-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FeDxKLv8sUBicmzXYbt6FogQPZPKLRO1O02oJv9fPyv2GonDa74K9lN2PFAvjo44 MNQpe2Pdyy0g6Cd6ZJNo7g== 0000950135-99-001910.txt : 19990412 0000950135-99-001910.hdr.sgml : 19990412 ACCESSION NUMBER: 0000950135-99-001910 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990409 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSTRON CORP CENTRAL INDEX KEY: 0000050716 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 042057203 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-05641 FILM NUMBER: 99591085 BUSINESS ADDRESS: STREET 1: 100 ROYALL ST CITY: CANTON STATE: MA ZIP: 02021 BUSINESS PHONE: 6178282500 MAIL ADDRESS: STREET 1: 100 ROYALL STREET CITY: CANTON STATE: MA ZIP: 02021 10-K405 1 INSTRON CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ___________ TO ___________ COMMISSION FILE NUMBER 1-5641 INSTRON CORPORATION (Exact name of registrant as specified in its Charter) MASSACHUSETTS 04-2057203 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 ROYALL STREET CANTON, MASSACHUSETTS 02021 (Address of Principal (Zip Code) executive offices) (781) 828-2500 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK, $1 PAR VALUE AMERICAN STOCK EXCHANGE (Title of Each Class) (Name of each exchange on which registered) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE (Title of class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ X ]. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No The aggregate market value of the Registrant's common stock held by nonaffiliates of the Registrant as of March 19 , 1999 was $86,739,613 The number of shares outstanding of each of the issuer's classes of common stock as of March 19, 1999 was 6,956,838. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the definitive proxy statement for the 1999 Annual Meeting of Stockholders are incorporated by reference in Part III. - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS THE COMPANY Founded in 1946, Instron Corporation ("Instron" or the "Company") designs, develops, manufactures, markets, and services materials and structural testing systems, software, and accessories. These products are used principally in research and development and quality control applications to test the mechanical properties of various materials, components, and structures. The materials tested include metals, plastics, textiles, composites, ceramics and rubber. Instron systems test virtually all natural and man-made materials from fragile fibers to the exotic materials needed for space exploration. In the worldwide market for these systems, Instron is a leading producer of static (electromechanical), dynamic (servohydraulic), simulation (structures), hardness and impact testing systems. Instron offers a comprehensive range of instruments and computer based systems that provide and enhance control of the testing process, data collection and analysis. Instron's products are typically assembled from a number of company-designed standard hardware and software modules and accessories, selected and configured for the customer's specific application. Additional hardware, software and accessories may be added to the system at a later date. The Company has sales and service offices in 14 United States cities and 17 foreign countries. Approximately 55% of the Company's revenues are derived from sales outside the United States. Principal manufacturing facilities are located in the United States, the United Kingdom and Germany. PRINCIPAL MARKETS The Company's principal markets are industrial and academic institutions and governments; organizations that seek to understand the characterization and properties of materials and products. INDUSTRY - Most major industries use materials testing systems as a part of their research and development and quality control activities. Industrial research focuses upon developing new materials, substitute materials, or new uses for existing materials that reduce manufacturing or operating costs and improve product quality and durability. Industrial activity and structural testing tends to be concentrated in the automotive, transportation, aerospace and civil engineering sectors. Industrial quality control involves testing the properties of finished products as well as materials used as inputs to the manufacturing process. 2 3 ACADEMIC INSTITUTIONS - Academic institutions use Instron products for both basic research and instruction in materials science. The Company places particular emphasis on academic institutions because scientists and engineers trained on Instron equipment may influence additional sales of the Company's products later in their careers. GOVERNMENTS - Government and government agency use of Instron products principally involves testing which supports defense, space, and civil engineering programs, ascertains compliance with safety and other legal requirements, and conducts research on new materials and emerging technologies. PRINCIPAL PRODUCTS Instron offers a comprehensive range of general-purpose materials testing systems, application software, and accessories within two principal product lines; static systems and dynamic systems. The major distinction between a static system and a dynamic system is the means used to apply force to the test specimen. The former uses a screw-driven moving crosshead and the latter a servo-controlled hydraulic actuator. Many tests can be carried out equally well with either a static or dynamic test machine. However, if the test requires extremely rapid rates of loading, or subjects the test material to rapidly fluctuating loads, then a dynamic test machine is appropriate. Instron's product offerings vary in the force capacity of the machines, the complexity of the drive system, and the sophistication of the control electronics, the computer system, and the software. STATIC SYSTEMS - Static (electromechanical) systems consist of a frame, a moving crosshead, a load cell, grips, and electronic modules to control the test and analyze the test data. Static systems typically stretch or compress the material being tested at a user selected, constant speed that ranges from fractional microns per minute to one meter per minute. These systems continuously measure the precise force being applied to, and the resulting deformation of, the test material at various time intervals. They also analyze the results of the test, and either print, graph or electronically display them. Instron's static product offerings include the cost effective Series 4400 product line and the high-performance Series 5500 product line. The Series 5500 systems are usually used for research and development and are equipped with sophisticated software and many accessories. Quality control applications usually require fewer accessories and less breadth of application capability. The prices of static systems generally range from $15,000 to $150,000. Static systems and related accessories accounted for approximately 62%, 70%, and 69% of the Company's revenue in 1998, 1997 and 1996, respectively. 3 4 DYNAMIC SYSTEMS - Dynamic (servohydraulic drive) systems allow repeated deformation of the material being tested to simulate in-use conditions over an extended period of time. These systems use a servo-controlled hydraulic actuator, a load cell, grips, and electronic modules that control the test and analyze the test data. Software, computer control, and data analysis are features routinely added to basic dynamic systems. The computer may be used to command actuator motion to simulate real-life loading conditions. It is also used to store and analyze data and display parameters of performance and endurance for test materials or test components. Utilizing the Company's engineering expertise, dynamic systems are often customized to fit the need of a customer's particular test application. Machines can be configured not only to stretch or compress the material being tested, but also to simultaneously twist it or subject it to other forms of complex loading. The dynamic product line includes structural testing or simulation systems. These systems are used to simulate real life conditions while testing a wide range of automotive components from suspension and steering systems to entire vehicles. They typically consist of several actuators that push and pull the structure at different points, and sensors that collect and transmit the resulting data to a central processing unit. The prices of dynamic systems generally range from $40,000 to $400,000 with very complex structural testing systems ranging as high as several million dollars. Dynamic systems and related accessories accounted for approximately 38%, 30% and 31% of the Company's sales in 1998, 1997 and 1996, respectively. HARDNESS SYSTEMS - Instron is in the forefront of development for new hardness-testing systems. These systems indent the surface of a material under a controlled force. The size of the resulting indentation gives an indication of the hardness of the surface of the material. The Series 2000 hardness-testing machine takes advantage of Instron's advanced electromechanical position and control technology and also incorporates Instron's load cell technology. The prices of hardness testing machines range from $2,000 to $20,000. The sales of hardness systems and related accessories are included in the percentage amounts for static systems set forth above. SERVICE - In recent years, the Company has invested in new service offerings, including calibration, extended warranties, software support, upgrade contracts, training and telephone support. The service business accounted for approximately 16%, 17%, and 16% of the Company's total revenue in 1998, 1997, and 1996, 4 5 respectively. The service revenue is included in the percentage amounts for static and dynamic systems set forth above. OTHER PRODUCTS AND ACCESSORIES - Instron manufactures and sells a wide range of other products and accessories. The products include durometers, impact testers, and asphalt binder testers. Typical accessories include application software, grips, fixtures, optical/video extensometers that measure precisely the deformation of the material being tested without actually contacting it, robotic devices that automatically feed test specimens to the systems, and environmental control accessories. Accessories can be included with the initial purchase or subsequently purchased in order to expand the capability of the original machine. The Company also has license agreements with third parties for the exclusive sale of certain products, including software, in the material and structural testing industry. These other products and accessories for static and dynamic equipment purchased separately from the original sale of equipment are included in the percentage amounts for static and dynamic systems set forth above. ACQUISITIONS On August 4, 1998, the Company acquired substantially all the assets of Satec Systems, Inc. of Grove City, Pennsylvania, for approximately $12.6 million in cash. Satec is a manufacturer of a range of materials testing equipment sold primarily in the United States with annual sales of approximately $18.0 million. This acquisition has been accounted for under the purchase method of accounting and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The operating results of Satec have been included in the Company's consolidated results of operations from the date of acquisition. IST was a joint venture company that Instron entered into in November 1996 with Carl Schenck AG in the area of structural testing. On September 27, 1998, the Company acquired the remaining 49% interest in Instron Schenck Testing Systems ("IST") from Carl Schenck A.G. of Darmstadt, Germany for $2.7 million in cash. IST has become a world-class structures testing business with sales of more than $55 million in 1998. This additional investment has been accounted for under the purchase method of accounting and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The operations of IST for the fourth quarter of 1998 have been consolidated into the Company's results of operations from the date of acquisition. Prior to this acquisition the Company accounted for its 51% interest in IST under the equity method of accounting. 