<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER 1-5641
INSTRON CORPORATION
(Exact name of registrant as specified in its Charter)
MASSACHUSETTS 04-2057203
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 ROYALL STREET
CANTON, MASSACHUSETTS 02021
(Address of Principal (Zip Code)
executive offices)
(781) 828-2500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $1 PAR VALUE AMERICAN STOCK EXCHANGE
(Title of Each Class) (Name of each exchange
on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ X ].
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods 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
The aggregate market value of the Registrant's common stock held by
nonaffiliates of the Registrant as of March 19 , 1999 was $86,739,613
The number of shares outstanding of each of the issuer's classes of common stock
as of March 19, 1999 was 6,956,838.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive proxy statement for the 1999 Annual Meeting
of Stockholders are incorporated by reference in Part III.
- --------------------------------------------------------------------------------
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PART I
ITEM 1. BUSINESS
THE COMPANY
Founded in 1946, Instron Corporation ("Instron" or the "Company") designs,
develops, manufactures, markets, and services materials and structural testing
systems, software, and accessories. These products are used principally in
research and development and quality control applications to test the mechanical
properties of various materials, components, and structures. The materials
tested include metals, plastics, textiles, composites, ceramics and rubber.
Instron systems test virtually all natural and man-made materials from fragile
fibers to the exotic materials needed for space exploration.
In the worldwide market for these systems, Instron is a leading producer of
static (electromechanical), dynamic (servohydraulic), simulation (structures),
hardness and impact testing systems. Instron offers a comprehensive range of
instruments and computer based systems that provide and enhance control of the
testing process, data collection and analysis.
Instron's products are typically assembled from a number of company-designed
standard hardware and software modules and accessories, selected and configured
for the customer's specific application. Additional hardware, software and
accessories may be added to the system at a later date.
The Company has sales and service offices in 14 United States cities and 17
foreign countries. Approximately 55% of the Company's revenues are derived from
sales outside the United States. Principal manufacturing facilities are located
in the United States, the United Kingdom and Germany.
PRINCIPAL MARKETS
The Company's principal markets are industrial and academic institutions and
governments; organizations that seek to understand the characterization and
properties of materials and products.
INDUSTRY - Most major industries use materials testing systems as a part of
their research and development and quality control activities. Industrial
research focuses upon developing new materials, substitute materials, or new
uses for existing materials that reduce manufacturing or operating costs and
improve product quality and durability. Industrial activity and structural
testing tends to be concentrated in the automotive, transportation, aerospace
and civil engineering sectors.
Industrial quality control involves testing the properties of finished products
as well as materials used as inputs to the manufacturing process.
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ACADEMIC INSTITUTIONS - Academic institutions use Instron products for
both basic research and instruction in materials science. The Company places
particular emphasis on academic institutions because scientists and engineers
trained on Instron equipment may influence additional sales of the Company's
products later in their careers.
GOVERNMENTS - Government and government agency use of Instron products
principally involves testing which supports defense, space, and civil
engineering programs, ascertains compliance with safety and other legal
requirements, and conducts research on new materials and emerging
technologies.
PRINCIPAL PRODUCTS
Instron offers a comprehensive range of general-purpose materials testing
systems, application software, and accessories within two principal product
lines; static systems and dynamic systems. The major distinction between a
static system and a dynamic system is the means used to apply force to the test
specimen. The former uses a screw-driven moving crosshead and the latter a
servo-controlled hydraulic actuator. Many tests can be carried out equally well
with either a static or dynamic test machine. However, if the test requires
extremely rapid rates of loading, or subjects the test material to rapidly
fluctuating loads, then a dynamic test machine is appropriate. Instron's product
offerings vary in the force capacity of the machines, the complexity of the
drive system, and the sophistication of the control electronics, the computer
system, and the software.
STATIC SYSTEMS - Static (electromechanical) systems consist of a frame, a moving
crosshead, a load cell, grips, and electronic modules to control the test and
analyze the test data. Static systems typically stretch or compress the material
being tested at a user selected, constant speed that ranges from fractional
microns per minute to one meter per minute. These systems continuously measure
the precise force being applied to, and the resulting deformation of, the test
material at various time intervals. They also analyze the results of the test,
and either print, graph or electronically display them.
Instron's static product offerings include the cost effective Series 4400
product line and the high-performance Series 5500 product line. The Series 5500
systems are usually used for research and development and are equipped with
sophisticated software and many accessories. Quality control applications
usually require fewer accessories and less breadth of application capability.
The prices of static systems generally range from $15,000 to $150,000. Static
systems and related accessories accounted for approximately 62%, 70%, and 69% of
the Company's revenue in 1998, 1997 and 1996, respectively.
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DYNAMIC SYSTEMS - Dynamic (servohydraulic drive) systems allow repeated
deformation of the material being tested to simulate in-use conditions over an
extended period of time. These systems use a servo-controlled hydraulic
actuator, a load cell, grips, and electronic modules that control the test and
analyze the test data.
Software, computer control, and data analysis are features routinely added to
basic dynamic systems. The computer may be used to command actuator motion to
simulate real-life loading conditions. It is also used to store and analyze data
and display parameters of performance and endurance for test materials or test
components.
Utilizing the Company's engineering expertise, dynamic systems are often
customized to fit the need of a customer's particular test application. Machines
can be configured not only to stretch or compress the material being tested, but
also to simultaneously twist it or subject it to other forms of complex loading.
The dynamic product line includes structural testing or simulation systems.
These systems are used to simulate real life conditions while testing a wide
range of automotive components from suspension and steering systems to entire
vehicles. They typically consist of several actuators that push and pull the
structure at different points, and sensors that collect and transmit the
resulting data to a central processing unit.
The prices of dynamic systems generally range from $40,000 to $400,000 with very
complex structural testing systems ranging as high as several million dollars.
Dynamic systems and related accessories accounted for approximately 38%, 30% and
31% of the Company's sales in 1998, 1997 and 1996, respectively.
HARDNESS SYSTEMS - Instron is in the forefront of development for new
hardness-testing systems. These systems indent the surface of a material under a
controlled force. The size of the resulting indentation gives an indication of
the hardness of the surface of the material.
The Series 2000 hardness-testing machine takes advantage of Instron's advanced
electromechanical position and control technology and also incorporates
Instron's load cell technology.
The prices of hardness testing machines range from $2,000 to $20,000. The sales
of hardness systems and related accessories are included in the percentage
amounts for static systems set forth above.
SERVICE - In recent years, the Company has invested in new service offerings,
including calibration, extended warranties, software support, upgrade contracts,
training and telephone support. The service business accounted for approximately
16%, 17%, and 16% of the Company's total revenue in 1998, 1997, and 1996,
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respectively. The service revenue is included in the percentage amounts for
static and dynamic systems set forth above.
OTHER PRODUCTS AND ACCESSORIES - Instron manufactures and sells a wide range of
other products and accessories. The products include durometers, impact testers,
and asphalt binder testers. Typical accessories include application software,
grips, fixtures, optical/video extensometers that measure precisely the
deformation of the material being tested without actually contacting it, robotic
devices that automatically feed test specimens to the systems, and environmental
control accessories. Accessories can be included with the initial purchase or
subsequently purchased in order to expand the capability of the original
machine.
The Company also has license agreements with third parties for the exclusive
sale of certain products, including software, in the material and structural
testing industry.
These other products and accessories for static and dynamic equipment purchased
separately from the original sale of equipment are included in the percentage
amounts for static and dynamic systems set forth above.
ACQUISITIONS
On August 4, 1998, the Company acquired substantially all the assets of Satec
Systems, Inc. of Grove City, Pennsylvania, for approximately $12.6 million in
cash. Satec is a manufacturer of a range of materials testing equipment sold
primarily in the United States with annual sales of approximately $18.0 million.
This acquisition has been accounted for under the purchase method of accounting
and, accordingly, the acquired assets and liabilities have been recorded at
their estimated fair values at the date of acquisition. The operating results of
Satec have been included in the Company's consolidated results of operations
from the date of acquisition.
IST was a joint venture company that Instron entered into in November 1996 with
Carl Schenck AG in the area of structural testing. On September 27, 1998, the
Company acquired the remaining 49% interest in Instron Schenck Testing Systems
("IST") from Carl Schenck A.G. of Darmstadt, Germany for $2.7 million in cash.
IST has become a world-class structures testing business with sales of more than
$55 million in 1998. This additional investment has been accounted for under the
purchase method of accounting and, accordingly, the acquired assets and
liabilities have been recorded at their estimated fair values at the date of
acquisition. The operations of IST for the fourth quarter of 1998 have been
consolidated into the Company's results of operations from the date of
acquisition. Prior to this acquisition the Company accounted for its 51%
interest in IST under the equity method of accounting.
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RESEARCH AND DEVELOPMENT
The Company maintains major research and development staffs at its U.S. and
U.K. manufacturing facilities. These development staffs often work directly with
industrial and government researchers and the materials science departments of
universities to create leading edge solutions to materials testing applications.
Instron is a pioneer in the development and application of electronic
measurement and drive systems techniques in materials testing systems. The
Company has continuously designed, developed, and marketed state-of-the-art
testing systems, software, and accessories, including digitally controlled
static and dynamic testing systems.
In 1998, the Company expensed $8,485,000 on research and development activities,
compared with $6,959,000 in 1997, and $8,616,000 in 1996. The Company has also
capitalized certain software development costs of $1,490,000. $637,000, and
$1,144,000 during 1998, 1997 and 1996, respectively. During these years, certain
Instron engineering resources have been utilized to develop new products for IST
in accordance with the joint venture agreement. The costs associated with the
development efforts were reimbursed by IST. If research and development expenses
were restated, for comparison purposes, by including software development costs
as period expenses, and by adjusting engineering expenses for the effect of IST
and Satec and the disposition of LMS, research and development expenses of the
ongoing business would have increased by 7.5% in 1998. In recent years, the
Company has focused its research and development expenditures on creating new
product platforms for static and dynamic product lines, developing new hardness
testing machines, developing new software and enhancements, and redesigning
products to reduce manufacturing costs. These new products and enhancements do
not, in the Company's opinion, present a significant risk that on-hand
inventory, which supports existing models, will be made obsolete because of the
interchangeability of parts and the lead time available before the introduction
of new products.
COMPETITIVE CONDITIONS
The Company competes with a number of other manufacturers, some of whom have
greater financial, technical and marketing resources than the Company. The
intensity of the competition varies by product line and by geographic area.
Competition in the United States is greatest in the dynamic line where the
Company has one major domestic competitor, MTS Systems Corporation. Competition
in foreign markets is greatest in Germany and Japan, where there are major local
manufacturers. The principal competitive factors are engineering excellence, the
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quality and technical capability of the equipment, responsiveness to customer
needs, quality of service, and price performance.
BACKLOG
At December 31, 1998, the Company's backlog of orders was approximately
$74,477,000 compared with $28,748,000 at December 31, 1997. The increase in
backlog is due primarily to the inclusion of the IST and Satec backlogs in
December 31, 1998.
The Company anticipates that substantially all of its backlog as of December 31,
1998 will be shipped during 1999.
RAW MATERIALS
While the Company is dependent upon a limited number of suppliers for certain
components, it has not experienced significant problems in procurement or
delivery of any essential materials, parts or components. Substantially all
purchasing is accomplished on a competitive basis while maintaining a level of
inventory sufficient to provide support of customer servicing requirements and
meet scheduled delivery dates.
PATENTS AND TRADEMARKS
The Company has several patents in the United States and in foreign countries.
However, the Company relies principally on its engineering and technological
capabilities rather than on these patents to maintain its position in the
industry. The trademarks "Dynatup," "Shore," "Rockwell" and "Instron" and the
device mark are registered trademarks of the Company. Under current law, these
trademarks may be renewed indefinitely as long as they are maintained in use.
ENVIRONMENTAL CONSIDERATIONS
Compliance with federal, state and local provisions relating to protection of
the environment has not had, and is not expected to have, any material adverse
effects upon the production, capital expenditures, earnings, and competitive
position of the Company and its subsidiaries.
NUMBER OF EMPLOYEES
At December 31, 1998 the Company employed 1,421 people worldwide.
SEASONALITY
Historically, the Company's sales are highest in the fourth quarter of each year
due to the ordering pattern of its customers, which favors fourth quarter
deliveries before budget authorizations expire. Sales in the first quarter are
usually low as it takes time to rebuild in-process inventory levels after the
heavy fourth quarter delivery requirements have been satisfied. Also, third
quarter sales are generally low due to vacation patterns of both Company
production workers and customer technical personnel needed for acceptance
testing. The seasonal factors affecting sales are usually reflected in quarterly
net income.
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FOREIGN OPERATIONS
Foreign operations represent a significant portion of the Company's business.
The Company's branches and subsidiaries outside of the United States accounted
for 55% of the Company's total revenue in 1998, 59% in 1997 and 61% in 1996. The
Company believes that the business and political risk of operating in most of
its current foreign markets is not, in the aggregate, materially greater than
the risk undertaken by the Company in the United States. The recent economic
turmoil in the Asian economies has increased the business risks associated with
operating in this region. The Company's principal foreign assets are located in
the United Kingdom and Germany.
Foreign exchange fluctuations can have a significant impact on the Company's
consolidated net assets and results of operations as reported in U.S. dollars.
However, the Company believes that these fluctuations generally have not had,
and it does not expect them to have, a significant economic effect on the
Company's business since foreign operations are generally financed, and revenues
and expenses are, for the most part, paid in local currencies, except for
intercompany purchases which are closely monitored. Financial information
concerning domestic and foreign operations appears in Notes 1 and 2 in the
"Notes to Consolidated Financial Statements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations", included as part of
this report.
ITEM 2. PROPERTIES
The Company's corporate headquarters and principal United States manufacturing
facility is located at the junction of Routes 128 and 138 in Canton,
Massachusetts, approximately 15 miles from Boston. On March 27, 1998, the
Company sold 42 acres of excess land in Canton, Massachusetts for $13.5 million
in cash. The Company believes that the remaining 24 acres are sufficient for
current and future business requirements.
The Company's principal foreign facilities include 120,000 square feet of office
and manufacturing space located on seven acres of Company-owned land in High
Wycombe, England, approximately 30 miles west of London and 50,000 square feet
of office and manufacturing space leased in Darmstadt, Germany.
The Company has 35 sales offices and demonstration centers which are located
throughout the United States and in 17 foreign countries. The Company believes
that all properties are adequate and suitable for its present needs.
ITEM 3. LEGAL PROCEEDINGS
The registrant and its subsidiaries are not involved in any material pending
legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of the executive officers of the Company are
listed below along with their business experience during the past five years.
<TABLE>
<CAPTION>
NAME, AGE AND POSITION BUSINESS EXPERIENCE DURING PAST 5 YEARS
---------------------- ---------------------------------------
<S> <C>
James M. McConnell, 58 Mr. McConnell joined Instron Corporation in 1990 as President
President and Chief Executive Officer and Chief Executive Officer. From 1987 to 1990, Mr. McConnell
was President and Chief Executive Officer of Automatic
Switch Company, and from 1986 to 1987, he was President of Rosemont,
Inc. (both are wholly-owned subsidiaries of Emerson Electric Co.)
Joseph E. Amaral, 51 Mr. Amaral joined Instron Corporation in 1978. Since 1985, Mr.
Vice President, General Manager, Amaral has held positions as Corporate Technology Manager,
North America Operations Corporate Product Planning Manager, and Vice President,
Corporate Technical Director. In March 1995, he was elected
Vice President, General Manager of North America Operations.
Kenneth L. Andersen, 57 Mr. Andersen joined Instron Corporation in 1983. Since 1983,
Vice President, Mr. Andersen has held positions as Director of Software
North America Sales Business Group, Director of Structures Business Group, and
Corporate Marketing Director. In 1993, he was elected Vice
President of Sales, North America
John R. Barrett, 44 Mr. Barrett joined Instron Corporation in 1988 as Assistant
Treasurer Treasurer. From 1979 to 1988, Mr. Barrett has held various
financial management positions with Computervision Corporation. In
1993, he was elected Treasurer of the Corporation.
Jonathan L. Burr, 51 Mr. Burr joined Instron Corporation in 1979. He has held
Vice President, Corporate Director positions as Personnel Administrator, Director of Personnel, and
of Human Resources Corporate Director of Human Resources. In 1993, he was elected Vice
President, Corporate Director of Human Resources. Mr. Burr is the
son of George S. Burr, Vice Chairman of the Board of Directors.
</TABLE>
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EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
<TABLE>
<CAPTION>
NAME, AGE AND POSITION BUSINESS EXPERIENCE DURING PAST 5 YEARS
---------------------- ---------------------------------------
<S> <C>
Yahya Gharagozlou, 43 Mr. Gharagozlou joined Instron Corporation in 1981. He has held
Vice President, Corporate Technical positions as Corporate Product Manager for Software, Marketing
Director Manager, Product Planning Manager, and Director of Engineering.
In, 1996, he was elected Vice President, Corporate Technical
Director.
Arthur D. Hindman, 55 Mr. Hindman joined Instron Corporation in 1979. Since 1979, Mr.
Vice President and General Manager, Hindman has held positions as Manager, Marketing Administration;
Asia Pacific/Latin America International Sales Manager, and General Manager, Asia/Latin
America. In 1993, he was elected Vice President and
General Manager, Asia Pacific/Latin America. Mr. Hindman is the
son of Harold Hindman, Chairman of the Board of Directors.
William Milliken, 44 Mr. Milliken joined Instron Corporation in 1997 as Vice President,
Vice President, Corporate Corporate Director of Manufacturing. From 1988 to 1997, Mr. Milliken
Director of Manufacturing was Director of Manufacturing for Otis Elevator's Asia division. From
1978 to 1988 he held various financial and manufacturing management
positions with General Motors Corporation.
Linton A. Moulding, 45 Mr. Moulding joined Instron Corporation in 1985. He has held
Chief Financial Officer positions as Corporate Controller, Director of US Operations,
Corporate Vice President of Manufacturing, and Vice President of
Finance and Treasurer. In 1993, he was elected Chief Financial Officer
of the Corporation.
Norman Smith, 52 Mr. Smith joined Instron Limited in 1982 as Marketing Director
Vice President and Managing Director, Designate and assumed the position of Marketing Director in 1983.
of Instron Limited In January 1996, he was promoted to Deputy Managing Director and
was elected Vice President of Instron and Managing Director of
Instron Limited in November 1996.
</TABLE>
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the American Stock Exchange under the
symbol ISN. The table below sets forth the high and low sales prices of the
Common Stock and the dividends declared during the two most recent fiscal years.
