and Use of Proceeds (Continued)
<TABLE>
<S> <C>
Construction of plant, building and facilities $ -
Purchase and installation of machinery
and equipment 949,538
Purchase of real estate -
Acquisition of other business (including
transaction costs 4,825,000
Repayment of indebtedness 388,098
Working capital 599,725
Temporary investments, including cash &
cash equivalents 4,291,716
Other purposes (for which at least $100,000
has been used), including:
Payment of final S corporation distribution 600,765
-----------
$11,654,842
===========
</TABLE>
In connection with the termination of the Company's status as
an S corporation, the Company used $601,000 of the net proceeds
to pay a portion of the $4.3 million final distribution of
previously taxed but undistributed earnings of the Company.
All of the foregoing payments with the exception of the final S
corporation distribution were direct or indirect payments to
persons other than (i) directors, officers or their associates;
(ii) persons owning ten percent (10%) or more of the Company's
Common Stock; or (iii) affiliates of the Company.
Item 3. Defaults Upon Senior Securities
None
- 23 -
<PAGE>
inTEST CORPORATION
PART II. OTHER INFORMATION (Continued)
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Articles of Incorporation: Previously filed by the
Company as an Exhibit to the Company's Registration
Statement on Form S-1, File No. 333-26457, and
Incorporated herein by reference.
3.2 By-Laws: Previously filed by the Company as an Exhibit
to the Company's Registration Statement on Form S-1,
File No. 333-26457, and incorporated herein by
reference.
10 Lease Agreement between the Company and Hoot Owl Farms,
Inc. dated July 28, 1999
27 Financial Data Schedule
(b) Reports on Form 8-K
None
- 24-
<PAGE>
Signatures
Pursuant to the requirements 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.
inTEST Corporation
Date: November 15, 1999 /s/ Robert E. Matthiessen
------------------ ------------------------------------
Robert E. Matthiessen
President and Chief Executive Officer
Date: November 15, 1999 /s/ Hugh T. Regan, Jr.
------------------ ------------------------------------
Hugh T. Regan, Jr.
Treasurer and Chief Financial Officer
<PAGE>
Index to Exhibits
Item 6. Exhibits and Reports on Form 8-K
3.1 Articles of Incorporation: Previously filed by the
Company as an Exhibit to the Company's Registration
Statement on Form S-1, File No. 333-26457, and
Incorporated herein by reference.
3.2 By-Laws: Previously filed by the Company as an Exhibit
to the Company's Registration Statement on Form S-1,
File No. 333-26457, and incorporated herein by
reference.
10 Lease Agreement between the Company and Hoot Owl Farms, Inc.
dated July 28, 1999
27 Financial Data Schedule
<PAGE>
Exhibit 10
BUSINESS LEASE
The Landlord and the Tenant agree to lease the Rental Space for the Term
and at the Rent stated, as follows: (The words Landlord and Tenant include all
landlords and all tenants under this Lease.)
Landlord HOOT OWL FARMS, INC. Tenant inTEST CORP,.a.DE.Corporation
c/o Lahn Real Estate, Inc. 2 Pin Oak Lane
Rte, 70 and 73 Cir. Cherry Hill,.NJ 08003
POB 248, Marlton, NJ 08053
Rental Space Approximately 11,000 sq. ft. of a 22,000 sq. ft., M/L building
on the East side of Old Cuthbert Road as identified as Section
1.
in the Building at 1871 Old Cuthbert Road, Cherry Hill, NJ 08003
Date of Lease July 28, 1999 Rent for the Term is $242,000.00
Term 5 years
Beginning 9/1/99 The Rent is payable in advance on the
Ending 8/31/2004 first day of each month, as follows:
Security $4,000.00 9/1/99-8/31/01, $4.25 s.f. NN ($3,895.83/mo.)*
9/1/01-8/31/04, $4.50 s.f. NN ($4,125.00/mo.)*
Broker. The Landlord and the Tenant
recognize Rent payable to "HOOT OWL FARMS, INC."
