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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER 1-5641
INSTRON CORPORATION
(Exact name of registrant as specified in its Charter)
<TABLE>
<S> <C>
MASSACHUSETTS 04-2057203
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
100 ROYALL STREET 02021
CANTON, MASSACHUSETTS (Zip Code)
(Address of Principal executive offices)
</TABLE>
(781) 828-2500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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
As of December 31, 1999, the Registrant had 551,164 shares outstanding of common
stock, all of which was held by affiliates of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
ITEM 1. BUSINESS
THE COMPANY
Founded in 1946, Instron Corporation (the "Company") is a world leader in the
design, manufacture, marketing, and servicing of materials and structural
testing systems, software, and accessories. Our 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.
Our 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. Options, such as, hardware, software and
accessories may be added to the system at a later date.
The Company has 35 sales and service offices located throughout the United
States and 16 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 evaluate and 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. Materials testing focuses on the
mechanical properties of materials, including tensile strength, compressive
strength, fracture properties and hardness. Structural testing simulates the
life cycle of components or complete products in order to verify their design,
durability and performance capabilities. 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 our 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
We offer 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. A static system testing
a cloth specimen would gradually apply more and more force to the cloth by
pulling it from two sides until the cloth tears. The system would measure the
precise force applied to the cloth throughout the test.
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 generally 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 56%, 62%, and 70% of
the Company's revenue in 1999, 1998 and 1997, 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 our 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 44%, 38% and
30% of the Company's sales in 1999, 1998 and 1997, 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 technical support via telephone. The service business accounted for
approximately 16%, 16%, and 17% of the Company's total revenue in 1999, 1998,
and 1997,
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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.
MERGER AGREEMENT AND RECAPITALIZATION.
On May 6, 1999, Instron entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Kirtland Capital Partners III L.P. ("Kirtland") and
ISN Acquisition Corporation, a corporation newly formed by Kirtland
("MergerCo"), pursuant to which Kirtland and certain affiliates, together with
members of Instron's management and certain members of Instron's Board of
Directors who are also stockholders (collectively, the "Rollover
Stockholders"), agreed to acquire the Company in a recapitalization merger
transaction.
The parties amended the Merger Agreement on August 5, 1999 to, among other
things, permit the closing of the merger to occur in September rather than
August. On September 3, 1999, the Company's stockholders approved the Merger
Agreement as amended. The Company completed its merger by and among Instron
Corporation, ISN Acquisition Corporation and Kirtland Capital Partners III L.P.
on September 29, 1999. The merger and related transactions were treated as a
Recapitalization (the "Recapitalization") for financial reporting purposes.
Accordingly, the historical basis of the Company's assets and liabilities was
not affected by these transactions.
Under the Merger Agreement, the MergerCo merged with and into the Company with
the Company continuing as the surviving corporation (the "Merger"). Pursuant to
the Merger, each outstanding share of the Company's common stock (except for
shares held by the Company, its subsidiaries and MergerCo), were converted into
the right to receive a cash payment of $22.00, without interest. Certain shares
of the Company's common stock held by the Rollover Stockholders were converted
into shares of stock of the surviving corporation.
As of December 31, 1999, the Company has incurred compensation expenses of $13.0
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million as a result of the Recapitalization. In addition, the Company incurred
costs of $13.1 million directly related to the Recapitalization. Of these
transaction costs, $90 million was capitalized and will be amortized over the
life of the 13 1/4% Senior Subordinated Notes (the "Notes") and the Senior
Credit Facility, and $4.1 million was charged to stockholders' equity.
The Notes were originally issued as part of a unit offering. Each unit ("Unit")
consisted of $1,000 principal amount of Notes and one Warrant to purchase 0.5109
shares of Instron's common stock (the "Warrants"). The SEC declared the
Registration Statement effective at 2:00 p.m. on February 14, 2000. At that
time, the Units separated into their component Notes and Warrants. The Notes and
Warrants may now be traded separately and the Units have ceased to exist.
As of March 15, 2000, Instron completed the offer to exchange all outstanding
13 1/4% Senior Subordinated Notes due 2009 for substantially identical notes
registered under the federal securities laws.
RESEARCH AND DEVELOPMENT
We maintain major research and development staffs at our 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.
We are a pioneer in the development and application of electronic measurement
and drive systems techniques in materials testing systems. We have continuously
designed, developed, and marketed state-of-the-art testing systems, software,
and accessories, including digitally controlled static and dynamic testing
systems.
In 1999, the Company expensed $11,213,000 on research and development
activities, compared with $8,485,000 in 1998, and $6,959,000 in 1997. The
Company has also capitalized certain software development costs of $2,206,000,
$1,490,000, and $637,000 during 1999, 1998 and 1997, respectively. During 1998
and 1997, certain Instron engineering resources were 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, research and development expenses of
the ongoing business would have increased by 1.0% in 1999. In recent years, we
have focused our research and development expenditures on creating new product
platforms and software for the dynamic and structural testing product lines,
developing new hardness testing machines 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
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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
We compete with a number of other manufacturers, some of whom have greater
financial, technical and marketing resources than Instron. 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 Instron 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 quality and
technical capability of the equipment, responsiveness to customer needs, quality
of service, and price performance.
BACKLOG
At December 31, 1999, the Company's backlog of orders was approximately
$68,925,000 compared with $74,477,000 at December 31, 1998. The decrease in
backlog is due primarily to reduced structural testing backlog.
The Company anticipates that substantially all of its backlog as of December 31,
1999 will be shipped during 2000, with the exception of a major order of over $9
million.
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. 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.
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.
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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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
with the ability to 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 providing 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, 1999 the Company employed 1,435 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 lower 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. Prior to the acquisition of IST, we generally experienced a close
correlation between backlog at the end of a specific quarter and our shipments
for the subsequent quarter. IST's structures business is characterized by
relatively large contract sizes and longer delivery periods. And since our
current backlog now includes IST, we believe that our total backlog at the end
of a quarter is no longer a predictable indication of shipments for the next
quarter.
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 1999, 55% in 1998 and 59% in 1997. The
Company
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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 Note 13 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 Form
10-K.
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 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 70,000 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 16 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, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
This information is contained in Part III under the caption "Directors and
Executive Officers of the Registrant".
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On September 29, 1999, the Company consummated a recapitalization transaction,
pursuant to which Kirtland acquired approximately 88.3% of the total issued and
outstanding common stock of the Company. On such date, the Company terminated
the registration of the common stock under the Securities Exchange Act of 1934,
as amended, and accordingly, the Company's common stock no longer is publicly
traded and an established market does not exist for such common stock. On
September 29, 1999, the last reported sales price of the common stock as
reported on the American Stock Exchange under the symbol "ISN" was $22.00. As of
March 23, 2000, there were 14 holders of record of the common stock. The table
below sets forth the high and low sales prices of the common stock as reported
on the American Stock Exchange prior to the recapitalization transaction, and
the dividends declared during the two most recent fiscal years.
<TABLE>
<CAPTION>
Period High Low Dividend per Share
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<S> <C> <C> <C>
First Quarter 1998 $19.188 $15.50 $.04
Second Quarter 1998 $20.625 $18.375 $.04
Third Quarter 1998 $19.125 $11.50 $.04
Fourth Quarter 1998 $17.25 $11.875 $.04
First Quarter 1999 $19.00 $15.00 $.04
Second Quarter 1999 $21.00 $15.00 None
Third Quarter 1999 (through 9/29/99) $22.00 $18.75 None
Fourth Quarter 1999 N/A N/A None
</TABLE>
Under the terms of the Merger Agreement executed in the second quarter of fiscal
1999, the Company agreed not to pay any dividends on its common stock prior to
the closing of the recapitalization transaction. Under the Indenture governing
the terms of the Company's public debt and under the Company's credit facility
with its lenders, there are covenants which restrict the future payment of
dividends. We currently intend to retain our earnings for future growth and,
therefore, do not anticipate paying cash dividends in the foreseeable future.
Under Massachusetts law, we are permitted to pay dividends only out of our
surplus, or, if there is no surplus, out of our net profits.
Set forth below is information regarding equity securities which we sold or
issued during the period covered by this filing that were not registered under
the Securities Act of 1933, as amended. No underwriters were used in connection
with this sale and issuance.
1. On September 29, 1999, we issued a total of 557,431 shares of common stock
for an aggregate consideration of $61,317,410. The sale and issuance of
these securities was exempt from registration under the Securities Act
pursuant to Section 4(2) thereof, on the basis that the transaction did not
involve a public offering.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
In thousands, except per share data 1999(1) 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
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Bookings of new orders $ 213,496 $166,515 $150,020 $161,692 $155,092
Total revenue 210,564 183,029 155,660 153,113 150,571
Income (loss) from operations (1,323) 9,646 12,571 9,145 8,921
Income (loss) before taxes (5,388) 20,333 11,555 7,385 7,684
Net Income (loss) (4,991) 11,459 7,164 4,582 4,995
Backlog 68,925 74,477 28,748 34,361 36,136
Research & development 11,213 8,485 6,959 8,616 8,782
Earnings before interest, taxes,
depreciation and amortization (EBITDA) 7,131 27,671 18,880 15,329 15,891
Adjusted EBITDA 20,170 21,570 18,880 17,141 15,891
FINANCIAL POSITION
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Working capital $ 63,399 $ 55,241 $41,942 $ 44,094 $ 38,259
Total assets 166,675 158,254 118,985 121,833 113,334
Total debt 121,633 19,632 13,659 23,919 19,875
Stockholders' equity (deficit) (15,753) 79,584 66,254 62,401 56,102
Capital expenditures 4,593 5,841 4,176 4,473 4,510
PER SHARE OF COMMON STOCK
- ------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) per basic share $ (0.98) $ 1.72 $ 1.11 $ .72 $ .79
Earnings (Loss) per diluted share (0.98) 1.62 1.05 .70 .78
Dividends declared .04 .16 .16 .16 .15
Book value (28.27) 11.46 9.82 9.68 8.85
PERFORMANCE MEASUREMENT
- ------------------------------------------------------------------------------------------------------------------------
Revenue growth 15.0% 17.6% 1.7% 1.7% 10.6%
Pre-tax income (loss) as a % of total
revenue (2.6) 11.1 7.4 4.8 5.1
Effective income tax rate 7.4 43.6 38.0 38.0 35.0
Net income (loss) as a % of total
revenue (2.4) 6.3 4.6 3.0 3.3
Working capital ratio 2.2:1 1.9:1 2.0:1 1.9:1 1.9:1
</TABLE>
(1) Includes the effects of the recapitalization of the Company during 1999.
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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 1999 reflect the Recapitalization of Instron
and Merger on September 29, 1999, (see Note 2 of Notes to Consolidated Financial
Statements) pursuant to which Kirtland acquired approximately 88.3% of the
common stock of the Company, and includes the results of Satec and IST for the
entire year. The consolidated results for 1998 reflect the inclusion of Satec
and IST from the dates of acquisition.
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. 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 and $6,858,000 for the first nine months of 1998 and the total
year of 1997, 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 and 1997 Instron recorded net losses related to its 51% share
of the joint venture results of $902,000 and $876,000, 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 the
consolidated results of Instron, representing three months of activity in 1998.
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.
The results for 1997 include sales associated with the Laboratory
Microsystems division ("LMS") which was sold to Axiom Systems in April 1997.
LMS' revenue for 1997 was $1,237,000 and had no significant impact on our net
income in 1997.
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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 $210,564,000 in fiscal 1999 increased by 15.0% from
revenue of $183,029,000 in fiscal 1998 due primarily to the inclusion of Satec
and IST products and services. If revenues attributable to Satec and structures
were excluded from both years, total revenue for 1999 would have been
$138,714,000 compared to $144,486,000, a decrease of 4.0% due primarily to lower
servohydraulic and hardness shipments. Adjusted revenue in 1998 was lower by
1.9% from 1997 due primarily to the impact of the economic downturn in the Asian
markets.