5 6 RESEARCH AND DEVELOPMENT The Company maintains major research and development staffs at its U.S. and U.K. manufacturing facilities. These development staffs often work directly with industrial and government researchers and the materials science departments of universities to create leading edge solutions to materials testing applications. Instron is a pioneer in the development and application of electronic measurement and drive systems techniques in materials testing systems. The Company has continuously designed, developed, and marketed state-of-the-art testing systems, software, and accessories, including digitally controlled static and dynamic testing systems. In 1998, the Company expensed $8,485,000 on research and development activities, compared with $6,959,000 in 1997, and $8,616,000 in 1996. The Company has also capitalized certain software development costs of $1,490,000. $637,000, and $1,144,000 during 1998, 1997 and 1996, respectively. During these years, certain Instron engineering resources have been utilized to develop new products for IST in accordance with the joint venture agreement. The costs associated with the development efforts were reimbursed by IST. If research and development expenses were restated, for comparison purposes, by including software development costs as period expenses, and by adjusting engineering expenses for the effect of IST and Satec and the disposition of LMS, research and development expenses of the ongoing business would have increased by 7.5% in 1998. In recent years, the Company has focused its research and development expenditures on creating new product platforms for static and dynamic product lines, developing new hardness testing machines, developing new software and enhancements, and redesigning products to reduce manufacturing costs. These new products and enhancements do not, in the Company's opinion, present a significant risk that on-hand inventory, which supports existing models, will be made obsolete because of the interchangeability of parts and the lead time available before the introduction of new products. COMPETITIVE CONDITIONS The Company competes with a number of other manufacturers, some of whom have greater financial, technical and marketing resources than the Company. The intensity of the competition varies by product line and by geographic area. Competition in the United States is greatest in the dynamic line where the Company has one major domestic competitor, MTS Systems Corporation. Competition in foreign markets is greatest in Germany and Japan, where there are major local manufacturers. The principal competitive factors are engineering excellence, the 6 7 quality and technical capability of the equipment, responsiveness to customer needs, quality of service, and price performance. BACKLOG At December 31, 1998, the Company's backlog of orders was approximately $74,477,000 compared with $28,748,000 at December 31, 1997. The increase in backlog is due primarily to the inclusion of the IST and Satec backlogs in December 31, 1998. The Company anticipates that substantially all of its backlog as of December 31, 1998 will be shipped during 1999. RAW MATERIALS While the Company is dependent upon a limited number of suppliers for certain components, it has not experienced significant problems in procurement or delivery of any essential materials, parts or components. Substantially all purchasing is accomplished on a competitive basis while maintaining a level of inventory sufficient to provide support of customer servicing requirements and meet scheduled delivery dates. PATENTS AND TRADEMARKS The Company has several patents in the United States and in foreign countries. However, the Company relies principally on its engineering and technological capabilities rather than on these patents to maintain its position in the industry. The trademarks "Dynatup," "Shore," "Rockwell" and "Instron" and the device mark are registered trademarks of the Company. Under current law, these trademarks may be renewed indefinitely as long as they are maintained in use. ENVIRONMENTAL CONSIDERATIONS Compliance with federal, state and local provisions relating to protection of the environment has not had, and is not expected to have, any material adverse effects upon the production, capital expenditures, earnings, and competitive position of the Company and its subsidiaries. NUMBER OF EMPLOYEES At December 31, 1998 the Company employed 1,421 people worldwide. SEASONALITY Historically, the Company's sales are highest in the fourth quarter of each year due to the ordering pattern of its customers, which favors fourth quarter deliveries before budget authorizations expire. Sales in the first quarter are usually low as it takes time to rebuild in-process inventory levels after the heavy fourth quarter delivery requirements have been satisfied. Also, third quarter sales are generally low due to vacation patterns of both Company production workers and customer technical personnel needed for acceptance testing. The seasonal factors affecting sales are usually reflected in quarterly net income. 7 8 FOREIGN OPERATIONS Foreign operations represent a significant portion of the Company's business. The Company's branches and subsidiaries outside of the United States accounted for 55% of the Company's total revenue in 1998, 59% in 1997 and 61% in 1996. The Company believes that the business and political risk of operating in most of its current foreign markets is not, in the aggregate, materially greater than the risk undertaken by the Company in the United States. The recent economic turmoil in the Asian economies has increased the business risks associated with operating in this region. The Company's principal foreign assets are located in the United Kingdom and Germany. Foreign exchange fluctuations can have a significant impact on the Company's consolidated net assets and results of operations as reported in U.S. dollars. However, the Company believes that these fluctuations generally have not had, and it does not expect them to have, a significant economic effect on the Company's business since foreign operations are generally financed, and revenues and expenses are, for the most part, paid in local currencies, except for intercompany purchases which are closely monitored. Financial information concerning domestic and foreign operations appears in Notes 1 and 2 in the "Notes to Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations", included as part of this report. ITEM 2. PROPERTIES The Company's corporate headquarters and principal United States manufacturing facility is located at the junction of Routes 128 and 138 in Canton, Massachusetts, approximately 15 miles from Boston. On March 27, 1998, the Company sold 42 acres of excess land in Canton, Massachusetts for $13.5 million in cash. The Company believes that the remaining 24 acres are sufficient for current and future business requirements. The Company's principal foreign facilities include 120,000 square feet of office and manufacturing space located on seven acres of Company-owned land in High Wycombe, England, approximately 30 miles west of London and 50,000 square feet of office and manufacturing space leased in Darmstadt, Germany. The Company has 35 sales offices and demonstration centers which are located throughout the United States and in 17 foreign countries. The Company believes that all properties are adequate and suitable for its present needs. ITEM 3. LEGAL PROCEEDINGS The registrant and its subsidiaries are not involved in any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1998. 8 9 EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages and positions of the executive officers of the Company are listed below along with their business experience during the past five years.
NAME, AGE AND POSITION BUSINESS EXPERIENCE DURING PAST 5 YEARS ---------------------- --------------------------------------- James M. McConnell, 58 Mr. McConnell joined Instron Corporation in 1990 as President President and Chief Executive Officer and Chief Executive Officer. From 1987 to 1990, Mr. McConnell was President and Chief Executive Officer of Automatic Switch Company, and from 1986 to 1987, he was President of Rosemont, Inc. (both are wholly-owned subsidiaries of Emerson Electric Co.) Joseph E. Amaral, 51 Mr. Amaral joined Instron Corporation in 1978. Since 1985, Mr. Vice President, General Manager, Amaral has held positions as Corporate Technology Manager, North America Operations Corporate Product Planning Manager, and Vice President, Corporate Technical Director. In March 1995, he was elected Vice President, General Manager of North America Operations. Kenneth L. Andersen, 57 Mr. Andersen joined Instron Corporation in 1983. Since 1983, Vice President, Mr. Andersen has held positions as Director of Software North America Sales Business Group, Director of Structures Business Group, and Corporate Marketing Director. In 1993, he was elected Vice President of Sales, North America John R. Barrett, 44 Mr. Barrett joined Instron Corporation in 1988 as Assistant Treasurer Treasurer. From 1979 to 1988, Mr. Barrett has held various financial management positions with Computervision Corporation. In 1993, he was elected Treasurer of the Corporation. Jonathan L. Burr, 51 Mr. Burr joined Instron Corporation in 1979. He has held Vice President, Corporate Director positions as Personnel Administrator, Director of Personnel, and of Human Resources Corporate Director of Human Resources. In 1993, he was elected Vice President, Corporate Director of Human Resources. Mr. Burr is the son of George S. Burr, Vice Chairman of the Board of Directors.
9 10 EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
NAME, AGE AND POSITION BUSINESS EXPERIENCE DURING PAST 5 YEARS ---------------------- --------------------------------------- Yahya Gharagozlou, 43 Mr. Gharagozlou joined Instron Corporation in 1981. He has held Vice President, Corporate Technical positions as Corporate Product Manager for Software, Marketing Director Manager, Product Planning Manager, and Director of Engineering. In, 1996, he was elected Vice President, Corporate Technical Director. Arthur D. Hindman, 55 Mr. Hindman joined Instron Corporation in 1979. Since 1979, Mr. Vice President and General Manager, Hindman has held positions as Manager, Marketing Administration; Asia Pacific/Latin America International Sales Manager, and General Manager, Asia/Latin America. In 1993, he was elected Vice President and General Manager, Asia Pacific/Latin America. Mr. Hindman is the son of Harold Hindman, Chairman of the Board of Directors. William Milliken, 44 Mr. Milliken joined Instron Corporation in 1997 as Vice President, Vice President, Corporate Corporate Director of Manufacturing. From 1988 to 1997, Mr. Milliken Director of Manufacturing was Director of Manufacturing for Otis Elevator's Asia division. From 1978 to 1988 he held various financial and manufacturing management positions with General Motors Corporation. Linton A. Moulding, 45 Mr. Moulding joined Instron Corporation in 1985. He has held Chief Financial Officer positions as Corporate Controller, Director of US Operations, Corporate Vice President of Manufacturing, and Vice President of Finance and Treasurer. In 1993, he was elected Chief Financial Officer of the Corporation. Norman Smith, 52 Mr. Smith joined Instron Limited in 1982 as Marketing Director Vice President and Managing Director, Designate and assumed the position of Marketing Director in 1983. of Instron Limited In January 1996, he was promoted to Deputy Managing Director and was elected Vice President of Instron and Managing Director of Instron Limited in November 1996.
10 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the American Stock Exchange under the symbol ISN. The table below sets forth the high and low sales prices of the Common Stock and the dividends declared during the two most recent fiscal years.