LAHN AGENCY INC. AND MERTZ CORP. Rte. 70 & 73 Circle
as the Broker who brought about this Marlton, NJ 08053
Lease. The Landlord shall pay the
Broker's commission * Plus Tenants proportional share (50%)
of Annual property taxes and insurance
Liability Insurance. Minimum amounts: for each person injured $500,000.00 for
any one accident $1,000,000.00 for property damage $500,000.00
Use of Rental Space Machine Shop and Office
Additional agreements: 1) Late payment of rent: Tenant shall be assessed and
pay an additional amount of eight (8%) percent of monthly rent as a late
charge for all monthly rent payments received after ten (10) days from
scheduled due date. In the event that a check tendered in payment of rent
hereunder is returned by the bank as uncollectible, tenant shall also pay an
additional charge of $20.00. 2)Upon signing lease, tenant shall pay $7,895.83,
representing first months rent ($3,895.83) and security deposit ($4,000.00).
Tenant may take occupancy at that time but may not begin operations until
tenant receives a certificate of occupancy.
Table of Contents
1.Possession and Use 6.No Alterations
2.Delay in Giving of Possession 17.Signs
3.No Assignment or Subletting 18.Access to Rental Space
4.Rent and Additional Rent 19.Fire and Other Casualty
5.Security 20.Eminent Domain
6.Liability Insurance 21.Subordination to Mortgage
7.Unavailability of Fire Insurance, 22.Tenant's Certificate
Rate Increases 23 Violation, Eviction, Re-entry and
8.Water Damage Damages
9.Liability of Landlord and Tenant 24.Notices
10.Real Estate Taxes 25.No Waiver
11.Acceptance of Rental Space 26.Survival
12.Quiet Enjoyment 27.End of Term
13.Utilities and Services 28.Binding
14.Tenant's Repairs, Maintenance, 29.Full Agreement
and Compliance
15.Landlord's Repairs and Maintenance
<PAGE>
1. Possession and Use
The Landlord shall give possession of the Rental Space to the Tenant for
the Term. The Tenant shall take possession of and use the Rental Space for the
purpose stated above. The Tenant may not use the Rental Space for any other
purpose without the written consent of the Landlord.
The Tenant shall not allow the Rental Space to be used for any unlawful
or hazardous purpose. The Tenant is satisfied that the Rental Space is zoned
for the Use stated. The Tenant shall obtain any necessary certificate of
occupancy or other certificate permitting the Tenant to use the Rental Space
for that Use.
The Tenant shall not use the Rental Space in any manner that results in
(1) an increase in the rate of fire or liability insurance or (2) cancellation
of any fire or liability insurance policy on the Rental Space. The Tenant
shall comply with all requirements of the insurance companies insuring the
Rental Space. The Tenant shall not abandon the Rental Space during the Term of
this Lease or permit it to become vacant.
2. Delay in Giving of Possession
This paragraph applies if (a) the Landlord cannot give possession of the
Rental Space to the Tenant on the beginning date and (b) the reason for the
delay is not the Landlord's fault. The Landlord shall not be held liable for
the delay. The Landlord shall then have 30 days in which to give possession.
If possession is given within that time, the Tenant shall accept possession
and pay the Rent from that date. The ending date of the Term shall not change.
If possession is not given within that time this Lease may be cancelled by
either party on notice to the other.
3. No Assignment or Subletting.
The Tenant may not do any of the following without the Landlord's written
consent: (a) assign this Lease (if the Tenant is a corporation, the sale of a
majority of its common shares shall be treated as an assignment), (b) sublet
all or any part of the Rental Space or (c).permit any other person or business
to use the Rental Space.
4. Rent and Additional Rent
Tenant shall pay the rent to the Landlord at the Landlord's address.
If the Tenant fails to comply with any agreement in this Lease, the
Landlord may do so on behalf of the Tenant. The Landlord may charge the cost
to comply, including reasonable attorney's fees, to the Tenant as "additional
rent". The additional rent shall be due and payable as Rent with the next
monthly Rent payment. Non-payment of additional rent shall give the Landlord
the same rights against the Tenant as if the Tenant failed to pay the Rent.
5. Security
The Tenant has given to the Landlord the Security stated above. The
Security shall be held by the Landlord during the Term of this Lease. The
Landlord may deduct from the Security any expenses incurred in connection with
the Tenant's violation of any agreement in this Lease. For example, if the
Tenant does not leave the Rental Space in good condition at the end of the
Term, the Security may be used to put it in good condition. If the amount of
damage exceeds the Security, the Tenant shall pay the additional amount to the
Landlord on demand.