<TABLE>
<CAPTION>
1998 1997
--------------------------- ------------------------------
Market Price Cash Market Price Cash
---------------- Dividends ----------------- Dividends
High Low Declared High Low Declared
<S> <C> <C> <C> <C> <C> <C>
First quarter $19.188 $15.500 $.04 $13.500 $12.000 $.04
Second quarter 20.625 18.375 .04 14.250 10.750 .04
Third quarter 19.125 11.500 .04 18.875 14.000 .04
Fourth quarter 17.250 11.875 .04 19.188 15.125 .04
---- ----
Year $20.625 $11.50 $.16 $19.188 $10.75 $.16
==== ====
</TABLE>
The number of holders of record of the Company's Common Stock at December 31,
1998 was 435. This number does not include shareholders for whom shares are held
in a "nominee" or "street" name.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
In thousands, except per share data 1998 1997 1996 1995 1994
- -------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
- -----------------
Bookings of new orders $166,515 $150,020 $161,692 $155,092 $138,947
Total revenue 183,029 155,660 153,113 150,571 136,192
Income from operations 9,646 12,571 9,145 8,921 8,082
Income before taxes 20,333 11,555 7,385 7,684 6,979
Net Income 11,459 7,164 4,582 4,995 4,537
Backlog 74,477 28,748 34,361 36,136 32,687
Research & development 8,485 6,959 8,616 8,782 8,062
Earnings before interest, taxes,
depreciation and amortization (EBITDA) 27,671 18,880 15,329 15,891 13,855
FINANCIAL POSITION
- ------------------
Working capital $ 55,241 $ 41,942 $ 44,094 $ 38,259 $ 33,849
Total assets 158,254 118,985 121,833 113,334 102,294
Total debt 19,632 13,659 23,919 19,875 17,818
Stockholders' equity 79,584 66,254 62,401 56,102 51,926
Capital expenditures 5,841 4,176 4,473 4,510 4,286
PER SHARE OF COMMON STOCK
- -------------------------
Net income per basic share $ 1.72 $ 1.11 $ .72 $ .79 $ .72
Net income per diluted share 1.62 1.05 .70 .78 .72
Dividends declared .16 .16 .16 .15 .12
Book value 11.46 9.82 9.68 8.85 8.26
PERFORMANCE MEASUREMENT
- -----------------------
Revenue growth 17.6% 1.7% 1.7% 10.6% 10.9%
Pre-tax income as a % of total revenue 11.1 7.4 4.8 5.1 5.1
Effective income tax rate 43.6 38.0 38.0 35.0 35.0
Net income as a % of total revenue 6.3 4.6 3.0 3.3 3.3
Return on average stockholders' equity 15.7 11.1 7.7 9.2 9.2
Total debt as a % of debt, plus equity 19.8 17.1 27.7 26.2 25.5
Working capital ratio 1.9:1 2.0:1 2.2:1 1.9:1 1.9:1
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The consolidated results for 1998 reflect, from the dates of
acquisition, the inclusion of Satec which was acquired in August 1998 and the
buyout of the remaining 49% of the IST joint venture in September 1998.
During August 1998, the Company acquired Satec Systems, a materials testing
company supplying electromechanical and servohydraulic products primarily to the
metals industry. The business was acquired for $12.6 million in cash and the
consolidated results of Instron reflect Satec's activity for the last five
months of 1998. Satec's reported sales were $8,757,000 and net income was
$356,000 for the last five months of 1998. For information purposes, Satec's
annual sales for 1998 and 1997 were $18,642,000 and $17,064,000, respectively.
IST was a joint venture company that Instron entered into in November 1996
with Carl Schenck AG in the area of structural testing. Both companies
contributed their structural testing business and signed contracts to provide
manufacturing, R&D and support services to the joint venture. During 1997 and
the first nine months of 1998, Instron owned 51% of IST and accounted for the
joint venture using the equity method of accounting. Instron's revenue from IST
was $11,395,000, $6,858,000 and $519,000 for the first nine months of 1998, the
total year of 1997, and the last two months of 1996, respectively. This revenue
reflects the shipment of systems from Instron to IST under the terms of a
manufacturing and supply agreement at substantially reduced gross margins
compared to normal customer margins, and commission income earned by Instron for
selling IST products. During the time that Instron owned 51% of the entity, IST
had operating losses, due in part to low margin orders contributed into the
joint venture, and the time and effort necessary to consolidate the operations
and technology of the two contributing partners. For 1998, 1997 and 1996,
Instron recorded net losses related to its 51% share of the joint venture
results of $902,000, $876,000 and $69,000, respectively.
Instron exercised its option to purchase the remaining 49% of IST for $2.7
million in cash on September 27, 1998. Upon the completion of the acquisition,
the full results of operations from the IST business were included in
consolidated results of Instron, representing three months of activity in 1998.
IST broke even in the fourth quarter and is anticipated to make a contribution
to earnings in 1999. IST's customer revenue of $18,441,000 for the fourth
quarter of 1998 was included in Instron's reported results. For information
purposes, IST's annual revenues were $56,619,000 and $39,777,000 in 1998 and
1997, respectively.
Financial comparisons of the results of fiscal 1997 and 1996 are impacted
by Instron's sale of its Laboratory MicroSystems division ("LMS") to Axiom
Systems in April 1997. LMS's revenues were $1,237,000 in the first quarter of
1997 and $5,625,000 in 1996. LMS had no significant impact on net income in
either year.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (continued)
Total revenue of $183,029,000 in fiscal 1998 increased by 17.6% from
revenue of $155,660,000 in fiscal 1997 due primarily to the acquisitions of
Satec and IST. Total revenue in fiscal 1997 increased by 1.7% from revenue of
$153,113,000 in fiscal 1996.
Bookings of new orders were $166,515,000 in fiscal 1998. Bookings on a pro
forma basis, including the annual bookings of IST and Satec, would have been
$212.7 million in 1998 compared to $220.1 million in 1997, a decrease of 3.4%.
This decrease is due largely to the impact of the economic downturn in the Asian
markets.
The Company's backlog of orders was $74,477,000 at December 31, 1998, an
increase of 159.1% from 1997 due primarily to the inclusion of the IST and Satec
backlogs. The year end 1997 backlog decreased by 16.3% from 1996.
The gross profit margins for the three years ended December 31, 1998 were
39.3%, 41.2% and 42.1%, respectively. The trend of decreasing margins is due
principally to the impact of supplying IST with structures systems at lower than
normal profit margins. Gross margins excluding LMS, IST and Satec were 44.3%,
42.7% and 42.8% in 1998, 1997 and 1996, respectively. This improvement in 1998
is due in part to improved service margins and the benefit of actions previously
taken to reduce manufacturing costs.
The 1998 selling and administrative expenses of $48,869,000 increased by
9.5% from 1997 due principally to the inclusion of expenses relating to Satec
and IST. As a percentage of revenue, selling and administrative expenses
decreased to 26.7% in 1998, compared to 28.7% in 1997 and 29.3% in 1996.
Research and development expenses increased by 21.9% in 1998 and decreased
by 19.2% in 1997. The increase in 1998 is due primarily to the inclusion of the
development efforts of Satec and IST. The decrease in 1997 compared to 1996
resulted from certain Instron engineering resources ($2 million in 1997) being
utilized to develop new products for IST in accordance with the joint venture
agreement, which were reimbursed by IST. During the three years ended December
31, 1998, the Company has capitalized certain software development costs. (See
Note 1 of Notes to Consolidated Financial Statements). If research and
development expenses were restated, for comparison purposes, by including
capitalized software development costs as period expenses, by adjusting
engineering expenses for the effect of Satec and IST and the disposition of LMS
as previously discussed, research and development expenses of the ongoing
business would have increased by 7.5% in 1998. As a percentage of total revenue,
research and development expenditures, on a comparable basis, represented 7.0%,
6.4% and 6.4% in 1998, 1997 and 1996 respectively.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (continued)
Operating income decreased by 23.3% to $9,646,000 in 1998, compared to
$12,571,000 in 1997 and $9,145,000 in 1996. As a percentage of total revenue,
operating income represented 5.3%, 8.1% and 6.8% in 1998, 1997 and 1996
respectively. Operating income for 1998 includes a special items charge of
$4,975,000 for the cost of consolidating European operations and to write down
the value of non-performing assets. The Company has closed down a manufacturing
plant in Germany, relocated sales and service personnel to another Instron
location in Germany, and moved the manufacturing operation to the United
Kingdom. The majority of these actions were completed in the fourth quarter and
substantially all cash disbursements are expected to be made by the end of the
first quarter of 1999. Before the effect of the special items charge, operating
income in 1998 was $14,621,000 or 8.0% of total revenue and increased by 16.3%
compared to 1997 due primarily to certain improved product and service margins
and the positive contribution of Satec and IST in the fourth quarter.
A non-operating pre-tax gain of $11,076,000 was recorded in the first
quarter of 1998 on the sale of excess land in Canton, Massachusetts. Net
interest expense decreased by 72% in 1998 and by 22% in 1997. The net decrease
in both 1998 and 1997 was due to reduced interest expense resulting from lower
average borrowings and was further reduced by interest income received on notes
receivable and temporary bank deposits. Foreign exchange losses of $157,000 in
1998 resulted from the strengthening of the British pound against certain
European currencies. Foreign exchange losses of $185,000 in 1997 resulted from
the strengthening of the U.S. dollar against certain Asian currencies.
Income before taxes was 11.1% of total revenue in 1998, compared to 7.4% in
1997 and 4.8% in 1996. Excluding the special items charge and the non-operating
gain on the sale of the land in 1998, as well as the special items charge in
1996, income before taxes as a percentage of total revenue was 7.8%, 7.4% and
6.0% in 1998, 1997 and 1996, respectively. The consolidated effective tax rate
was 43.6% compared to 38% in 1997 and 1996. This higher tax rate is due to
certain non-deductible expenses relating to the special items charge. A detailed
reconciliation of the Company's effective tax rate and the United States
statutory tax rate appears in Note 6 of Notes to Consolidated Financial
Statements.
Instron reported net income of $11,459,000, or $1.62 per diluted share of
common stock, for the year ended December 31, 1998, compared with $7,164,000 or
$1.05 per diluted share in 1997. Net income in 1998 included a special items
charge to operations of $4,975,000 ($4,232,000 net of taxes) and a non-operating
gain on the sale of land of $11,076,000 ($6,867,000 net of taxes). If these
special items are excluded, net income in 1998 was $8,824,000, or $1.25 per
diluted share, an increase of 23.2% from 1997, due primarily to improved product
and service margins, the positive contribution of Satec and IST in the fourth
quarter, and a decline in net interest expense.
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (continued)
Net income in 1996 included a special items charge to operations of
$1.8 million ($1.1 million net of taxes). Excluding the effect of the special
items charge in 1996, net income increased by 25.6% in 1997 due primarily to
increased revenues of the on-going business, a decline in interest expense and
lower foreign exchange losses.
FINANCIAL CONDITION
The Company's operating activities generated cash of $5.3 million and $17.0
million in 1998 and 1997, respectively. Investing activities used $6.8 million
in 1998 and $6.2 million in 1997, while financing activities provided $6.1
million in 1998 and used $10.6 million in 1997. The Company's primary source of
funds in 1998 and 1997 was net cash generated by operations, supplemented in
1998 by the net proceeds of the sale of excess land in Canton, Massachusetts.
The net cash generated by operations in 1998 consisted primarily of net income,
as adjusted for the non-cash effect of depreciation and amortization expense,
which was partially offset by an increase in accounts receivable.
At December 31, 1998, accounts receivable were $65.8 million compared to
$48.2 million at year end 1997 which reflects higher fourth quarter revenue in
1998, and the consolidation of Satec and IST balance sheets. Inventories of
$36.1 million increased by $12.1 million due to the consolidation of Satec and
IST. The inventory turnover ratio increased to 2.97 from 2.87 at the end of
1997.
The Company's principal investment activities during 1998 included the
purchase of Satec for $12.6 million, the buyout of the remaining 49% of IST for
$2.7 million, capital expenditures of $5.8 million, and the development of
software products for $1.5 million. The Company plans to make capital
expenditures of approximately $6.2 million in fiscal 1999, principally for
manufacturing equipment and information systems. In addition, the Company plans
to continue to develop and enhance its software products and pursue its strategy
of acquisitions.
The Company's total debt outstanding at year-end 1998 was $19.6 million
compared to $13.7 million at the end of 1997. The ratio of total debt to debt
plus equity, at year-end 1998 increased to 19.8% from 17.1% in 1997. The
increase in debt was primarily due to funding acquisitions in 1998.
The Company maintains a multi-currency revolving credit and term loan
facility that provides for borrowings of up to $35.0 million. At December 31,
1998 the Company had outstanding domestic and international borrowings of $13.2
million and at December 31, 1997 had outstanding domestic borrowings of $7.6
million under this facility which were classified as long-term. The Company has
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION (continued)
additional overdraft and borrowing facilities for allowing advances of
approximately $32.0 million of which $6.4 million and $6.1 million were
outstanding and classified as short-term borrowings at December 31, 1998 and
1997, respectively.
The Company believes its present capital resources and anticipated
operating cash flows are sufficient to meet its current and future cash
requirements to finance operations, capital expenditures and acquisitions.
On March 27, 1998, the Company sold 42 acres of excess land in Canton,
Massachusetts, for $13.5 million in cash.
Approximately 22% of the Company's total orders came from Asian markets in
1997. Bookings from this region declined by 30% in 1998 compared to 1997. At the
same time, however, IST doubled new order bookings in this part of the world.
The current strength in North America and Europe is expected to continue in
1999, though the Company is not expecting any significant recovery in bookings
from the Asian markets in 1999.
Earnings are anticipated to maintain their upward momentum in 1999,
reflecting benefits from manufacturing cost improvement programs and the full
year benefit of the recent acquisitions.
EURO CURRENCY ISSUE. On January 1, 1999, eleven of the fifteen member
countries of the European Union established fixed conversion rates between their
existing currencies ("legacy currencies") and one common currency - the euro.
The euro now trades on currency exchanges and may be used in business
transactions. Beginning in January 2002, new euro-denominated bills and coins
will be issued, and legacy currencies will be withdrawn from circulation. The
Company's operating subsidiaries affected by the euro conversion have
established plans to address the systems and business issues raised by the euro
currency conversion.
These issues include, among others, (i) the need to adapt computer and
other business systems and equipment to accommodate euro-denominated
transactions; and (ii) the competitive impact of cross-border price
transparency, which may make it more difficult for businesses to charge
different prices for the same products on a country-by-country basis,
particularly once the euro currency is issued in 2002. The Company anticipates
that the euro conversion will not have a material adverse impact on its
financial condition or results of operations.
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION (continued)
YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT. Instron supports the
exchange of information relating to the Year 2000 issue and designates the
information following below as the Year 2000 Readiness Disclosure within the
meaning of the Year 2000 Information and Readiness Disclosure Act. Information
set forth herein regarding the Year 2000 compliance of non-Instron products and
services are "republications" under the Year 2000 Information and Readiness
Disclosure Act and are based on information supplied by other companies about
the products and services they offer. Instron has not independently verified the
contents of these republications and takes no responsibility for the accuracy or
completeness of information contained in such republications.
YEAR 2000 ISSUE READINESS DISCLOSURE. The term "Year 2000 issue" is a
general term used to describe various business-related problems that may result
from the improper processing by computer systems of dates after 1999. The Year
2000 issue affects virtually all companies and all organizations. The Company
has identified its Year 2000 non-compliance risks in four categories: (i)
internal business systems, (ii) internal electronic equipment and embedded chip
technology; (iii) external non-compliance by the Company's suppliers, and (iv)
software systems products supplied by the Company to its customers.
INTERNAL BUSINESS SYSTEMS:- The Company has an active, ongoing program to
insure that its business systems will be Year 2000 compliant. Instron began this
program to identify and correct Year 2000 issues in 1996. In accordance with
this program, the Company is following a four step process to address the Year
2000 Issue. The first stage consisted of auditing the major business systems and
telecommunication switches. This stage identified a couple of minor issues but
due to the installation of a new ERP system in 1996 at our two primary
manufacturing sites, the exposure is minimal and is expected to be corrected by
June 1999. The second stage, begun in September 1997, is an audit of all
departmental systems and network operating systems. This audit is nearing
completion and has formed the basis for the third stage which identifies the
corrective actions required, and outlines the necessary plan of action. The
final stage, which has started, will include the implementation and testing of
all required modifications.
Accordingly, the Company is confident that its internal business systems
will be made Year 2000 compliant in a timely manner and in any event, no later
than July 1999. The Company anticipates making capital expenditures of
approximately $500,000 in 1999 to upgrade computing, networking and
telecommunications systems as part of the plan to address the Year 2000 issue.
Although the costs associated with identifying and implementing the necessary
plan of action are not expected to be material to the Company's financial
position, there can be no assurance to this effect.
The Company has initiated an audit of the business systems of the two
recent acquisitions, Satec and IST. So far, there has been no indication of any
major Year 2000 issue that cannot be resolved in a timely manner.
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION (continued)
INTERNAL ELECTRONIC EQUIPMENT AND EMBEDDED CHIP TECHNOLOGY:- The audit
process has identified certain telecommunication equipment that needs to be
upgraded to address the Year 2000 issue. The Company plans to replace this
equipment by June 1999, and is currently reviewing such office and facilities
equipment as machine tools, photocopiers, security systems and other systems
which may be impacted by the Year 2000 issue. The Company estimates that the
total cost of completing any modifications, upgrades or replacements of this
equipment will not have a material adverse effect on the Company's business or
results of operations. This estimate is being monitored and will be revised as
additional information becomes available.
SUPPLIERS:- The Company has started a communication program with key
suppliers of computers, equipment, parts and material used, operated and
maintained by the Company. This program is intended to identify and, to the
extent possible, resolve issues with suppliers involving the Year 2000 problem.
However, the Company has limited or no control over the actions of these third
party suppliers. Any failure of these suppliers to resolve Year 2000 issues with
their systems in a timely manner could have a material adverse effect upon the
Company's business, financial condition and results of operation.
COMPANY SUPPLIED SYSTEMS AND SOFTWARE TO CUSTOMERS:- The Company believes
that it has substantially identified and resolved all potential Year 2000 Issues
with all of the software products that it is currently developing and marketing.
Existing software on installed machines may not be Year 2000 compliant and
communication programs have been initiated to advise customers on how to upgrade
or replace their existing systems. Management believes that it is not possible
to determine with complete certainty that all Year 2000 issues affecting the
Company's products have been identified due to the complexity of these systems
and the fact that these products interact with other third party vendor products
and operate on computer systems which are not under the Company's control. Any
such failures to identify or remediate Year 2000 problems affecting the
Company's systems and software products could have a material adverse effect
upon the Company's business, financial conditions and results of operations.
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION (continued)
The information presented above sets forth the key steps taken by the
Company to address the Year 2000 Issue. There can be no absolute assurance that
the Company has identified all the issues, can resolve them in a timely manner,
and that there will be no failures or disruptions to operations which could
result in a material adverse effect upon the company's business, financial
condition, results of operations, and business prospects.