Bookings of new orders were $213,496,000 in 1999 and $166,515,000 in 1998.
If bookings attributable to Satec and IST were excluded for both years, bookings
for 1999 would have been $143,127,000 compared to $144,103,000.
Our backlog at December 31, 1999 was $68,925,000, a decrease of 7.4% from
$74,477,000 as of December 31, 1998.
The gross profit margins for each of the three years in the period ended
December 31, 1999 were 38.7%, 39.3%, and 41.2%, respectively. The trend of
decreasing margins is due principally to the mix impact of the volume associated
with IST. Gross margins, excluding LMS and IST, were 44.1%, 43.4%, and 41.8% in
1999, 1998 and 1997, respectively. The improvement in 1999 and 1998 is due in
part to the benefit of actions previously taken to reduce manufacturing costs.
The 1999 selling and administrative expenses of $58,535,000 increased by
19.8% from 1998 due principally to the inclusion of expenses relating to Satec
and IST. As a percentage of revenue, selling and administrative expenses were
27.8% in 1999, compared to 26.7% in 1998 and 28.7% in 1997.
Research and development expenses increased by 32.2% in 1999 and increased
by 21.9% in 1998. The increase in both years is due primarily to the inclusion
of the development efforts of Satec and IST. During the three years ended
December 31, 1999, the Company capitalized certain software development costs.
(See Note 3 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 1.0% in 1999. As a percentage of total revenue,
research and development expenditures, on a comparable basis, represented 6.4%,
6.1%, and 5.4% in 1999, 1998 and 1997, respectively.
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (continued)
Losses from operations for 1999 include recapitalization compensation
expense of $13,039,000 arising from the Merger Agreement between Instron
Corporation and Kirtland. Without one-time charges, income from operations would
have been $11,716,000 compared to $14,621,000. This decline in income from
operations is due primarily to losses from our structures business. 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. Before the effect of the
special items charge, operating income in 1998 increased by 16.3% compared to
1997 due primarily to certain improved product and service margins and the
positive contributions 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 increased by $3.6 million in 1999 and decreased by $0.6 million
in 1998. The net increase in 1999 is due to higher average borrowings (related
to the Recapitalization and the purchases of Satec and IST) and to lower
interest income received on notes receivable. The decrease in net interest
expense in 1998 was due to lower average borrowings and was further reduced by
interest income received on notes receivable and temporary bank deposits.
Foreign exchange losses of $197,000 and $157,000 in 1999 and 1998, respectively,
resulted from the strengthening of the British pound against certain European
currencies.
Loss before taxes was $5,388,000 in 1999, compared to income before taxes
of $20,333,000 in 1998 and $11,555,000 in 1997. Excluding the recapitalization
compensation expense in 1999 and the special items charge and the non-operating
gain on the sale of the land in 1998, income before taxes as a percentage of
total revenue was 3.6%, 7.8%, and 7.4% in 1999, 1998 and 1997, respectively. The
consolidated effective tax rate was 7.4% compared to 43.6% in 1998 and 38% in
1997. The provision for income taxes for 1999 varies from the Unites States
statutory rate of 34%, principally because of insufficient U.S. income to allow
for the full utilization of foreign tax credits. A detailed reconciliation of
the Company's effective tax rate and the United States statutory tax rate
appears in Note 8 of Notes to Consolidated Financial Statements.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (continued)
Instron reported net loss of $4,991,000 or $0.98 per diluted share of
common stock, for the year ended December 31, 1999, compared with $11,459,000,
or $1.62 per diluted share in 1998. Net loss for 1999 included a charge for
Recapitalization Compensation expense of $13,039,000 ($8,124,000 net of taxes).
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 items are excluded from both
years, adjusted net income in 1999 was $3,133,000 or $0.62 per diluted share, a
decrease of 64.5% from 1998. This decline in adjusted net income is due
primarily to lower margins on our structural testing business and higher net
interest expense. Adjusted 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 contributions of Satec and IST in the fourth
quarter, and a decline in net interest expense.
The Company's operating activities generated cash of $7.9 million and $5.3
million in 1999 and 1998, respectively. Investing activities used $6.4 million
in 1999 and $6.8 million in 1998, while financing activities provided $2.4
million in 1999 and $6.1 million in 1998.
Our primary source of funds in 1999 was net income, as adjusted for the
non-cash effect of depreciation, amortization and non-cash recapitalization
related costs, and a decrease in inventories. In 1998, net cash from operations
was supplemented by the net proceeds of the sale of excess land in Canton,
Massachusetts.
At December 31, 1999, accounts receivable were $65.5 million, slightly down
from last year's level of $65.8 million. Inventories of $31.1 million declined
by $4.7 million, primarily as a result of actions previously taken to
rationalize manufacturing.
The Company's principal investment activities during 1999 included capital
expenditures of $4.6 million and the development of software products for $2.2
million. In 1998, our principal investment activities 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 $4.0
million in fiscal 2000. In addition, we plan to continue to develop and enhance
our software products and pursue our strategy of acquisitions.
The Company's total debt outstanding at year-end 1999 was $121.6 million
compared to $19.6 million at the end of 1998. The increase in debt was primarily
due to funding the leveraged recapitalization of Instron (see Note 2 and Note 7
of Notes to Consolidated Financial Statements).
We have a term loan facility that provides borrowings of $30 million and a
multicurrency revolving credit facility that provides borrowings up to $50
million.
At December 31, 1999, the Company had borrowed $30 million and $28.8
million under the revolving term loan and revolving credit facility,
respectively. In addition, we have incurred $60 million of debt through the sale
of our Senior Subordinated Notes.
Principal and interest under the term loan facility and interest payments
under the revolving credit facility and the Senior Subordinated Notes represent
significant liquidity requirements for the Company. As of December 31, 1999, the
Company had $21.2 million of available credit under the $50 million revolving
credit facility.
We have other additional overdraft and borrowing facilities for allowing
advances up to approximately $3.9 million. As of December 31, 1999, the
outstanding portion of these facilities was $2.8 million, which was classified
as short-term debt.
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION (continued)
Instron believes its present capital resources and anticipated operating
cash flows are sufficient to finance its planned operations and investing
activities for the next eighteen months. If Instron was to consider an
acquisition larger than any it has completed in the last eight years, we would
have to seek alternative sources of equity funds and or additional debt.
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.
Bookings in the Asian market improved during 1999, but have not returned to the
levels attained prior to the economic crisis in this region.
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.
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION (continued)
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.
YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT. Instron supports the
exchange of information relating to the Year 2000 issue and designates the
information following 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
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: - In 1996, Instron began a program to ensure that its
business systems would be Year 2000 compliant. In accordance with this program,
the Company followed 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 some minor issues but due to
the installation of a new ERP system in 1996 at our two primary manufacturing
sites, the exposure was believed to be limited. The second stage, begun in
September 1997, was an audit of all departmental systems and network operating
systems, which formed the basis for the third stage which identified the
corrective actions required, and outlined the necessary plan of action. The
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION (continued)
final stage included the implementation and testing of all required
modifications.
The Company made 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.
The costs associated with identifying and implementing the necessary plan
of action have not been material to the Company's financial position.
INTERNAL ELECTRONIC EQUIPMENT AND EMBEDDED CHIP TECHNOLOGY: - The audit
process identified certain telecommunication equipment that needed to be
upgraded to address the Year 2000 issue. We believe that the total cost of
completing the replacements of this equipment did not have a material adverse
effect on the Company's business or results of operations.
SUPPLIERS: - The Company has not observed any problem with our suppliers
which has been due to a Year 2000 issue.
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.
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, but we have observed no major problem
which would indicate that any significant issues were not resolved. To date,
there has been no failures or disruptions to operations which has resulted in a
material adverse effect upon the company's business, financial condition,
results of operations, or business prospects.
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION (continued)
NEW ACCOUNTING PRONOUNCEMENTS. In June 1998, the FASB issued SFAS No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 was amended on July 7, 1999 by the issuance of Statement of
Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No.
133". SFAS No. 133, as amended, is effective for fiscal quarters
beginning after January 1, 2001 for Instron, and we do not expect its adoption
to have a material impact on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). This bulletin provides guidance from the staff on applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101A was subsequently issued in March 2000, deferring the requirement to
adopt the revised guidance until the second quarter of 2000, retroactive to the
first quarter of 2000. The Company is currently in the process of assessing the
impact, if any, that SAB 101 may have on the financial statements.
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 Form 10-K.
Certain factors that might cause such a difference include: the fluctuations in
interest rates, the stability of financial markets; the level of bookings
worldwide for Instron and IST, particularly in Asia; the success of the
automobile industry which is the major purchaser of IST products; the operating
results and profitability 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 effect demand for its products and services; the
Company's ability to successfully integrate the products and operations of
Satec; the Company's ability to identify and successfully consummate strategic
acquisitions; the Company's ability to meet the covenants and repayment
schedules of the new loan and debt facilities undertaken as a result of the
Merger and Recapitalization.
19
<PAGE> 20
ITEM 7A. 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, 1999, the face amount of outstanding forward currency
contracts to buy and sell U.S. dollars, Japanese yen and certain European
currencies was $11.4 million. A 10% fluctuation in exchange rates for these
currencies would change the fair value by approximately $1.1 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, 1999, and comparing
that with those calculated using hypothetical forward currency exchange rates.