1998 1997 --------------------------- ------------------------------ Market Price Cash Market Price Cash ---------------- Dividends ----------------- Dividends High Low Declared High Low Declared First quarter $19.188 $15.500 $.04 $13.500 $12.000 $.04 Second quarter 20.625 18.375 .04 14.250 10.750 .04 Third quarter 19.125 11.500 .04 18.875 14.000 .04 Fourth quarter 17.250 11.875 .04 19.188 15.125 .04 ---- ---- Year $20.625 $11.50 $.16 $19.188 $10.75 $.16 ==== ====
The number of holders of record of the Company's Common Stock at December 31, 1998 was 435. This number does not include shareholders for whom shares are held in a "nominee" or "street" name. 11 12 ITEM 6. SELECTED FINANCIAL DATA
In thousands, except per share data 1998 1997 1996 1995 1994 - -------------------------------------- -------- -------- -------- -------- -------- OPERATING RESULTS - ----------------- Bookings of new orders $166,515 $150,020 $161,692 $155,092 $138,947 Total revenue 183,029 155,660 153,113 150,571 136,192 Income from operations 9,646 12,571 9,145 8,921 8,082 Income before taxes 20,333 11,555 7,385 7,684 6,979 Net Income 11,459 7,164 4,582 4,995 4,537 Backlog 74,477 28,748 34,361 36,136 32,687 Research & development 8,485 6,959 8,616 8,782 8,062 Earnings before interest, taxes, depreciation and amortization (EBITDA) 27,671 18,880 15,329 15,891 13,855 FINANCIAL POSITION - ------------------ Working capital $ 55,241 $ 41,942 $ 44,094 $ 38,259 $ 33,849 Total assets 158,254 118,985 121,833 113,334 102,294 Total debt 19,632 13,659 23,919 19,875 17,818 Stockholders' equity 79,584 66,254 62,401 56,102 51,926 Capital expenditures 5,841 4,176 4,473 4,510 4,286 PER SHARE OF COMMON STOCK - ------------------------- Net income per basic share $ 1.72 $ 1.11 $ .72 $ .79 $ .72 Net income per diluted share 1.62 1.05 .70 .78 .72 Dividends declared .16 .16 .16 .15 .12 Book value 11.46 9.82 9.68 8.85 8.26 PERFORMANCE MEASUREMENT - ----------------------- Revenue growth 17.6% 1.7% 1.7% 10.6% 10.9% Pre-tax income as a % of total revenue 11.1 7.4 4.8 5.1 5.1 Effective income tax rate 43.6 38.0 38.0 35.0 35.0 Net income as a % of total revenue 6.3 4.6 3.0 3.3 3.3 Return on average stockholders' equity 15.7 11.1 7.7 9.2 9.2 Total debt as a % of debt, plus equity 19.8 17.1 27.7 26.2 25.5 Working capital ratio 1.9:1 2.0:1 2.2:1 1.9:1 1.9:1
12 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The consolidated results for 1998 reflect, from the dates of acquisition, the inclusion of Satec which was acquired in August 1998 and the buyout of the remaining 49% of the IST joint venture in September 1998. During August 1998, the Company acquired Satec Systems, a materials testing company supplying electromechanical and servohydraulic products primarily to the metals industry. The business was acquired for $12.6 million in cash and the consolidated results of Instron reflect Satec's activity for the last five months of 1998. Satec's reported sales were $8,757,000 and net income was $356,000 for the last five months of 1998. For information purposes, Satec's annual sales for 1998 and 1997 were $18,642,000 and $17,064,000, respectively. IST was a joint venture company that Instron entered into in November 1996 with Carl Schenck AG in the area of structural testing. Both companies contributed their structural testing business and signed contracts to provide manufacturing, R&D and support services to the joint venture. During 1997 and the first nine months of 1998, Instron owned 51% of IST and accounted for the joint venture using the equity method of accounting. Instron's revenue from IST was $11,395,000, $6,858,000 and $519,000 for the first nine months of 1998, the total year of 1997, and the last two months of 1996, respectively. This revenue reflects the shipment of systems from Instron to IST under the terms of a manufacturing and supply agreement at substantially reduced gross margins compared to normal customer margins, and commission income earned by Instron for selling IST products. During the time that Instron owned 51% of the entity, IST had operating losses, due in part to low margin orders contributed into the joint venture, and the time and effort necessary to consolidate the operations and technology of the two contributing partners. For 1998, 1997 and 1996, Instron recorded net losses related to its 51% share of the joint venture results of $902,000, $876,000 and $69,000, respectively. Instron exercised its option to purchase the remaining 49% of IST for $2.7 million in cash on September 27, 1998. Upon the completion of the acquisition, the full results of operations from the IST business were included in consolidated results of Instron, representing three months of activity in 1998. IST broke even in the fourth quarter and is anticipated to make a contribution to earnings in 1999. IST's customer revenue of $18,441,000 for the fourth quarter of 1998 was included in Instron's reported results. For information purposes, IST's annual revenues were $56,619,000 and $39,777,000 in 1998 and 1997, respectively. Financial comparisons of the results of fiscal 1997 and 1996 are impacted by Instron's sale of its Laboratory MicroSystems division ("LMS") to Axiom Systems in April 1997. LMS's revenues were $1,237,000 in the first quarter of 1997 and $5,625,000 in 1996. LMS had no significant impact on net income in either year. 13 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (continued) Total revenue of $183,029,000 in fiscal 1998 increased by 17.6% from revenue of $155,660,000 in fiscal 1997 due primarily to the acquisitions of Satec and IST. Total revenue in fiscal 1997 increased by 1.7% from revenue of $153,113,000 in fiscal 1996. Bookings of new orders were $166,515,000 in fiscal 1998. Bookings on a pro forma basis, including the annual bookings of IST and Satec, would have been $212.7 million in 1998 compared to $220.1 million in 1997, a decrease of 3.4%. This decrease is due largely to the impact of the economic downturn in the Asian markets. The Company's backlog of orders was $74,477,000 at December 31, 1998, an increase of 159.1% from 1997 due primarily to the inclusion of the IST and Satec backlogs. The year end 1997 backlog decreased by 16.3% from 1996. The gross profit margins for the three years ended December 31, 1998 were 39.3%, 41.2% and 42.1%, respectively. The trend of decreasing margins is due principally to the impact of supplying IST with structures systems at lower than normal profit margins. Gross margins excluding LMS, IST and Satec were 44.3%, 42.7% and 42.8% in 1998, 1997 and 1996, respectively. This improvement in 1998 is due in part to improved service margins and the benefit of actions previously taken to reduce manufacturing costs. The 1998 selling and administrative expenses of $48,869,000 increased by 9.5% from 1997 due principally to the inclusion of expenses relating to Satec and IST. As a percentage of revenue, selling and administrative expenses decreased to 26.7% in 1998, compared to 28.7% in 1997 and 29.3% in 1996. Research and development expenses increased by 21.9% in 1998 and decreased by 19.2% in 1997. The increase in 1998 is due primarily to the inclusion of the development efforts of Satec and IST. The decrease in 1997 compared to 1996 resulted from certain Instron engineering resources ($2 million in 1997) being utilized to develop new products for IST in accordance with the joint venture agreement, which were reimbursed by IST. During the three years ended December 31, 1998, the Company has capitalized certain software development costs. (See Note 1 of Notes to Consolidated Financial Statements). If research and development expenses were restated, for comparison purposes, by including capitalized software development costs as period expenses, by adjusting engineering expenses for the effect of Satec and IST and the disposition of LMS as previously discussed, research and development expenses of the ongoing business would have increased by 7.5% in 1998. As a percentage of total revenue, research and development expenditures, on a comparable basis, represented 7.0%, 6.4% and 6.4% in 1998, 1997 and 1996 respectively. 14 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (continued) Operating income decreased by 23.3% to $9,646,000 in 1998, compared to $12,571,000 in 1997 and $9,145,000 in 1996. As a percentage of total revenue, operating income represented 5.3%, 8.1% and 6.8% in 1998, 1997 and 1996 respectively. Operating income for 1998 includes a special items charge of $4,975,000 for the cost of consolidating European operations and to write down the value of non-performing assets. The Company has closed down a manufacturing plant in Germany, relocated sales and service personnel to another Instron location in Germany, and moved the manufacturing operation to the United Kingdom. The majority of these actions were completed in the fourth quarter and substantially all cash disbursements are expected to be made by the end of the first quarter of 1999. Before the effect of the special items charge, operating income in 1998 was $14,621,000 or 8.0% of total revenue and increased by 16.3% compared to 1997 due primarily to certain improved product and service margins and the positive contribution of Satec and IST in the fourth quarter. A non-operating pre-tax gain of $11,076,000 was recorded in the first quarter of 1998 on the sale of excess land in Canton, Massachusetts. Net interest expense decreased by 72% in 1998 and by 22% in 1997. The net decrease in both 1998 and 1997 was due to reduced interest expense resulting from lower average borrowings and was further reduced by interest income received on notes receivable and temporary bank deposits. Foreign exchange losses of $157,000 in 1998 resulted from the strengthening of the British pound against certain European currencies. Foreign exchange losses of $185,000 in 1997 resulted from the strengthening of the U.S. dollar against certain Asian currencies. Income before taxes was 11.1% of total revenue in 1998, compared to 7.4% in 1997 and 4.8% in 1996. Excluding the special items charge and the non-operating gain on the sale of the land in 1998, as well as the special items charge in 1996, income before taxes as a percentage of total revenue was 7.8%, 7.4% and 6.0% in 1998, 1997 and 1996, respectively. The consolidated effective tax rate was 43.6% compared to 38% in 1997 and 1996. This higher tax rate is due to certain non-deductible expenses relating to the special items charge. A detailed reconciliation of the Company's effective tax rate and the United States statutory tax rate appears in Note 6 of Notes to Consolidated Financial Statements. Instron reported net income of $11,459,000, or $1.62 per diluted share of common stock, for the year ended December 31, 1998, compared with $7,164,000 or $1.05 per diluted share in 1997. Net income in 1998 included a special items charge to operations of $4,975,000 ($4,232,000 net of taxes) and a non-operating gain on the sale of land of $11,076,000 ($6,867,000 net of taxes). If these special items are excluded, net income in 1998 was $8,824,000, or $1.25 per diluted share, an increase of 23.2% from 1997, due primarily to improved product and service margins, the positive contribution of Satec and IST in the fourth quarter, and a decline in net interest expense. 