CONTINGENCY PLANS:- The Company intends to develop contingency plans for
significant business risks identified by the Company that might result from
Year-2000 related events. Because the Company has not yet identified any
specific business function that will be materially at risk of significant
Year-2000 related disruptions, and because a full assessment of the Company's
risk from potential Year 2000 failures is still in process, the Company has not
yet developed detailed contingency plans specific to Year 2000 problems. In the
event that the Company concludes that one or more contingency plans are
required, development of such contingency plans is currently scheduled to occur
no later than September, 1999 or as otherwise appropriate.
QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK.
The Company is exposed to market risk related to changes in foreign
currency exchange rates. The Company enters into foreign exchange contracts to
manage and reduce the impact of changes in foreign currency exchange rates. The
Company does not enter into derivatives or other financial instruments for
trading or speculative purposes. The exposures are associated with certain
accounts receivable denominated in local currencies and certain foreign
revenue transactions.
At December 31, 1998, the face amount of outstanding forward currency
contracts to buy and sell U.S. dollars, Japanese yen and certain European
currencies was $6.3 million. A 10% fluctuation in exchange rates for these
currencies would change the fair value by approximately $0.3 million. However,
any change in the fair value of the contracts would be offset by changes in the
underlying value of the transactions being hedged.
The hypothetical movement disclosed above was estimated by calculating the
fair value of the forward currency contracts at December 31, 1998, and comparing
that with those calculated using hypothetical forward currency exchange rates.
NEW ACCOUNTING PRONOUNCEMENTS.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. The statement
is effective for fiscal years beginning after June 15, 1999. Management is
currently evaluating the effects of this change on its recording of derivatives
and hedging activities. The Company will adopt SFAS No. 133 for its fiscal year
ending December 31, 2000.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Internal Use Software," which provides
guidance on the accounting for the costs of software developed or obtained for
internal use. SOP 98-1 is effective for fiscal years beginning after December
15, 1998. Management does not expect the statement to have a material impact on
its financial position or results of operations.
FORWARD LOOKING STATEMENTS.
Certain statements contained in this Annual Report are "forward-looking"
statements within the meaning of the federal securities laws and are made in
reliance upon the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. No assurances can be given that actual results will not
differ materially from those projected in the forward-looking statements
contained in this Annual Report. Certain factors that might cause such a
difference include: the level of bookings worldwide for Instron, Satec and IST,
particularly in Asia; the success of the automobile industry which is the major
purchaser of IST products; the operating results of Satec and IST; the impact of
fluctuations in exchange rates and the uncertainties of operating in a global
economy, including fluctuations in the economic conditions of the foreign and
domestic markets served by the Company which can affect the demand for its
products and services; the Company's ability to successfully integrate the
products and operations of Satec; the impact of Year 2000 issues; and the
Company's ability to identify and successfully consummate strategic
acquisitions.
20
<PAGE> 21
INSTRON CORPORATION
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1998
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION
21
<PAGE> 22
INSTRON CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Consolidated Financial Statements included in Item 8: PAGE
----
<S> <C>
Report of Independent Accountants.............................................. 23
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.............................................. 24
Consolidated Balance Sheets as of December 31, 1998 and 1997................... 25
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996............................................................ 26
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996.............................................. 27
Notes to Consolidated Financial Statements..................................... 28-37
Supplementary Financial Information
(Quarterly Financial Information/1998 and 1997 - (Unaudited).................. 38
</TABLE>
22
<PAGE> 23
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF INSTRON CORPORATION:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Instron Corporation
and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
------------------------------
Boston, Massachusetts PricewaterhouseCoopers LLP
February 18, 1999
23
<PAGE> 24
INSTRON CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
In thousands, except share and per share data (Years Ended December 31) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Sales $ 152,879 $ 129,679 $ 128,804
Service 30,150 25,981 24,309
----------- ----------- -----------
Total revenue 183,029 155,660 153,113
----------- ----------- -----------
Cost of revenue:
Sales 91,410 74,126 72,556
Service 19,644 17,363 16,086
----------- ----------- -----------
Total cost of revenue 111,054 91,489 88,642
----------- ----------- -----------
Gross profit 71,975 64,171 64,471
----------- ----------- -----------
Operating expenses:
Selling and administrative 48,869 44,641 44,898
Research and development 8,485 6,959 8,616
Special items charge 4,975 0 1,812
----------- ----------- -----------
Total operating expenses 62,329 51,600 55,326
Income from operations 9,646 12,571 9,145
----------- ----------- -----------
Other (income) expense:
Gain on sale of land (11,076) 0 0
Interest expense 1,175 1,465 1,548
Interest income (943) (634) (477)
Foreign exchange losses 157 185 689
----------- ----------- -----------
Total other expenses (10,687) 1,016 1,760
----------- ----------- -----------
Income before income taxes 20,333 11,555 7,385
Provision for income taxes 8,874 4,391 2,803
----------- ----------- -----------
Net income $ 11,459 $ 7,164 $ 4,582
=========== =========== ===========
Weighted average number of 6,667,914 6,455,527 6,396,202
basic common shares
Earnings per share - basic $ 1.72 $ 1.11 $ .72
=========== =========== ===========
Weighted average number of 7,066,257 6,791,801 6,524,467
diluted common shares
Earnings per share - diluted $ 1.62 $ 1.05 $ .70
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
24
<PAGE> 25
INSTRON CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands, except share data (December 31) 1998 1997
- --------------------------------------------- -------- -------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,209 $ 2,566
Accounts receivable, net of allowance for doubtful
accounts of $800 in 1998 and $1,071 in 1997 65,766 48,226
Inventories 36,121 24,024
Deferred income taxes 3,060 3,314
Prepaid expenses and other current assets 2,223 3,767
-------- --------
Total current assets 114,379 81,897
Property, plant and equipment:
Land and buildings 21,254 21,796
Machinery and equipment 45,217 39,627
Accumulated depreciation (42,470) (40,216)
-------- --------
Property, plant and equipment, net 24,001 21,207
Goodwill 12,384 6,423
Deferred income taxes 904 806
Other assets 6,586 8,652
-------- --------
Total assets $158,254 $118,985
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings $ 6,416 $ 6,059
Accounts payable 15,807 11,095
Accrued liabilities 22,958 14,083
Accrued employee compensation and benefits 6,798 6,220
Accrued income taxes 93 957
Advance payments received on contracts 7,066 1,541
-------- --------
Total current liabilities 59,138 39,955
Long-term debt 13,216 7,600
Pension and other long-term liabilities 6,316 5,176
-------- --------
Total liabilities 78,670 52,731
-------- --------
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock, $1 par value; 1,000,000 shares authorized;
none issued
Common stock, $1 par value; 10,000,000 shares authorized;
7,051,968 and 6,823,698 shares issued, respectively 7,052 6,824
Additional paid in capital 8,727 6,972
Deferred compensation (2,662) (3,235)
Retained earnings 72,496 62,097
Accumulated other comprehensive income (loss) (4,699) (5,690)
-------- --------
80,914 66,968
Less: Treasury stock at cost; 108,262 and 74,952 shares,
respectively 1,330 714
-------- --------
Total stockholders' equity 79,584 66,254
-------- --------
Total liabilities and stockholders' equity $158,254 $118,985
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
INSTRON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
In thousands (Years Ended December 31) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
- ------------------------------------
<S> <C> <C> <C>
Net income $ 11,459 $ 7,164 $ 4,582
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on the sale of property, plant and equipment, net (11,076) (88) (5)
Depreciation and amortization 7,106 6,494 6,873
Provision for losses on accounts receivable 73 27 358
Deferred income taxes (580) 306 299
Changes in assets and liabilities, excluding
the effects from purchase of businesses:
(Increase) decrease in accounts receivable (6,312) (1,335) 1,297
(Increase) decrease in inventories 165 2,563 (521)
(Increase) decrease in prepaid expenses and
other current assets 2,055 (2,028) 151
Increase (decrease) in accounts payable and
accrued expenses 3,097 3,477 (3,894)
Other (711) 409 684
-------- -------- --------
Net cash provided by operating activities 5,276 16,989 9,824
-------- -------- --------
Cash Flows From Investing Activities
- ------------------------------------
Capital expenditures (5,841) (4,176) (4,473)
Joint venture investment 0 0 (6,926)
Purchase of businesses, net of cash acquired (13,086) (2,010) 0
Proceeds from the sale of property, plant and equipment 13,684 376 224
Capitalized software costs (1,490) (637) (1,144)
Other (31) 220 156
-------- -------- --------
Net cash used by investing activities (6,764) (6,227) (12,163)
-------- -------- --------
Cash Flows From Financing Activities
- ------------------------------------
Net borrowings under revolving credit and term
loan facility 5,609 (9,730) 6,068
Net short-term borrowings 199 (173) (2,785)
Cash dividends paid (1,060) (1,064) (1,024)
Proceeds from stock option exercises 1,983 348 861
Treasury stock purchases (616) 0 0
-------- -------- --------
Net cash provided (used) by financing activities 6,115 (10,619) 3,120
-------- -------- --------
Effect of exchange rate changes on cash 16 (118) 116
-------- -------- --------
Net increase in cash and cash equivalents 4,643 25 897
Cash and cash equivalents at beginning of year 2,566 2,541 1,644
-------- -------- --------
Cash and cash equivalents at end of year $ 7,209 $ 2,566 $ 2,541
======== ======== ========
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------
Cash paid during the year for:
Interest $ 1,430 $ 1,671 $ 1,730
Income taxes 9,145 3,041 2,286
Supplemental Disclosures of Noncash Investing and Financing Activities
- ----------------------------------------------------------------------
Fair value of assets acquired $ 28,229 $ 2,649 $ 0
Cash paid 15,312 2,010 0
-------- -------- --------
Liabilities incurred or assumed in
business acquisitions $ 12,917 $ 639 $ 0
======== ======== ========
Note receivable on sale of business $ 0 $ 3,000 $ 0
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 27
INSTRON CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated Total
Additional other stock-
Common paid in Deferred Retained comprehensive Treasury holders'
In thousands, except share data stock capital Compensation earnings income (loss) stock equity
- ------------------------------------ ------ ---------- ------------ -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $6,415 $2,538 $ 0 $52,439 $(4,576) $ (714) $56,102
Net income 4,582 4,582
Other comprehensive income (loss) 1,660 1,660
------
Comprehensive income 6,242
Cash dividends declared
($.16 per share) (1,024) (1,024)
104,366 shares issued under
employee stock option plans 105 976 1,081
- ------------------------------------ ------ ------ ------- ------- ------- ------ ------
Balance at December 31, 1996 6,520 3,514 0 55,997 (2,916) (714) 62,401
Net income 7,164 7,164
Other comprehensive income (loss) (2,774) (2,774)
------
Comprehensive income 4,390
Cash dividends declared
($.16 per share) (1,064) (1,064)
33,511 shares issued under
employee stock option plans 34 314 348
Restricted stock grants issued
during the year 270 3,144 (3,414) 0
Compensation expense recognized
under the 1992 Stock Incentive Plan 179 179
- ------------------------------------ ------ ------ ------- ------- ------- ------ ------
Balance at December 31, 1997 6,824 6,972 (3,235) 62,097 (5,690) (714) 66,254
Net income 11,459 11,459
Other comprehensive income (loss) 991 991
------
Comprehensive income 12,450
Cash dividends declared
($.16 per share) (1,060) (1,060)
228,270 shares issued, net, under
employee stock option plans 228 1,755 1,983
Purchase of 33,310 treasury shares (616) (616)
Compensation expense recognized
under the 1992 Stock Incentive Plan 573 573
- ------------------------------------ ------ ------ ------- ------- ------- ------ ------
Balance at December 31, 1998 $7,052 $8,727 $(2,662) $72,496 $(4,699) $(1,330) $79,584
====== ====== ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of all domestic and foreign subsidiaries. Significant intercompany
transactions and balances are eliminated. Certain reclassifications were made to
prior years' amounts to conform with the 1998 presentation.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that effect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported periods. Actual results could differ
from those estimates.
FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's principal
foreign operations are translated at exchange rates prevailing at the end of the
period. Income statement items are translated using average quarterly exchange
rates. Translation gains or losses are included in accumulated other
comprehensive income (loss) and are reported in income only if the underlying
foreign investment is sold or liquidated.
FOREIGN EXCHANGE RISK MANAGEMENT The Company regularly enters into forward
contracts primarily denominated in Japanese yen and certain European currencies
to hedge firm sales and purchase commitments. Forward currency contracts have
maturities of less than one year. These contracts are used to reduce the
Company's risk associated with exchange rate movements, as gains and losses on
these contracts are intended to offset exchange losses and gains on underlying
exposures. The Company does not engage in currency speculation. The Company's
policy is to defer gains and losses on these contracts until the corresponding
losses and gains are recognized on the items being hedged. Both the contract
gains and losses and the gains and losses on the items being hedged are
included in selling and administrative expenses. The unrealized losses were not
material in 1998 and 1997 as the fair value of these contracts were
approximately equal to the fair value of the underlying exposures.
At December 31, 1998, the face amount of outstanding forward currency contracts
to sell U.S. dollars for non U.S. currencies was $3.2 million, Japanese yen for
German deutschemarks was $1.9 million and French francs for British pounds was
$0.7 million. At December 31, 1998, the face amount of outstanding forward
currency contracts to buy German deutschemarks for U.S. dollars was $2.4
million, German deutschemarks for Japanese yen $1.9 million, British pounds for
U.S. dollars was $0.9 million, British pounds for French francs was $0.7 million
and British pounds for German deutschemarks was $0.4 million.
28
<PAGE> 29
CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the
Company to a concentration of credit risk principally consist of cash, cash
equivalents and trade receivables. The Company places its temporary cash
investments with major banks throughout the world, in high quality, liquid
instruments. The Company sells to a broad range of customers throughout the
world and performs ongoing credit evaluations to minimize the risk of loss. The
Company makes use of various devices such as letters of credit to protect its
interests, principally on sales to foreign customers. In addition, the Company
has certain receivables, payables, borrowings and other assets and liabilities
denominated in foreign currencies, which are not hedged and therefore are
subject to exchange rate fluctuations.
INVENTORIES Inventories are valued at the lower of cost or market (net
realizable value). The last-in, first-out (LIFO) method of determining cost is
used for certain inventories in the United States and Asian branches. The
Company uses the first-in, first-out (FIFO) method for all other locations.
GOODWILL AND INTANGIBLE ASSETS. Intangible assets are stated at cost
and amortized using the straight-line method over the assets estimated useful
lives which range from 4 to 10 years. The Company evaluates the possible
impairment of long-lived assets, including intangible assets, whenever events
or circumstances indicate the carrying value of the assets may not be
recoverable. Impairment of purchased technology amounts and goodwill is
measured on the basis of whether anticipated future undiscounted operating cash
flows expected from the acquired business will recover the recorded respective
intangible asset balances over the remaining amortization period. At December
31, 1998, no amounts have been determined impaired. Amortization of goodwill
and other intangibles was $2,295,000, $1,974,000 and $2,254,000 in 1998, 1997
and 1996, respectively.
PROPERTY, PLANT AND EQUIPMENT Depreciation is computed principally using the
straight-line method over the estimated useful lives of 10 to 25 years for land
improvements, 10 to 40 years for buildings and improvements and 3 to 15 years
for machinery and equipment. Maintenance and repairs are expensed as incurred.
Depreciation expense was $4,239,000, $4,341,000 and $4,619,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. Upon retirement or
disposition, the cost and related accumulated depreciation of the assets
disposed of are removed from the accounts, with any resulting gain or loss
included in operations. On March 27, 1998, the Company sold 42 acres of excess
land in Canton, Massachusetts for $13.5 million.
SOFTWARE DEVELOPMENT COSTS Certain software development costs are capitalized
and then amortized over future periods. Amortization of capitalized software
costs is computed on a product-by-product basis over the estimated economic life
of the product, generally three years. Unamortized software costs included in
other assets were $2,272,000, $1,574,000 and $2,473,000 at December 31, 1998,
1997 and 1996, respectively.
29
<PAGE> 30
Software development costs of $1,490,000, $637,000 and $1,144,000 were
capitalized during 1998, 1997 and 1996, respectively. The amounts amortized and
charged to expense in 1998, 1997 and 1996 were $792,000, $725,000, and
$1,350,000, respectively.
REVENUE RECOGNITION Revenue from product sales are recognized at time of
shipment. Revenue from services are recognized as services are performed and
ratably over the contract period for service maintenance contracts.
INCOME TAXES Deferred income taxes are provided using the liability method,
which estimates future tax effects of differences between financial statement
carrying amounts and the tax basis of existing assets and liabilities. Tax
credits are recorded as a reduction in income taxes.
Provisions are made for the U.S. income tax liability on earnings of foreign
subsidiaries, except for locations where the Company has designated earnings to
be permanently invested. Such earnings amounted to approximately $22,803,000 at
year-end 1998.
EARNINGS PER SHARE. Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares plus the dilutive effect of common share
equivalents outstanding using the "treasury stock method."
The following is a reconciliation of the basic and diluted EPS calculations:
<TABLE>
<CAPTION>
In thousands, except per share data 1998 1997 1996
- ----------------------------------- -------- ------- -------
<S> <C> <C> <C>
Net Income $11,459 $ 7,164 $ 4,582
======= ======= =======
Weighted average number of common
shares outstanding - basic 6,668 6,456 6,396
Dilutive effect of stock options
outstanding 398 336 128
------- ------- -------
Weighted average of common and dilutive
shares - diluted 7,066 6,792 6,524
======= ======= =======
BASIC EARNINGS PER SHARE $ 1.72 $ 1.11 $ 0.72
======= ======= =======
DILUTED EARNINGS PER SHARE $ 1.62 $ 1.05 0.70
======= ======= =======
</TABLE>
At December 1998, 4,500 Options were not included in the calculation of diluted
earnings per share as they were antidilutive.
FAIR VALUE. The Company's financial instruments consist primarily of cash and
cash equivalents, trade receivables, trade payables and debt. The carrying
amounts of these instruments approximates fair value.
COMPREHENSIVE INCOME (LOSS). In June 1997, the Financial Accounting Standards
Board issued SFAS 130, "Reporting Comprehensive Income," which is effective for
periods beginning after December 15, 1997. The statement establishes standards
for reporting and displaying comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. The statement requires that all components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. The Company has adopted SFAS 130 in the
accompanying financial statements.
PENSION PLAN. In February 1998, the Financial Accounting Standards Board issued
SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" which is effective for periods beginning after December 15, 1997. The
statement standardizes employer disclosure requirements about pension and other
postretirement benefit plans by requiring additional information on changes in
the benefit obligations and fair values of plan assets and eliminating certain
disclosures that are no longer useful. It does not change the measurement of
recognition of those plans. The Company has adopted SFAS 132 in the accompanying
financial statements.