20
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants..................................... 22
Consolidated Balance Sheets as of December 31, 1999 and 1998.......... 23
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997..................................... 24
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1999, 1998 and 1997......................... 25
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.................................................. 26
Notes to Consolidated Financial Statements............................ 27-40
Supplemental Financial Information:
Quarterly Financial Data (Unaudited)................................. 41
21
<PAGE> 22
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 operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
Instron Corporation and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States 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
------------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 14, 2000
22
<PAGE> 23
INSTRON CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------------------
In thousands, except share and per share data 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,978 $ 7,209
Accounts receivable, net of allowance for doubtful
accounts of $830 in 1999 and $800 in 1998 65,481 65,766
Inventories 31,117 36,121
Income tax receivable 3,594 0
Deferred income taxes 3,879 3,060
Prepaid expenses and other current assets 2,428 2,223
--------- ---------
Total current assets 117,477 114,379
Property, plant and equipment:
Land and buildings 21,369 21,254
Machinery and equipment 46,109 45,217
Accumulated depreciation (44,335) (42,470)
--------- ---------
Property, plant and equipment, net 23,143 24,001
Goodwill 10,879 12,384
Deferred income taxes 832 904
Other assets 5,551 6,586
Deferred financing costs, net 8,793 0
--------- ---------
Total assets $ 166,675 $ 158,254
========= =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Short-term borrowings $ 2,815 $ 6,416
Accounts payable 11,947 15,807
Accrued liabilities 27,129 22,958
Accrued employee compensation and benefits 5,280 6,798
Accrued income taxes 0 93
Advance payments received on contracts 6,907 7,066
--------- ---------
Total current liabilities 54,078 59,138
Long-term debt - revolver 28,818 13,216
Senior debt - term loan 30,000 0
13-1/4% senior subordinated notes due 2009 60,000 0
--------- ---------
Total long-term debt 118,818 13,216
Pension and other long-term liabilities 9,532 6,316
--------- ---------
Total liabilities 182,428 78,670
--------- ---------
Commitments and contingencies (Note 11)
Stockholders' equity (deficit):
Common stock, $1 par value; 7,051,968 shares issued 0 7,052
Recapitalized common stock, $0.01 par value; 1,000,000
shares authorized; 557,164 issued 557 0
Additional paid in capital 49,881 8,727
Deferred compensation 0 (2,662)
Retained earnings (accumulated deficit) (59,043) 72,496
Accumulated other comprehensive loss (7,148) (4,699)
--------- ---------
(15,753) 80,914
Less: Treasury stock at cost; 108,262 shares at
December 31, 1998 0 1,330
--------- ---------
Total stockholders' equity (deficit) (15,753) 79,584
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 166,675 $ 158,254
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
23
<PAGE> 24
INSTRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
In thousands, except share and per share data
(Years Ended December 31) 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Sales $ 176,144 $ 152,879 $ 129,679
Service 34,420 30,150 25,981
----------- ----------- -----------
Total revenue 210,564 183,029 155,660
----------- ----------- -----------
Cost of revenue:
Sales 105,800 91,410 74,126
Service 23,300 19,644 17,363
----------- ----------- -----------
Total cost of revenue 129,100 111,054 91,489
----------- ----------- -----------
Gross profit 81,464 71,975 64,171
----------- ----------- -----------
Operating expenses:
Selling and administrative 58,535 48,869 44,641
Research and development 11,213 8,485 6,959
Special items charge 0 4,975 0
Recapitalization compensation expense 13,039 0 0
----------- ----------- -----------
Total operating expenses 82,787 62,329 51,600
Income (loss) from operations (1,323) 9,646 12,571
----------- ----------- -----------
Other expense (income):
Gain on sale of land 0 (11,076) 0
Interest expense 4,648 1,175 1,465
Interest income (780) (943) (634)
Foreign exchange losses 197 157 185
----------- ----------- -----------
Total other expenses (income) 4,065 (10,687) 1,016
----------- ----------- -----------
Income (loss) before income taxes (5,388) 20,333 11,555
Provision (benefit) for income taxes (397) 8,874 4,391
----------- ----------- -----------
Net income (loss) $ (4,991) $ 11,459 $ 7,164
=========== =========== ===========
Weighted average number of
basic common shares 5,089,918 6,667,914 6,455,527
Earnings (loss) per share - basic $ (0.98) $ 1.72 $ 1.11
=========== =========== ===========
Weighted average number of
diluted common shares 5,089,918 7,066,257 6,791,801
Earnings (loss) per share - diluted $ (0.98) $ 1.62 $ 1.05
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
24
<PAGE> 25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Accum-
ulated
Recap- Addi- Retained Other
italized tional Deferred Earnings Compre-
In thousands, except share and per Preferred Common Common Paid in Compensa- (Accumulated hensive Treasury Total
share data Series B Stock Stock Capital tion Deficit) Loss Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $6,520 $ 3,514 $ 55,997 $(2,916) $ (714) $ 62,401
Net income 7,164 7,164
Translation Adjustment (2,774) (2,774)
--------
Comprehensive income (loss) 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 $(3,414) 0
Amortization of Deferred Compensation 179 179
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 6,824 6,972 (3,235) 62,097 (5,690) (714) 66,254
Net income 11,459 11,459
Translation Adjustment 991 991
--------
Comprehensive income 12,450
Cash dividends declared
($.16 per share) (1,060) (1,060)
228,270 shares issued under
employee stock option plans 228 1,755 1,983
Purchase of 33,310 treasury shares (616) (616)
Amortization of Deferred Compensation 573 573
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 7,052 8,727 (2,662) 72,496 (4,699) (1,330) 79,584
Net income (loss) (4,991) (4,991)
Translation Adjustment (2,449) (2,449)
--------
Comprehensive income (loss) (7,440)
Cash dividends declared
($.04 per share) (268) (268)
34,742 shares issued under
employee stock option plans 35 352 387
Amortization of Deferred Compensation 366 366
Recapitalization related
transactions:
Retirement of 108,262 shares
of treasury stock (108) (1,222) 1,330 0
Recognition of deferred
compensation 2,296 2,296
Conversion of 324,755 shares
of common stock to 324,755 shares
of preferred stock $ 325 (325) 0
Issuance of warrants 2,250 2,250
Repurchase of all outstanding
common stock (6,654) (10,107) (126,280) (143,041)
Conversion of 324,755 shares of
preferred stock to 64,951 shares
of Recapitalized common stock (325) $ 65 260 0
Purchase of 492,480 shares of
Recapitalized common stock 492 53,680 54,172
Fees related to recapitalization (4,059) (4,059)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 - - $557 $49,881 - $(59,043) $(7,148) - $(15,753)
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
25
<PAGE> 26
INSTRON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
In thousands (Years Ended December 31) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (4,991) $ 11,459 $ 7,164
Adjustments to reconcile net income to net cash provided by
operating activities:
(Gain) on the sale of property, plant and equipment 0 (11,076) (88)
Depreciation and amortization 8,651 7,106 6,494
Non-cash recapitalization related costs 3,874 -- --
Provision for losses on accounts receivable 288 73 27
Deferred taxes (747) (580) 306
Changes in assets and liabilities, excluding the effects
from purchase of business:
Income tax receivable (3,687) -- --
(Increase) decrease in accounts receivable (285) (6,312) (1,335)
(Increase) decrease in inventories 4,743 165 2,563
(Increase) decrease in prepaid expenses and other
current assets (196) 2,055 (2,028)
Increase (decrease) in accounts payable and accrued
expenses (1,151) 3,097 3,477
Increase in other long-term liabilities 2,016 -- --
Other, net (596) (711) 409
-------- -------- -------
Net cash provided by operating activities 7,919 5,276 16,989
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of property, plant and equipment 66 13,684 376
Capital expenditures (4,593) (5,841) (4,176)
Purchase of business -- (13,086) (2,010)
Capitalized software costs (2,206) (1,490) (637)
Other, net 362 (31) 220
-------- -------- -------
Net cash used by investing activities (6,371) (6,764) (6,227)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) of lines of credit and borrowing
arrangements prior to recapitalization (16,817) 5,609 (9,730)
Borrowings under new revolving line of credit 28,818 -- --
Issuance of senior subordinated notes 60,000 -- --
Issuance of senior term loan 30,000 -- --
Net borrowings, Revolver line of credit 0 199 (173)
Debt financing fees (6,812) -- --
Recapitalization related fees (4,059) -- --
Issuance of Recapitalized common stock 54,172 -- --
Cash dividends paid (268) (1,060) (1,064)
Proceeds from exercise of stock options 387 1,983 348
Purchase of treasury stock, common stock and options
outstanding (143,041) (616) 0
-------- -------- -------
Net cash provided (used) in financing activities 2,380 6,115 (10,619)
-------- -------- -------
Effect of exchange rate changes on cash (159) 16 (118)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents 3,769 4,643 25
Cash and cash equivalents at beginning of year 7,209 2,566 2,541
-------- -------- -------
Cash and cash equivalents at end of period $ 10,978 $ 7,209 $ 2,566
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 2,106 $ 1,430 $ 1,671
Income taxes 2,388 9,145 3,041
Conversion of common stock to preferred stock 325 -- --
Conversion of preferred stock to Recapitalized common stock 325 -- --
Issuance of common stock warrants 2,250 -- --
Retirement of treasury stock 1,330 -- --
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Liabilities incurred or assumed in business acquisitions $ -- $ 12,917 $ 639
======== =======
</TABLE>
The accompanying Notes are an integral part of the consolidated
financial statements
26
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Instron Corporation (the "Company") was founded in 1946 and is a global company
that designs, manufactures, markets and services material and structural testing
systems, software and accessories. The Company's products are used principally
in research and development and quality control applications to test the
mechanical properties of various materials, components and structures.
2. MERGER AGREEMENT AND RECAPITALIZATION
On May 6, 1999, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Kirtland Capital Partners III L.P. ("Kirtland") and ISN
Acquisition Corporation, a corporation newly formed by Kirtland ("MergerCo"),
pursuant to which Kirtland and certain affiliates, together with members of
Instron's management and certain members of Instron's Board of Directors who are
also stockholders (collectively, the "Rollover Stockholders"), agreed to acquire
the Company.
On September 3, 1999, the Company's stockholders approved the Agreement and Plan
of Merger dated as of May 6, 1999, as amended. The Company completed its merger
by and among Instron Corporation, ISN Acquisition Corporation and Kirtland
Capital Partners III L.P. on September 29, 1999. The merger and related
transactions were treated as a Recapitalization (the "Recapitalization") for
financial reporting purposes. Accordingly, the historical basis of the Company's
assets and liabilities was not affected by these transactions.
Under the Merger Agreement, the MergerCo merged with and into the Company with
the Company continuing as the surviving corporation (the "Merger"). Pursuant to
the Merger, each outstanding share of the Company's common stock (except for
shares held by the Company, its subsidiaries and MergerCo), was converted into
the right to receive a cash payment of $22.00, without interest. Certain shares
of the Company's common stock held by the Rollover Stockholders have been
converted into shares of stock of the surviving corporation.
As of December 31, 1999, the Company has incurred compensation expenses of $13.0
million as a result of the Recapitalization. In addition, the Company incurred
costs of $13.1 million directly related to the Recapitalization. Of these
transaction costs, $9.0 million was capitalized and will be amortized over the
life of the 13 1/4% Senior Subordinated Notes (the "Notes") and the Senior
Credit Facility, and $4.1 million was charged to stockholders' equity.
27
<PAGE> 28
The Notes were originally issued as part of a unit offering. Each unit ("Unit")
consisted of a $1,000 principal amount Note and one warrant to purchase 0.5109
shares of Instron's recapitalized common stock (the "Warrants"). On February 14,
2000, the Notes were registered with the Securities and Exchange Commission (the
"SEC"), at which time the Units separated into their component Notes and
Warrants. The Notes and Warrants may now be traded separately and the Units have
ceased to exist.
3. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of all domestic and foreign subsidiaries. Significant intercompany
transactions and balances have been eliminated. Certain reclassifications were
made to prior years' amounts to conform with the 1999 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. Significant estimates in
these financial statements include net realizable value of inventories,
allowances for accounts receivable, warranty reserves, tax valuation reserves
and one time charges. 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 adjustments are recorded directly in stockholders' equity and
are included in income only if the underlying foreign investment is sold or
liquidated.
28
<PAGE> 29
FOREIGN EXCHANGE RISK MANAGEMENT The Company regularly enters into forward
contracts primarily denominated in Japanese yen and certain European currencies
to hedge 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 losses and gains on the items being hedged are included
in costs of goods sold. The unrealized losses were not material in 1999 and 1998
as the fair value of these contracts were approximately equal to the fair value
of the underlying exposures.
At December 31, 1999, the face amount of outstanding forward currency contracts
to sell U.S. dollars for non-U.S. currencies was $0.3 million, Japanese yen for
German deutschemarks was $6.7 million, Japanese yen for British pounds $3.8
million and French francs for British pounds was $0.6 million.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments
purchased with a maturity of three months or less at the time of purchase 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.
29
<PAGE> 30
INTANGIBLE ASSETS Intangible assets are stated at cost and amortized using the
straight-line method over the estimated useful life of the assets which ranges
from 3 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
intangible assets is measured on the basis of whether anticipated future
discounted operating cash flows expected from the assets will recover the
recorded respective intangible asset balances over the remaining amortization
period. At December 31, 1999, no amount has been determined to be impaired.
Goodwill and purchased technology are included in long term other assets and the
related amortization was $2,139,000, $1,503,000 and $1,249,000 in 1999, 1998 and
1997, 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 $4,669,000, $4,239,000 and $4,341,000 for the years
ended December 31, 1999, 1998 and 1997, 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
recorded 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 $3,270,000, $2,272,000 and $1,574,000 at December 31, 1999,
1998 and 1997, respectively. Software development costs of $2,206,000,
$1,490,000 and $637,000 were capitalized during 1999, 1998 and 1997,
respectively. The amounts amortized and charged to expense in 1999, 1998 and
1997 were $1,208,000, $792,000, and $725,000, 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.