If the Landlord uses the Security or any part of it during the Term, the
Tenant shall on demand pay the Landlord for the amount spent. The amount of
the Security is to remain constant throughout the Term. The Security is not to
be used by the Tenant for the payment of Rent. The Landlord shall repay to the
Tenant any balance remaining within a reasonable time after the end of the
Term. The Tenant shall not be entitled to interest on the Security.
<PAGE>
If the Landlord's interest in the Rental Space is transferred, the
Landlord shall turn over the Security to the new Landlord. The Landlord shall
notify the Tenant of the name and address of the new Landlord. Notification
must be given within 5 days after the transfer, by registered or certified
mail. The Landlord shall then no longer be responsible to the Tenant for the
repayment of the Security. The new Landlord shall be responsible to the Tenant
for the return of the Security.
6. Liability Insurance
The Tenant shall obtain, pay for, and keep in effect for the benefit of
the Landlord and the Tenant public liability insurance on the Rental Space.
The insurance company and the broker must be acceptable to the Landlord. This
coverage must be in the minimum amounts stated above.
All policies shall state that the insurance company cannot cancel or
refuse to renew without at least 10 days written notice to the Landlord.
The Tenant shall deliver the original policy to the Landlord with proof
of payment of the first year's premiums. This shall be done not less than 15
days before the Beginning of the Term. The Tenant shall deliver a renewal
policy to the Landlord with proof of payment not less than 15 days before the
expiration date of each policy.
7. Unavailability of Fire Insurance, Rate Increases
If due to the Tenant's use of the Rental Space the Landlord cannot obtain
fire insurance on the Building in an amount and form acceptable to the
Landlord, the Landlord may cancel this Lease on 30 days notice to the Tenant.
If due to the Tenant's use of the Rental Space the fire insurance rate is
increased, the Tenant shall pay the increase in the premium to the Landlord
on demand.
8. Water Damage
The Landlord shall not be liable for any damage or injury to any persons
or property caused by the leak or flow of water from or into any part of the
Building.
9. Liability of Landlord and Tenant
The Landlord shall not be liable for injury or damage to any person or
property unless it is due to the Landlord's act or neglect. The Tenant shall
defend the Landlord from and reimburse the Landlord for all liability and
costs resulting from any injury or damage due to the act or neglect of the
Tenant or the Tenant's employees.
10. Real Estate Taxes.
N/A
11. Acceptance of Rental Space
The Tenant has inspected the Rental Space and agrees that the Rental
Space is in satisfactory condition. The Tenant accepts the Rental Space "as
is".
12. Quiet Enjoyment
The Landlord has the right to enter into this Lease. If the Tenant
complies with this Lease, the Landlord must provide the Tenant with
undisturbed possession of the Rental Space.
13. Utilities and Services
The Tenant shall arrange and pay for all utilities and services required
for the Rental Space, including the following:
(a) Heat (d) Gas
(b) Hot and cold water (e) Maintenance service contracts
(c) Electricity (f) Exterminating contracts
(g) and any other utilities or services used by Tenant from date of
signing of this Lease, including trash removal.
The Landlord shall pay for the following utilities and services:
a) snow removal
<PAGE>
The Landlord is not liable for any stoppage or reduction of utilities
and services beyond the control of the Landlord. This does not excuse the
Tenant from paying Rent.
14. Tenant's Repairs, Maintenance, and Compliance
The Tenant shall:
(a) Promptly comply with all laws, orders, rules and requirements of
governmental authorities, insurance carriers, board of fire underwriters, or
similar groups.
(b) Maintain the Rental Space and all equipment and fixtures in it in
good repair and appearance, including HVAC system.
(c) Make all necessary repairs to the Rental Space and all equipment and
fixtures in it, except structural repairs.
(d) Maintain the Rental Space in neat, clean, safe, and sanitary
condition free of all garbage.
(e) Keep the walks, driveway, parking area, yard, entrances, hallways,
and stairs clean and free from trash and debris.
(f) Use all electric, plumbing and other facilities in the Rental Space
safely.