30
<PAGE> 31
2. INDUSTRY SEGMENT AND FOREIGN OPERATIONS
SFAS 131 establishes standards for reporting information about operating
segments in annual financial statements of public business enterprises. It also
establishes standards for related disclosures about products and service,
geographic areas, and major customers. The Company evaluated its business
activities that are regularly reviewed by the Chief Executive Officer for which
discrete financial information is available. As a result of this evaluation, the
Company determined that is has two operating segments: Materials Testing and
Structural Testing.
Instron's Materials Testing business manufactures and markets material testing
instruments (electromechanical, sevohydraulic, hardness and impact), software
and accessories. The structural testing business manufactures and markets
systems for simulating real-life testing of components and products. The
economic characteristics, production processes, core technology, types and
classes of customers, method of distribution and regulatory environments are
similar for both of these operating segments which operate within the material
testing industry. As a result of these similarities, both segments have been
aggregated into one reporting segment for financial statement purposes.
The following table summarizes the Company's operations by significant
geographic location for the years ended December 31:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
- ---------------------------------- --------- --------- ---------
<S> <C> <C> <C>
REVENUE, INCLUDING INTERAREA SALES
United States $ 102,860 $ 76,314 $ 70,924
Germany 26,293 14,484 15,619
Other Europe 54,395 52,393 49,294
Asia/Latin America 31,335 40,004 39,077
Other international 3,552 3,868 3,404
Eliminations (35,406) (31,403) (25,205)
--------- --------- ---------
Total revenue $ 183,029 $ 155,660 $ 153,113
========= ========= =========
IDENTIFIABLE ASSETS AT YEAR-END
United States $ 64,903 $ 38,384 $ 38,654
Germany 22,983 6,771 8,180
Other Europe 38,546 35,903 37,091
Asia/Latin America 18,232 18,645 19,149
Other international 1,965 2,072 2,499
Corporate 13,335 18,066 16,938
Eliminations (1,710) (856) (678)
--------- --------- ---------
Total assets $ 158,254 $ 118,985 $ 121,833
========= ========= =========
</TABLE>
Total assets in the United Kingdom in 1998, 1997 and 1996 were $24,227,000,
$24,883,000 and $24,475,000, respectively.
Sales between geographic areas in 1998, 1997 and 1996, respectively, consisted
primarily of $20,023,000, $13,091,000 and $11,337,000 from the United States and
$15,204,000, $18,168,000 and $13,706,000 from European operations. Transfers
between geographic areas are at manufacturing cost plus a markup factor.
31
<PAGE> 32
3. INVENTORIES
Inventories at December 31 were as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997
- ----------------- ------- -------
<S> <C> <C>
Raw materials $13,257 $12,742
Work in process 16,560 5,156
Finished goods 6,304 6,126
------- -------
Total inventory $36,121 $24,024
======= =======
</TABLE>
Inventories valued at LIFO amounted to $9,056,000 and $9,395,000 at December 31,
1998 and 1997, respectively. The excess of current cost over stated LIFO value
was $5,205,000 at December 31, 1998 and $5,247,000 at December 31, 1997.
4. BORROWING ARRANGEMENTS
The Company maintains a multicurrency revolving credit and term loan facility
that provides for borrowings of up to $35,000,000 through April 2000. Borrowings
outstanding as of April 2000 convert to a term loan payable in sixteen equal
quarterly installments. Interest on borrowings under the agreement is based upon
either base rates, money market rates, or other short-term borrowing rates.
Facility fees under this agreement are 1/4 of 1% per annum. The Company has met
the various covenants in the agreement, the most restrictive of which requires a
minimum level of tangible net worth. At December 31, 1998 and 1997,
respectively, outstanding domestic borrowings of $8,375,000 and $7,600,000 with
a weighted average interest rate of 6.10% and 6.61%, and outstanding European
borrowings of $4,841,000 in 1998 with a weighted average interest rate of 4.75%,
were classified as long-term debt. Long-term debt maturing under the credit
agreement in each of the five years subsequent to December 31, 1998, assuming
outstanding borrowings at December 31, 1998 are unchanged at April 2000, is
$2,478,000 in 2000, $3,304,000 in 2001, 2002 and 2003.
The Company's subsidiaries have other overdraft and borrowing facilities
allowing advances up to approximately $32,000,000. At December 31, 1998, the
outstanding portion of these facilities was $6,416,000, due currently. Bank
guarantees outstanding at December 31, 1998, for which the Company is
contingently liable, amounted to $10,976,000 and relate principally to
performance contracts.
5. OPERATING LEASE COMMITMENTS
Rental expense amounted to $3,998,000, $3,697,000 and $3,348,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. As of December 31, 1998,
minimum annual commitments under noncancellable operating leases with terms of
more than one year are:
<TABLE>
<CAPTION>
Later
In thousands 1999 2000 2001 2002 2003 Years
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$3,842 $3,094 $2,483 $1,245 $601 $1,033
</TABLE>
32
<PAGE> 33
6. INCOME TAXES
The significant components of the Company's deferred tax assets and liabilities
at December 31, are as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997
- -------------------------------------------------------------
<S> <C> <C>
Employee benefits $ 4,634 $ 3,986
Inventories 3,280 2,734
Accrued expenses 1,305 632
------- -------
Total deferred assets 9,219 7,352
------- -------
Accrued expenses (246) (360)
Fixed assets (1,517) (1,400)
Capitalized software costs
and intangibles (3,002) (982)
------- -------
Total deferred liabilities (4,765) (2,742)
------- -------
Valuation reserve (490) (490)
------- -------
Total net deferred assets $ 3,964 $ 4,120
======= =======
</TABLE>
A valuation reserve has been established where, based upon available evidence,
it is more likely than not that some or all of the deferred tax assets will not
be realized. The valuation allowance relates primarily to foreign tax benefits.
The components of income before income taxes consisted of the following:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $17,775 $ 5,664 $2,996
Foreign 2,558 5,891 4,389
------- ------- ------
Total $20,333 $11,555 $7,385
======= ======= ======
Income tax provisions (credits) were as follows:
<CAPTION>
In thousands 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $6,441 $1,701 $ 609
Foreign 1,896 2,090 1,486
State 381 172 314
------ ------ ------
8,718 3,963 2,409
------ ------ ------
Deferred, net:
Federal & State 139 518 215
Foreign 17 (90) 179
------ ------ ------
156 428 394
------ ------ ------
Total provision for income taxes $8,874 $4,391 $2,803
====== ====== ======
The provisions for income taxes varied from the United States statutory rate of
35% for 1998 and 34% for 1997 and 1996 principally because of the tax effect of
the following:
<CAPTION>
In thousands 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision at United States
statutory rate $7,117 $3,929 $2,511
Effect of earnings of foreign operations
subject to different tax rates 1,019 (2) 199
State taxes, net of federal
income tax benefit 247 114 208
Benefit of Foreign Sales Corporation (76) (68) (195)
Goodwill amortization -- 356 97
All other, net 567 62 (17)
------ ------ ------
Total tax provision $8,874 $4,391 $2,803
====== ====== ======
</TABLE>
33
<PAGE> 34
7. EMPLOYEE PENSION AND RETIREMENT PLANS
The Company maintains qualified noncontributory defined benefit pension plans
covering United States employees and employees of Instron's United Kingdom
subsidiary. The benefits are based on years of service and final average
compensation at the date of retirement. The Company's general policy is to fund
the pension plans to the extent such contributions are deductible under
standards established by the Internal Revenue Service in the U.S. and the Inland
Revenue in the U.K. Plan assets in the U.S. consist of mutual funds which invest
primarily in common stocks, corporate bonds, U.S. government notes and temporary
cash investments. In the U.K., plan assets are invested in funds whose assets
consist primarily of common stocks, bonds and other securities. Employees of the
Japan subsidiary receive lump sum payments as a multiple of annual salary at
retirement or termination, based on years of service. These Japanese benefits
are unfunded.
Net periodic pension costs include the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
In thousands U.S. U.K. Japan U.S. U.K. Japan U.S. U.K. Japan
- ---------------------------------- ------- ------- ------ ------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost $ 1,122 $ 1,749 $ 222 961 $ 1,357 $ 231 $ 936 $ 1,158 $ 257
Interest cost 1,911 2,278 171 1,799 1,990 201 1,648 1,690 206
Expected return on plan assets (2,077) (2,971) 0 (1,914) (2,742) 0 (1,682) (2,576) 0
Amortization of transition asset
(liability) (9) (76) 18 (9) (75) 19 (9) ( 72) 21
Amortization of prior service cost 44 (73) 0 44 (89) 0 44 (91) 0
Amortization of unrecognized
(gain) loss 2 0 0 1 (59) 0 1 130 0
Settlement gain 0 0 (118) 0 0 0 0 0 0
------- ------- ------ ------- ------- ------ ------- ------- ------
Net periodic pension cost $ 993 $ 907 $ 293 $ 882 $ 382 $ 451 $ 938 $ 239 $ 484
======= ======= ====== ======= ======= ====== ======= ======= ======
Assumptions used in the accounting for the Company's U.S., U.K., and Japan plans at December 31 were:
<CAPTION>
1998 1997 1996
------------------------ ---------------------- -----------------------
U.S. U.K. Japan U.S. U.K. Japan U.S. U.K. Japan
- ------------------------------ ---- ---- ----- ---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted average discount rate 6.75% 5.5% 4.0% 7.0% 6.5% 5.0% 7.5% 8.0% 6.0%
Rates of increase in
compensation levels 4.25 4.0 3.0 4.5 4.75 4.0 5.0 5.5 5.0
Expected long-term rate of
return on assets 9.0 7.25 0.0 9.0 8.75 0.0 9.0 9.5 0.0
The following is a reconciliation of the Projected Benefit Obligation as of December 31:
<CAPTION>
1998 1997 1996
------------------------------ ------------------------------ ---------------------------
In thousands U.S. U.K. Japan U.S. U.K. Japan U.S. U.K. Japan
- ---------------------------- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Projected benefit obligation
at prior year end $ 26,209 $ 33,222 $ 3,221 $ 23,246 $ 24,681 $3,404 $ 21,134 $ 20,167 $3,327
Service cost 1,122 1,749 222 961 1,357 231 936 1,159 257
Interest cost 1,911 2,278 171 1,799 1,990 201 1,648 1,690 206
Actuarial (gain) loss 1,170 1,160 (102) 989 7,019 (205) 201 287 4
Benefits paid (871) (1,437) 0 (786) (1,288) (10) (673) (1,246) (4)
Plan amendments 0 262 0 0 287 0 0 94 0
Settlement 0 0 (872) 0 0 0 0 244 0
Foreign currency gain (loss) 0 180 400 0 (824) (400) 0 2,286 (386)
-------- -------- -------- -------- -------- ------ -------- -------- ------
Projected Benefit Obligation
at year end $ 29,541 $ 37,414 $ 3,040 $ 26,209 $ 33,222 $3,221 $ 23,246 $ 24,681 $3,404
======== ======== ======== ======== ======== ====== ======== ======== ======
The following is a reconciliation of the beginning and ending balances of the fair value of Plan assets at December 31:
<CAPTION>
1998 1997 1996
------------------------------- ---------------------------- ---------------------------
In thousands U.S. U.K. Japan U.S. U.K. Japan U.S. U.K. Japan
- ---------------------------- -------- -------- -------- -------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fair value of plan assets
at prior year end $ 26,650 $ 33,522 $ 0 $ 24,865 $ 29,748 $ 0 $ 21,556 $ 24,466 $ 0
Actual return on plan assets 3,667 5,475 0 2,546 4,812 0 2,655 2,576 0
Employer contributions 24 1,334 551 25 1,288 10 1,327 1,195 4
Benefits paid (871) (1,437) (551) (786) (1,288) (10) (673) (1,246) (4)
Foreign currency gain (loss) 0 184 0 0 (1,038) 0 0 2,757 0
-------- -------- -------- -------- -------- ---- -------- -------- ---
Fair value of plan assets
at year end $ 29,470 $ 39,078 $ 0 $ 26,650 $ 33,522 $ 0 $ 24,865 $ 29,748 $ 0
======== ======== ======== ======== ======== ==== ======== ======== ===
</TABLE>
The funded status of the Company's U.S., U.K. and Japan plans and amounts
recognized in the consolidated Balance Sheet at December 31 were:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- -------------------------- --------------------------
In thousands U.S. U.K. Japan U.S. U.K. Japan U.S. U.K. Japan
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Projected benefit obligation
in excess of (less than)
plan assets $ 71 $(1,664) $3,040 $ (441) $ (300) $ 3,221 $(1,619) $(5,067) $3,404
Unrecognized asset (liability)
at transition 48 465 (243) 57 538 (229) 66 637 (278)
Unrecognized prior service cost (461) 737 (505) 1,066 0 (549) 1,498 0
Unrecognized gain (loss) 4,104 163 648 3,683 (1,177) 259 4,038 4,011 77
------ ------- ------ ------ ------- ------- ------- ------- ------
Pension liability included assets
in Consolidated Balance Sheet $3,762 $ (299) $3,445 $2,794 $ 127 $ 3,251 $ 1,936 $ 1,079 $3,203
====== ======= ====== ====== ======= ======= ======= ======= ======
</TABLE>
The expense of all pension plans for 1998, 1997 and 1996 was $2,193,000,
$1,715,000, and $1,661,000, respectively. The Company also sponsors a Savings
and Security Plan for all U.S. employees. The plan (in accordance with section
401(k) of the Internal Revenue Code) offers participating employees a program of
regular savings and investment, funded by their own contributions and those of
the Company. The amount charged to operating expense for this plan was $582,000,
$530,000 and $523,000 in 1998, 1997 and 1996, respectively.
34
<PAGE> 35
8. STOCK OPTION PLANS
The Company accounts for stock-based compensation using the intrinsic value
method. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock.
The Company has two stock options plans currently in effect under which future
grants may be issued: the 1992 Stock Incentive Plan and the 1979 Non-Qualified
Plan. A total of 1,391,500 shares has been authorized by the Company for grants
of options or shares. Stock Options granted during 1998, 1997 and 1996 generally
have a maximum term of eight years and vest equally over four years.
A summary of the Company's stock option activity for the years ended December 31
follows:
<TABLE>
<CAPTION>
Weighted
Number Average
of Options Exercise Prices
- ---------------------------------------------------------------------
<S> <C> <C>
Outstanding at
December 31, 1995 881,450 $10.80
Granted, 1996 225,750 13.51
Exercised, 1996 (112,726) 9.91
Terminated, 1996 (15,750) 12.59
--------
Outstanding at
December 31, 1996 978,724 11.49
Granted, 1997 5,000 12.25
Exercised, 1997 (37,385) 11.02
Terminated, 1997 (13,000) 12.43
--------
</TABLE>
35
<PAGE> 36
Outstanding at
December 31, 1997 933,339 11.51
Granted, 1998 77,250 16.71
Exercised, 1998 (260,848) 9.92
Terminated, 1998 (24,937) 13.90
--------
Outstanding at
December 31, 1998 724,804 $12.55
========
At December 31, 1998, 1997 and 1996, respectively, there were 502,735, 656,902
and 526,045 options exercisable with a weighted average exercise price of
$11.84, $10.94 and $10.58. Exercise prices for options outstanding as of
December 31, 1998, ranged from $10.00 to $19.625. The weighted average remaining
contractual life of those options is 4.3 years.
The weighted average fair value at date of grant for options granted during
1998, 1997 and 1996 was $7.39, $5.04 and $5.79 per option, respectively. The
fair value of these options at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions for 1998,
1997 and 1996, respectively: risk-free interest rates of 5.07%, 5.70% and 6.50%;
dividend yields of 0.97%, 1.31% and 1.19%; volatility factors of the expected
market price of the Company's common stock of .35, .31 and .30; and a weighted
average expected life of the options of 7.9, 8.0 and 7.8 years.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant date for awards in 1998, 1997 and 1996, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
1998 1997 1996
------- ------ ------
Net income - pro forma $10,871 $6,691 $4,105
Earnings per share - basic $ 1.63 $ 1.04 $ .64
Earnings per share - diluted $ 1.54 $ .99 $ .63
The pro forma effect on net income for 1997 and 1996 is not representative of
the pro forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995.
On May 14, 1997 and October 29, 1997, respectively, the Company issued 250,000
and 20,500 shares of restricted stock to key employees, which resulted in
$3,414,000 of non-cash deferred compensation to be recognized as operating
expense over a seven year period. Vesting is accelerated upon change in control
or if certain performance criteria are met.
9. ACQUISITIONS
On August 4, 1998, the Company acquired substantially all the assets of Satec
Systems, Inc. of Grove City, Pennsylvania, for approximately $12.6 million in
cash. Satec is a manufacturer of a range of materials testing equipment sold
primarily in the United States with annual sales of approximately $18.0 million.
This acquisition has been accounted for under the purchase method of accounting
and, accordingly, the acquired assets and liabilities have been recorded at
their estimated fair values at the date of acquisition. In conjunction with this
acquisition the Company recorded $7.2 million of goodwill which is being
amortized over ten years. The operating results of Satec have been included in
the Company's consolidated results of operations from the date of acquisition.
36
<PAGE> 37
On September 27, 1998, the Company acquired the remaining 49% interest in IST
from Carl Schenck A.G. of Darmstadt, Germany for $2.7 million in cash. The book
value of net assets acquired were equal to the consideration paid. IST has
become a world-class structures testing business with sales of more than $55
million in 1998. This additional investment has been accounted for under the
purchase method of accounting and, accordingly, the acquired assets and
liabilities have been recorded at their estimated fair values at the date of
acquisition. The operations of IST for the fourth quarter of 1998 have been
consolidated into the Company's results of operations from the date of
acquisition. Prior to this acquisition the Company accounted for its 51%
interest in IST under the equity method of accounting.
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. The statement
is effective for fiscal years beginning after June 15, 1999. Management is
currently evaluating the effects of this change on its recording of derivatives
and hedging activities. The Company will adopt SFAS No. 133 for its fiscal year
ending December 31, 2000.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Internal Use Software," which provides
guidance on the accounting for the costs of software developed or obtained for
internal use. SOP 98-1 is effective for fiscal years beginning after December
15, 1998. This statement does not have a material impact on the Company's
financial position or results of operations.
11. SPECIAL ITEMS CHARGES
During the first quarter of 1998, the Company recorded a special items charge to
operations to undertake a consolidation of its European operations and
write-down the value of certain non-performing assets. A pre-tax charge of
$4,975,000 was taken in the quarter ended March 28, 1998 to cover these actions.
The special items charge includes termination benefits, the costs to exit a
manufacturing facility, other asset impairments and other related costs. The
Company has closed down a manufacturing plant in Germany, relocated sales and
service support personnel to another Instron location in Germany and has moved
the manufacturing operation to the United Kingdom. During 1998 the Company paid
$1.4 million for termination benefits and related costs and $1.6 million for the
costs to shutdown and exit a manufacturing facility in Germany. In addition, the
Company wrote-off $1.0 million of non-performing assets in 1998, primarily
relating to its interest in Lightspeed Simulation Systems. The balance of the
Special Items reserve relates primarily to the Company's obligation under a
long-term lease agreement in Germany, partially offset by estimated income under
a sub-lease arrangement.