RESEARCH AND DEVELOPMENT Cost relating to research and development are expensed
as incurred.
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.
30
<PAGE> 31
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 $19,869,000 at
year-end 1999.
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.
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 potential common
stock outstanding using the "treasury stock method."
The following is a reconciliation of the basic and diluted EPS calculations for
the years ended December 31:
<TABLE>
<CAPTION>
In thousands, except per share data 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $(4,991) $11,459 $7,164
======= ======= ======
Weighted average number of common
shares outstanding - basic 5,090 6,668 6,456
Dilutive effect of stock options
outstanding 0 398 336
------- ------- ------
Weighted average of common and dilutive
shares - diluted 5,090 7,066 6,792
======= ======= ======
BASIC EARNINGS PER SHARE $ (0.98) $ 1.72 $ 1.11
======= ======= ======
DILUTED EARNINGS PER SHARE $ (0.98) $ 1.62 $ 1.05
======= ======= ======
</TABLE>
At December 31, 1999, Instron had outstanding options of 45,905 shares of
recapitalized common stock and outstanding warrants of 30,654 shares of
recapitalized common stock. These potential common shares have been excluded
from the diluted earnings per share computation as their inclusion would have an
antidilutive effect on loss per share.
NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 was amended on July 7, 1999 by the issuance of Statement of Accounting
Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of SFAS No. 133".
SFAS No. 133, as amended, is effective for fiscal quarters beginning after
January 1, 2001 for Instron, and we do not expect its adoption to have a
material impact on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). This bulletin provides guidance from the staff on applying generally
accepted accounting principals to revenue recognition in financial statements.
SAB 101A was subsequently issued in March 2000, deferring the requirement to
adopt the revised guidance until the second quarter of 2000, retroactive to the
first quarter of 2000. The Company is currently in the process of assessing the
impact, if any, that SAB 101 may have on the financial statements.
31
<PAGE> 32
4. 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. 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.
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. The book value of net assets acquired were
equal to the consideration paid. 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.
The following pro forma information assumes that the acquisitions of Satec and
the remaining interest in IST had occurred as of January 1, 1997, and includes
the assumed impact of goodwill amortization expense recorded as a result of the
acquisitions:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Sales $219,748 $205,643
Net income 10,762 6,708
Earnings per share - basic 1.61 1.04
Earnings per share - diluted 1.52 0.99
</TABLE>
5. INVENTORIES
Inventories at December 31 were as follows:
<TABLE>
<CAPTION>
In thousands 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $13,346 $13,257
Work in process 9,823 16,560
Finished goods 7,948 6,304
------- -------
Total inventory $31,117 $36,121
======= =======
</TABLE>
Inventories valued at LIFO amounted to $7,845,000 and $9,056,000 at December 31,
1999 and 1998, respectively. The excess of current cost over stated LIFO value
was $5,588,000 at December 31, 1999 and $5,205,000 at December 31, 1998.
During 1999, inventory quantities were reduced. This reduction resulted in a
liquidation of LIFO inventory quantities carried at lower costs prevailing
in prior years as compared with the cost of 1999 purchases, the effect of which
was not material to costs of goods sold, net loss or loss per share.
32
<PAGE> 33
6. DEFERRED FINANCING COSTS
DEFERRED FINANCING COSTS at December 31, 1999, were comprised of the following:
In thousands 1999
- --------------------------------------------------------------------------------
Financing fees of notes $4,316
Financing fees of Senior 2,496
Credit facility 2,250
------
9,062
Amortization of financing fees and debt discount (269)
------
Total deferred financing costs $8,793
======
7. BORROWING ARRANGEMENTS
As part of the Recapitalization, the Company entered into a Senior Credit
Facility providing for a Revolving Credit Facility of up to $50.0 million
(subject to an available borrowing base) and a Term Loan Facility of $30.0
million, maturing in five and one-half years, unless terminated sooner upon
certain events of default. If terminated upon an event of default, all
outstanding advances under the credit facility may be required to be immediately
repaid. The revolving portion of the Senior Credit Facility can be used to
complete permitted acquisitions or for working capital and other general
corporate purposes. Borrowings under the Senior Credit Facility will bear
interest, at our option, at either the higher of the federal funds rate plus
0.5% or the prime rate plus 1.25%, or a LIBOR rate plus 2.75%. The weighted
average interest rate on the loans under the Senior Credit Facility was 9.07%
per annum for the period commencing September 29, 1999 and ending December 31,
1999.
Ability to borrow under the Senior Credit Facility will be subject to the
Company's compliance with the covenants described below. In addition, the
Company incurred $60 million of debt through the sale of its 13 1/4% Senior
Subordinated Notes and Warrants (the "Senior Subordinated Notes"). The Warrants,
when exercised, will entitle the holder thereof to receive 0.5109 of a fully
paid and non-assessable share of common stock, par value $0.01 per share at an
exercise price of $0.01 per share, subject to adjustment. The Warrants will be
exercisable on or prior to September 15, 2009. The value of the Warrants on the
date of the Recapitalization was $2.3 million and this value is being amortized
over 10 years.
Under the mandatory repayment schedule of the Term Loan Facility, the Company is
required to make scheduled repayments in twenty-two quarterly installments of
principal with interest thereon on the first day of each January, April, July
and October commencing January 1, 2000. The Senior Subordinated Notes, which
mature in 2009, require interest to be paid semi-annually in arrears each March
15 and September 15. The interest on the Revolving Credit Facility is due
quarterly in arrears.
The Company is also required, under the Terms of the Senior Credit
Facility, to pay a commitment fee based on the unused amount of the Revolving
Credit Facility. The rate of 0.50% is an annual rate, paid quarterly in arrears.
All of our obligations under the Senior Credit Facility are and will be secured
by a first priority lien on substantially all of the properties and assets of
Instron and our existing and future domestic subsidiaries. In addition, our
obligations under the Senior Credit Facility are and will be secured by a first
priority pledge of and security interest in all of the outstanding capital stock
of our existing domestic subsidiaries and future domestic subsidiaries and a
pledge of 65% of the outstanding capital stock of some foreign subsidiaries.
Certain of our foreign subsidiaries have also granted a lien on substantially
all of their properties and assets.
The Senior Credit Facility requires that the Company meet and maintain certain
financial ratios and tests, including a minimum consolidated net worth,
consolidated EBITDA, consolidated interest coverage ratio, consolidated fixed
charge coverage ratio, maximum consolidated leverage ratio and senior leverage
ratio.
The Senior Credit Facility also contains covenants that limit the ability of the
Company and its operating subsidiaries to take various actions, including
incurring additional indebtedness and liens and entering into some leases,
fundamentally changing corporate structure, including mergers, consolidations
and liquidations, acquiring and disposing of property, making principal payments
on indebtedness prior to maturity, dividends and capital stock purchases,
investments, capital expenditures, some modifications to organizational
documents, changing fiscal periods, entering into sale and leaseback
transactions, entering into affiliate transactions, entering into agreements
restricting distributions, amending the acquisition documents, granting negative
pledges and making a material change in the nature of the Company's business.
The Senior Subordinated Notes are governed by negative covenants that are
substantially similar or less restrictive than those of the Senior Credit
Facility.
The Senior Credit Facility contains customary events of default with respect to
the Company and its operating subsidiaries, including defaults with respect to
other indebtedness.
The Company's subsidiaries have other overdraft and borrowing facilities
allowing advances up to approximately $3.9 million. At December 31, 1999, the
outstanding portion of these facilities was $2.8 million, which has been
classified as short-term debt. Bank guarantees outstanding at December 31, 1999,
for which the Company is contingently liable, amounted to $7.9 million and
related principally to performance contracts.
33
<PAGE> 34
8. INCOME TAXES
Deferred tax liabilities and assets are recognized for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the tax bases of assets and
liabilities and their reported amounts using enacted tax rates in effect for the
year in which the differences are expected to reverse income tax provisions in
the year in which the credits arise.
The Company does not provide for U.S. income tax liability on undistributed
earnings of its foreign subsidiaries. The earnings of non-U.S. subsidiaries,
which reflect full provision for non-U.S. income taxes, are indefinitely
reinvested in non-U.S. operations or will be remitted substantially free of
additional tax. Accordingly, no material provision has been made for taxes that
might be payable upon remittance of such non-U.S. earnings.
The significant components of the Company's deferred tax assets and liabilities
at December 31, are as follows:
<TABLE>
<CAPTION>
In thousands 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Employee benefits $ 5,966 $ 4,634
Inventories 2,838 3,280
Accrued expenses 937 1,305
Foreign tax credits 1,263 --
------- -------
Total deferred assets 11,004 9,219
------- -------
Accrued expenses (252) (246)
Fixed assets (1,442) (1,517)
Capitalized software costs and intangibles (3,336) (3,002)
------- -------
Total deferred liabilities (5,030) (4,765)
------- -------
Valuation reserve (1,263) (490)
------- -------
Total net deferred assets $ 4,711 $ 3,964
======= =======
</TABLE>
Prior to 1999, a valuation reserve had been established where, based upon
available evidence, it was more likely than not that certain foreign deferred
tax assets would not be realized. During 1999, this valuation reserve has been
eliminated as these foreign assets were in fact recovered.
Also in 1999, the Company has foreign excess tax credits against which the
Company has elected to provide a valuation allowance because of a limited carry-
forward period and the uncertainty that the credits will be realized.