(g) Use no more electricity than the wiring or feeders to the Rental
Space can safely carry.
(h) Replace all broken glass in the Rental Space.
(i) Do nothing to destroy, deface, damage, or remove any part of the
Rental Space.
(j) Keep no inflammable or dangerous things in the Rental Space.
(k) Promptly notify the Landlord when there are conditions which need
repair.
(l) Do nothing to destroy the peace and quiet of the Landlord, other
tenants, or persons in the neighborhood.
(m) Tenant shall be responsible for all plate glass and shall carry plate
glass insurance naming Landlord as additional insured under the policy.
The Tenant shall pay any expenses involved in complying with the above.
15. Landlord's Repairs and Maintenance
The Landlord shall:
(a) Maintain the public areas, roof and exterior walls in good condition.
(b) Make all structural repairs unless these repairs are made necessary
by the act or neglect of the Tenant or the Tenant's employees. Specifically
excluding any air conditioning units or systems installed by Tenant.
(c) Make necessary replacements of the plumbing, cooling, heating and
electrical systems, except when made necessary by the act or neglect of the
Tenant or the Tenant's employees.
16. No Alterations
The Tenant may not make any changes or additions to the Rental Space
without the Landlord's written consent. Any changes or additions made without
the Landlord's written consent shall be removed by the Tenant on demand.
<PAGE>
All changes or additions made with the Landlord's written consent shall
become The property of the Landlord when completed and paid for by the Tenant.
They shall remain as part of the Rental Space at the end of the Term. The
Landlord may demand that the Tenant remove any changes or additions at the end
of the Term. The Tenant shall promptly pay for all costs of any changes or
additions. The Tenant shall not allow any mechanic's lien or other claim to be
filed against the Building. If any lien or claim is filed against the
Building, the Tenant shall have it promptly removed.
17. Signs
The Tenant shall obtain the Landlord's written consent before placing any
sign on or about the Rental Space. Signs must conform with all applicable
municipal ordinances and regulations. All costs to be borne by Tenant.
18. Access to Rental Space
The Landlord shall have access to the Rental Space on reasonable notice
to the Tenant to (a) inspect the Rental Space (b) make necessary repairs,
alterations, or improvements, (c) supply services, and (d) show it to
prospective buyers, mortgage lenders, contractors or insurers.
The Landlord may show the Rental Space to rental applicants at reasonable
hours on notice to the Tenant within 6 months before the end of the Term.
The Landlord may enter the Rental Space at any time without notice to the
Tenant in case of emergency.
19. Fire and Other Casualty
The Tenant is liable for the acts and neglect of the Tenant's employees.
The Tenant shall notify the Landlord at once of any fire or other
casualty in the Rental Space. The Tenant is not required to pay Rent when the
Rental Space is unusable. If part of the Rental Space can be used, the Tenant
must pay Rent pro-rata for the usable part. If the fire or other casualty is
caused by the act or neglect of the Tenant, the Tenant shall pay for all
repairs and all other damage.
If the Rental Space is partially damaged by fire or other casualty
without the act or neglect of the Tenant, the Landlord shall repair it as soon
as possible. This includes the damage to the Rental Space and fixtures
installed by the Landlord. The Landlord need not repair or replace anything
installed by the Tenant.
Either party may cancel this Lease if the Rental Space is so damaged by
fire or other casualty that it cannot be repaired within 90 days. If the
parties cannot agree, the opinion of a contractor chosen by the Landlord and
the Tenant will be binding on both parties. The Tenant may not cancel this
Lease if the fire or other casualty is caused by the act or neglect of the
Tenant.
This Lease shall end if the Rental Space is totally destroyed by fire or
other casualty without the act or neglect of the Tenant. The Rent shall be
paid to the date of destruction.
20. Eminent Domain
Eminent domain is the right of a government to lawfully condemn and take
private property for public use. Fair value must be paid for the property. The
taking occurs either by court order or by deed to the condemning party. If any
part of the Rental Space is taken by eminent domain, either party may cancel
this lease on 30 days notice to the other. The entire payment for the taking
shall belong to the Landlord. The Tenant shall make no claim for the value of
the remaining part of the Term.