In March 1996, the Company recognized a $1,812,000 special items charge to
implement a work force reduction and consolidate certain manufacturing
operations.
37
<PAGE> 38
SUPPLEMENTARY FINANCIAL INFORMATION
QUARTERLY FINANCIAL DATA
(quarterly data unaudited)
<TABLE>
<CAPTION>
Quarter Quarter Quarter Quarter
In thousands, except per share data 1 2 3 4 Year
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998:
Total revenue $33,869 $37,761 $43,331 $68,068 $183,029
Gross profit 13,742 15,734 16,718 25,781 71,975
Income before income taxes 8,159 2,914 3,403 5,857 20,333
Net income 3,911 1,807 2,110 3,631 11,459
Earnings per share - basic* 0.60 0.27 0.32 0.54 1.72
Earnings per share - diluted 0.55 0.25 0.30 0.52 1.62
-------------------------------------------------------------------------------------------------
1997:
Total revenue $36,023 $37,124 $35,996 $46,517 $155,660
Gross profit 14,706 15,127 15,008 19,330 64,171
Income before income taxes 1,482 2,376 2,966 4,731 11,555
Net income 919 1,470 1,842 2,933 7,164
Earnings per share - basic 0.14 0.23 0.29 0.45 1.11
Earnings per share - diluted* 0.14 0.22 0.26 0.42 1.05
-------------------------------------------------------------------------------------------------
</TABLE>
* The sum of the quarterly earnings per share does not equal the amount
reported for the year, as per share amounts are calculated independently and are
based on the weighted average common shares outstanding for each period.
38
<PAGE> 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption, "Executive
Officers of the Registrant", in Part I hereof, and the remainder is contained
under the captions, "Information Regarding the Board of Directors' Nominees and
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Registrant's definitive proxy statement relating to its 1999 Annual
Meeting of Stockholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the captions "Summary Compensation Table,"
"Severance and Other Agreements," "Pension Plans," "Stock Option Plans" and
"Stock Performance Graph" in the Registrant's definitive proxy statement
relating to its 1999 Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Registrant's definitive proxy statement
relating to its 1999 Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Information Regarding the Board of
Directors' Nominees and Directors" in the Registrant's definitive proxy
statement relating to its 1999 Annual Meeting of Stockholders is incorporated
herein by reference.
39
<PAGE> 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
The following consolidated financial statements are included in
Item 8:
Consolidated statements of income for the
years ended December 31, 1998, 1997 and 1996
Consolidated balance sheets at
December 31, 1998 and 1997
Consolidated statements of cash flows for the
years ended December 31, 1998 1997 and 1996
Consolidated statements of stockholders' equity
for the years ended December 31, 1998, 1997 and 1996
Notes to consolidated financial statements
(a)2. FINANCIAL STATEMENT SCHEDULE
Schedule
Page Number
---- --------
Report of Independent Accountants on
financial statement schedule 44
Consolidated valuation accounts 45 II
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements, including the accompanying notes.
(a)3. EXHIBITS
Exhibit No. Description of Exhibits
- ----------- -----------------------
3(a) Restated Articles of Organization of the Registrant and all
amendments - incorporated by reference to Exhibit 3(a) of the
Registrant's Form 10-K for the year ended December 31, 1981,
Exhibit 4 of the Registrant's Form 10-Q for the quarter ended
March 31, 1984, Exhibit 4 of the Registrant's Form 10-Q for
the quarter ended June 28, 1986, and Exhibit 4 of the
Registrant's Form 10-Q for the quarter ended June 27, 1987.
3(b) By-Laws of the Registrant, as amended, incorporated by
reference to the Current Report on Form 8-K, filed with the
Securities and Exchange Commission on October 5, 1990.
40
<PAGE> 41
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(CONTINUED)
10(a) 1979 Non-Qualified Stock Option and Stock Appreciation Rights Plan, as
amended, incorporated by reference to Exhibit 10(a) of Form 10-K for
the year ended December 31, 1991.
10(b) 1982 Incentive Stock Option Plan, as amended, incorporated by reference
to Exhibit 10(b) of Form 10-K for the year ended December 31, 1987 and
to Exhibit 19(b) of Form 10-Q for the quarter ended September 29, 1990.
10(c) 1984 United Kingdom Share Option Scheme, as amended, incorporated by
reference to Exhibit 10(c) of Form 10-K for the year ended December 31,
1991.
10(d) 1992 Stock Incentive Plan, incorporated by reference to Exhibit 10(b)
of Form 10-K for the year ended December 31, 1991.
10(e) Form of Executive Severance Agreement, dated as of December 8, 1993,
between the Company and one key employee, incorporated by reference to
Exhibit 10(f) on Form 10-K for the year ended December 31, 1993.
10(f) Form of Executive Severance Agreement, dated as of December 8, 1993,
between Instron Limited, the Company and two key employees,
incorporated by reference to Exhibit 10(h) on Form 10-K for the year
ended December 31, 1993.
41
<PAGE> 42
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(CONTINUED)
10(g) Form of Executive Severance Agreement entered into between the Company
and one key employee, incorporated by reference to exhibit 10(l) on
Form 10-K for the year ended December 31, 1997.
10(h) Form of Executive Severance Agreement entered into among Instron
Limited, the Company and one key employee, incorporated by
reference to exhibit 10(m) on Form 10-K for the year ended December
31, 1997.
10(i) Executive Severance Agreement entered into by the Company and James M.
McConnell, dated May 14, 1998.
10(j) Form of Executive Severance Agreement entered into by the Company and
each of Linton A Moulding, Joseph E. Amaral, William J. Milliken, Yahya
Gharagozlou and five other executive officers, in each case dated
May 14, 1998.
10(k) Lease Agreement, dated as of March 31, 1998, by and between Schenck
Immobilien & Services GmbH and Instron Schenck Testing Systems GmbH.
10(l) Strategic Alliance Agreement between Instron Corporation, Instron
Partners, Instron GmbH, Instron Schenck Testing Systems GmbH, Instron
Schenck Testing Systems, and Carl Schenck AG, Schenck Atis GmbH,
Schenck Pegasus Testing Inc., Schenck Fertigungs GmbH, executed
September 24, 1998 and effective as of September 27, 1998.
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
(b) Report on Form 8-K
None.
42
<PAGE> 43
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.
INSTRON CORPORATION Date: March 30, 1999
(Registrant)
By: /s/ James M. McConnell By: /s/ Linton A. Moulding
------------------------------------- ------------------------------
James M. McConnell Linton A. Moulding
President and Chief Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Harold Hindman Chairman of the Board March 30, 1999
- ------------------------
Harold Hindman
/s/ George S. Burr Vice Chairman of the Board March 30, 1999
- ------------------------
George S. Burr
/s/ James M. McConnell President, Chief Executive Officer March 30, 1999
- ------------------------ and Director
James M. McConnell
/s/ John W. Lacey Director March 30, 1999
- ------------------------
John W. Lacey
/s/ Dennis J. Moore Director March 30, 1999
- ------------------------
Dennis J. Moore
/s/ Sheldon Rutstein Director March 30, 1999
Sheldon Rutstein
/s/ John F. Smith Director March 30, 1999
- ------------------------
John F. Smith
/s/ Richard W. Young Director March 30, 1999
- ------------------------
Richard W. Young
43
<PAGE> 44
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENTS SCHEDULE
To the Board of Directors and Stockholders
of Instron Corporation:
Our audits of the consolidated financial statements referred to in our report
dated February 18, 1999 included in this Annual Report on Form 10-K also
included an audit of the financial statement schedule noted in Item 14(a)(2) of
this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
------------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 18, 1999
44
<PAGE> 45
SCHEDULE II
INSTRON CORPORATION
CONSOLIDATED VALUATION ACCOUNTS
<TABLE>
<CAPTION>
(A)
Effect of
Balance at Additions Foreign
Beginning Charged to Currency (B) Balance at
Description of Year Operations Translation Deductions End of Year
- ---------------------------- ---------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended December 31, 1998 $1,071,000 $146,000 $(43,000) $374,000 $ 800,000
---------- -------- -------- -------- ----------
Year ended December 31, 1997 $1,107,000 $ 27,000 $(56,000) $ 7,000 $1,071,000
---------- -------- -------- -------- ----------
Year ended December 31, 1996 $1,040,000 $358,000 $ 27,000 $318,000 $1,107,000
---------- -------- -------- -------- ----------
</TABLE>
(A) Included in "Additions Charged to Operations" for the year ended
December 31, 1998, is 73,000 for allowance for doubtful accounts
recorded in conjunction with the acquisitions of Satec and IST.
(B) Uncollected receivables written off, net of recoveries and deduction
due to the disposal of LMS in 1997.
45
<PAGE> 1
Exhibit 10(i)
EXECUTIVE SEVERANCE AGREEMENT
-----------------------------
EXECUTIVE SEVERANCE AGREEMENT made as of May 14, 1998 by and between
Instron Corporation, a Massachusetts corporation with its principal place of
business in Canton, Massachusetts (the "Company"), and James M. McConnell of
8 Pine Hill Drive, Needham, Massachusetts 02192 (the "Executive").
1. Purpose. The Company considers it essential to the best interests of its
stockholders to foster the continuous employment of key management personnel.
The Board of Directors of the Company (the "Board") recognizes, however, that,
as is the case with many publicly held corporations, the possibility of a Change
in Control (as defined in Section 2 hereof) exists and that such possibility,
and the uncertainty and questions which it may raise among management, may
result in the departure or distraction of management personnel to the detriment
of the Company and its stockholders. Therefore, the Board has determined that
appropriate steps should be taken to reinforce and encourage the continued
attention and dedication of members of the Company's management, including the
Executive, to their assigned duties without distraction in the face of
potentially disturbing circumstances arising from the possibility of a Change in
Control. Nothing in this Agreement shall be construed as creating an express or
implied contract of employment and, except as otherwise agreed in writing
between the Executive and the Company, the Executive shall not have any right to
be retained in the employ of the Company.
2. Change in Control. A "Change in Control" shall be deemed to have
occurred in any one of the following events:
(a) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934 (the "Act")) becomes a "beneficial owner"
(as such term is defined in Rule 13d-3 promulgated under the Act) (other than
the Company, any trustee or other fiduciary holding securities under an employee
benefit plan of the Company, or any corporation owned, directly or indirectly,
by the stockholders of the Company in substantially the same proportions as
their ownership of stock of the Company), directly or indirectly, of securities
of the Company representing fifty percent (50%) or more of the combined voting
power of the Company's then outstanding securities;
(b) persons who, as of March 4, 1998, constituted the Company's Board (the
"Incumbent Board") cease for any reason, including without limitation as a
result of a tender offer, proxy contest, merger or similar transaction, to
constitute at least a majority of the Board, provided that any person becoming a
director of the Company subsequent to March 4, 1998 whose election was approved
by at least a majority of the directors then comprising the Incumbent Board
shall, for purposes of this Agreement, be considered a member of the Incumbent
Board;
<PAGE> 2
(c) the stockholders of the Company approve a merger or consolidation of
the Company with any other corporation or other entity, other than (a) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 80% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation or (b) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
"person" (as hereinabove defined) acquires more than 50% of the combined voting
power of the Company's then outstanding securities; or
(d) the stockholders of the Company approve a plan of complete liquidation
of the Company or an agreement for the sale or disposition by the Company of all
or substantially all of the Company's assets.
3. Terminating Event. A "Terminating Event" shall mean any voluntary or
involuntary termination of the Executive's employment occurring subsequent to a
Change in Control as defined in Section 2, except that a Terminating Event shall
not be deemed to have occurred solely as a result of the Executive being an
employee of any direct or indirect successor to the business or assets of the
Company, rather than continuing as an employee of the Company following a Change
in Control.
4. Severance Payment. In the event a Terminating Event occurs within
twenty-four (24) months after a Change in Control,
(a) the Company shall pay to the Executive an amount equal to two (2) times
the "base amount" (as such term is defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code")) applicable to the Executive (the
"Base Amount"), payable in one lump-sum payment. Said amount shall be paid no
later than thirty-one (31) days following the Date of Termination (as such term
is defined in Section 8(b)); and
(b) the Company shall pay to the Executive all reasonable legal and
arbitration fees and expenses incurred by the Executive in successfully
obtaining or enforcing any right or benefit provided by this Agreement.
5A. Additional Benefits. This Section 5A shall apply solely to the extent
the sum of (i) the payments made by the Company to or for the benefit of the
Executive under this Agreement (the "Severance Payment") and (ii) the value, as
calculated in accordance with Section 280G of the Code, of the benefits and
payments received by the Executive as a result of a Change in Control under any
other agreement or plan (the "Other 280G Benefits") (the sum of such Severance
Payment and the Other 280G Benefits are referred to as the "Total Severance
Benefits"), exceed 330% of the Base Amount (the "Threshold Amount").
2
<PAGE> 3
(a) In the event the Total Severance Benefits exceed the Threshold Amount,
then the Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") such that the net amount retained by the Executive, after
deduction of the excise tax imposed by Section 4999 of the Code (the "Excise
Tax") on the Total Severance Benefits, any Federal, state and local income tax,
employment tax and Excise Tax upon the payment provided by this subsection, and
any interest and/or penalties assessed with respect to such Excise Tax, shall be
equal to the Total Severance Benefits.
(b) Subject to the provisions of Section 5A(c), all determinations required
to be made under this Section 5A, including the amount of such Gross-Up Payment,
shall be made by the Company's independent accounting firm (the "Accounting
Firm") which shall provide detailed supporting calculations both to the Company
and the Executive within 15 business days of the Date of Termination, if
applicable, or at such earlier time as is reasonably requested by the Company or
the Executive. For purposes of determining the amount of the Gross-Up Payment,
the Executive shall be deemed to pay federal income taxes at the highest
marginal rate of federal income taxation applicable to individuals for the
calendar year in which the Gross-Up Payment is to be made and state and local
income taxes at the highest marginal rates of individual taxation in the state
and locality of the Executive's residence on the Date of Termination, net of the
maximum reduction in federal income taxes which could be obtained from deduction
of such state and local taxes. The Gross-Up Payment, as determined pursuant to
this Section 5A(b), shall be paid to the Executive within five days of the
receipt of the Accounting Firm's determination. Any determination by the
Accounting Firm shall be binding upon the Company and the Executive. As a result
of the uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should have been
made (an "Underpayment"). In the event that the Company exhausts its remedies
pursuant to Section 5A(c) and the Executive thereafter is required to make a
payment of any Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred, consistent with the calculations required to be
made hereunder, and any such Underpayment, and any interest and penalties
imposed on the Underpayment and required to be paid by the Executive in
connection with the proceedings described in Section 5A(c), shall be promptly
paid by the Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-up Payment. Such notification shall be given as soon as
practicable but no later than 10 business days after the Executive knows of such
claim and shall apprise the Company of the nature of such claim and the date on
which such claim is requested to be paid. The Executive shall not pay such claim
prior to the expiration of the 30-day period following the date on which he
gives such notice to the Company (or such shorter period ending on the date that
any payment of taxes with respect to such claim is due). If the Company notifies
the Executive in
3
<PAGE> 4
writing prior to the expiration of such period that it desires to contest such
claim, the Executive shall:
(i) give the Company any information reasonably requested by the Company
relating to such claim,
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim
by an attorney selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
(iv) permit the Company to participate in any proceedings relating to such
claim; provided, however that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax, including
interest and penalties with respect thereto, imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 5A(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option,
may pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim
and may, at its sole option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner,
and the Executive agrees to prosecute such contest to a determination before
any administrative tribunal, in a court of initial jurisdiction and in one or
more appellate courts, as the Company shall determine; provided, however,
that if the Company directs the Executive to pay such claim and sue for a
refund, the Company shall advance the amount of such payment to the Executive
on an interest-free basis and shall indemnify and hold the Executive
harmless, on an after-tax basis, from any Excise Tax or income tax, including
interest or penalties with respect thereto, imposed with respect to such
advance or with respect to any imputed income with respect to such advance;
and further provided that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with
respect to which such contested amount is claimed to be due is limited solely
to such contested amount. Furthermore, the Company's control of the contest
shall be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive shall be entitled to settle or contest,
as the case may be, any other issues raised by the Internal Revenue Service
or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 5A(c), the Executive becomes entitled to receive any
refund with respect to
4
<PAGE> 5
such claim, the Executive shall (subject to the Company's complying with the
requirements of Section 5A(c)) promptly pay to the Company the amount of such
refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 5A(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
5B. Limitation on Benefits. This Section 5B shall apply solely to the
extent the Total Severance Benefits are less than or equal to the Threshold
Amount.
(a) Solely in the event the Total Severance Benefits are less than or equal
to the Threshold Amount, it is the intention of the Executive and of the Company
that no payments of the Total Severance Benefits by the Company to or for the
benefit of the Executive under this Agreement or any other agreement or plan
shall be non-deductible to the Company by reason of the operation of Section
280G of the Code relating to parachute payments. Accordingly, and
notwithstanding any other provision of this Agreement or any such agreement or
plan, if by reason of the operation of said Section 280G, any such payments
exceed the amount which can be deducted by the Company, the Severance Payment
which the Executive is entitled to receive under this Agreement shall be reduced
by that amount which exceeds the maximum amount deductible by the Company under
Section 280G. To the extent that Severance Payments exceeding such maximum
deductible amount have been made to or for the benefit of the Executive, such
excess payments shall be refunded to the Company with interest thereon at the
applicable federal rate determined under Section 1274(d) of the Code, compounded
annually, or at such other rate as may be required in order that no such
payments shall be non-deductible to the Company by reason of the operation of
said Section 280G.
(b) If any dispute between the Company and the Executive as to any of the
amounts to be determined under this Section 5B, or the method of calculating
such amounts, cannot be resolved by the Company and the Executive, either the
Company or the Executive, after giving three (3) days' written notice to the
other, may refer the dispute to a partner in the Boston office of a firm of
independent certified public accountants selected jointly by the Company and the
Executive. The determination of such partner as to the amount to be determined
under Section 5B(a) and the method of calculating such amounts shall be final
and binding on both the Company and the Executive. The Company shall bear the
costs of any such determination if the amount determined by such partner differs
to any material degree from the final amount proposed by the Company to the
Executive before submission to such partner. If there is no such material
difference, the costs of any such determination shall be evenly divided between
the Company and the Executive.
5
<PAGE> 6
6. Term. This Agreement shall take effect on the date first set forth above
and shall terminate upon the earlier of (a) the termination by the Company of
the employment of the Executive prior to a Change in Control because of (A) a
willful act of dishonesty by the Executive with respect to any matter involving
the Company or any subsidiary or affiliate, or (B) conviction of the Executive
of a crime involving moral turpitude, or (C) the gross or willful failure by the
Executive to substantially perform the Executive's duties with the Company, or
(b) the resignation or termination of the Executive for any reason prior to a
Change in Control.