The components of income (loss) before income taxes consisted of the following:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $(6,448) $17,775 $ 5,664
Foreign 1,060 2,558 5,891
------- ------- -------
Total $(5,388) $20,333 $11,555
======= ======= =======
</TABLE>
Income tax provisions (benefits) were as follows:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 104 $6,441 $ 1,701
Foreign (1,469) 1,896 2,090
State 221 381 172
------- ------ -------
(1,144) 8,718 3,963
------- ------ -------
Deferred, net:
Federal & State (1,451) 139 518
Foreign 2,198 17 (90)
------- ------ -------
747 156 428
------- ------ -------
Total provision (benefit) for $ (397) $8,874 $ 4,391
income taxes ======= ====== =======
</TABLE>
34
<PAGE> 35
The provisions for income taxes varied from the United States statutory rate of
34% for 1999, 35% for 1998 and 34% for 1997 principally because of the tax
effect of the following:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision at United States
statutory rate $(1,832) $ 7,117 $ 3,929
Effect of earnings of foreign operations
subject to different tax rates 1,520 1,019 (2)
State taxes, net of federal
income tax benefit 103 247 114
Benefit of Foreign Sales Corporation (111) (76) (68)
Goodwill and amortization 0 0 356
All other, net (77) 567 62
------- ------- -------
Total tax provision $ (397) $ 8,874 $ 4,391
======= ======= =======
</TABLE>
9. EMPLOYEE PENSION AND RETIREMENT PLANS
The Company maintains qualified 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 for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- ---------------------------
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 $ 1,217 $ 1,796 $ 201 $ 1,122 $ 1,749 $ 222 $ 961 $ 1,357 $ 231
Interest cost 2,094 1,967 127 1,911 2,278 171 1,799 1,990 201
Expected return on plan assets (2,321) (2,755) 0 (2,077) (2,971) 0 (1,914) (2,742) 0
Amortization of transition asset
(liability) (9) (74) 21 (9) (76) 18 (9) (75) 19
Amortization of prior service cost 44 (55) 0 44 (73) 0 44 (89) 0
Amortization of unrecognized
(gain) loss 2 0 (24) 2 0 0 1 (59) 0
Settlement gain 0 0 0 0 0 (118) 0 0 0
------- ------- ------ ------- ------- ------ ------- ------- ------
Net periodic pension cost $ 1,027 $ 879 $ 325 $ 993 $ 907 $ 293 $ 882 $ 382 $ 451
======= ======= ====== ======= ======= ====== ======= ======= ======
</TABLE>
Assumptions used in the accounting for the Company's U.S., U.K., and Japan plans
at December 31 were:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- --------------------- --------------------------
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 7.0% 6.0% 3.25% 6.75% 5.5% 4.0% 7.0% 6.5% 5.0%
Rates of increase in
compensation levels 4.25 4.0 3.0 4.25 4.0 3.0 4.5 4.75 4.0
Expected long-term rate of
return on assets 9.0 6.75 -- 9.0 7.25 -- 9.0 8.75 --
</TABLE>
35
<PAGE> 36
The following is a reconciliation of the Projected Benefit Obligation as of
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------ --------------------------
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 $29,541 $37,414 $3,040 $26,209 $33,222 $3,221 $23,246 $24,681 $3,404
Service cost 1,217 1,796 201 1,122 1,749 222 961 1,357 231
Interest cost 2,094 1,967 127 1,911 2,278 171 1,799 1,990 201
Actuarial (gain) loss (532) (3,585) 230 1,170 1,160 (102) 989 7,019 (205)
Benefits paid (933) (1,330) (28) (871) (1,437) 0 (786) (1,288) (10)
Plan amendments 0 181 0 0 262 0 0 287 0
Plan participants' contribution
and government refund 0 246 0 0 0 0 0 0 0
Settlement 0 0 0 0 0 (872) 0 0 0
Foreign currency gain (loss) 0 (996) 395 0 180 400 0 (824) (400)
------- ------- ------ ------- ------- ------ ------- -------- ------
Projected Benefit Obligation
at year end $31,387 $35,693 $3,965 $29,541 $37,414 $3,040 $26,209 $33,222 $3,221
======= ======= ====== ======= ======= ====== ======= ======= ======
</TABLE>
The following is a reconciliation of the beginning and ending balances of the
fair value of Plan assets at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- --------------------------
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 $29,470 $39,078 $ 0 $26,650 $33,522 $ 0 $24,865 $29,748 $ 0
Actual return on plan assets 3,959 6,803 0 3,667 5,475 0 2,546 4,812 0
Employer contributions 24 838 28 24 1,334 551 25 1,288 10
Benefits paid (933) (1,330) (28) (871) (1,437) (551) (786) (1,288) (10)
Plan participants' contribution
and government refund 0 246 0 0 0 0 0 0 0
Foreign currency gain (loss) 0 (1,051) 0 0 184 0 0 (1,038) 0
------- ------- ------ ------- ------- ------- ------- ------- -------
Fair value of plan assets
at year end $32,520 $44,584 $ 0 $29,470 $39,078 $ 0 $26,650 $33,522 $ 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>
1999 1998 1997
------------------------- ------------------------- --------------------------
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 $(1,134) $(8,891) $3,965 $ 71 $(1,664) $ 3,040 $ (441) $ (300) $3,221
Unrecognized asset (liability)
at transition 40 378 (247) 48 465 (243) 57 538 (229)
Unrecognized prior service cost (417) 481 0 (461) 737 0 (505) 1,066 0
Unrecognized gain (loss) 6,276 7,779 438 4,104 163 648 3,683 (1,177) 259
------- ------- ------ ------- ------- ------- ------- ------- ------
Pension liability/assets included
in Consolidated Balance Sheet $ 4,765 $ (253) $4,156 $ 3,762 $ (299) $ 3,445 $ 2,794 $ 127 $3,251
======= ======= ====== ======= ======= ======= ======= ======= ======
</TABLE>
The expense of all pension plans for 1999, 1998 and 1997 was $2,231,000,
$2,193,000, and $1,715,000, 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 amounts charged to operating expense for this plan were
$643,000, $582,000 and $530,000 in 1999, 1998 and 1997, respectively.
10. 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.
36
<PAGE> 37
The Company has one stock option plan currently in effect under which future
grants may be issued: the 1999 Stock Option Plan. As of December 31, 1999 64,715
shares were authorized by the Company for grants of options or shares. Stock
Options granted during 1999 generally have a maximum term of ten years and vest
equally over five years. Options granted in 1998 and 1997, generally had a
maximum term of eight years and vested 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, 1996 978,724 $ 11.49
Granted, 1997 5,000 12.25
Exercised, 1997 (37,385) 11.02
Terminated, 1997 (13,000) 12.43
--------
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
Granted in 1999, prior to
recapitalization(2) 5,000 15.88
Exercised in 1999, prior to
recapitalization (598,179) 12.56
Terminated in 1999, prior to
recapitalization (6,625) 14.64
--------
Outstanding at
September 29, 1999 125,000 $ 12.53
Impact of recapitalization(1) (100,000)
--------
Options outstanding post-
recapitalization 25,000 $ 62.67
Granted in 1999, post-
recapitalization 23,360 110.00
Terminated in 1999, post-
recapitalization (5,455) 83.84
--------
Outstanding at December 31, 1999 45,905 $ 87.33
========
</TABLE>
(1) Options to purchase up to an aggregate of 125,000 shares of our common
stock held by members of management were converted into options to purchase
up to an aggregate of 25,000 shares of our common stock following the
recapitalization. Each of these retained options is fully vested and
exercisable.
(2) Includes 563,437 options that were purchased upon consummation of the
recapitalization.
At December 31, 1999, 1998 and 1997, respectively, there were 21,700, 502,735
and 656,902 options exercisable with a weighted average exercise price of
$62.05, $11.84 and $10.94. Exercise prices for options outstanding as of
December 31, 1999, ranged from $53.75 to $110.00. The weighted average remaining
contractual life of those options is 6.9 years.
The weighted average fair value at date of grant for options granted during
1999, 1998 and 1997 was $51.74, $7.39 and $5.04 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 1999,
1998 and 1997, respectively: risk-free interest rates of 6.23%, 5.07% and 5.70%;
dividend yields of 0.0%, 0.97% and 1.31%; volatility factors of the expected
market price of the Company's common stock of .32, .35 and .31; and a weighted
average expected life of the options of 8.8, 7.9 and 8.0 years.
37
<PAGE> 38
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant date for awards in 1999, 1998 and 1997, the
Company's net income (loss) and earnings (loss) per share would have been the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) - pro forma $(5,606) $10,871 $6,691
Earnings (loss) per share - basic $ (1.10) $ 1.63 $ 1.04
Earnings (loss) per share - diluted $ (1.10) $ 1.54 $ .99
</TABLE>
The pro forma effect on net income for 1997 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 was accelerated upon the change in
control associated with the recapitalization which resulted in a charge to
earnings in the third quarter of 1999 of $2,296,000.
11. OPERATING LEASE COMMITMENTS
Rental expense amounted to $5,551,000, $3,998,000 and $3,697,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. As of December 31, 1999,
minimum annual commitments under noncancellable operating leases with terms of
more than one year are:
<TABLE>
<CAPTION>
Later
In thousands 2000 2001 2002 2003 2004 Years
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$4,160 $3,182 $2,717 $785 $559 $593
</TABLE>
38
<PAGE> 39
12. 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 $5.0
million 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 accrual of $460,000 at December 31, 1999 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.
13. 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 it has two operating units: Materials Testing and
Structural Testing.
Instron's Materials Testing business manufactures and markets material testing
instruments (electromechanical, servohydraulic, 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 units which operate within the material
testing industry. As a result of these similarities, both units 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 1999 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE, INCLUDING INTERAREA SALES
United States $ 108,322 $ 102,860 $ 76,314
Germany 44,007 26,293 14,484
Rest of Europe 50,289 54,395 52,393
Asia/Latin America 33,512 31,335 40,004
Rest of World 4,588 3,552 3,868
Eliminations (30,154) (35,406) (31,403)
--------- --------- ---------
Total revenue $ 210,564 $ 183,029 $ 155,660
========= ========= =========
IDENTIFIABLE ASSETS AT YEAR-END
United States $ 61,481 $ 64,903 $ 38,384
United Kingdom 28,777 24,227 24,883
Germany 8,352 22,983 6,771
Rest of Europe 29,422 14,319 11,020
Asia/Latin America 19,879 18,232 18,645
Rest of World 2,415 1,965 2,072
Corporate 18,555 13,335 18,066
Eliminations (2,202) (1,710) (856)
--------- --------- ---------
Total assets $ 166,675 $ 158,254 $ 118,985
========= ========= =========
</TABLE>
Sales between geographic areas in 1999, 1998 and 1997, respectively, consisted
primarily of $14,087,000, $20,023,000 and $13,091,000 from the United States and
$15,777,000, $15,204,000 and $18,168,000 from European operations. Transfers
between geographic areas are at manufacturing cost plus a markup factor.
39
<PAGE> 40
14. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
Some of our wholly owned subsidiaries will not be guarantors of our senior
subordinated notes. In the event of a bankruptcy, liquidation or reorganization
of any of these non-guarantor subsidiaries, these non-guarantor subsidiaries
will pay the holders of their debts and their trade creditors before they will
be able to distribute any of their assets to us. Summarized below is selected
financial information for the guarantor subsidiaries and the non-guarantor
subsidiaries as of December 31, 1999 and for the twelve month period then ended:
<TABLE>
<CAPTION>
Combined Company Combined
and Guarantor Non-Guarantor
In thousands Subsidiaries Subsidiaries Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance Sheet Data as of December 31, 1999:
Current Assets .......................... $ 54,349 $63,128 $117,477
Total Assets ............................ 92,929 73,746 166,675
Total Liabilities ....................... 132,748 49,680 182,428
Stockholders' Equity (deficit) .......... (39,606) 23,853 (15,753)
Statement of Income Data for the twelve months
ended December 31, 1999
Total Revenue ........................... 131,616 78,948 210,564
Income (loss) before income taxes ....... (6,143) 755 (5,388)
Net income (loss) ....................... (5,287) 296 (4,991)
</TABLE>
40
<PAGE> 41
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL 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>
1999:
Total revenue $48,745 $52,260 $ 49,948 $ 59,611 $ 210,564
Gross profit 19,891 19,641 18,717 23,215 81,464
Income (loss) before income taxes 2,569 3,004 (10,120) (841) (5,388)
Net income (loss) 1,593 1,863 (7,813) (634) (4,991)
Earnings per share - basic* 0.24 0.28 (1.15) (1.14) (0.98)
Earnings per share - diluted* 0.22 0.26 (1.15) (1.14) (0.98)
- ----------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------
</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 and includes the effects of the recapitalization in the third
quarter of 1999.
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 following table sets forth information with respect to persons who are
currently members of the Board of Directors or executive officers of Instron.
Directors serve for a term of one year or until their successors are elected and
qualified; officers serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION YEARS OF SERVICE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
James M. McConnell 59 President, Chief Executive 10
Officer and Director
Joseph E. Amaral 52 Vice President, Instron Materials 22
Testing
John R. Barrett 45 Vice President, Corporate Business 12
Development and Treasurer
Jonathan L. Burr 52 Vice President, Corporate 21
Director of Human Resources
Yahya Gharagozlou 44 Vice President, Corporate 19
Technical Director
Arthur D. Hindman 56 Vice President, Strategic Planning 21
and Growth
William J. Milliken 45 Vice President, Corporate 3
Director of Manufacturing
Linton A. Moulding 46 Vice President and Chief Financial 15
Officer
Norman L. A. Smith 53 Vice President, International Sales 18
Raymond A. Lancaster 53 Director --
Thomas N. Littman 36 Director --
Dennis J. Moore 61 Director 6
John F. Turben 64 Director --
</TABLE>
James M. McConnell joined Instron in 1990 as President and Chief Executive
Officer. From 1987 to 1990, he 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.). He has been a
Director of Instron since April 1990. Mr. McConnell is also a director of ESCO
Electronics Corporation.