21. Subordination to Mortgage
In a foreclosure sale all mortgages which now or in the future affect the
Building have priority over this Lease. This means that the holder of a
mortgage may end this Lease on a foreclosure sale. The Tenant shall sign all
papers needed to give any mortgage priority over this Lease. If the Tenant
refuses, the Landlord may sign the papers on behalf of the Tenant.
<PAGE>
22. Tenant's Certificate
At the request of the Landlord, the Tenant shall sign a certificate
stating that (a) this Lease has not been amended and is in effect, (b) the
Landlord has fully performed all of the Landlord's agreements in this Lease,
(c) the Tenant has no rights to the Rental Space except as stated in this
Lease, (d) the Tenant has paid all Rent to date, and (e) the Tenant has not
paid Rent for more than one month in advance. The Certificate shall also list
all the property attached to the Rental Space owned by the Tenant.
23. Violation, Eviction, Re-entry and Damages
If the Tenant violates any agreement in this Lease, the Landlord has the
right to end this Lease and re-enter the Rental Space. This is done by
eviction. The Landlord may also evict the Tenant for all other causes provided
by law. Eviction is a court procedure to remove a tenant. It is started by the
filing, of a complaint in court and the service of a summons on a tenant to
appear in court. After a court order of eviction and compliance with the
warrant of removal, the Landlord may re-enter and take back possession of the
Rental Space. If the cause for eviction is non-payment of Rent, notice does
not have to be given to the Tenant before the Landlord files a complaint. If
there is any other cause to evict, the Landlord must give to the Tenant
the notice required by law before the Landlord files a complaint.
The Tenant is liable for all damages caused by the Tenant's violation of
any agreement in this Lease. This includes reasonable attorney's fees and
costs.
After eviction the Tenant shall pay the Rent for the Term or until the
Landlord re-rents the Rental Space, if sooner. If the Landlord re-rents the
Rental Space for less than the Tenant's Rent, the Tenant shall pay the
difference until the end of the Term. The Tenant shall not be entitled to any
excess resulting from the re-renting. The Tenant shall also pay (a) all
reasonable expenses incurred by the Landlord in preparing the Rental Space for
re-renting and (b) commissions paid to a broker for obtaining a new tenant.
24. Notices
All notices given under this Lease must be in writing. Unless otherwise
provided by law, they may be given by (a) personal delivery, or (b) certified
mail, return receipt requested. Each party must accept the certified mail sent
by the other. Notices shall be addressed to the Landlord at the address
written at the beginning of this Lease and to the Tenant at the Rental Space.
25. No Waiver
The Landlord's failure to enforce any agreement in this Lease does not
prevent the Landlord from enforcing the agreement as to any later violations.
26. Survival
If any agreement in this Lease is contrary to law, the rest of the Lease
shall remain in effect.
27. End of Term
At the end of the Term the Tenant shall (a) leave the Rental Space clean,
(b) remove all of the Tenant's property, (c) remove all signs and restore that
portion of the Rental Space on which they were placed, (d) repair all damage
caused by moving, and (e) return the Rental Space to the Landlord in the same
condition as it was at the beginning of the Term except for normal wear and
tear.
If the Tenant leaves any property in the Rental Space, the Landlord may
(a) dispose of it and charge the Tenant for the cost of disposal, or (b) keep
it as abandoned property.
28. Binding
This Lease binds the Landlord and the Tenant and all parties who lawfully
succeed to their rights or take their places.
<PAGE>
29. Full Agreement
The parties have read this Lease. It contains their full agreement. It
may not be changed except in writing signed by the Landlord and the Tenant.
30. See ISRA ADDENDUM AITACHED
31. See ATTACHED ADDENDA
Signatures
The Landlord and the Tenant agree to the terms of this Lease by signing
below. If a party is a corporation, this Lease is signed by the proper
corporate officers and its corporate seal is affixed.
Witness or attested by: HOOT OWL FARMS, INC., Landlord
/s/ William L. Slobodnik BY: /s/ Herbert Lahn
- ------------------------- ------------------------------- L.S.
As to Landlord Herbert Lahn, President
inTEST CORPORATION, a DE Corporation
/s/ Susan M. Knox-Dawson BY: /s/ Hugh T. Regan, Jr.
- ------------------------- ------------------------------- L.S.