7. Withholding. All payments made by the Company under this Agreement shall
be net of any tax or other amounts required to be withheld by the Company under
applicable law.
8. Notice and Date of Termination; Disputes; Etc.
(a) Notice of Termination. After a Change in Control and during the term of
this Agreement, any purported termination of the Executive's employment (other
than by reason of death) shall be communicated by written Notice of Termination
from one party hereto to the other party hereto in accordance with this Section
8. For purposes of this Agreement, a "Notice of Termination" shall mean a notice
which shall indicate the reason for termination and the Date of Termination.
(b) Date of Termination. "Date of Termination", with respect to any
purported termination of the Executive's employment after a Change in Control
and during the term of this Agreement, shall mean the date specified in the
Notice of Termination. In the case of a termination by the Company, The Date of
Termination shall not be less than thirty (30) days after the Notice of
Termination is given. In the case of a termination by the Executive, the Date of
Termination shall not be less than fifteen (15) days from the date such Notice
of Termination is given. In the event that the Executive gives a Notice of
Termination to the Company, the Company may unilaterally accelerate the Date of
Termination.
(c) No Mitigation. The Company agrees that, if the Executive's employment
by the Company is terminated during the term of this Agreement, the Executive is
not required to seek other employment or to attempt in any way to reduce any
amounts payable to the Executive by the Company pursuant to Section 4(a) and (b)
hereof. Further, the amount of any payment provided for in this Agreement shall
not be reduced by any compensation earned by the Executive as the result of
employment by another employer, by retirement benefits, by offset against any
amount claimed to be owed by the Executive to the Company or otherwise.
(d) Settlement and Arbitration of Disputes. Any controversy or claim
arising out of or relating to this Agreement or the breach thereof shall be
settled exclusively by arbitration in accordance with the laws of the
Commonwealth of Massachusetts by three arbitrators, one of whom shall be
appointed by the Company, one by the Executive and the third by the first two
6
<PAGE> 7
arbitrators. If the first two arbitrators cannot agree on the appointment of a
third arbitrator, then the third arbitrator shall be appointed by the American
Arbitration Association in the City of Boston. Such arbitration shall be
conducted in the City of Boston in accordance with the rules of the American
Arbitration Association for commercial arbitrations, except with respect to the
selection of arbitrators which shall be as provided in this Section 8(d).
Judgment upon the award rendered by the arbitrators may be entered in any court
having jurisdiction thereof.
9. Assignment; Prior Agreements. Neither the Company nor the Executive may
make any assignment of this Agreement or any interest herein, by operation of
law or otherwise, without the prior written consent of the other party, and
without such consent any attempted transfer shall be null and void and of no
effect. This Agreement shall inure to the benefit of and be binding upon the
Company and the Executive, their respective successors, executors,
administrators, heirs and permitted assigns. In the event of the Executive's
death after a Terminating Event but prior to the completion by the Company of
all payments due him under Section 4(a) and (b) of this Agreement, the Company
shall continue such payments to the Executive's beneficiary designated in
writing to the Company prior to his death (or to his estate, if the Executive
fails to make such designation). This Agreement reflects the entire agreement of
the parties with respect to its subject matter and supersedes all prior written
or oral negotiations, commitments, agreements and writings.
10. Enforceability. If any portion or provision of this Agreement shall to
any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
11. Waiver. No waiver of any provision hereof shall be effective unless
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
12. Notices. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by registered or certified mail, postage prepaid, to the
Executive at the last address the Executive has filed in writing with the
Company, or to the Company at its main office, attention of the Board of
Directors.
13. Effect on Other Plans. An election by the Executive to resign after a
Change in Control under the provisions of this Agreement shall not be deemed a
voluntary termination of employment by the Executive for the purpose of
interpreting the provisions of any of the Company's benefit plans, programs or
policies. Nothing in this Agreement shall be construed
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to limit the rights of the Executive under the Company's benefit plans, programs
or policies except as otherwise provided in Section 5 hereof, and except that
the Executive shall have no rights to any severance benefits under any severance
pay plan.
14. Amendment. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by a duly authorized representative of
the Company.
15. Governing Law. This is a Massachusetts contract and shall be construed
under and be governed in all respects by the laws of the Commonwealth of
Massachusetts.
16. Obligations of Successors. In addition to any obligations imposed by
law upon any successor to the Company, the Company will use its best efforts to
require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business or
assets of the Company to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform if no such succession had taken place.
17. Confidential Information. The Executive shall never use, publish or
disclose in a manner adverse to the Company's interests, any proprietary or
confidential information relating to (a) the business, operations or properties
of the Company or any subsidiary or other affiliate of the Company, or (b) any
materials, processes, business practices, technology, know-how, research,
programs, customer lists, customer requirements or other information used in the
manufacture, sale or marketing of any of the respective products or services of
the Company or any subsidiary or other affiliate of the Company; provided,
however, that no breach or alleged breach of this Section 17 shall entitle the
Company to fail to comply fully and in a timely manner with any other provision
hereof. Nothing in this Agreement shall preclude the Company from seeking money
damages, or equitable relief by injunction or otherwise without the necessity of
proving actual damage to the Company, for any breach by the Executive hereunder.
18. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be an original, but all of which together will
constitute one instrument binding upon the parties hereto.
[Signature Page Follows Next]
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IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by the Company by its duly authorized officer, and by the Executive, as of the
date first above written.
INSTRON CORPORATION
By: /s/ John R. Barrett
-------------------------------
Name: John R. Barrett
Title: Treasurer
/s/ James M. McConnell
-----------------------------------
James M. McConnell
DOCSC\703646.2
9
<PAGE> 1
Exhibit 10(j)
EXECUTIVE SEVERANCE AGREEMENT
-----------------------------
AGREEMENT made as of the 14th day of May, 1998, by and between Instron
Corporation, a Massachusetts corporation with its principal place of business in
Canton, Massachusetts (the "Company"), and [Name of Executive] of [Address of
Executive] (the "Executive").
1. Purpose. The Company considers it essential to the best interests of its
stockholders to foster the continuous employment of key management personnel.
The Board of Directors of the Company (the "Board") recognizes, however, that,
as is the case with many publicly held corporations, the possibility of a Change
in Control (as defined in Section 2 hereof) exists and that such possibility,
and the uncertainty and questions which it may raise among management, may
result in the departure or distraction of management personnel to the detriment
of the Company and its stockholders. Therefore, the Board has determined that
appropriate steps should be taken to reinforce and encourage the continued
attention and dedication of members of the Company's management, including the
Executive, to their assigned duties without distraction in the face of
potentially disturbing circumstances arising from the possibility of a Change in
Control. Nothing in this Agreement shall be construed as creating an express or
implied contract of employment and, except as otherwise agreed in writing
between the Executive and the Company, the Executive shall not have any right to
be retained in the employ of the Company.
2. Change in Control. A "Change in Control" shall be deemed to have
occurred in any one of the following events:
(a) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934 (the "Act")) becomes a "beneficial owner"
(as such term is defined in Rule 13d-3 promulgated under the Act) (other than
the Company, any trustee or other fiduciary holding securities under an employee
benefit plan of the Company, or any corporation owned, directly or indirectly,
by the stockholders of the Company in substantially the same proportions as
their ownership of stock of the Company), directly or indirectly, of securities
of the Company representing fifty percent (50%) or more of the combined voting
power of the Company's then outstanding securities;
(b) persons who, as of March 4, 1998, constituted the Company's Board (the
"Incumbent Board") cease for any reason, including without limitation as a
result of a tender offer, proxy contest, merger or similar transaction, to
constitute at least a majority of the Board, provided that any person becoming a
director of the Company subsequent to March 4, 1998 whose election was approved
by at least a majority of the directors then comprising the Incumbent Board
shall, for purposes of this Agreement, be considered a member of the Incumbent
Board;
<PAGE> 2
(c) the stockholders of the Company approve a merger or consolidation of
the Company with any other corporation or other entity, other than (a) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 80% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation or (b) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
"person" (as hereinabove defined) acquires more than 50% of the combined voting
power of the Company's then outstanding securities; or
(d) the stockholders of the Company approve a plan of complete liquidation
of the Company or an agreement for the sale or disposition by the Company of all
or substantially all of the Company's assets.
3. Terminating Event. A "Terminating Event" shall mean any of the events
provided in this Section 3 occurring subsequent to a Change in Control as
defined in Section 2:
(a) termination by the Company of the employment of the Executive with the
Company for any reason other than (A) a willful act of dishonesty by the
Executive with respect to any matter involving the Company or any subsidiary or
affiliate, or (B) conviction of the Executive of a crime involving moral
turpitude, or (C) the gross or willful failure by the Executive to substantially
perform the Executive's duties with the Company, or (D) the failure by the
Executive to perform his full-time duties with the Company by reason of his
death, disability or retirement; provided, however, that a Terminating Event
shall not be deemed to have occurred pursuant to this Section 3(a) solely as a
result of the Executive being an employee of any direct or indirect successor to
the business or assets of the Company, rather than continuing as an employee of
the Company following a Change in Control. For purposes of clauses (A) and (C)
of this Section 3(a), no act, or failure to act, on the Executive's part shall
be deemed "willful" unless done, or omitted to be done, by the Executive without
reasonable belief that the Executive's act, or failure to act, was in the best
interest of the Company and its subsidiaries and affiliates. For purposes of
this Agreement, "disability" shall mean the Executive's incapacity due to
physical or mental illness which has caused the Executive to be absent from the
full-time performance of his duties with the Company for a period of six (6)
consecutive months if the Company shall have given the Executive a Notice of
Termination and, within thirty (30) days after such Notice of Termination is
given, the Executive shall not have returned to the full-time performance of his
duties. For purposes of this Agreement, "retirement" shall mean termination of
the Executive's employment in accordance with the Company's retirement policy,
not including early retirement, generally applicable to its salaried employees,
as in effect immediately prior to the Change in Control, or
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<PAGE> 3
in accordance with any retirement arrangement established with respect to the
Executive with the Executive's express written consent;
(b) termination by the Executive of the Executive's employment with the
Company for Good Reason. Good Reason shall mean the occurrence of any of the
following events:
(i) a substantial adverse change, not consented to by the Executive,
in the nature or scope of the Executive's responsibilities, authorities,
powers, functions or duties from the responsibilities, authorities, powers,
functions or duties exercised by the Executive immediately prior to the
Change in Control; or
(ii) a reduction in the Executive's annual base salary as in effect on
the date hereof or as the same may be increased from time to time except
for across-the-board salary reductions similarly affecting all or
substantially all management employees; or
(iii) the relocation of the Company's offices at which the Executive
is principally employed immediately prior to the date of a Change in
Control to a location more than fifty (50) miles from such offices, or the
requirement by the Company for the Executive to be based anywhere other
than the Company's offices at such location, except for required travel on
the Company's business to an extent substantially consistent with the
Executive's business travel obligations immediately prior to the Change in
Control; or
(iv) the failure by the Company to pay to the Executive any portion of
his compensation or to pay to the Executive any portion of an installment
of deferred compensation under any deferred compensation program of the
Company within fifteen (15) days of the date such compensation is due
without prior written consent of the Executive; or
(v) the failure by the Company to obtain an effective agreement from
any successor to assume and agree to perform this Agreement.
4. Severance Payment. In the event a Terminating Event occurs within
twenty-four (24) months after a Change in Control,
(a) the Company shall pay to the Executive an amount equal to two (2) times
the "base amount" (as such term is defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code")) applicable to the Executive (the
"Base Amount"), payable in one lump-sum payment. Said amount shall be paid no
later than thirty-one (31) days following the Date of Termination (as such term
is defined in Section 8(b)); and
(b) the Company shall pay to the Executive all reasonable legal and
arbitration fees and expenses incurred by the Executive in successfully
obtaining or enforcing any right or benefit provided by this Agreement.
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<PAGE> 4
5A. Additional Benefits. This Section 5A shall apply solely to the extent
the sum of (i) the payments made by the Company to or for the benefit of the
Executive under this Agreement (the "Severance Payment") and (ii) the value, as
calculated in accordance with Section 280G of the Code, of the benefits and
payments received by the Executive as a result of a Change in Control under any
other agreement or plan (the "Other 280G Benefits") (the sum of such Severance
Payment and the Other 280G Benefits are referred to as the "Total Severance
Benefits"), exceed 330% of the Base Amount (the "Threshold Amount").
(a) In the event the Total Severance Benefits exceed the Threshold Amount,
then the Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") such that the net amount retained by the Executive, after
deduction of the excise tax imposed by Section 4999 of the Code (the "Excise
Tax") on the Total Severance Benefits, any Federal, state and local income tax,
employment tax and Excise Tax upon the payment provided by this subsection, and
any interest and/or penalties assessed with respect to such Excise Tax, shall be
equal to the Total Severance Benefits.
(b) Subject to the provisions of Section 5A(c), all determinations required
to be made under this Section 5A, including the amount of such Gross-Up Payment,
shall be made by the Company's independent accounting firm (the "Accounting
Firm") which shall provide detailed supporting calculations both to the Company
and the Executive within 15 business days of the Date of Termination, if
applicable, or at such earlier time as is reasonably requested by the Company or
the Executive. For purposes of determining the amount of the Gross-Up Payment,
the Executive shall be deemed to pay federal income taxes at the highest
marginal rate of federal income taxation applicable to individuals for the
calendar year in which the Gross-Up Payment is to be made and state and local
income taxes at the highest marginal rates of individual taxation in the state
and locality of the Executive's residence on the Date of Termination, net of the
maximum reduction in federal income taxes which could be obtained from deduction
of such state and local taxes. The Gross-Up Payment, as determined pursuant to
this Section 5A(b), shall be paid to the Executive within five days of the
receipt of the Accounting Firm's determination. Any determination by the
Accounting Firm shall be binding upon the Company and the Executive. As a result
of the uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should have been
made (an "Underpayment"). In the event that the Company exhausts its remedies
pursuant to Section 5A(c) and the Executive thereafter is required to make a
payment of any Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred, consistent with the calculations required to be
made hereunder, and any such Underpayment, and any interest and penalties
imposed on the Underpayment and required to be paid by the Executive in
connection with the proceedings
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<PAGE> 5
described in Section 5A(c), shall be promptly paid by the Company to or for the
benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-up Payment. Such notification shall be given as soon as
practicable but no later than 10 business days after the Executive knows of such
claim and shall apprise the Company of the nature of such claim and the date on
which such claim is requested to be paid. The Executive shall not pay such claim
prior to the expiration of the 30-day period following the date on which he
gives such notice to the Company (or such shorter period ending on the date that
any payment of taxes with respect to such claim is due). If the Company notifies
the Executive in writing prior to the expiration of such period that it desires
to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such
claim by an attorney selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
(iv) permit the Company to participate in any proceedings relating to
such claim; provided, however that the Company shall bear and pay directly
all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any Excise Tax or income
tax, including interest and penalties with respect thereto, imposed as a
result of such representation and payment of costs and expenses. Without
limitation on the foregoing provisions of this Section 5A(c), the Company
shall control all proceedings taken in connection with such contest and, at
its sole option, may pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect
of such claim and may, at its sole option, either direct the Executive to
pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to
pay such claim and sue for a refund, the Company shall advance the amount
of such payment to the Executive on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax
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<PAGE> 6
basis, from any Excise Tax or income tax, including interest or penalties
with respect thereto, imposed with respect to such advance or with respect
to any imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to which such
contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited
to issues with respect to which a Gross-Up Payment would be payable
hereunder and the Executive shall be entitled to settle or contest, as the
case may be, any other issues raised by the Internal Revenue Service or any
other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 5A(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 5A(c)) promptly pay to the Company
the amount of such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 5A(c), a determination is
made that the Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
5B. Limitation on Benefits. This Section 5B shall apply solely to the
extent the Total Severance Benefits are less than or equal to the Threshold
Amount.
(a) Solely in the event the Total Severance Benefits are less than or equal
to the Threshold Amount, it is the intention of the Executive and of the Company
that no payments of the Total Severance Benefits by the Company to or for the
benefit of the Executive under this Agreement or any other agreement or plan
shall be non-deductible to the Company by reason of the operation of Section
280G of the Code relating to parachute payments. Accordingly, and
notwithstanding any other provision of this Agreement or any such agreement or
plan, if by reason of the operation of said Section 280G, any such payments
exceed the amount which can be deducted by the Company, the Severance Payment
which the Executive is entitled to receive under this Agreement shall be reduced
by that amount which exceeds the maximum amount deductible by the Company under
Section 280G. To the extent that Severance Payments exceeding such maximum
deductible amount have been made to or for the benefit of the Executive, such
excess payments shall be refunded to the Company with interest thereon at the
applicable federal rate determined under Section 1274(d) of the Code, compounded
annually, or at such other rate as may be required in order that no such
payments shall be non-deductible to the Company by reason of the operation of
said Section 280G.
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<PAGE> 7
(b) If any dispute between the Company and the Executive as to any of the
amounts to be determined under this Section 5B, or the method of calculating
such amounts, cannot be resolved by the Company and the Executive, either the
Company or the Executive, after giving three (3) days' written notice to the
other, may refer the dispute to a partner in the Boston office of a firm of
independent certified public accountants selected jointly by the Company and the
Executive. The determination of such partner as to the amount to be determined
under Section 513(a) and the method of calculating such amounts shall be final
and binding on both the Company and the Executive. The Company shall bear the
costs of any such determination if the amount determined by such partner differs
to any material degree from the final amount proposed by the Company to the
Executive before submission to such partner. If there is no such material
difference, the costs of any such determination shall be evenly divided between
the Company and the Executive.
6. Term. This Agreement shall take effect on the date first set forth above
and shall terminate upon the earlier of (a) the termination by the Company of
the employment of the Executive because of (A) a willful act of dishonesty by
the Executive with respect to any matter involving the Company or any subsidiary
or affiliate, or (B) conviction of the Executive of a crime involving moral
turpitude, or (C) the gross or willful failure by the Executive to substantially
perform the Executive's duties with the Company, or (D) the failure by the
Executive to perform his full-time duties with the Company by reason of his
death, disability (as defined in Section 3(a)) or retirement (as defined in
Section 3(a)), (b) the resignation or termination of the Executive for any
reason prior to a Change in Control, or (c) the resignation of the Executive
after a Change in Control for any reason other than the occurrence of any of the
events enumerated in Section 3(b)(i)-(v) of this Agreement.
7. Withholding. All payments made by the Company under this Agreement shall
be net of any tax or other amounts required to be withheld by the Company under
applicable law.