Joseph E. Amaral joined Instron in 1978. Since 1985, Mr. Amaral has held
positions as Corporate Technology Manager, Corporate Product Planning Manager,
and Vice President, Corporate Technical Director. In March 1995, he was elected
Vice President, General Manager of North America Operations. He is currently
executive in charge of Instron Materials Testing.
41
<PAGE> 42
John R. Barrett joined Instron in 1988. He has held positions as Assistant
Treasurer and Treasurer. In 1999, he was elected Vice President, Corporate
Business Development and Treasurer.
Jonathan L. Burr joined Instron in 1979. He has held positions as Personnel
Administrator, Director of Personnel and Corporate Director of Human Resources.
In 1993 he was elected Vice President, Corporate Director of Human Resources.
Yahya Gharagozlou joined Instron in 1981. He has held positions as
Corporate Product Manager for Software, Marketing Manager and Director of
Engineering. In 1996, he was elected Vice President, Corporate Technical
Director.
Arthur D. Hindman joined Instron in 1979. Since 1979, Mr. Hindman has held
positions as Manager, Marketing Administration, International Sales Manager, and
General Manager, Asia/Latin America. In 1993, he was elected a Vice President
and is currently executive in charge of Strategic Planning and Growth.
William J. Milliken joined Instron in 1997 as Vice President, Corporate
Director of Manufacturing. From 1988 to 1997, he was Director of Manufacturing
for Otis Elevator Company's Asia division.
Linton A. Moulding joined Instron in 1985. He has held positions as
Corporate Controller, Director of U.S. Operations, Corporate Vice President of
Manufacturing and Vice President of Finance and Treasurer. In 1993, he was
elected Vice President and Chief Financial Officer of Instron.
Norman L. A. Smith joined Instron Limited in 1982. He has held positions as
Marketing Director Designate, Marketing Director, Deputy Managing Director and
Vice President of Instron and Managing Director of Instron Limited. He is
currently executive in charge of International Sales.
Raymond A. Lancaster joined Instron in 1999 as a director in connection
with the recapitalization. Mr. Lancaster joined Kirtland as a Managing Partner
in 1995. Prior to joining Kirtland, Mr. Lancaster was a General Partner of Key
Equity Partners and was responsible for KeyCorp's Private Equity Group. Mr.
Lancaster is a member of Kirtland's Advisory Board and is a Director of
Fairmount Minerals Ltd., Management Reports, Inc., PVC Container Corporation,
Shore Bridge Corp., STERIS Corporation and Stonebridge Industries, Inc.
42
<PAGE> 43
Thomas N. Littman joined Instron in 1999 as a director in connection with
the recapitalization. Mr. Littman joined Kirtland as a Partner in 1995 after
working as an Associate with the law firm of Jones, Day, Reavis & Pogue. He
serves as Director of R Tape Corp. and Stonebridge Industries, Inc.
Dennis J. Moore joined Instron as a director in 1994. Mr. Moore is Chairman
and Chief Executive Officer of ESCO Electronics Corporation, a diversified
producer of defense systems and commercial products. From 1990 to 1992 he was
President and Chief Operating Officer of ESCO.
John F. Turben joined Instron in 1999 as a director in connection with the
recapitalization. Mr. Turben founded the predecessor to Kirtland Capital
Partners in 1977. He is a Managing Partner of Kirtland and serves as Chairman of
The Hickory Group, Ltd., PVC Container Corporation and Harrington and Richardson
1871, Inc. He is a Director of NACCO Industries, Inc., Unifrax Corporation,
TruSeal Technologies, Inc., Stonebridge Industries, Inc. and a Manager and Vice
Chairman of Gries Financial LLC.
Director Compensation:
The Directors of the Corporation (with the exception of Dennis Moore) currently
earn a directors fee of $10,000 per year. Dennis Moore, currently earns a
directors fee of $20,000 per year plus $500 for attendance at each meeting of
the Board and $250 per committee meeting attended. Mr. Moore also received a
one-time grant of an option to purchase 500 shares of common stock of Instron
with an exercise price of $110 per share vesting 20% per year.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION AWARDS
---------------------------------
SECURITIES
NAME AND PRINCIPAL ANNUAL RESTRICTED STOCK UNDERLYING ALL OTHER
POSITIONS YEAR SALARY BONUS AWARDS(1) OPTIONS(#) COMPENSATION(2)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James M. McConnell 1999 $338,077 $ 99,715 -- 6,465(5) $4,800
President and Chief 1998 325,769 214,176 -- -- 4,800
Executive Officer 1997 280,000 208,447 $612,500(3) -- 4,750
Linton A. Moulding 1999 171,539 27,258 -- 2,155(5) 4,800
Chief Financial Officer 1998 165,769 66,585 -- -- 4,777
1997 149,346 67,165 306,250(3) -- 4,750
Joseph E. Amaral 1999 153,846 27,225 -- 2,155(5) 4,800
Vice President and 1998 155,500 56,221 -- -- 4,800
General Manager, 1997 142,808 58,200 306,250(3) -- 4,750
Instron Materials Testing
William J. Milliken 1999 153,846 24,008 -- 2,155(5) 4,800
Vice President, 1998 155,769 53,544 -- -- 4,800
Corporate Director of 1997 28,846 24,283 351,063(3) -- 865
Manufacturing
Yahya Gharagozlou 1999 152,692 23,760 -- 2,155(5) 4,800
Vice President, 1998 149,808 54,096 -- -- 4,800
Corporate Technical 1997 124,115 53,166 306,250(3) -- 4,545
Director
</TABLE>
(1) Amounts shown represent dollar value of the restricted stock on the date of
grant.
(2) Amount shown represents matching contributions made under our 401(k) Plan.
43
<PAGE> 44
(3) We awarded Mr. McConnell 50,000 shares and we awarded Messrs. Amaral,
Gharagozlou and Moulding 25,000 shares of common stock in the form of
restricted stock on May 14, 1997, valued at $12.25 per share based on the
closing stock price on the date of the grant. We awarded Mr. Milliken
20,500 shares of common stock in the form of restricted stock on October
29, 1997 valued at $17.125 per share based on the closing stock price on
the date of the grant. As a result of the recapitalization, all the
restricted stock were cashed out for $22.00 per share, except for 25,340
shares which were converted into restricted stock of the surviving
corporation. As amended, the restricted stock award agreements governing
these shares will provide for vesting of the restricted stock on May 14,
2004, or earlier depending on our financial results. Prior to the
recapitalization, dividends on the restricted stock awards were paid at the
same rate as paid to all stockholders.
(4) Mr. Milliken joined Instron in October 1997, as Vice President, Corporate
Director of Manufacturing. Salary for 1997 in the table reflects a partial
year.
(5) These shares reflect the one-for-five reverse stock split that the Company
effected in connection with the recapitalization.
SEVERANCE AND OTHER AGREEMENTS
During the past six years, we entered in to Executive Severance Agreements with
all of our current executive officers and five additional key employees. The
severance agreements, other than Mr. McConnell's, were amended in connection
with the Recapitalization. Each agreement, other than Mr. McConnell's, provides
that the employee will receive severance benefits if he is terminated by Instron
(other than for cause or by reason of his death, disability or retirement), or
by the employee for "Good Reason" (as defined in the severance agreements)
within 24 months after a "Change in Control" (as defined in the severance
agreements). Mr. McConnell's severance agreement provided that he would receive
severance benefits if his employment was terminated for any reason within 24
months after a Change in Control. The severance agreements generally provide for
the following severance benefits:
* a lump-sum payment equal to 200% of the employee's "base amount" (as
defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as
amended); and
44
<PAGE> 45
* subject to specified limitations, the provision of a "gross-up" payment to
an executive officer if he becomes subject to an excise tax as a result of
receiving change-in-control severance benefits (including the value of
accelerated vesting of options and restricted stock).
PENSION PLANS
The following table sets forth a range of estimated annual retirement benefits
under Instron's U.S. Employees' Pension Plan for persons in the compensation and
years of service classification specified.
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFIT
------------------------------------------------------------------------------------
AVERAGE ANNUAL 30 OR MORE
COMPENSATION (1) 10 YEARS 15 YEARS 20 YEARS 25 YEARS YEARS
<S> <C> <C> <C> <C> <C>
$125,000 $20,833 $31,250 $41,667 $52,083 $ 62,500
150,000 25,000 37,500 50,000 62,500 75,000
175,000 29,167 43,750 58,333 72,917 87,500
200,000 33,333 50,000 66,667 83,333 100,000
</TABLE>
- -----------
(1) Section 401(a)(17) of the Internal Revenue Code limits the compensation
taken into account in calculating an employee's retirement benefits. The
limit for compensation paid in 1999 was $160,000.
Our calculation of retirement benefits under our pension plan is based on
average annual compensation, which includes salary and performance compensation,
for the highest five full consecutive twelve-month periods out of the last ten
full consecutive twelve-month periods preceding retirement or termination of
employment. Under our pension plan, as of December 31, 1999, the employees
listed in the Summary Compensation Table were credited with the years of service
shown in the following chart:
James M. McConnell......................................10 years
Linton A. Moulding......................................15 years
Joseph E. Amaral........................................22 years
William J. Milliken..................................... 2 years
Yahya Gharagozlou.......................................15 years
The estimated annual benefit for years of service in the table above is computed
on the basis of payment of a straight line life annuity at the normal retirement
age of 65. The amounts in the table do not reflect plan offsets for benefits
provided under Instron's former Employee' Profit Sharing Retirement Plan nor the
required Pension Plan offsets for social security payments.
45
<PAGE> 46
STOCK OPTION PLANS
The following table sets forth stock options granted in 1999 to each of the
Corporation's executive officers named in the Summary Compensation Table. The
following table also discloses for each executive officer listed the gain or
"spread" that would be realized if the options were exercised when the
Corporation's stock price had appreciated by the percentage levels indicated
from the market price on the date of grant. No stock appreciation rights to the
Corporation's executive officers or other employees during 1999.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE
SECURITIES PERCENT OF VALUE AT ASSUMED ANNUAL RATE
UNDERLYING TOTAL OPTIONS OF STOCK PRICE APPRECIATION
OPTIONS TO EXERCISE OR FOR OPTION TERMS (3)
GRANTED EMPLOYEES BASE PRICE EXPIRATION ----------------------------
NAME (#)(1)(2) IN FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James M. McConnell 6,465 19.7 $110.00 09/29/09 $447,238 $1,133,390
Linton A. Moulding 2,155 6.6 110.00 09/29/09 149,079 377,797
Joseph E. Amaral 2,155 6.6 110.00 09/29/09 149,079 377,797
William J. Milliken 2,155 6.6 110.00 09/29/09 149,079 377,797
Yahya Gharagozlou 2,155 6.6 110.00 09/29/09 149,079 377,797
</TABLE>
(1) All such options are subject to a vesting schedule pursuant to which 20% of
such options vest and become exercisable on each of the first five
anniversaries of the respective grant date.
(2) These shares reflect the one-for-five reverse stock split that the Company
effected in connection with the recapitalization.
(3) Represents amounts of hypothetical potential gains from the stock options
granted in 1999. These hypothetical gains are based entirely on assumed
annual growth rates of 5% and 10% in value of the Corporation's stock price
over the life of the stock options.
46
<PAGE> 47
The following table sets forth information regarding options exercised in 1999
and options held at December 31, 1999 by our executive officers named in the
Summary Compensation Table.