As to Tenant Hugh T. Regan, Jr., Treas. & CFO
<PAGE>
ADDENDA BETWEEN HOOT OWL FARM, INC. & inTEST CORP.
31. Landlord will:
a. carpet existing offices (Tenant may select color)
b. Install drive-in ramp on tail gate door nearest to Cuthbert Rd.
c. Install 3 phase, 400 amp service to building; tenant to distribute
electricity within building as required at Tenants expense
d. Install a/c systems for total space
32. Tenant acknowledges that one or more of the principals of Lahn Real
Estate, Inc. and Lahn Agency, Inc. hold a New Jersey real estate license,
have an ownership in the property being leased hereunder. Tenant waives
any rights, which Tenant may have by virtue of this fact.
33. Tenant has the option to renew this lease upon its expiration for an
additional five (5) years, provided tenant has met all conditions of this
lease and shall notify Landlord by certified mail 90 days prior to the
expiration of the lease of its intent to renew. The net/net rent shall be:
lst & 2nd years $5.00 sq. ft. net/net
3rd & 4th years $5.50 sq. ft. net/net
5th year $6.00 sq. ft. net/net
HOOT OWL FARMS, INC. inTEST CORPORATION
/s/ Herbert Lahn /s/ Hugh T. Regan, Jr.
- ----------------------------- -----------------------------------
Herbert Lahn, President Hugh T. Regan, Jr., Treasurer & CFO
Dated: 7/28/99 Dated: 7/27/99
<PAGE>
ISRA ADDENDUM
Tenant shall, at Tenant's own expense, comply with the Industrial Site
Recovery Act, N.J.S.A. 13:1K-6 et seq as amended by P.L. 1993, Ch. 139 and the
Regulations promulgated thereunder and any amending or successor legislation
and regulations ("ISRA") in the event of a closing of Tenant's operations, a
transfer of Tenant's operations, or a change in the ownership of Tenant which
would trigger ISRA.
The Tenant acknowledges that whether it is covered by ISRA or is not
covered by ISRA due to its SIC number or for any other reason, Tenant shall be
responsible for all remediation, at its own expense, of any spills, discharge
of toxic or hazardous substances, pollutants or waste by Tenant (or its
servants, agents, invitees, or licensees) or resulting directly from Tenant's
use and occupancy of the premises, regardless of whether the ISRA-triggering
event is related to Tenant or Landlord.
In no event, however, shall Tenant be responsible for any remediation at
the premises unless resulting directly from Tenant's use and occupancy of the
premises, or to the discharge of a hazardous or toxic substance, pollutant or
waste at the premises by Tenant (or its servants, agents, invitees or
licensees) during Tenant's lease term. Landlord shall be responsible for
remediation of any discharge, spill or pollution which occurred prior to
Tenant's occupancy of the premises.
The Tenant will take all necessary steps at Tenant's sole expense to
accomplish such cleanup, remediation, and removal promptly upon the earliest
of (a) written notification to do so by the Landlord, (b) discovery by the
Tenant of the existence of the spill, pollution or leak, or (c) the
termination of the Lease.
The Tenant shall indemnify and hold harmless Landlord and Landlord's
successors, assigns, servants, agents and employees from any fines or other
liability resultant from any spills, pollution or leaks occurring during the
occupancy by Tenant. This indemnification includes the cost of remediation,
investigation costs, restoration, attorney's fees and costs of governmental
authorities, and third-party claims resulting from the contamination, disposal
or discharge.
Tenant, at Tenant's cost, shall accomplish all necessary cleanup,
remediation and removal in accordance with all applicable state and federal
laws and all of the regulations of governmental and quasi-governmental bodies.
The Landlord shall have the right to monitor progress of same, so long as much
monitoring does not interfere with the tenant's remediation or cause tenant to
incur any additional expenses for the requisite work.
LANDLORD: TENANT:
HOOT OWL FARMS, INC. inTEST CORPORATION, a Delaware Corp.
/s/ Herbert Lahn /s/ Hugh T. Regan, Jr.
- ----------------------------- -----------------------------------
Herbert Lahn, President Hugh T. Regan, Jr., Treasurer & CFO
Dated: 7/28/99 Dated: 7/27/99
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