8. Notice and Date of Termination; Disputes, Etc.
(a) Notice of Termination. After a Change in Control and during the term of
this Agreement, any purported termination of the Executive's employment (other
than by reason of death) shall be communicated by written Notice of Termination
from one party hereto to the other party hereto in accordance with this Section
8. For purposes of this Agreement, a "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision in this Agreement relied
upon and the Date of Termination. Further, a Notice of Termination pursuant to
one or more of clauses (A) through (C) of Section 3(a) hereof is required to
include a copy of a resolution duly adopted by the affirmative vote of not less
than two-thirds (2/3) of the entire membership of the Board at a meeting of the
Board (after reasonable notice to the Executive and an opportunity for the
Executive, accompanied by the Executive's counsel, to be heard before the Board)
finding that, in the good faith opinion of the
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<PAGE> 8
Board, the termination met the criteria set forth in one or more of clauses (A)
through (C) of Section 3(a) hereof.
(b) Date of Termination. "Date of Termination", with respect to any
purported termination of the Executive's employment after a Change in Control
and during the term of this Agreement, shall mean (i) if the Executive's
employment is terminated for disability, thirty (30) days after Notice of
Termination is given (provided that the Executive shall not have returned to the
full-time performance of the Executive's duties during such thirty (30) day
period) and (ii) if the Executive's employment is terminated for any other
reason, the date specified in the Notice of Termination. In the case of a
termination by the Company other than a termination pursuant to one or more of
clauses (A) through (C) of Section 3(a) (which may be effective immediately),
the Date of Termination shall not be less than thirty (30) days after the Notice
of Termination is given. In the case of a termination by the Executive, the Date
of Termination shall not be less than fifteen (15) days from the date such
Notice of Termination is given. Notwithstanding Section 3(a) of this Agreement,
in the event that the Executive gives a Notice of Termination to the Company,
the Company may unilaterally accelerate the Date of Termination and such
acceleration shall not result in a Terminating Event for purposes of Section
3(a) of this Agreement.
(c) No Mitigation. The Company agrees that, if the Executive's employment
by the Company is terminated during the term of this Agreement, the Executive is
not required to seek other employment or to attempt in any way to reduce any
amounts payable to the Executive by the Company pursuant to Section 4(a) and (b)
hereof. Further, the amount of any payment provided for in this Agreement shall
not be reduced by any compensation earned by the Executive as the result of
employment by another employer, by retirement benefits, by offset against any
amount claimed to be owed by the Executive to the Company or otherwise.
(d) Settlement and Arbitration of Disputes. Any controversy or claim
arising out of or relating to this Agreement or the breach thereof shall be
settled exclusively by arbitration in accordance with the laws of the
Commonwealth of Massachusetts by three arbitrators, one of whom shall be
appointed by the Company, one by the Executive and the third by the first two
arbitrators. If the first two arbitrators cannot agree on the appointment of a
third arbitrator, then the third arbitrator shall be appointed by the American
Arbitration Association in the City of Boston. Such arbitration shall be
conducted in the City of Boston in accordance with the rules of the American
Arbitration Association for commercial arbitrations, except with respect to the
selection of arbitrators which shall be as provided in this Section 8(d).
Judgment upon the award rendered by the arbitrators may be entered in any court
having jurisdiction thereof.
9. Assignment; Prior Agreements. Neither the Company nor the Executive may
make any assignment of this Agreement or any interest herein, by operation of
law or otherwise, without the prior written consent of the other party, and
without such consent any attempted transfer shall be null and void and of no
effect. This Agreement shall inure to the
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benefit of and be binding upon the Company and the Executive, their respective
successors, executors, administrators, heirs and permitted assigns. In the event
of the Executive's death after a Terminating Event but prior to the completion
by the Company of all payments due him under Section 4(a) and (b) of this
Agreement, the Company shall continue such payments to the Executive's
beneficiary designated in writing to the Company prior to his death (or to his
estate, if the Executive fails to make such designation).
10. Enforceability. If any portion or provision of this Agreement shall to
any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
11. Waiver. No waiver of any provision hereof shall be effective unless
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
12. Notices. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by registered or certified mail, postage prepaid, to the
Executive at the last address the Executive has filed in writing with the
Company, or to the Company at its main office, attention of the Board of
Directors.
13. Effect on Other Plans. An election by the Executive to resign after a
Change in Control under the provisions of this Agreement shall not be deemed a
voluntary termination of employment by the Executive for the purpose of
interpreting the provisions of any of the Company's benefit plans, programs or
policies. Nothing in this Agreement shall be construed to limit the rights of
the Executive under the Company's benefit plans, programs or policies except as
otherwise provided in Section 5 hereof, and except that the Executive shall have
no rights to any severance benefits under any severance pay plan.
14. Amendment. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by a duly authorized representative of
the Company.
15. Governing Law. This is a Massachusetts contract and shall be construed
under and be governed in all respects by the laws of the Commonwealth of
Massachusetts.
16. Obligations of Successors. In addition to any obligations imposed by
law upon any successor to the Company, the Company will use its best efforts to
require any successor
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(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform if no such succession had
taken place.
17. Confidential Information. The Executive shall never use, publish or
disclose in a manner adverse to the Company's interests, any proprietary or
confidential information relating to (a) the business, operations or properties
of the Company or any subsidiary or other affiliate of the Company, or (b) any
materials, processes, business practices, technology, know-how, research,
programs, customer lists, customer requirements or other information used in the
manufacture, sale or marketing of any of the respective products or services of
the Company or any subsidiary or other affiliate of the Company; provided,
however, that no breach or alleged breach of this Section 17 shall entitle the
Company to fail to comply fully and in a timely manner with any other provision
hereof. Nothing in this Agreement shall preclude the Company from seeking money
damages, or equitable relief by injunction or otherwise without the necessity of
proving actual damage to the Company, for any breach by the Executive hereunder.
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by the Company by its duly authorized officer, and by the Executive, as of the
date first above written.
INSTRON CORPORATION
By:
-----------------------------
Name:
Title:
-----------------------------
[Name of Executive]
29680.c3
10
<PAGE> 1
LEASE AGREEMENT
between
Schenck Immobilien & Services GmbH with registered Office situated at
Landwehrstrasse 55, 64273 Darmstadt, Federal Republic of Germany
hereinafter called "Schenck" or "Landlord" and
Instron Schenck Testing Systems GmbH with registered Office situated
Landwehrstrasse 55, 64273 Darmstadt, Federal Republic of Germany
hereinafter called "IST" or "Tenant"
Whereas, IST has acquired certain assets and related liabilities of
Schenck's affiliated company Schenck Atis GmbH, Structural Testing Business
pursuant to a Joint Venture Agreement dated October 25, 1996;
Whereas, IST has conducted its Structural Testing Business at its
headquarter at Landwehrstrasse, 64273 Darmstadt since such date;
Whereas, Landlord is the owner of these premises;
Whereas, IST has let from Landlord office and factory facilities at the
Landlord's premises located in Darmstadt pursuant to a Lease Agreement of
October 25, 1996;
Whereas, therefore IST will continue to lease from Landlord these
office and factory facilities in accordance with the terms and conditions
hereafter set forth.
Landlord and Tenant hereby agree with each other as follows:
<PAGE> 2
1. PREMISES AND PARKING LOTS
Landlord hereby leases and lets to Tenant, and Tenant hereby takes and
hires from Landlord, upon and subject to the terms, conditions,
covenants and provisions hereof, certain facilities situated at
Landwehrstrasse, 64273 Darmstadt, more particularly described on
EXHIBIT "A" annexed hereto and made part hereof (all the foregoing
hereinafter sometimes referred to. as the "Leased Premises" and
sometimes referred to as the "Premises") and Tenant is entitled to use
a certain amount of parking lots, situated at the Premises or nearby.
The number and the situation of the parking lots is.
listed and particularly described in EXHIBIT "B".
2. TERM
The initial term of this lease shall be for a period of five (5) years
from April 1, 1998 and shall automatically be extended for subsequent
five year periods unless terminated by Landlord with a notice period of
three (3) years or by Tenant with a notice period of one (1) year.
3. RENT
(a) Tenant covenants and agrees to pay Landlord for the Leased
Premises without previous demand therefor, during the term of
this Lease the basic rent at the rate per annum equal to the
sums as set forth on EXHIBIT "C" annexed hereto and made a
part hereof.
For the first period of five years the Basic Rent is reduced
by a discount of DM 9.500,-- per month.
Should the Index for an average four person employee household
with average income ("Vier Personen Arbeitnehmer-Haushalt mit
durchschnittlichem
2
<PAGE> 3
Einkommen") with the base year 1991= 100 as established by the
German Statistic Authority ("Statistisches Bundesarnt")
increase or decrease by more than ten (10) points the parties
agree to enter into good faith negotiations for an adaption of
the rent in order to reflect such inflation. If the parties do
not reach an agreement within 90 day from the beginning of
negotiations the parties will forward the matter to an
independent arbitrator whose decision shall be final and
binding.
All basic, rent per annum shall be due and payable by Tenant
in advance equal monthly installments on the third day of each
and every calendar month during the term of this Lease and
shall be payable by bank transfer to Landlord's Bank Account.
BANK: LANDESBANK HESSEN-TH[UPSILON]FIRINGEN, DARMSTADT
BANK CODE: 508 500 49
ACCOUNT NO.: 5010559002
(b) As herein used the term "rent" shall be deemed to include the
above said rent and the Utility Expenses payable by Tenant to
Landlord hereunder Section 5.(a).
4. USE OF PREMISES
The Leased Premises may be used for office and manufacturing, assembly
and testing purposes.
5. TAXES AND UTILITY EXPENSES
3
<PAGE> 4
(a) Tenant shall, during the term of this Lease pay simultaneously
as an "Additional Rent" and when rent shall become due and
payable pursuant to Section 3.(a) on a monthly basis the
Utility Expenses, such as rates and charges for cold water,
hot water, steam, heat, gas, electricity power, insurance
fees, taxes and other services and services furnished to the
Leased Premises or occupants thereof during the term of this
Lease conclusively listed by category in EXHIBIT "D" annexed
hereto and made a part, hereof. Tenant or Landlord may
terminate certain or all of the following services:
Hausmeister, Gebauddereinigung und Werksreninigung furnished
to the leased Premises or occupants thereof with a notice
period of one (1) year.
(b) During the term of this Lease for the period covering each
calendar year, the landlord shall only once a year until
August 30 calculate all actual cost pursuant to Section 5(a),
If the sum of the above said payments made by the Tenant
exceeds the sum of the actual cost for the items stated in
Section 5 (a), then the Landlord shall promptly refund the
excess payment to the Tenant. If the sum of the actual cost
for the items stated in Section 5 (a) are in excess of the sum
of the payments made by the Tenant pursuant to Section 5 (a),
then the Tenant shall promptly pay the Landlord the excess.
(c) For each year the Additional Rent payments stated in Section 5
(a) shall be based on the prior years actual cost.
6. IMPROVEMENTS, REPAIRS, ADDITIONS, REPLACEMENTS
(a) Tenant shall, at all times during the term of this Lease and
at its own cost and expense keep the Leased Premises clean,
safe and free of waste. Tenant shall keep and maintain or
cause to be kept and maintained in repair and good condition
the interior of the Leased Premises including the interior
decorations normal wear and tear excepted.
4
<PAGE> 5
(b) Landlord shall, at all times during the term of this Lease,
and at its own cost and expense, keep and maintain or cause to
be kept and maintained in repair and good condition (ordinary
wear and tear excepted) the Leased Premises with the exception
of installations and equipment as listed in EXHIBIT "E".
Landlord shall not be liable for damages which result from or
arise out of or in connection with Tenant's fault negligence,
acts or omissions, which shall be remedied or caused to be
remedied by Tenant at its own costs and expense.
(c) Tenant is only entitled to make alterations, changes,
replacements, improvements and additions in and to the
Landlord's Premises, the buildings and improvements thereon as
far as Landlord provides its written consent.
(d) On the last day or sooner termination of the term of this
Lease, Tenant shall quit and surrender the Leased Premises
broom clean and in good condition (ordinary wear and tear
excepted).
7. REQUIREMENTS OR PUBLIC AUTHORITY
During the term of this Lease, each Party with respect to its sphere of
responsibility shall, at its own cost and expense, promptly observe and
comply with all present and future laws, ordinances, requirements,
orders, directives, rules and regulations and of all other governmental
authorities affecting the Leased Premises thereto or any part thereof
whether the same are in force at the commencement of the term of this
Lease or may in the future be passed, enacted or directed, and Tenant
shall pay the costs, expenses, liabilities, losses, damages, fines,
penalties, claims and demands including reasonable counsel fees, that
may in any manner arise out of or be imposed because of the failure of
Tenant to comply with the covenants of this Section 7.
5
<PAGE> 6
8. LANDLORD'S ACCESS TO PREMISES
Landlord or Landlord's agents and designees shall have the right, but
not the obligation, to enter upon the Leased Premises at all reasonable
times subject to reasonable notice to examine same and to exhibit the
Leased Premises to prospective purchasers and prospective Tenants, but
in the case of prospective Tenants only during the last year of the
term of this Lease. Tenant allows Landlord, Landlord's employees,
officers, servants or visitors the unrestricted access to areas which
are jointly used according to the Leased Premises, such as floors,
cellars, toilets, restrooms etc.
9. ASSIGNMENT AND SUBLETTING, EXTENSIONS
(a) Tenant may not assign, sublease (in whole or in part or
parts), mortgage or otherwise encumber this Lease (in whole or
in part or parts) without Landlord's written consent therefor.
The Tenant, however, shall have the right to sublease the
Leased Premises within the Instron group of companies.
(b) Should the parties agree that Landlord leases and lets
additional premises to Tenant, and that Tenant takes and hires
additional premises from Landlord, the terms, conditions,
covenants and provisions of such extension of the lease shall.
follow the terms, conditions, covenants and provisions of this
Agreement.
10. SIGNS
Tenants shall have the right to install, maintain and replace in, on or
over or in front of the Leased Premises or in any part thereof such
signs and advertising matter as Tenant may desire, provided that
Landlord shall give its written consent, which consent shall not be
unreasonably withheld by Landlord. If required Landlord shall apply
public permissions affecting the installation of signs and Tenant shall
pay such cost and expenses.
6
<PAGE> 7
11. SECURITY, SAFETY, TENANT'S ACCESS TO LANDLORD'S FACILITIES
Tenant, its officers, agents, servants, employees, contractors,
sublessees or visitors are obliged to obey the regulation related to
safety, environmental matters and security at the Premises and Parking
Lots. The regulations are laid down in writing and will be furnished by
Landlord to Tenant on demand. Landlord shall furnish Tenant and
Tenant's employees with separate ID-cards and all necessary keys to
enter Premises, Parking Lots and Landlord's facilities in Darmstadt if
required.
12. INDEMNITY
Tenant shall indemnify and save harmless Landlord from and against any
and all liability, damage, penalties or judgments arising from injury
to person or property sustained by anyone in and about the premises
resulting from any act or omission of Tenant or its officers, agents,
servants, employees, contractors (other than any company affiliated
with the Landlord), visitors or sublessees.
13. INSURANCE
(a) Tenant shall provide at its expense, and keep in force during
the term of this Lease, a general liability insurance in an
insurance company licensed to do business in the Federal
Republic of Germany in the amount of at least one million DM
with respect to injury or death to any one, person and two
million DM with respect to injury or death to more than one
person in any one accident or other occurrence and one million
Dollars with respect to damages to property. Tenant agrees to
deliver certificates of such insurance to Schenck at the
beginning of the term of this lease and thereafter not less
than ten (10) days prior to the expiration of my such policy.
The general liability insurances shall include an insurance
against all damages occurring to the Premises resulting
7
<PAGE> 8
from any fault or negligence of Tenant as far as insurance
coverage is available under usual German insurance terms and
conditions.
(b) During the term of this lease, Landlord shall keep the
buildings insured against loss and damage by fire on a
replacement cost basis.
14. ENVIRONMENTAL
Each Party shall indemnify and bold harmless the other Party from any
Environmental Liabilities resulting from any acts, omissions or
circumstances caused by using the Premises after the date from which
the tenant has initially let the Premises from the Landlord
("Commencement Date") or existing on the Premises prior to the
Commencement Date.
(a) The Parties shall indemnify and hold harmless each other from
any Environmental Liabilities resulting from any acts,
omissions or circumstances caused within the sphere, of
responsibility of the relevant Party, each on or after the
Commencement Date, and not already caused or existing prior to
the Commencement Date. The Landlord shall indemnify and hold
harmless the Tenant from any Environmental Liabilities
existing on the Premises at any time and not caused within the
sphere of responsibility of the Tenant.
(b) With respect to Environmental Liabilities resulting both from
(i) acts, omissions and circumstances caused prior to the
Commencement Date or existing on the Premises and (ii) acts,
omissions and circumstances caused on or after the
Commencement Date and not caused or existing prior to the
Commencement Date, the relevant Party shall bear the
respective liability prorated in relation to the degree or
level which was caused or existing prior to or which was
caused on or after the Commencement Date.
8
<PAGE> 9
(c) If it cannot be proven that the respective liability results
from an act, omissions or circumstance for which one party is
responsible, or if it cannot be proven for which level or
degree each party is responsible then the respective
Environmental Liability shall be prorated between Landlord and
Tenant as follows:
<TABLE>
<CAPTION>
Year of Discovery after the
Commencement Date Share of the Landlord Share of the Tenant
<S> <C> <C> <C>
2 80% 20%
3 60% 40%
4 40% 60%
5 20% 80%
0% 100%
</TABLE>
15. FORCE MAJEURE
In the event that Landlord or Tenant shall be delayed, hindered or
prevented from the performance of any act required hereunder by reason
of strikes, lock-outs, labour troubles, inability to procure materials,
failure of power, restrictive governmental laws or regulations, riots,
insurrection, the act, failure to act or default of the other party,
war or other reason beyond their control, then performance of such act
shall be excused for the period of the delay and the period of the
performance of any such act shall be extended for a period equivalent
to the period of such delay.
16. GOVERNING LAW, ARBITRATION AND CONFIDENTIALITY
With respect to Governing Law, Arbitration and Confidentiality the
rules and regulations of Section 34 and 37 of the Joint Venture
Agreement between Schenck Atis GmbH and Instron Corporation of October
25, 1996 shall be applicable.
9
<PAGE> 10
17. ENTIRE AGREEMENT
This Agreement together with its Exhibits hereto represents the
complete Agreement and understanding between the parties with respect
to the, subject matter herein and supersedes all prior written and oral
Agreement and understandings between the parties with respect thereto.
This Agreement may not be changed orally but only by an Agreement in
writing signed by the parties hereto. Tenant agrees that it is not
relying on any representations or Agreements other than those contained
in this Lease.