15 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (continued) Net income in 1996 included a special items charge to operations of $1.8 million ($1.1 million net of taxes). Excluding the effect of the special items charge in 1996, net income increased by 25.6% in 1997 due primarily to increased revenues of the on-going business, a decline in interest expense and lower foreign exchange losses. FINANCIAL CONDITION The Company's operating activities generated cash of $5.3 million and $17.0 million in 1998 and 1997, respectively. Investing activities used $6.8 million in 1998 and $6.2 million in 1997, while financing activities provided $6.1 million in 1998 and used $10.6 million in 1997. The Company's primary source of funds in 1998 and 1997 was net cash generated by operations, supplemented in 1998 by the net proceeds of the sale of excess land in Canton, Massachusetts. The net cash generated by operations in 1998 consisted primarily of net income, as adjusted for the non-cash effect of depreciation and amortization expense, which was partially offset by an increase in accounts receivable. At December 31, 1998, accounts receivable were $65.8 million compared to $48.2 million at year end 1997 which reflects higher fourth quarter revenue in 1998, and the consolidation of Satec and IST balance sheets. Inventories of $36.1 million increased by $12.1 million due to the consolidation of Satec and IST. The inventory turnover ratio increased to 2.97 from 2.87 at the end of 1997. The Company's principal investment activities during 1998 included the purchase of Satec for $12.6 million, the buyout of the remaining 49% of IST for $2.7 million, capital expenditures of $5.8 million, and the development of software products for $1.5 million. The Company plans to make capital expenditures of approximately $6.2 million in fiscal 1999, principally for manufacturing equipment and information systems. In addition, the Company plans to continue to develop and enhance its software products and pursue its strategy of acquisitions. The Company's total debt outstanding at year-end 1998 was $19.6 million compared to $13.7 million at the end of 1997. The ratio of total debt to debt plus equity, at year-end 1998 increased to 19.8% from 17.1% in 1997. The increase in debt was primarily due to funding acquisitions in 1998. The Company maintains a multi-currency revolving credit and term loan facility that provides for borrowings of up to $35.0 million. At December 31, 1998 the Company had outstanding domestic and international borrowings of $13.2 million and at December 31, 1997 had outstanding domestic borrowings of $7.6 million under this facility which were classified as long-term. The Company has 16 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION (continued) additional overdraft and borrowing facilities for allowing advances of approximately $32.0 million of which $6.4 million and $6.1 million were outstanding and classified as short-term borrowings at December 31, 1998 and 1997, respectively. The Company believes its present capital resources and anticipated operating cash flows are sufficient to meet its current and future cash requirements to finance operations, capital expenditures and acquisitions. On March 27, 1998, the Company sold 42 acres of excess land in Canton, Massachusetts, for $13.5 million in cash. Approximately 22% of the Company's total orders came from Asian markets in 1997. Bookings from this region declined by 30% in 1998 compared to 1997. At the same time, however, IST doubled new order bookings in this part of the world. The current strength in North America and Europe is expected to continue in 1999, though the Company is not expecting any significant recovery in bookings from the Asian markets in 1999. Earnings are anticipated to maintain their upward momentum in 1999, reflecting benefits from manufacturing cost improvement programs and the full year benefit of the recent acquisitions. EURO CURRENCY ISSUE. On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing currencies ("legacy currencies") and one common currency - the euro. The euro now trades on currency exchanges and may be used in business transactions. Beginning in January 2002, new euro-denominated bills and coins will be issued, and legacy currencies will be withdrawn from circulation. The Company's operating subsidiaries affected by the euro conversion have established plans to address the systems and business issues raised by the euro currency conversion. These issues include, among others, (i) the need to adapt computer and other business systems and equipment to accommodate euro-denominated transactions; and (ii) the competitive impact of cross-border price transparency, which may make it more difficult for businesses to charge different prices for the same products on a country-by-country basis, particularly once the euro currency is issued in 2002. The Company anticipates that the euro conversion will not have a material adverse impact on its financial condition or results of operations. 17 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION (continued) YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT. Instron supports the exchange of information relating to the Year 2000 issue and designates the information following below as the Year 2000 Readiness Disclosure within the meaning of the Year 2000 Information and Readiness Disclosure Act. Information set forth herein regarding the Year 2000 compliance of non-Instron products and services are "republications" under the Year 2000 Information and Readiness Disclosure Act and are based on information supplied by other companies about the products and services they offer. Instron has not independently verified the contents of these republications and takes no responsibility for the accuracy or completeness of information contained in such republications. YEAR 2000 ISSUE READINESS DISCLOSURE. The term "Year 2000 issue" is a general term used to describe various business-related problems that may result from the improper processing by computer systems of dates after 1999. The Year 2000 issue affects virtually all companies and all organizations. The Company has identified its Year 2000 non-compliance risks in four categories: (i) internal business systems, (ii) internal electronic equipment and embedded chip technology; (iii) external non-compliance by the Company's suppliers, and (iv) software systems products supplied by the Company to its customers. INTERNAL BUSINESS SYSTEMS:- The Company has an active, ongoing program to insure that its business systems will be Year 2000 compliant. Instron began this program to identify and correct Year 2000 issues in 1996. In accordance with this program, the Company is following a four step process to address the Year 2000 Issue. The first stage consisted of auditing the major business systems and telecommunication switches. This stage identified a couple of minor issues but due to the installation of a new ERP system in 1996 at our two primary manufacturing sites, the exposure is minimal and is expected to be corrected by June 1999. The second stage, begun in September 1997, is an audit of all departmental systems and network operating systems. This audit is nearing completion and has formed the basis for the third stage which identifies the corrective actions required, and outlines the necessary plan of action. The final stage, which has started, will include the implementation and testing of all required modifications. Accordingly, the Company is confident that its internal business systems will be made Year 2000 compliant in a timely manner and in any event, no later than July 1999. The Company anticipates making capital expenditures of approximately $500,000 in 1999 to upgrade computing, networking and telecommunications systems as part of the plan to address the Year 2000 issue. Although the costs associated with identifying and implementing the necessary plan of action are not expected to be material to the Company's financial position, there can be no assurance to this effect. The Company has initiated an audit of the business systems of the two recent acquisitions, Satec and IST. So far, there has been no indication of any major Year 2000 issue that cannot be resolved in a timely manner. 18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION (continued) INTERNAL ELECTRONIC EQUIPMENT AND EMBEDDED CHIP TECHNOLOGY:- The audit process has identified certain telecommunication equipment that needs to be upgraded to address the Year 2000 issue. The Company plans to replace this equipment by June 1999, and is currently reviewing such office and facilities equipment as machine tools, photocopiers, security systems and other systems which may be impacted by the Year 2000 issue. The Company estimates that the total cost of completing any modifications, upgrades or replacements of this equipment will not have a material adverse effect on the Company's business or results of operations. This estimate is being monitored and will be revised as additional information becomes available. SUPPLIERS:- The Company has started a communication program with key suppliers of computers, equipment, parts and material used, operated and maintained by the Company. This program is intended to identify and, to the extent possible, resolve issues with suppliers involving the Year 2000 problem. However, the Company has limited or no control over the actions of these third party suppliers. Any failure of these suppliers to resolve Year 2000 issues with their systems in a timely manner could have a material adverse effect upon the Company's business, financial condition and results of operation. COMPANY SUPPLIED SYSTEMS AND SOFTWARE TO CUSTOMERS:- The Company believes that it has substantially identified and resolved all potential Year 2000 Issues with all of the software products that it is currently developing and marketing. Existing software on installed machines may not be Year 2000 compliant and communication programs have been initiated to advise customers on how to upgrade or replace their existing systems. Management believes that it is not possible to determine with complete certainty that all Year 2000 issues affecting the Company's products have been identified due to the complexity of these systems and the fact that these products interact with other third party vendor products and operate on computer systems which are not under the Company's control. Any such failures to identify or remediate Year 2000 problems affecting the Company's systems and software products could have a material adverse effect upon the Company's business, financial conditions and results of operations. 19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION (continued) The information presented above sets forth the key steps taken by the Company to address the Year 2000 Issue. There can be no absolute assurance that the Company has identified all the issues, can resolve them in a timely manner, and that there will be no failures or disruptions to operations which could result in a material adverse effect upon the company's business, financial condition, results of operations, and business prospects. CONTINGENCY PLANS:- The Company intends to develop contingency plans for significant business risks identified by the Company that might result from Year-2000 related events. Because the Company has not yet identified any specific business function that will be materially at risk of significant Year-2000 related disruptions, and because a full assessment of the Company's risk from potential Year 2000 failures is still in process, the Company has not yet developed detailed contingency plans specific to Year 2000 problems. In the event that the Company concludes that one or more contingency plans are required, development of such contingency plans is currently scheduled to occur no later than September, 1999 or as otherwise appropriate. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK. The Company is exposed to market risk related to changes in foreign currency exchange rates. The Company enters into foreign exchange contracts to manage and reduce the impact of changes in foreign currency exchange rates. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The exposures are associated with certain accounts receivable denominated in local currencies and certain foreign revenue transactions. At December 31, 1998, the face amount of outstanding forward currency contracts to buy and sell U.S. dollars, Japanese yen and certain European currencies was $6.3 million. A 10% fluctuation in exchange rates for these currencies would change the fair value by approximately $0.3 million. However, any change in the fair value of the contracts would be offset by changes in the underlying value of the transactions being hedged. The hypothetical movement disclosed above was estimated by calculating the fair value of the forward currency contracts at December 31, 1998, and comparing that with those calculated using hypothetical forward currency exchange rates. NEW ACCOUNTING PRONOUNCEMENTS. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The statement is effective for fiscal years beginning after June 15, 1999. Management is currently evaluating the effects of this change on its recording of derivatives and hedging activities. The Company will adopt SFAS No. 133 for its fiscal year ending December 31, 2000. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "Internal Use Software," which provides guidance on the accounting for the costs of software developed or obtained for internal use. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. Management does not expect the statement to have a material impact on its financial position or results of operations. FORWARD LOOKING STATEMENTS. Certain statements contained in this Annual Report are "forward-looking" statements within the meaning of the federal securities laws and are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. No assurances can be given that actual results will not differ materially from those projected in the forward-looking statements contained in this Annual Report. Certain factors that might cause such a difference include: the level of bookings worldwide for Instron, Satec and IST, particularly in Asia; the success of the automobile industry which is the major purchaser of IST products; the operating results of Satec and IST; the impact of fluctuations in exchange rates and the uncertainties of operating in a global economy, including fluctuations in the economic conditions of the foreign and domestic markets served by the Company which can affect the demand for its products and services; the Company's ability to successfully integrate the products and operations of Satec; the impact of Year 2000 issues; and the Company's ability to identify and successfully consummate strategic acquisitions. 20 21 INSTRON CORPORATION ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 1998 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION 21 22 INSTRON CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements included in Item 8: PAGE ---- Report of Independent Accountants.............................................. 23 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996.............................................. 24 Consolidated Balance Sheets as of December 31, 1998 and 1997................... 25 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996............................................................ 26 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996.............................................. 27 Notes to Consolidated Financial Statements..................................... 28-37 Supplementary Financial Information (Quarterly Financial Information/1998 and 1997 - (Unaudited).................. 38