AGGREGATE EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR END(#) AT FISCAL YEAR END ($)(1)
---------------------- -------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- --------------- ---------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
James M. McConnell 162,000 $1,610,000 0 / 6,465 $ 0 / $ 0
Linton A. Moulding 9,000 93,750 8,700 / 2,155 431,250 / 0
Joseph E. Amaral 40,319 421,575 3,000 / 2,155 391,875 / 0
William J. Milliken -- -- -- / 2,155 0 / 0
Yahya Gharagozlou 30,500 286,344 0 / 2,155 0 / 0
</TABLE>
(1) Represents the total gain which would be realized if all exercisable
options were exercised. There was no public market for the Instron common stock
as of December 31, 1999. Accordingly, these values have been calculated on the
basis of an assumed fair market value of $110.00 per share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the ownership of Instron
common stock by:
* the stockholders we know to be beneficial owners of more than five percent
(5%) of the outstanding shares of Instron common stock:
* each of our directors;
* each of our executive officers;
* all directors and executive officers of Instron as a group; and
* other persons as required.
47
<PAGE> 48
The table shows the beneficial ownership interests of the parties listed above
as of this filing. Unless otherwise indicated, we believe that each of the
stockholders listed has sole voting and investment power with respect to their
beneficially owned shares of common stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
NAME OF BENEFICIAL OWNER(1) NUMBER(2) PERCENT(3)
<S> <C> <C>
Kirtland Partners Ltd (4) 492,480 85.08%
2550 SOM Center Road Suite 105
Willoughby Hills, Ohio 44094
George S. Burr 12,000 2.07
Helen L. Burr 4,000 *
The Harold Hindman Trust - 1969 (5) 16,000 2.76
James M. McConnell (6) 19,585 3.38
Joseph E. Amaral (7) 3,000 *
John R. Barrett (8) 458 *
Jonathan L. Burr (9) 8,329 1.44
The Jonathan L. Burr Trust - 1965 (10) 4,000 *
Yahya Gharagozlou (11) 1,062 *
Arthur D. Hindman (12) 2,552 *
William J. Milliken 2,189 *
Linton A. Moulding (13) 11,409 1.97
Norman L. Smith 1,800 *
Raymond A. Lancaster (4) - -
Thomas N. Littman - -
Dennis J. Moore - -
John F. Turben (4) - -
All Directors and executive officers as a group 54,384 9.39
(10 persons)(14)
</TABLE>
*Less than 1%.
(1) Unless otherwise set forth above, the address of the listed stockholders is
c/o Instron Corporation, 100 Royall Street, Canton, Massachusetts 02021.
(2) These shares reflect the one-for-five reverse stock split that the Company
effected in connection with the recapitalization.
(3) These percentages are based on the number of outstanding shares of Instron
common stock upon the consummation of the recapitalization on a fully
diluted basis (assuming the exercise of all retained options and excluding
any effect of the warrants issued in connection with the outstanding
notes).
48
<PAGE> 49
(4) Kirtland Partners Ltd. is the general partner of Kirtland Capital Partners
III L.P. and the managing member of each of Kirtland Capital Company III
LLC and ISN Investments Ltd. As such, Kirtland Partners Ltd. will exercise
complete control over the shares of Instron common stock held by each
entity, including voting control and investment decisions with respect to
all the shares. Each of John F. Turben, Raymond A. Lancaster, John G.
Nestor and William R. Robertson is an executive officer, manager and member
of Kirtland Partners Ltd., and as a result of these positions, may be
deemed to have beneficial ownership of the shares of Instron common stock
held by these entities. Messrs. Turben, Lancaster, Nestor and Robertson
disclaim beneficial ownership of all shares of common stock held by
Kirtland.
(5) The Harold Hindman Trust --- 1969 is a trust of which Harold Hindman and
Robert N. Shapiro are the trustees and Harold Hindman is the sole
beneficiary, but with respect to which Harold Hindman has sole voting and
dispositive power over the shares.
(6) The number shown includes 2,400 shares of restricted common stock.
(7) The number shown is the number of shares that Mr. Amaral has the right to
acquire upon the exercise of his retained options.
(8) The number shown represents shares of restricted common stock.
(9) The number shown includes (a) 329 shares of restricted common stock and
(b)8,000 shares that Mr. Burr has the right to acquire upon the exercise of
his retained options.
(10) The Jonathan L. Burr Trust --- 1965 is a trust of which Preston Saunders,
Robert C. Pomeroy and Mary-Kathleen O'Connell are the trustees and Jonathan
L. Burr is the sole beneficiary, but with respect to which Jonathan L. Burr
has shared voting power (with Robert S. Burr, Susan Burr Carlo and Leslie
B. Barresi) and sole dispositive power over the shares.
(11) The number shown includes 1,062 shares of restricted common stock
49
<PAGE> 50
(12) The number shown includes (a) 552 shares of restricted common stock and
(b)2,000 shares that Mr. Hindman has the right to acquire upon the exercise
of his retained options.
(13) The number shown includes 8,700 shares that Mr. Moulding has the right to
acquire upon the exercise of retained options and 2,709 shares owned as a
joint tenant with his wife, Jane Elizabeth Moulding:
(14) The number shown includes (a) 5,068 shares of restricted common stock and
(b) 25,000 shares that executive officers have the right to acquire upon
the exercise of retained options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE RECAPITALIZATION
On May 6, 1999, we entered into a merger agreement with Kirtland and ISN
Acquisition Corporation to effect a recapitalization of Instron. The parties
amended the merger agreement on August 5, 1999 by Amendment No. 1 to, among
other things, permit the closing of the recapitalization to occur in September
rather than August. In the recapitalization, which was consummated on September
29, 1999, Kirtland and its affiliates acquired approximately 88.3% of our
outstanding common stock. Members of our management retained approximately 5.9%
of our outstanding common stock and three other stockholders retained an
approximate 5.8% equity interest in Instron. Kirtland and its affiliates
contributed approximately $54.2 million in cash to Instron in the
recapitalization.
MANAGEMENT. The members of management who participated in the recapitalization
agreed with Kirtland to exchange, in a series of transactions, an aggregate of
165,210 shares of our common stock they owned prior to the recapitalization (of
which 25,340 shares were restricted) that resulted in their ownership of 32,951
shares of our common stock after the recapitalization (of which 5,068 shares are
restricted). The shares of restricted stock are governed by the Instron
Corporation 1992 Stock Incentive Plan and amended restricted stock award
agreements. The amended restricted stock award agreements provide for vesting of
the restricted stock on May 14, 2004, or earlier depending on our financial
results, and amend the definitions of "cause" and "good reason."
In addition, options to purchase up to an aggregate of 125,000 shares of our
common stock held by members of management were converted into options to
purchase up to an aggregate of 25,000 shares of our common stock following the
recapitalization. Each of these retained options is fully vested and
exercisable. The retained options represented approximately 4.3% of our common
stock, assuming the exercise of all retained options.
50
<PAGE> 51
OTHER STOCKHOLDERS. Three other stockholders agreed with Kirtland to exchange,
in a series of transaction, an aggregate of 160,000 shares of our common stock
they owned prior to the recapitalization that resulted in their ownership of
32,000 shares of our common stock after the recapitalization.
CASH PAYMENTS TO MEMBERS OF MANAGEMENT AND THE OTHER STOCKHOLDERS. Members of
management and the three other stockholders did not convert all the shares and
options to purchase shares of our common stock that they owned prior to the
recapitalization. In the recapitalization, members of management and the three
other stockholders were entitled to receive $22.00 per share in cash for their
unconverted shares of our common stock, including shares of restricted common
stock owned by some members of management. They were also entitled to receive
cash based on the number of shares of our common stock underlying their
unconverted options and the difference between the applicable per share exercise
price of the options and $22.00.
Members of management and three other stockholders received cash payments,
directly or indirectly, upon consummation of the recapitalization. The members
of management, James M. McConnell, Joseph E. Amaral, Kenneth L. Andersen, John
R. Barrett, Jonathan L. Burr, the Jonathan L. Burr Trust --- 1965, Yahya
Gharagozlou, Arthur D. Hindman, William J. Milliken, Linton A. Moulding and
Norman L. Smith, received an aggregate of approximately $14.9 million and
retained equity, including options and restricted stock, with a value of
approximately $6.4 million. The three other stockholders, George S. Burr, Helen
L. Burr, and The Harold Hindman Trust --- 1969 (includes cash for shares owned
of record by Harold Hindman, a trustee and the sole beneficiary of The Harold
Hindman Trust --- 1969), received an aggregate of $15.9 million and retained
equity with a value of approximately $3.5 million. The value of retained equity
is based upon a value of $22.00 per share adjusted for the reverse stock split
that took place upon consummation of the recapitalization. We believe that the
members of management used a substantial portion of the payments they received
to repay debt incurred in connection with prior exercises of options and to pay
tax obligations associated with the exercise of options and the vesting of
restricted stock.
GRANT OF NEW OPTIONS TO MANAGEMENT. In the recapitalization, we adopted the
Instron Corporation 1999 Stock Option Plan and reserved for issuance under this
plan 10% of the aggregate number of shares of common stock outstanding on a
fully diluted basis immediately following the recapitalization. We granted to
members of management options to purchase, in the aggregate, 40% of the shares
reserved under the plan following the recapitalization. Each option is
exercisable at the fair market value per share determined in good faith by our
Board of Directors.
51
<PAGE> 52
CONFIDENTIALITY AND NONCOMPETITION AGREEMENTS WITH MEMBERS OF MANAGEMENT. In
order to induce Kirtland to enter into the recapitalization, at the effective
time of the recapitalization each of the members of management entered into a
confidentiality and noncompetition agreement with us. Under the agreement, each
member of management will maintain the confidentiality of business information
and will not engage in competition for so long as he is employed with us or any
of our subsidiaries and thereafter until the first anniversary of the date on
which he last worked for us.
SEVERANCE AGREEMENTS WITH MEMBERS OF MANAGEMENT. Each member of management,
other than Mr. McConnell, amended his existing executive severance agreement
upon the closing of the recapitalization to modify the definition of "good
reason." As amended, the severance agreements provide that a termination
constitutes "good reason" if we fail to maintain the executive in a position
with responsibilities associated with a vice president level or higher, or if
the executive's title is reduced to below a vice president or, except for John
R. Barrett, the executive is no longer a member of our executive committee. The
amended severance agreements do not apply to any termination that occurs after
the second anniversary of the recapitalization, or to any change in control
after the recapitalization.
DEFERRED COMPENSATION AGREEMENT WITH JAMES M. MCCONNELL. At the effective time
of the recapitalization, we entered into a deferred compensation agreement with
Mr. McConnell to replace his existing executive severance agreement. Under this
agreement, we credited $1.2 million to a nonforfeitable deferred compensation
account. We will credit interest on the value of the account in arrears on the
last business day of each quarter at a rate of interest equal to the composite
"prime rate" as quoted for that day. The account will be paid in five annual
installments commencing on the fifth anniversary of the recapitalization.
Commencement of payments will be accelerated in the event of Mr. McConnell's
disability, death or termination without cause. Upon a change in control, the
account will be paid to Mr. McConnell in a lump sum.
In the event that any payment under the deferred compensation agreement would be
an "excess parachute payment" within the meaning of the Code, then we may
propose that the payments to be made under the agreement be reduced so that no
portion of the payment, if so reduced, constitutes an excess parachute payment.
If Mr. McConnell agrees to any such reduction, interest credited to the account
will be reduced so that no portion of the interest to be paid, as so reduced,
constitutes an excess parachute payment. If Mr. McConnell does not agree to this
reduction, then we may accelerate payments to Mr. McConnell so that no payment
to Mr. McConnell will constitute an excess parachute payment. Mr. McConnell is
entitled to receive an additional "gross-up payment" to the extent necessary to
offset any federal, state and local income tax, employment tax and excise tax
upon the excess parachute payment.
52
<PAGE> 53
VOTING AGREEMENT. Under a voting agreement, dated as of May 6, 1999, member of
management, three other stockholders, and some of their affiliates agreed with
ISN Acquisition Corporation to vote all of the shares of our common stock owned
by them in favor of the recapitalization. These individuals also agreed (1) not
to dispose of any common stock, or deposit any common stock into a voting trust
or enter into a voting agreement or arrangement with respect to voting any
voting shares, (2) to waive their appraisal rights, and (3) at Kirtland's
request, to take further lawful actions as may be necessary or desirable to
consummate the recapitalization. The common stock subject to these voting
agreements represents approximately 22.4% of our outstanding common stock. The
voting agreement terminated upon the consummation of the recapitalization.