/s/ John J. F. Tattersfield /s/ Andreas Birk
- --------------------------- ----------------------------
(Tenant) (Landlord)
Instron Schenck Testing Schenck Immobilien
Systems GmbH & Service GmbH
10
<PAGE> 11
EXHIBIT C
Rent IST
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Building No. Gross Space Rent D.M. square Base Rent D.M.
square meter meter
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
12 589.06 1.35 7,274.89
- --------------------------------------------------------------------------------------------------------
12 Cellar 70.38 7.26 510.96
- --------------------------------------------------------------------------------------------------------
13 135.12 2,261.00
- --------------------------------------------------------------------------------------------------------
13 3 63,52 16.73 1,062.68
- --------------------------------------------------------------------------------------------------------
71 1,683.05 18.16 30,564.19
- --------------------------------------------------------------------------------------------------------
71 Cellar 396.76 7.26 2,880.48
- --------------------------------------------------------------------------------------------------------
30 1,824.86 9.30 16,971.20
- --------------------------------------------------------------------------------------------------------
30 2 184.74 9.30 1,718.08
- --------------------------------------------------------------------------------------------------------
30 Cellar 549.11 3.87 2,125.06
- --------------------------------------------------------------------------------------------------------
55 21.46 3.87 83.05
- --------------------------------------------------------------------------------------------------------
96 Cellar 15.62 7.26 113.40
- --------------------------------------------------------------------------------------------------------
Group summation 5,535.68 65,564.89 -65,564.89
- --------------------------------------------------------------------------------------------------------
Discount for the first 5 years -9,500.00
--------------------------------------------------------------------------
Total 56,064.99
--------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
Exhibit D
MIETNEBENKOSTEN 1
Klirna
Heizung
Kran
Wasser
Strom
Werkschutz
12
<PAGE> 13
Exhibit D
MIETNEBENKOSTEN 2
Versicherung
Betriebskosten
Hausmeister
Gebaudereinigung
Werksreinigung
Gebuhren, Abgaben
13
<PAGE> 1
STRATEGIC ALLIANCE AGREEMENT
BETWEEN
1. Instron Corporation, 100 Royall Street, Canton, Massachusetts 02021,
- hereinafter called "Instron Corp." -
2. Instron Partners, 100 Royall Street, Canton, Massachusetts 02021,
- hereinafter called "IP" -
3. Instron GmbH, Industriestrasse 19, 67063 Ludwigshafen am Rhein,
- hereinafter called "Instron GmbH" -
4. Instron Schenck Testing Systems GmbH, LandwehrstraBe 55, 65273 Darmstadt,
- hereinafter called "GmbH"
5. Instron Schenck Testing Systems, a Delaware general Partnership,
- hereinafter called "Partnership"
- - Instron Corp., IP and Instron GmbH are also jointly referred to as
"Instron" -
AND
6. Carl Schenck AG, Landwehrstrasse 55, Darmstadt,
- hereinafter called "Schenck AG" -
7. Schenck Atis GmbH, Landwehrstrasse 55, Darmstadt,
- hereinafter called "Schenck Atis" -
8. Schenck Pegasus Testing Inc., 535 Acorm Street, Deer Park, N. Y.
11729-3 69 8, USA,
- hereinafter called "SPT" -
9. Schenck Fertigungs GmbH, Landwehrstrasse 55, Darmstadt,
- hereinafter called "Schenck Fertigung" -
- - Schenck AG, Schenck Atis and SPT are also jointly referred to as "Schenck" -
<PAGE> 2
1. CURRENT STATUS
1.1 By notarial deed dated November 14, 1996 of the notary public Dr. P.
Schmidt zur Nedden in Frankfurt/Main (A.Prot. 1996/574) (the "Deed
1"), Instron Corporation ("Instron Corp."), Carl Schenck AG ("Schenck
AG") and other parties have entered into a Joint Venture Agreement
("JVA") on the formation of a Joint Venture reflected in joint
ownership of a German GmbH with the name Instron Schenck Testing
Systems GmbH and a US partnership with the name Instron Schenck
Testing Systems.
1.2 By notarial deed dated November 14, 1996 of the notary public Dr. P.
Schmidt zur Nedden in Frankfart/Main (A. Prot. 1996/573) Instron
Corp., Schenck AG and other parties have entered into an Asset
Purchase Agreement on the Sale of the Servohydraulic Machine Business
from Schenck Atis to Instron Limited, a subsidiary of Instron Corp.
1.3 Instron GmbH and IP desire to purchase the shares and interests of
Schenck Atis and SPT in the GmbH and the Partnership irrespective of
the terms of the JVA but subject to the terms and conditions contained
herein. Simultaneously, the parties intend to terminate the JVA.
2. SALE AND TRANSFER OF QUOTAS AND INTERESTS
Instron GmbH and EP on the one hand and Schenck Atis and SPT on the other
hand hereby enter into the Sale Agreement attached hereto as EXHIBIT 2,
pursuant to which Schenck Atis and SPT sell to Instron GmbH and IP as of
the date hereof and transfer to the Instron GmbH and IP, as of the
Effective Date; all its interests in the GmbH and the Partnership, subject
to the terms contained herein.
2
<PAGE> 3
3. NAME LICENSE
3.1 For a transition period of 3 years from the Effective Date Schenck AG,
Schenck Atis and SPT hereby grant the GmbH and the Partnership the
right to use the name and mark "Schenck" in accordance with past
practice, whether as part of their corporate or trade name or for use
as a logo or otherwise in connection with the company's business and
products of structural testing, including in brochures, leaflets and
otherwise as usual in the Business in accordance with past practices.
The license shall be royalty-free, non-exclusive and shall not be
transferable. The GmbH and Partnership shall not have a right to
sublicense the license. Upon terminate of such license, GmbH and the
Partnership shall cease using the licensed name and mark as part of
its corporate names and in any newly printed brochures, leaflets or
other materials; existing brochures, leaflets or other materials may
be used for a period of 18 months from termination of the license set
out herein.
3.2 The GmbH and the Partnership shall have an option to renew the license
by written notice to Schenck AG for two additional one year periods,
in each case in consideration of a lump sum license fee of 100.000,-
per year of extension. Such license fee shall be payable not later
than three business days from beginning of the extension period for
which such fee becomes due. The option must be exercised not less than
two months before the expiration of the relevant license period.
3.3 Prior to the date referred to in Sections 3.1 and 3.2, Schenck shall
only be entitled to terminate the license for cause (aus wichtigem
Grund) subject to a two months notice period, and not to the extent
that the licensees have taken appropriate action to remedy the reason
for termination, and only if the continuation of the license can not
be reasonably requested from Schenck (die Fortsetzung der Lizenz ist
nicht mehr zumutbar).
3
<PAGE> 4
3.4 The GmbH and Partnership shall promptly notify Schenck in the event
that it becomes aware of any third party infringements of Schencles
name rights with respect to the term "Schenck".
4. OTHER AGREEMENTS
4.1 The Contract Manufacturing and Supply Agreement between Schenck
Fertigung and GmbH dated as of November 17, 1996 attached to the JVA
as EXHIBIT 11.2.1 (the CMSA 1") and the Contract Manufacturing and
Supply Agreement dated as of November 17, 1996 between Schenck Pegasus
and the Partnership attached to the JVA as EXHIBIT 11.2.2 (the CMSA
2") will be continued. Effective as of the Effective Date, Section
4.1.2 of the CMSA 1 and Sec. 4.1 of the CMSA 2 will be amended to read
as follows:
"The price to be paid for Components delivered hereunder on or after
September 27, 1998 shall be the price quoted by the supplying party
which price shall be the price quoted by the supplying party, but
which price shall not exceed 110% of the sum of the Manufacturing Cost
plus the Other Cost of the Components."
Sec. 4.1.2 of the CMSA I shall further be amended by the following
language:
"Capitalized terms used herein and not defined herein shall have the
meaning ascribed to them in the Contract Manufacturing and Supply
Agreement of November 17, 1996 between Schenck Pegasus Corporation and
Instron Schenck Testing Systems."
4.2 The lease agreement between Schenck. Immobilien & Service GmbH
(formerly: Schenck GmbH + Co. Immobilien & Service KG and GmbH)
attached to the JVA as EXHIBIT 10.1, as amended on March 31, 1998,
shall be further amended as follows:
4
<PAGE> 5
(i) Instron Wolpert GmbH ("Wolpert") will become a party to the lease
agreement.
(ii) Wolpert will lease the space at the Schenck premises in
Darmstadt, Landwehrstrasse 55, marked in EXHIBIT 4.2 (1) hereto.
(iii) The lease payment for such space will be as set out in EXHIBIT
4.2 (iv) (2) hereto.
Instron Corp and Schenck AG will cause QmbH, Wolpert and Schenck
Immobilien & Service GmbH to amend the lease agreement accordingly
effective as of October 1, 1998.
4.3 The Support Services Agreement between Schenck AG and GmbH of November
14, 1996 attached to the JVA as EXHIBIT 11.1.1 shall be continued.
4.4 The License Agreement between the Partnership, Schenck Pegasus, and
Schenck AG dated as of November 17, 1996 attached to the JVA as
EXHIBIT 15 shall be continued.
4.5 Effective as of the Effective Date all other Agreements attached to
the JVA shall be terminated. These are the following agreements:
(i) Research and Development Agreement between Schenck AG and GmbH
and the Partnership dated as of November 14, 1996
(ii) After Sales Service Agreement between Schenck AG and GmbH and the
Partnership dated as of November 17, 1996
(iii) Finder's Fee and Commission Sales Agreement between Schenck AG
and GmbH and the Partnership dated as of November 17, 1996
5
<PAGE> 6
(iv) Preferred Supplier and Joint Sales Agreement between GmbH and the
Partnership and Schenck AG dated as of November 17, 1996
(v) Support Services Agreement between Schenck Pegasus and the
Partnership dated as of November 14, 1996
(vi) Finder's Fee Agreement between Instron Limited and Schenck AG
dated as of November 17, 1996
4.6 The parties agree that Schenck and its affiliates, GmbH, the
Partnership and Instron Corp. and its affiliates are hereby released
from any and all obligations and liabilities arising under, out of or
in connection with the agreements terminated pursuant to Section 4.5.
5. TERMINATION OF JVA AND RELEASE
5.1 The parties agree that the JVA is terminated and that both Schenck and
its affiliates and Instron Corp. and its affiliates are hereby
released from any and all obligations and liabilities arising under,
out of or in connection with the JVA, except for (i) obligations and
liabilities under those agreements which will be continued pursuant to
Section 4 hereof and (ii) obligations and liabilities under Section 32
and 34 of the JVA.
5.2 Schenck AG will ensure, and will cause its affiliates to ensure, that
any board members of GmbH, the Partnership or any of their
subsidiaries appointed by Schenck AG or any of its affiliates, or
elected upon their proposal for election by Schenck AG or any of its
affiliates, will resign on or immediately after the Effective Date.
Instron Corp. will cause these board members to be discharged
(entlastet) by appropriate corporate action without undue delay
thereafter.
6
<PAGE> 7
5.3 Instron Corp. will, and will cause its affiliates to, grant
Schenck AG and its affiliates reasonable access to the books
and records of GmbH and the Partnership to the extent
reasonably required by the Schenck AG and its affiliates (i)
in order to be able to comply with reporting obligations
imposed by applicable law or (ii) in connection with tax or
similar audits of the party requesting access. Schenck AG
will, and will cause its affiliates to, grant GmbH, the
Partnership, Instron. Corp. and its affiliates reasonable
access to the books and records of Schenck AG and its
affiliates to the extent reasonably required by GmbH, the
Partnership, Instron Corp. and its affiliates (i) in order to
be able to comply with reporting obligations imposed by
applicable law or (ii) in connection with tax or similar
audits of the party requesting access.
5.4 Any claims relating to legal defects (Rechtsmangel) which GmbH
and the Partnership may have against Schenck AG or any of its
affiliates under Sections 7.3 and 7.4 of the German Schenck
Contribution Agreement and the U.S. Schenck Contribution
Agreement (as defined in the JVA) and any mutual claims under
Section 3.2 of the German Schenck Contribution Agreement and
under Section 3.3 of the U.S. Schenck Contribution Agreement
shall remain unaffected.
6. EFFECTIVE DATE
The Effective Date within the meaning of this Agreement shall be September
27, 1998.
7. COSTS AND FEES
7.1 The fees for the notarization of this Agreement shall be born equally
by Schenck AG and Instron Corporation.
7.2 Each party shall bear its own professional advisers' fees and other
costs.
7
<PAGE> 8
8. MISCELLANEOUS
8.1 Amendments and modifications of this Agreement (including this clause)
must be made in written or in notarial form, if such form is required.
8.2 All notices and other notifications pursuant to or in connection with
this Agreement must be made in writing and must be hand delivered or
sent by registered mail or by telecopy (with a confirmation copy to
follow by mail) to the following address(es) or to the addresses which
the respective party shall notify to the other in writing:
to any Instron party:
Instron Corporation
100 Royall Street
Canton, MA 02021
U.S.A.
Attn.: John Barrett
Fax No.: (001) 781-821-2487
To any Schenck party:
Carl Schenck AG
Landwehrstrasse 55
D-64293 Darmstadt
Federal Republic of Germany
Attn.: Legal Department
Fax No.: 06151-32 39 05
With copy to:
Schenck Corporation
535 Acorn Street
Deer Park, NY 11729-3698
Attn.: Blaise Sarcone
Fax No.: (001) 516-242-4308
8
<PAGE> 9
8.3 The partial or total invalidity of, or the impossibility to perform,
individual provisions of this Agreement shall not impair the validity
of the other provisions of the Agreement. The parties undertake to
replace a provision that is or has become invalid in whole or in part
by a valid provision, the economic result of which comes as close as
possible to that, of the invalid provision. In the event that the
Agreement does not deal with certain issues or certain provisions are
impossible to be performed, the same procedure shall apply.
8.4 The parties undertake to take all actions and make declarations that
are necessary and suitable to achieve the consummation of this
Agreement. This shall apply in, particular to declarations to the
Commercial Registers and the financial authorities.
8.5 Headings are inserted for convenience only, are not part of this
Agreement and shall not modify the content of any provisions of this
Agreement.
8.6 Rights and obligations arising from this Agreement shall not be
assignable by any party without prior written consent of the other
party.
8.7 As from the date on which the CMSA 1 terminates this Agreement shall
no longer be referred to as the "Strategic Alliance Agreement" but
only as the "Umbrella Agreement".
8.8 This Agreement shall be governed by the laws of the Federal Republic
of Germany (with the exception of the provisions relating to the
conflict of laws).
8.9 The courts of Frankfurt am Main shall have exclusive jurisdiction with
respect to all disputes arising out of or in connection with this
Agreement.
9
<PAGE> 10
INSTRON CORPORATION
By: /s/ John Barrett
---------------------------------
John Barrett, Treasurer
INSTRON PARTNERS
By: /s/ John Barrett
---------------------------------
John Barrett, Treasurer
INSTRON GMBH
By: /s/ John Barrett
---------------------------------
John Barrett, Treasurer
INSTRON SCHENCK TESTING SYSTEMS GMBH
By: /s/ John Barrett
---------------------------------
John Barrett, Treasurer
INSTRON SCHENCK TESTING SYSTEMS
By: /s/ John Barrett
---------------------------------
John Barrett, Treasurer
CARL SCHENCK AG
By: /s/ Jan Wittstock By: /s/ Andreas Birk
--------------------------------- -----------------------------
10
<PAGE> 11
Jan Wittstock, Financial Director Legal Counsel to Schenck
SCHENCK ATIS GMBH
By: /s/ Jan Wittstock By: /s/ Andreas Birk
--------------------------------- -----------------------------
Jan Wittstock, Financial Director Legal Counsel to Schenck
SCHENCK PEGASUS TESTING INC.
By: /s/ Jan Wittstock By: /s/ Andreas Birk
--------------------------------- -----------------------------
Jan Wittstock, Financial Director Legal Counsel to Schenck
SCHENCK FERTIGUNGS GMBH
By: /s/ Jan Wittstock By: /s/ Andreas Birk
--------------------------------- -----------------------------
Jan Wittstock, Financial Director Legal Counsel to Schenck
11
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
All of the subsidiaries listed below are included in the consolidated financial
statements.
Percentage of Organized
Voting Securities Under the
Incorporated Owned by Registrant Laws of
- -------------------------------------------------------------------------------
IRT - II Trust 100% Massachusetts (1)
Instron Realty Trust 100% Massachusetts (1)
Instron Japan Company, Ltd. 100% Massachusetts (1)
Instron Asia, Ltd. 100% Massachusetts (1)
Instron Canada Inc. 100% Canada (1)
Instron Foreign Sales Corporation 100% Jamaica (1)
Equipamentos Cientificos Instron, Ltda. 100% Brazil (1)
Instron Limited 100% United Kingdom (2)
Instron S.A. 100% France (2)
Instron Proprietary, Ltd. 100% Australia (2)
Instron International, Ltd. 100% United Kingdom (2)
Severn Furnaces, Ltd. 100% United Kingdom (2)
Instron Singapore Pte Limited 100% Singapore (1)
Instron Holdings, Ltd. 100% United Kingdom (1)
Instron Wolpert GmbH 100% Germany (2)
Instron Korea Co. Ltd. 100% Korea (1)
Instron Schenck Testing Systems 100% Delaware (1)
Instron Schenck Testing Systems - GmbH 100% Germany (3)
(1) Subsidiaries of Instron Corporation (a Massachusetts corporation).
(2) Subsidiaries of Instron Holdings Limited (United Kingdom).
(3) Subsidiary of Instron GmbH
45
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements on
Form S-3 (File No. 2-77062), and Forms S-8 (File Nos. 2-77060, 2-91694, 33-43955
and 33-48287) of our reports dated February 18, 1999, on our audits of the
consolidated financial statements and related financial statement schedule of
Instron Corporation as of December 31, 1998, and 1997, and for each of the three
years in the period ended December 31, 1998, which reports are included in this
Annual Report on Form 10-K.
/s/ PriceWaterhouseCoopers L.L.P.
---------------------------------
PriceWaterhouseCoopers L.L.P.
Boston, Massachusetts
March 31, 1999
46
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME, CONSOLIDATED BALANCE SHEET AND CONSOLIDATED
STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 7,209
<SECURITIES> 0
<RECEIVABLES> 65,766
<ALLOWANCES> 800
<INVENTORY> 36,121
<CURRENT-ASSETS> 114,379
<PP&E> 66,471
<DEPRECIATION> 42,470
<TOTAL-ASSETS> 158,254
<CURRENT-LIABILITIES> 59,138
<BONDS> 0
0
0
<COMMON> 7,052
<OTHER-SE> 72,532
<TOTAL-LIABILITY-AND-EQUITY> 158,254
<SALES> 152,879
<TOTAL-REVENUES> 183,029
<CGS> 91,410
<TOTAL-COSTS> 111,054
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 73
<INTEREST-EXPENSE> 1,175
<INCOME-PRETAX> 20,333
<INCOME-TAX> 8,874
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,459
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.62
</TABLE>