22 23 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF INSTRON CORPORATION: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Instron Corporation and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP ------------------------------ Boston, Massachusetts PricewaterhouseCoopers LLP February 18, 1999 23 24 INSTRON CORPORATION CONSOLIDATED STATEMENTS OF INCOME
In thousands, except share and per share data (Years Ended December 31) 1998 1997 1996 - ----------------------------------------------------------------------- ----------- ----------- ----------- Revenue: Sales $ 152,879 $ 129,679 $ 128,804 Service 30,150 25,981 24,309 ----------- ----------- ----------- Total revenue 183,029 155,660 153,113 ----------- ----------- ----------- Cost of revenue: Sales 91,410 74,126 72,556 Service 19,644 17,363 16,086 ----------- ----------- ----------- Total cost of revenue 111,054 91,489 88,642 ----------- ----------- ----------- Gross profit 71,975 64,171 64,471 ----------- ----------- ----------- Operating expenses: Selling and administrative 48,869 44,641 44,898 Research and development 8,485 6,959 8,616 Special items charge 4,975 0 1,812 ----------- ----------- ----------- Total operating expenses 62,329 51,600 55,326 Income from operations 9,646 12,571 9,145 ----------- ----------- ----------- Other (income) expense: Gain on sale of land (11,076) 0 0 Interest expense 1,175 1,465 1,548 Interest income (943) (634) (477) Foreign exchange losses 157 185 689 ----------- ----------- ----------- Total other expenses (10,687) 1,016 1,760 ----------- ----------- ----------- Income before income taxes 20,333 11,555 7,385 Provision for income taxes 8,874 4,391 2,803 ----------- ----------- ----------- Net income $ 11,459 $ 7,164 $ 4,582 =========== =========== =========== Weighted average number of 6,667,914 6,455,527 6,396,202 basic common shares Earnings per share - basic $ 1.72 $ 1.11 $ .72 =========== =========== =========== Weighted average number of 7,066,257 6,791,801 6,524,467 diluted common shares Earnings per share - diluted $ 1.62 $ 1.05 $ .70 =========== =========== ===========
See accompanying notes to consolidated financial statements 24 25 INSTRON CORPORATION CONSOLIDATED BALANCE SHEETS
In thousands, except share data (December 31) 1998 1997 - --------------------------------------------- -------- ------- Assets Current assets: Cash and cash equivalents $ 7,209 $ 2,566 Accounts receivable, net of allowance for doubtful accounts of $800 in 1998 and $1,071 in 1997 65,766 48,226 Inventories 36,121 24,024 Deferred income taxes 3,060 3,314 Prepaid expenses and other current assets 2,223 3,767 -------- -------- Total current assets 114,379 81,897 Property, plant and equipment: Land and buildings 21,254 21,796 Machinery and equipment 45,217 39,627 Accumulated depreciation (42,470) (40,216) -------- -------- Property, plant and equipment, net 24,001 21,207 Goodwill 12,384 6,423 Deferred income taxes 904 806 Other assets 6,586 8,652 -------- -------- Total assets $158,254 $118,985 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Short-term borrowings $ 6,416 $ 6,059 Accounts payable 15,807 11,095 Accrued liabilities 22,958 14,083 Accrued employee compensation and benefits 6,798 6,220 Accrued income taxes 93 957 Advance payments received on contracts 7,066 1,541 -------- -------- Total current liabilities 59,138 39,955 Long-term debt 13,216 7,600 Pension and other long-term liabilities 6,316 5,176 -------- -------- Total liabilities 78,670 52,731 -------- -------- Commitments and contingencies (Note 5) Stockholders' equity: Preferred stock, $1 par value; 1,000,000 shares authorized; none issued Common stock, $1 par value; 10,000,000 shares authorized; 7,051,968 and 6,823,698 shares issued, respectively 7,052 6,824 Additional paid in capital 8,727 6,972 Deferred compensation (2,662) (3,235) Retained earnings 72,496 62,097 Accumulated other comprehensive income (loss) (4,699) (5,690) -------- -------- 80,914 66,968 Less: Treasury stock at cost; 108,262 and 74,952 shares, respectively 1,330 714 -------- -------- Total stockholders' equity 79,584 66,254 -------- -------- Total liabilities and stockholders' equity $158,254 $118,985 ======== ========
See accompanying notes to consolidated financial statements. 25 26 INSTRON CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands (Years Ended December 31) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities - ------------------------------------ Net income $ 11,459 $ 7,164 $ 4,582 Adjustments to reconcile net income to net cash provided by operating activities: Gain on the sale of property, plant and equipment, net (11,076) (88) (5) Depreciation and amortization 7,106 6,494 6,873 Provision for losses on accounts receivable 73 27 358 Deferred income taxes (580) 306 299 Changes in assets and liabilities, excluding the effects from purchase of businesses: (Increase) decrease in accounts receivable (6,312) (1,335) 1,297 (Increase) decrease in inventories 165 2,563 (521) (Increase) decrease in prepaid expenses and other current assets 2,055 (2,028) 151 Increase (decrease) in accounts payable and accrued expenses 3,097 3,477 (3,894) Other (711) 409 684 -------- -------- -------- Net cash provided by operating activities 5,276 16,989 9,824 -------- -------- -------- Cash Flows From Investing Activities - ------------------------------------ Capital expenditures (5,841) (4,176) (4,473) Joint venture investment 0 0 (6,926) Purchase of businesses, net of cash acquired (13,086) (2,010) 0 Proceeds from the sale of property, plant and equipment 13,684 376 224 Capitalized software costs (1,490) (637) (1,144) Other (31) 220 156 -------- -------- -------- Net cash used by investing activities (6,764) (6,227) (12,163) -------- -------- -------- Cash Flows From Financing Activities - ------------------------------------ Net borrowings under revolving credit and term loan facility 5,609 (9,730) 6,068 Net short-term borrowings 199 (173) (2,785) Cash dividends paid (1,060) (1,064) (1,024) Proceeds from stock option exercises 1,983 348 861 Treasury stock purchases (616) 0 0 -------- -------- -------- Net cash provided (used) by financing activities 6,115 (10,619) 3,120 -------- -------- -------- Effect of exchange rate changes on cash 16 (118) 116 -------- -------- -------- Net increase in cash and cash equivalents 4,643 25 897 Cash and cash equivalents at beginning of year 2,566 2,541 1,644 -------- -------- -------- Cash and cash equivalents at end of year $ 7,209 $ 2,566 $ 2,541 ======== ======== ======== Supplemental Disclosures of Cash Flow Information - ------------------------------------------------- Cash paid during the year for: Interest $ 1,430 $ 1,671 $ 1,730 Income taxes 9,145 3,041 2,286 Supplemental Disclosures of Noncash Investing and Financing Activities - ---------------------------------------------------------------------- Fair value of assets acquired $ 28,229 $ 2,649 $ 0 Cash paid 15,312 2,010 0 -------- -------- -------- Liabilities incurred or assumed in business acquisitions $ 12,917 $ 639 $ 0 ======== ======== ======== Note receivable on sale of business $ 0 $ 3,000 $ 0 ======== ======== ========
See accompanying notes to consolidated financial statements. 26 27 INSTRON CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated Total Additional other stock- Common paid in Deferred Retained comprehensive Treasury holders' In thousands, except share data stock capital Compensation earnings income (loss) stock equity - ------------------------------------ ------ ---------- ------------ -------- ------------ -------- -------- Balance at December 31, 1995 $6,415 $2,538 $ 0 $52,439 $(4,576) $ (714) $56,102 Net income 4,582 4,582 Other comprehensive income (loss) 1,660 1,660 ------ Comprehensive income 6,242 Cash dividends declared ($.16 per share) (1,024) (1,024) 104,366 shares issued under employee stock option plans 105 976 1,081 - ------------------------------------ ------ ------ ------- ------- ------- ------ ------ Balance at December 31, 1996 6,520 3,514 0 55,997 (2,916) (714) 62,401 Net income 7,164 7,164 Other comprehensive income (loss) (2,774) (2,774) ------ Comprehensive income 4,390 Cash dividends declared ($.16 per share) (1,064) (1,064) 33,511 shares issued under employee stock option plans 34 314 348 Restricted stock grants issued during the year 270 3,144 (3,414) 0 Compensation expense recognized under the 1992 Stock Incentive Plan 179 179 - ------------------------------------ ------ ------ ------- ------- ------- ------ ------ Balance at December 31, 1997 6,824 6,972 (3,235) 62,097 (5,690) (714) 66,254 Net income 11,459 11,459 Other comprehensive income (loss) 991 991 ------ Comprehensive income 12,450 Cash dividends declared ($.16 per share) (1,060) (1,060) 228,270 shares issued, net, under employee stock option plans 228 1,755 1,983 Purchase of 33,310 treasury shares (616) (616) Compensation expense recognized under the 1992 Stock Incentive Plan 573 573 - ------------------------------------ ------ ------ ------- ------- ------- ------ ------ Balance at December 31, 1998 $7,052 $8,727 $(2,662) $72,496 $(4,699) $(1,330) $79,584 ====== ====== ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements. 27 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of all domestic and foreign subsidiaries. Significant intercompany transactions and balances are eliminated. Certain reclassifications were made to prior years' amounts to conform with the 1998 presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that effect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's principal foreign operations are translated at exchange rates prevailing at the end of the period. Income statement items are translated using average quarterly exchange rates. Translation gains or losses are included in accumulated other comprehensive income (loss) and are reported in income only if the underlying foreign investment is sold or liquidated. FOREIGN EXCHANGE RISK MANAGEMENT The Company regularly enters into forward contracts primarily denominated in Japanese yen and certain European currencies to hedge firm sales and purchase commitments. Forward currency contracts have maturities of less than one year. These contracts are used to reduce the Company's risk associated with exchange rate movements, as gains and losses on these contracts are intended to offset exchange losses and gains on underlying exposures. The Company does not engage in currency speculation. The Company's policy is to defer gains and losses on these contracts until the corresponding losses and gains are recognized on the items being hedged. Both the contract gains and losses and the gains and losses on the items being hedged are included in selling and administrative expenses. The unrealized losses were not material in 1998 and 1997 as the fair value of these contracts were approximately equal to the fair value of the underlying exposures. At December 31, 1998, the face amount of outstanding forward currency contracts to sell U.S. dollars for non U.S. currencies was $3.2 million, Japanese yen for German deutschemarks was $1.9 million and French francs for British pounds was $0.7 million. At December 31, 1998, the face amount of outstanding forward currency contracts to buy German deutschemarks for U.S. dollars was $2.4 million, German deutschemarks for Japanese yen $1.9 million, British pounds for U.S. dollars was $0.9 million, British pounds for French francs was $0.7 million and British pounds for German deutschemarks was $0.4 million. 