FEES AND EXPENSES. In connection with the recapitalization, we agreed to pay for
the reasonable fees and expenses of legal counsel for members of our management
up to an aggregate of $85,000. We also agreed to pay for the reasonable fees and
expenses of three other stockholders' legal counsel up to an aggregate of
$40,000.
INDEMNIFICATION AND INSURANCE. The merger agreement contains standard
indemnification provisions for our former or current directors, officers,
employees, fiduciaries or agents. In addition, before the recapitalization, we
purchased an extended reporting period endorsement under our then-existing
directors' and officers' liability insurance coverage for our directors and
officers.
SPECIAL COMMITTEE. The members of the Special Committee of our Board of
Directors were treated in the recapitalization as public stockholders with
respect to their shares of our common stock. Upon consummation of the
recapitalization, Mr. Young received $550,000 as cash merger consideration and
Mr. Moore received $55,000 as cash merger consideration. The third member of the
Special Committee, Mr. Smith, did not own any shares of our common stock. None
of the members of the Special Committee held any options to purchase our common
stock.
STOCKHOLDERS AGREEMENT. Upon consummation of the recapitalization, all of our
stockholders entered into a stockholders agreement. The stockholders agreement
provides that our stockholders may not transfer their shares of common stock
except under specified circumstances. Under the stockholders agreement, we have
a right of first refusal in the event that any stockholder wishes to sell shares
of our common stock, or in the event that we do not exercise our right of first
refusal, the nontransferring stockholders, other than any management stockholder
who is no longer an employee, will have the opportunity to purchase the shares.
The stockholders agreement also provides that the stockholders will have the
opportunity to participate in some sales of our common stock by Kirtland, and
Kirtland has the right to cause the other stockholders to participate in
53
<PAGE> 54
some of these sales. In addition, the stockholders agreement provides for
certain "puts" and "calls" upon the termination of a management stockholder's
employment with Instron, and provides that if Kirtland purchases shares of our
common stock following the closing of the Recapitalization, the stockholders
have the right to purchase their pro rata share of the number of shares to be
issued to Kirtland.
REGISTRATION RIGHTS AGREEMENT. Upon consummation of the Recapitalization,
Kirtland and its affiliates, members of our management and Instron entered into
a registration rights agreement. Under this registration rights agreement, the
parties have the right to participate, or "piggy-back", in equity offerings
initiated by us that are registered under the Securities Act, subject, in the
case of members of our management, to the approval of the underwriters involved
with any equity offering and other customary terms and conditions.
ADVISORY SERVICES AGREEMENT. At the closing of the Recapitalization, Kirtland
and Instron entered into an advisory services agreement under which Kirtland
will provide management consulting and financial advisory services to Instron
for an annual fee in the amount of $500,000. The advisory services agreement
includes customary indemnification provisions in favor of Kirtland. Also at the
closing of the Recapitalization, we paid Kirtland a financing fee of $750,000
and reimbursed Kirtland for its out-of-pocket expenses as compensation for its
services as financial advisor.
54
<PAGE> 55
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 balance sheets at
December 31, 1999 and 1998
Consolidated statements of operations for the
years ended December 31, 1999, 1998 and 1997
Consolidated statements of stockholders' equity (deficit)
for the years ended December 31, 1999, 1998 and 1997
Consolidated statements of cash flows for the
years ended December 31, 1999, 1998 and 1997
Notes to consolidated financial statements
(a)2. FINANCIAL STATEMENT SCHEDULE
Schedule
Page Number
---- ------
Report of Independent Accountants on
financial statement schedule 59
Consolidated valuation accounts 60 II
55
<PAGE> 56
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(CONTINUED)
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
- ----------- -----------------------
2.1 Agreement and Plan of Merger, dated as of May 6, 1999, among
Kirtland Capital Partners III L.P., ISN Acquisition Corporation
and Instron Corporation (incorporated herein by reference to
Appendix A of the Definitive Proxy Statement on Schedule 14A of
Instron Corporation, filed on July 22, 1999).
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated as of
August 5, 1999, among Kirtland Capital Partners III L.P., ISN
Acquisition Corporation and Instron Corporation (incorporated
herein by reference to Appendix B of the Revised Letter to
Shareholders, filed as Definitive Additional Materials on
Schedule 14A of Instron Corporation on August 6, 1999).
3.1(i) Restated Articles of Organization of Instron Corporation.
(incorporated herein by reference to Registration Statement on
Form S-4, File Number 333-92727, as amended, of Instron
Corporation, filed on February 14, 2000)
3.1(ii) Amended and Restated By-Laws of Instron Corporation.
(incorporated herein by reference to Registration Statement on
Form S-4, File Number 333-92727, as amended, of Instron
Corporation, filed on February 14, 2000)
4.1 Indenture, dated as of September 29, 1999, between Instron
Corporation and Norwest Bank Minnesota, National Association as
Trustee. (incorporated herein by reference to Registration
Statement on Form S-4, File Number 333-92727, as amended, of
Instron Corporation, filed on February 14, 2000)
4.2 Debt Registration Rights Agreement, dated as of September 29,
1999, by and among Instron Corporation, the Subsidiary Guarantors
and Donaldson, Lufkin & Jenrette Securities Corporation.
(incorporated herein by reference to Registration Statement on
Form S-4, File Number 333-92727, as amended, of Instron
Corporation, filed on February 14, 2000)
4.3 Warrant Registration Rights Agreement, dated as of September 29,
1999, by and between Instron Corporation and Donaldson, Lufkin &
Jenrette Securities Corporation. (incorporated herein by
reference to Registration Statement on Form S-4, File Number
333-92727, as amended, of Instron Corporation, filed on February
14, 2000)
4.4 Warrant Agreement, dated as of September 29, 1999, between
Instron Corporation and Norwest Bank Minnesota, National
Association as Warrant Agent. (incorporated herein by reference
to Registration Statement on Form S-4, File Number 333-92727, as
amended, of Instron Corporation, filed on February 14, 2000)
4.5 Form of Exchange Note (included in Exhibit 4.1).
4.6 Form of Warrant (included in Exhibit 4.4).
10.1 Credit and Security Agreement, dated as of September 29, 1999,
among Instron Corporation, Instron, Ltd., Instron Schenck Testing
Systems, GMBH and Instron Wolpert GMBH as Borrowers and the Banks
which are Signatories and National City Bank as Administrative
Agent. (incorporated herein by reference to Registration
Statement on Form S-4, File Number 333-92727, as amended, of
Instron Corporation, filed on February 14, 2000)
10.2 Letter Agreement dated as of May 6, 1999 by and among Kirtland
and the Management Investors (incorporated herein by reference to
Exhibit (c)(2) to Schedule 13E-3 of Instron Corporation, filed on
May 26, 1999).
10.3 Letter Agreement dated as of May 6, 1999 by and among Kirtland,
Instron Corporation and the Other Investors (incorporated herein
by reference to Exhibit (c)(3) to Schedule 13E-3 of Instron
Corporation, filed on May 26, 1999).
10.4 Voting Agreement dated as of May 6, 1999 by and among Kirtland,
MergerCo, the Management Investors and certain of their
affiliates, and the Other Investors and certain of their
affiliates (incorporated herein by reference to Exhibit (c)(4) to
Schedule 13E-3 of Instron Corporation, filed on May 26, 1999).
10.5 Form of Stockholders Agreement by and among Instron Corporation
and all of its stockholders (incorporated herein by reference to
Exhibit (c)(5) to Schedule 13E-3 of Instron Corporation, filed on
May 26, 1999).
10.6 Form of Amendment to Restricted Stock Award Agreement
(incorporated herein by reference to Exhibit (c)(6) to Schedule
13E-3 of Instron Corporation, filed on May 26, 1999).
10.7 Form of Instron Corporation 1999 Stock Option Plan (incorporated
herein by reference to Exhibit (c)(7) to Schedule 13E-3 of
Instron Corporation, filed on May 26, 1999).
10.8 Form of Incentive Stock Option Agreement (incorporated herein by
reference to Exhibit (c)(8) to Schedule 13E-3 of Instron
Corporation, filed on May 26, 1999).
56
<PAGE> 57
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(CONTINUED)
Exhibit No. Description of Exhibits
- ----------- -----------------------
10.9 Form of Nonqualified Stock Option Agreeement (incorporated herein
by reference to Exhibit (c)(9) to Schedule 13E-3 on Instron
Corporation, filed on May 26, 1999).
10.10 Form of Amendment to Instron Corporation 1992 Stock Incentive
Plan (incorporated herein by reference to Exhibit (c)(10) to
Schedule 13E-3 of Instron Corporation, filed on May 26, 1999).
10.11 Form of Amendment to Nonqualified Stock Option Agreement
(incorporated herein by reference to Exhibit (c)(11) to Schedule
13E-3 of Instron Corporation, filed on May 26, 1999).
10.12 Form of Amendment to Incentive Stock Option Agreement
(incorporated herein by reference to Exhibit (c)(12) to Schedule
13E-3 of Instron Corporation, filed on May 26, 1999).
21 Subsidiaries of Instron Corporation.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
57
<PAGE> 58
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 , 2000
(Registrant)
By: /s/ James McConnell By: /s/Linton Moulding
---------------------------------- -------------------------------
James McConnell Linton 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/ John Turben Chairman of the Board March , 2000
- ---------------------
John Turben
President, Chief Executive Officer
/s/ James McConnell and Director March , 2000
- ---------------------
James McConnell
/s/ Dennis Moore Director March , 2000
- ---------------------
Dennis Moore
/s/ Raymond Lancaster Director March , 2000
- ---------------------
Raymond Lancaster
/s/ Thomas Littman Director March , 2000
- ---------------------
Thomas Littman
58
<PAGE> 59
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF INSTRON CORPORATION:
Our audits of the consolidated financial statements referred to in our report
dated March 14, 2000 appearing in this Annual Report on Form 10-K also included
an audit of the financial statement schedule listed 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
March 14, 2000
59
<PAGE> 60
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, 1999 $ 800,000 $288,000 $(48,000) $210,000 $ 830,000
---------- -------- -------- -------- ----------
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
---------- -------- -------- -------- ----------
</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.
60
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
All of the subsidiaries listed below are included in the consolidated financial
statements.
<TABLE>
<CAPTION>
Percentage of Organized
Voting Securities Under the
Incorporated Owned by Registrant Laws of
- --------------------------------------------------------------------------------
<S> <C> <C>
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)
</TABLE>
(1) Subsidiaries of Instron Corporation (a Massachusetts corporation).
(2) Subsidiaries of Instron Holdings Limited (United Kingdom).
(3) Subsidiary of Instron GmbH
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-4 (No. 333-93727) of Instron Corporation of our reports
dated March 14, 2000 relating to the financial statements and financial
statement schedule, which appear in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
-------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 10,978
<SECURITIES> 0
<RECEIVABLES> 65,481
<ALLOWANCES> 830
<INVENTORY> 31,117
<CURRENT-ASSETS> 117,477
<PP&E> 67,478
<DEPRECIATION> 44,335
<TOTAL-ASSETS> 166,675
<CURRENT-LIABILITIES> 54,078
<BONDS> 60,000
0
0
<COMMON> 557
<OTHER-SE> (16,310)
<TOTAL-LIABILITY-AND-EQUITY> 166,675
<SALES> 176,144
<TOTAL-REVENUES> 210,564
<CGS> 105,800
<TOTAL-COSTS> 129,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 326
<INTEREST-EXPENSE> 4,648
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