28 29 CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to a concentration of credit risk principally consist of cash, cash equivalents and trade receivables. The Company places its temporary cash investments with major banks throughout the world, in high quality, liquid instruments. The Company sells to a broad range of customers throughout the world and performs ongoing credit evaluations to minimize the risk of loss. The Company makes use of various devices such as letters of credit to protect its interests, principally on sales to foreign customers. In addition, the Company has certain receivables, payables, borrowings and other assets and liabilities denominated in foreign currencies, which are not hedged and therefore are subject to exchange rate fluctuations. INVENTORIES Inventories are valued at the lower of cost or market (net realizable value). The last-in, first-out (LIFO) method of determining cost is used for certain inventories in the United States and Asian branches. The Company uses the first-in, first-out (FIFO) method for all other locations. GOODWILL AND INTANGIBLE ASSETS. Intangible assets are stated at cost and amortized using the straight-line method over the assets estimated useful lives which range from 4 to 10 years. The Company evaluates the possible impairment of long-lived assets, including intangible assets, whenever events or circumstances indicate the carrying value of the assets may not be recoverable. Impairment of purchased technology amounts and goodwill is measured on the basis of whether anticipated future undiscounted operating cash flows expected from the acquired business will recover the recorded respective intangible asset balances over the remaining amortization period. At December 31, 1998, no amounts have been determined impaired. Amortization of goodwill and other intangibles was $2,295,000, $1,974,000 and $2,254,000 in 1998, 1997 and 1996, respectively. PROPERTY, PLANT AND EQUIPMENT Depreciation is computed principally using the straight-line method over the estimated useful lives of 10 to 25 years for land improvements, 10 to 40 years for buildings and improvements and 3 to 15 years for machinery and equipment. Maintenance and repairs are expensed as incurred. Depreciation expense was $4,239,000, $4,341,000 and $4,619,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Upon retirement or disposition, the cost and related accumulated depreciation of the assets disposed of are removed from the accounts, with any resulting gain or loss included in operations. On March 27, 1998, the Company sold 42 acres of excess land in Canton, Massachusetts for $13.5 million. SOFTWARE DEVELOPMENT COSTS Certain software development costs are capitalized and then amortized over future periods. Amortization of capitalized software costs is computed on a product-by-product basis over the estimated economic life of the product, generally three years. Unamortized software costs included in other assets were $2,272,000, $1,574,000 and $2,473,000 at December 31, 1998, 1997 and 1996, respectively. 29 30 Software development costs of $1,490,000, $637,000 and $1,144,000 were capitalized during 1998, 1997 and 1996, respectively. The amounts amortized and charged to expense in 1998, 1997 and 1996 were $792,000, $725,000, and $1,350,000, respectively. REVENUE RECOGNITION Revenue from product sales are recognized at time of shipment. Revenue from services are recognized as services are performed and ratably over the contract period for service maintenance contracts. INCOME TAXES Deferred income taxes are provided using the liability method, which estimates future tax effects of differences between financial statement carrying amounts and the tax basis of existing assets and liabilities. Tax credits are recorded as a reduction in income taxes. Provisions are made for the U.S. income tax liability on earnings of foreign subsidiaries, except for locations where the Company has designated earnings to be permanently invested. Such earnings amounted to approximately $22,803,000 at year-end 1998. EARNINGS PER SHARE. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares plus the dilutive effect of common share equivalents outstanding using the "treasury stock method." The following is a reconciliation of the basic and diluted EPS calculations:
In thousands, except per share data 1998 1997 1996 - ----------------------------------- -------- ------- ------- Net Income $11,459 $ 7,164 $ 4,582 ======= ======= ======= Weighted average number of common shares outstanding - basic 6,668 6,456 6,396 Dilutive effect of stock options outstanding 398 336 128 ------- ------- ------- Weighted average of common and dilutive shares - diluted 7,066 6,792 6,524 ======= ======= ======= BASIC EARNINGS PER SHARE $ 1.72 $ 1.11 $ 0.72 ======= ======= ======= DILUTED EARNINGS PER SHARE $ 1.62 $ 1.05 0.70 ======= ======= =======
At December 1998, 4,500 Options were not included in the calculation of diluted earnings per share as they were antidilutive. FAIR VALUE. The Company's financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables and debt. The carrying amounts of these instruments approximates fair value. COMPREHENSIVE INCOME (LOSS). In June 1997, the Financial Accounting Standards Board issued SFAS 130, "Reporting Comprehensive Income," which is effective for periods beginning after December 15, 1997. The statement establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. The statement requires that all components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company has adopted SFAS 130 in the accompanying financial statements. PENSION PLAN. In February 1998, the Financial Accounting Standards Board issued SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" which is effective for periods beginning after December 15, 1997. The statement standardizes employer disclosure requirements about pension and other postretirement benefit plans by requiring additional information on changes in the benefit obligations and fair values of plan assets and eliminating certain disclosures that are no longer useful. It does not change the measurement of recognition of those plans. The Company has adopted SFAS 132 in the accompanying financial statements. 30 31 2. INDUSTRY SEGMENT AND FOREIGN OPERATIONS SFAS 131 establishes standards for reporting information about operating segments in annual financial statements of public business enterprises. It also establishes standards for related disclosures about products and service, geographic areas, and major customers. The Company evaluated its business activities that are regularly reviewed by the Chief Executive Officer for which discrete financial information is available. As a result of this evaluation, the Company determined that is has two operating segments: Materials Testing and Structural Testing. Instron's Materials Testing business manufactures and markets material testing instruments (electromechanical, sevohydraulic, hardness and impact), software and accessories. The structural testing business manufactures and markets systems for simulating real-life testing of components and products. The economic characteristics, production processes, core technology, types and classes of customers, method of distribution and regulatory environments are similar for both of these operating segments which operate within the material testing industry. As a result of these similarities, both segments have been aggregated into one reporting segment for financial statement purposes. The following table summarizes the Company's operations by significant geographic location for the years ended December 31:
In thousands 1998 1997 1996 - ---------------------------------- --------- --------- --------- REVENUE, INCLUDING INTERAREA SALES United States $ 102,860 $ 76,314 $ 70,924 Germany 26,293 14,484 15,619 Other Europe 54,395 52,393 49,294 Asia/Latin America 31,335 40,004 39,077 Other international 3,552 3,868 3,404 Eliminations (35,406) (31,403) (25,205) --------- --------- --------- Total revenue $ 183,029 $ 155,660 $ 153,113 ========= ========= ========= IDENTIFIABLE ASSETS AT YEAR-END United States $ 64,903 $ 38,384 $ 38,654 Germany 22,983 6,771 8,180 Other Europe 38,546 35,903 37,091 Asia/Latin America 18,232 18,645 19,149 Other international 1,965 2,072 2,499 Corporate 13,335 18,066 16,938 Eliminations (1,710) (856) (678) --------- --------- --------- Total assets $ 158,254 $ 118,985 $ 121,833 ========= ========= =========
Total assets in the United Kingdom in 1998, 1997 and 1996 were $24,227,000, $24,883,000 and $24,475,000, respectively. Sales between geographic areas in 1998, 1997 and 1996, respectively, consisted primarily of $20,023,000, $13,091,000 and $11,337,000 from the United States and $15,204,000, $18,168,000 and $13,706,000 from European operations. Transfers between geographic areas are at manufacturing cost plus a markup factor. 31 32 3. INVENTORIES Inventories at December 31 were as follows:
In thousands 1998 1997 - ----------------- ------- ------- Raw materials $13,257 $12,742 Work in process 16,560 5,156 Finished goods 6,304 6,126 ------- ------- Total inventory $36,121 $24,024 ======= =======
Inventories valued at LIFO amounted to $9,056,000 and $9,395,000 at December 31, 1998 and 1997, respectively. The excess of current cost over stated LIFO value was $5,205,000 at December 31, 1998 and $5,247,000 at December 31, 1997. 4. BORROWING ARRANGEMENTS The Company maintains a multicurrency revolving credit and term loan facility that provides for borrowings of up to $35,000,000 through April 2000. Borrowings outstanding as of April 2000 convert to a term loan payable in sixteen equal quarterly installments. Interest on borrowings under the agreement is based upon either base rates, money market rates, or other short-term borrowing rates. Facility fees under this agreement are 1/4 of 1% per annum. The Company has met the various covenants in the agreement, the most restrictive of which requires a minimum level of tangible net worth. At December 31, 1998 and 1997, respectively, outstanding domestic borrowings of $8,375,000 and $7,600,000 with a weighted average interest rate of 6.10% and 6.61%, and outstanding European borrowings of $4,841,000 in 1998 with a weighted average interest rate of 4.75%, were classified as long-term debt. Long-term debt maturing under the credit agreement in each of the five years subsequent to December 31, 1998, assuming outstanding borrowings at December 31, 1998 are unchanged at April 2000, is $2,478,000 in 2000, $3,304,000 in 2001, 2002 and 2003. The Company's subsidiaries have other overdraft and borrowing facilities allowing advances up to approximately $32,000,000. At December 31, 1998, the outstanding portion of these facilities was $6,416,000, due currently. Bank guarantees outstanding at December 31, 1998, for which the Company is contingently liable, amounted to $10,976,000 and relate principally to performance contracts. 5. OPERATING LEASE COMMITMENTS Rental expense amounted to $3,998,000, $3,697,000 and $3,348,000 for the years ended December 31, 1998, 1997 and 1996, respectively. As of December 31, 1998, minimum annual commitments under noncancellable operating leases with terms of more than one year are:
Later In thousands 1999 2000 2001 2002 2003 Years - ---------------------------------------------------------------------------------------------- $3,842 $3,094 $2,483 $1,245 $601 $1,033
32 33 6. INCOME TAXES The significant components of the Company's deferred tax assets and liabilities at December 31, are as follows:
In thousands 1998 1997 - ------------------------------------------------------------- Employee benefits $ 4,634 $ 3,986 Inventories 3,280 2,734 Accrued expenses 1,305 632 ------- ------- Total deferred assets 9,219 7,352 ------- ------- Accrued expenses (246) (360) Fixed assets (1,517) (1,400) Capitalized software costs and intangibles (3,002) (982) ------- ------- Total deferred liabilities (4,765) (2,742) ------- ------- Valuation reserve (490) (490) ------- ------- Total net deferred assets $ 3,964 $ 4,120 ======= =======
A valuation reserve has been established where, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The valuation allowance relates primarily to foreign tax benefits. The components of income before income taxes consisted of the following:
In thousands 1998 1997 1996 - -------------------------------------------------------------------------- Domestic $17,775 $ 5,664 $2,996 Foreign 2,558 5,891 4,389 ------- ------- ------ Total $20,333 $11,555 $7,385 ======= ======= ====== Income tax provisions (credits) were as follows: In thousands 1998 1997 1996 - -------------------------------------------------------------------------- Currently payable: Federal $6,441 $1,701 $ 609 Foreign 1,896 2,090 1,486 State 381 172 314 ------ ------ ------ 8,718 3,963 2,409 ------ ------ ------ Deferred, net: Federal & State 139 518 215 Foreign 17 (90) 179 ------ ------ ------ 156 428 394 ------ ------ ------ Total provision for income taxes $8,874 $4,391 $2,803 ====== ====== ====== The provisions for income taxes varied from the United States statutory rate of 35% for 1998 and 34% for 1997 and 1996 principally because of the tax effect of the following: In thousands 1998 1997 1996 - --------------------------------------------------------------------------- Tax provision at United States statutory rate $7,117 $3,929 $2,511 Effect of earnings of foreign operations subject to different tax rates 1,019 (2) 199 State taxes, net of federal income tax benefit 247 114 208 Benefit of Foreign Sales Corporation (76) (68) (195) Goodwill amortization -- 356 97 All other, net 567 62 (17) ------ ------ ------ Total tax provision $8,874 $4,391 $2,803 ====== ====== ======
33 34 7. EMPLOYEE PENSION AND RETIREMENT PLANS The Company maintains qualified noncontributory defined benefit pension plans covering United States employees and employees of Instron's United Kingdom subsidiary. The benefits are based on years of service and final average compensation at the date of retirement. The Company's general policy is to fund the pension plans to the extent such contributions are deductible under standards established by the Internal Revenue Service in the U.S. and the Inland Revenue in the U.K. Plan assets in the U.S. consist of mutual funds which invest primarily in common stocks, corporate bonds, U.S. government notes and temporary cash investments. In the U.K., plan assets are invested in funds whose assets consist primarily of common stocks, bonds and other securities. Employees of the Japan subsidiary receive lump sum payments as a multiple of annual salary at retirement or termination, based on years of service. These Japanese benefits are unfunded. Net periodic pension costs include the following components:
1998 1997 1996 ------------------------ ------------------------ ------------------------ In thousands U.S. U.K. Japan U.S. U.K. Japan U.S. U.K. Japan - ---------------------------------- ------- ------- ------ ------- ------- ------ ------- ------- ------ Service cost $ 1,122 $ 1,749 $ 222 961 $ 1,357 $ 231 $ 936 $ 1,158 $ 257 Interest cost 1,911 2,278 171 1,799 1,990 201 1,648 1,690 206 Expected return on plan assets (2,077) (2,971) 0 (1,914) (2,742) 0 (1,682) (2,576) 0 Amortization of transition asset (liability) (9) (76) 18 (9) (75) 19 (9) ( 72) 21 Amortization of prior service cost 44 (73) 0 44 (89) 0 44 (91) 0 Amortization of unrecognized (gain) loss 2 0 0 1 (59) 0 1 130 0 Settlement gain 0 0 (118) 0 0 0 0 0 0 ------- ------- ------ ------- ------- ------ ------- ------- ------ Net periodic pension cost $ 993 $ 907 $ 293 $ 882 $ 382 $ 451 $ 938 $ 239 $ 484 ======= ======= ====== ======= ======= ====== ======= ======= ====== Assumptions used in the accounting for the Company's U.S., U.K., and Japan plans at December 31 were: 1998 1997 1996 ------------------------ ---------------------- ----------------------- U.S. U.K. Japan U.S. U.K. Japan U.S. U.K. Japan - ------------------------------ ---- ---- ----- ---- ---- ----- ---- ---- ----- Weighted average discount rate 6.75% 5.5% 4.0% 7.0% 6.5% 5.0% 7.5% 8.0% 6.0% Rates of increase in compensation levels 4.25 4.0 3.0 4.5 4.75 4.0 5.0 5.5 5.0 Expected long-term rate of return on assets 9.0 7.25 0.0 9.0 8.75 0.0 9.0 9.5 0.0 The following is a reconciliation of the Projected Benefit Obligation as of December 31: 1998 1997 1996 ------------------------------ ------------------------------ --------------------------- In thousands U.S. U.K. Japan U.S. U.K. Japan U.S. U.K. Japan - ---------------------------- ------------------------------------------------------------------------------------------------ Projected benefit obligation at prior year end $ 26,209 $ 33,222 $ 3,221 $ 23,246 $ 24,681 $3,404 $ 21,134 $ 20,167 $3,327 Service cost 1,122 1,749 222 961 1,357 231 936 1,159 257 Interest cost 1,911 2,278 171 1,799 1,990 201 1,648 1,690 206 Actuarial (gain) loss 1,170 1,160 (102) 989 7,019 (205) 201 287 4 Benefits paid (871) (1,437) 0 (786) (1,288) (10) (673) (1,246) (4) Plan amendments 0 262 0 0 287 0 0 94 0 Settlement 0 0 (872) 0 0 0 0 244 0 Foreign currency gain (loss) 0 180 400 0 (824) (400) 0 2,286 (386) -------- -------- -------- -------- -------- ------ -------- -------- ------ Projected Benefit Obligation at year end $ 29,541 $ 37,414 $ 3,040 $ 26,209 $ 33,222 $3,221 $ 23,246 $ 24,681 $3,404 ======== ======== ======== ======== ======== ====== ======== ======== ====== The following is a reconciliation of the beginning and ending balances of the fair value of Plan assets at December 31: 1998 1997 1996 ------------------------------- ---------------------------- --------------------------- In thousands U.S. U.K. Japan U.S. U.K. Japan U.S. U.K. Japan - ---------------------------- -------- -------- -------- -------- -------- ----- -------- -------- ----- Fair value of plan assets at prior year end $ 26,650 $ 33,522 $ 0 $ 24,865 $ 29,748 $ 0 $ 21,556 $ 24,466 $ 0 Actual return on plan assets 3,667 5,475 0 2,546 4,812 0 2,655 2,576 0 Employer contributions 24 1,334 551 25 1,288 10 1,327 1,195 4 Benefits paid (871) (1,437) (551) (786) (1,288) (10) (673) (1,246) (4) Foreign currency gain (loss) 0 184 0 0 (1,038) 0 0 2,757 0 -------- -------- -------- -------- -------- ---- -------- -------- --- Fair value of plan assets at year end $ 29,470 $ 39,078 $ 0 $ 26,650 $ 33,522 $ 0 $ 24,865 $ 29,748 $ 0 ======== ======== ======== ======== ======== ==== ======== ======== ===
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:
1998 1997 1996 ------------------------- -------------------------- -------------------------- In thousands U.S. U.K. Japan U.S. U.K. Japan U.S. U.K. Japan - ---------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation in excess of (less than) plan assets $ 71 $(1,664) $3,040 $ (441) $ (300) $ 3,221 $(1,619) $(5,067) $3,404 Unrecognized asset (liability) at transition 48 465 (243) 57 538 (229) 66 637 (278) Unrecognized prior service cost (461) 737 (505) 1,066 0 (549) 1,498 0 Unrecognized gain (loss) 4,104 163 648 3,683 (1,177) 259 4,038 4,011 77 ------ ------- ------ ------ ------- ------- ------- ------- ------ Pension liability included assets in Consolidated Balance Sheet $3,762 $ (299) $3,445 $2,794 $ 127 $ 3,251 $ 1,936 $ 1,079 $3,203 ====== ======= ====== ====== ======= ======= ======= ======= ======
The expense of all pension plans for 1998, 1997 and 1996 was $2,193,000, $1,715,000, and $1,661,000, respectively. The Company also sponsors a Savings and Security Plan for all U.S. employees. The plan (in accordance with section 401(k) of the Internal Revenue Code) offers participating employees a program of regular savings and investment, funded by their own contributions and those of the Company. The amount charged to operating expense for this plan was $582,000, $530,000 and $523,000 in 1998, 1997 and 1996, respectively. 34 35 8. STOCK OPTION PLANS The Company accounts for stock-based compensation using the intrinsic value method. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company has two stock options plans currently in effect under which future grants may be issued: the 1992 Stock Incentive Plan and the 1979 Non-Qualified Plan. A total of 1,391,500 shares has been authorized by the Company for grants of options or shares. Stock Options granted during 1998, 1997 and 1996 generally have a maximum term of eight years and vest equally over four years. A summary of the Company's stock option activity for the years ended December 31 follows:
Weighted Number Average of Options Exercise Prices - --------------------------------------------------------------------- Outstanding at December 31, 1995 881,450 $10.80 Granted, 1996 225,750 13.51 Exercised, 1996 (112,726) 9.91 Terminated, 1996 (15,750) 12.59 -------- Outstanding at December 31, 1996 978,724 11.49 Granted, 1997 5,000 12.25 Exercised, 1997 (37,385) 11.02 Terminated, 1997 (13,000) 12.43 --------
35 36 Outstanding at December 31, 1997 933,339 11.51 Granted, 1998 77,250 16.71 Exercised, 1998 (260,848) 9.92 Terminated, 1998 (24,937) 13.90 -------- Outstanding at December 31, 1998 724,804 $12.55 ======== At December 31, 1998, 1997 and 1996, respectively, there were 502,735, 656,902 and 526,045 options exercisable with a weighted average exercise price of $11.84, $10.94 and $10.58. Exercise prices for options outstanding as of December 31, 1998, ranged from $10.00 to $19.625. The weighted average remaining contractual life of those options is 4.3 years. The weighted average fair value at date of grant for options granted during 1998, 1997 and 1996 was $7.39, $5.04 and $5.79 per option, respectively. The fair value of these options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of 5.07%, 5.70% and 6.50%; dividend yields of 0.97%, 1.31% and 1.19%; volatility factors of the expected market price of the Company's common stock of .35, .31 and .30; and a weighted average expected life of the options of 7.9, 8.0 and 7.8 years. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1998, 1997 and 1996, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1998 1997 1996 ------- ------ ------ Net income - pro forma $10,871 $6,691 $4,105 Earnings per share - basic $ 1.63 $ 1.04 $ .64 Earnings per share - diluted $ 1.54 $ .99 $ .63 The pro forma effect on net income for 1997 and 1996 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. On May 14, 1997 and October 29, 1997, respectively, the Company issued 250,000 and 20,500 shares of restricted stock to key employees, which resulted in $3,414,000 of non-cash deferred compensation to be recognized as operating expense over a seven year period. Vesting is accelerated upon change in control or if certain performance criteria are met. 9. ACQUISITIONS On August 4, 1998, the Company acquired substantially all the assets of Satec Systems, Inc. of Grove City, Pennsylvania, for approximately $12.6 million in cash. Satec is a manufacturer of a range of materials testing equipment sold primarily in the United States with annual sales of approximately $18.0 million. This acquisition has been accounted for under the purchase method of accounting and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values at the date of acquisition. In conjunction with this acquisition the Company recorded $7.2 million of goodwill which is being amortized over ten years. The operating results of Satec have been included in the Company's consolidated results of operations from the date of acquisition. 36 37 On September 27, 1998, the Company acquired the remaining 49% interest in IST from Carl Schenck A.G. of Darmstadt, Germany for $2.7 million in cash. The book value of net assets acquired were equal to the consideration paid. IST has become a world-class structures testing business with sales of more than $55 million in 1998. This additional investment has been accounted for under the purchase method of accounting and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The operations of IST for the fourth quarter of 1998 have been consolidated into the Company's results of operations from the date of acquisition. Prior to this acquisition the Company accounted for its 51% interest in IST under the equity method of accounting. 10. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The statement is effective for fiscal years beginning after June 15, 1999. Management is currently evaluating the effects of this change on its recording of derivatives and hedging activities. The Company will adopt SFAS No. 133 for its fiscal year ending December 31, 2000. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "Internal Use Software," which provides guidance on the accounting for the costs of software developed or obtained for internal use. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. This statement does not have a material impact on the Company's financial position or results of operations. 11. SPECIAL ITEMS CHARGES During the first quarter of 1998, the Company recorded a special items charge to operations to undertake a consolidation of its European operations and write-down the value of certain non-performing assets. A pre-tax charge of $4,975,000 was taken in the quarter ended March 28, 1998 to cover these actions. The special items charge includes termination benefits, the costs to exit a manufacturing facility, other asset impairments and other related costs. The Company has closed down a manufacturing plant in Germany, relocated sales and service support personnel to another Instron location in Germany and has moved the manufacturing operation to the United Kingdom. During 1998 the Company paid $1.4 million for termination benefits and related costs and $1.6 million for the costs to shutdown and exit a manufacturing facility in Germany. In addition, the Company wrote-off $1.0 million of non-performing assets in 1998, primarily relating to its interest in Lightspeed Simulation Systems. The balance of the Special Items reserve relates primarily to the Company's obligation under a long-term lease agreement in Germany, partially offset by estimated income under a sub-lease arrangement. In March 1996, the Company recognized a $1,812,000 special items charge to implement a work force reduction and consolidate certain manufacturing operations. 37 38 SUPPLEMENTARY FINANCIAL INFORMATION QUARTERLY FINANCIAL DATA (quarterly data unaudited)
Quarter Quarter Quarter Quarter In thousands, except per share data 1 2 3 4 Year ------------------------------------------------------------------------------------------------- 1998: Total revenue $33,869 $37,761 $43,331 $68,068 $183,029 Gross profit 13,742 15,734 16,718 25,781 71,975 Income before income taxes 8,159 2,914 3,403 5,857 20,333 Net income 3,911 1,807 2,110 3,631 11,459 Earnings per share - basic* 0.60 0.27 0.32 0.54 1.72 Earnings per share - diluted 0.55 0.25 0.30 0.52 1.62 ------------------------------------------------------------------------------------------------- 1997: Total revenue $36,023 $37,124 $35,996 $46,517 $155,660 Gross profit 14,706 15,127 15,008 19,330 64,171 Income before income taxes 1,482 2,376 2,966 4,731 11,555 Net income 919 1,470 1,842 2,933 7,164 Earnings per share - basic 0.14 0.23 0.29 0.45 1.11 Earnings per share - diluted* 0.14 0.22 0.26 0.42 1.05 -------------------------------------------------------------------------------------------------
* The sum of the quarterly earnings per share does not equal the amount reported for the year, as per share amounts are calculated independently and are based on the weighted average common shares outstanding for each period. 38 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The response to this item is contained in part under the caption, "Executive Officers of the Registrant", in Part I hereof, and the remainder is contained under the captions, "Information Regarding the Board of Directors' Nominees and Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Registrant's definitive proxy statement relating to its 1999 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information contained under the captions "Summary Compensation Table," "Severance and Other Agreements," "Pension Plans," "Stock Option Plans" and "Stock Performance Graph" in the Registrant's definitive proxy statement relating to its 1999 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Registrant's definitive proxy statement relating to its 1999 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained under the caption "Information Regarding the Board of Directors' Nominees and Directors" in the Registrant's definitive proxy statement relating to its 1999 Annual Meeting of Stockholders is incorporated herein by reference. 39 40 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a)1. FINANCIAL STATEMENTS The following consolidated financial statements are included in Item 8: Consolidated statements of income for the years ended December 31, 1998, 1997 and 1996 Consolidated balance sheets at December 31, 1998 and 1997 Consolidated statements of cash flows for the years ended December 31, 1998 1997 and 1996 Consolidated statements of stockholders' equity for the years ended December 31, 1998, 1997 and 1996 Notes to consolidated financial statements (a)2. FINANCIAL STATEMENT SCHEDULE Schedule Page Number ---- -------- Report of Independent Accountants on financial statement schedule 44 Consolidated valuation accounts 45 II All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements, including the accompanying notes. (a)3. EXHIBITS Exhibit No. Description of Exhibits - ----------- ----------------------- 3(a) Restated Articles of Organization of the Registrant and all amendments - incorporated by reference to Exhibit 3(a) of the Registrant's Form 10-K for the year ended December 31, 1981, Exhibit 4 of the Registrant's Form 10-Q for the quarter ended March 31, 1984, Exhibit 4 of the Registrant's Form 10-Q for the quarter ended June 28, 1986, and Exhibit 4 of the Registrant's Form 10-Q for the quarter ended June 27, 1987. 3(b) By-Laws of the Registrant, as amended, incorporated by reference to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 5, 1990. 40 41 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (CONTINUED) 10(a) 1979 Non-Qualified Stock Option and Stock Appreciation Rights Plan, as amended, incorporated by reference to Exhibit 10(a) of Form 10-K for the year ended December 31, 1991. 10(b) 1982 Incentive Stock Option Plan, as amended, incorporated by reference to Exhibit 10(b) of Form 10-K for the year ended December 31, 1987 and to Exhibit 19(b) of Form 10-Q for the quarter ended September 29, 1990. 10(c) 1984 United Kingdom Share Option Scheme, as amended, incorporated by reference to Exhibit 10(c) of Form 10-K for the year ended December 31, 1991. 10(d) 1992 Stock Incentive Plan, incorporated by reference to Exhibit 10(b) of Form 10-K for the year ended December 31, 1991. 10(e) Form of Executive Severance Agreement, dated as of December 8, 1993, between the Company and one key employee, incorporated by reference to Exhibit 10(f) on Form 10-K for the year ended December 31, 1993. 10(f) Form of Executive Severance Agreement, dated as of December 8, 1993, between Instron Limited, the Company and two key employees, incorporated by reference to Exhibit 10(h) on Form 10-K for the year ended December 31, 1993. 41 42 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (CONTINUED) 10(g) Form of Executive Severance Agreement entered into between the Company and one key employee, incorporated by reference to exhibit 10(l) on Form 10-K for the year ended December 31, 1997. 10(h) Form of Executive Severance Agreement entered into among Instron Limited, the Company and one key employee, incorporated by reference to exhibit 10(m) on Form 10-K for the year ended December 31, 1997. 10(i) Executive Severance Agreement entered into by the Company and James M. McConnell, dated May 14, 1998. 10(j) Form of Executive Severance Agreement entered into by the Company and each of Linton A Moulding, Joseph E. Amaral, William J. Milliken, Yahya Gharagozlou and five other executive officers, in each case dated May 14, 1998. 10(k) Lease Agreement, dated as of March 31, 1998, by and between Schenck Immobilien & Services GmbH and Instron Schenck Testing Systems GmbH. 10(l) Strategic Alliance Agreement between Instron Corporation, Instron Partners, Instron GmbH, Instron Schenck Testing Systems GmbH, Instron Schenck Testing Systems, and Carl Schenck AG, Schenck Atis GmbH, Schenck Pegasus Testing Inc., Schenck Fertigungs GmbH, executed September 24, 1998 and effective as of September 27, 1998. 21 Subsidiaries of the Registrant 23 Consent of Independent Accountants 27 Financial Data Schedule (b) Report on Form 8-K None. 42 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INSTRON CORPORATION Date: March 30, 1999 (Registrant) By: /s/ James M. McConnell By: /s/ Linton A. Moulding ------------------------------------- ------------------------------ James M. McConnell Linton A. Moulding President and Chief Executive Officer Chief Financial Officer (Principal Executive Officer) (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Harold Hindman Chairman of the Board March 30, 1999 - ------------------------ Harold Hindman /s/ George S. Burr Vice Chairman of the Board March 30, 1999 - ------------------------ George S. Burr /s/ James M. McConnell President, Chief Executive Officer March 30, 1999 - ------------------------ and Director James M. McConnell /s/ John W. Lacey Director March 30, 1999 - ------------------------ John W. Lacey /s/ Dennis J. Moore Director March 30, 1999 - ------------------------ Dennis J. Moore /s/ Sheldon Rutstein Director March 30, 1999 Sheldon Rutstein /s/ John F. Smith Director March 30, 1999 - ------------------------ John F. Smith /s/ Richard W. Young Director March 30, 1999 - ------------------------ Richard W. Young 43 44 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENTS SCHEDULE To the Board of Directors and Stockholders of Instron Corporation: Our audits of the consolidated financial statements referred to in our report dated February 18, 1999 included in this Annual Report on Form 10-K also included an audit of the financial statement schedule noted in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP ------------------------------------ PricewaterhouseCoopers LLP Boston, Massachusetts February 18, 1999 44 45 SCHEDULE II INSTRON CORPORATION CONSOLIDATED VALUATION ACCOUNTS
(A) Effect of Balance at Additions Foreign Beginning Charged to Currency (B) Balance at Description of Year Operations Translation Deductions End of Year - ---------------------------- ---------- ---------- ----------- -------- ----------- Allowance for doubtful accounts: Year ended December 31, 1998 $1,071,000 $146,000 $(43,000) $374,000 $ 800,000 ---------- -------- -------- -------- ---------- Year ended December 31, 1997 $1,107,000 $ 27,000 $(56,000) $ 7,000 $1,071,000 ---------- -------- -------- -------- ---------- Year ended December 31, 1996 $1,040,000 $358,000 $ 27,000 $318,000 $1,107,000 ---------- -------- -------- -------- ----------
(A) Included in "Additions Charged to Operations" for the year ended December 31, 1998, is 73,000 for allowance for doubtful accounts recorded in conjunction with the acquisitions of Satec and IST. (B) Uncollected receivables written off, net of recoveries and deduction due to the disposal of LMS in 1997. 45 EX-10.(I) 2 EXECUTIVE SEVERANCE AGREEMENT WITH J.M.MCCONNELL 1 Exhibit 10(i) EXECUTIVE SEVERANCE AGREEMENT ----------------------------- EXECUTIVE SEVERANCE AGREEMENT made as of May 14, 1998 by and between Instron Corporation, a Massachusetts corporation with its principal place of business in Canton, Massachusetts (the "Company"), and James M. McConnell of 8 Pine Hill Drive, Needham, Massachusetts 02192 (the "Executive"). 1. Purpose. The Company considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. The Board of Directors of the Company (the "Board") recognizes, however, that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined in Section 2 hereof) exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. Therefore, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control. Nothing in this Agreement shall be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 2. Change in Control. A "Change in Control" shall be deemed to have occurred in any one of the following events: (a) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the "Act")) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the Act) (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; (b) persons who, as of March 4, 1998, constituted the Company's Board (the "Incumbent Board") cease for any reason, including without limitation as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Board, provided that any person becoming a director of the Company subsequent to March 4, 1998 whose election was approved by at least a majority of the directors then comprising the Incumbent Board shall, for purposes of this Agreement, be considered a member of the Incumbent Board; 2 (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation or other entity, other than (a) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (b) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 3. Terminating Event. A "Terminating Event" shall mean any voluntary or involuntary termination of the Executive's employment occurring subsequent to a Change in Control as defined in Section 2, except that a Terminating Event shall not be deemed to have occurred solely as a result of the Executive being an employee of any direct or indirect successor to the business or assets of the Company, rather than continuing as an employee of the Company following a Change in Control. 4. Severance Payment. In the event a Terminating Event occurs within twenty-four (24) months after a Change in Control, (a) the Company shall pay to the Executive an amount equal to two (2) times the "base amount" (as such term is defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code")) applicable to the Executive (the "Base Amount"), payable in one lump-sum payment. Said amount shall be paid no later than thirty-one (31) days following the Date of Termination (as such term is defined in Section 8(b)); and (b) the Company shall pay to the Executive all reasonable legal and arbitration fees and expenses incurred by the Executive in successfully obtaining or enforcing any right or benefit provided by this Agreement. 5A. Additional Benefits. This Section 5A shall apply solely to the extent the sum of (i) the payments made by the Company to or for the benefit of the Executive under this Agreement (the "Severance Payment") and (ii) the value, as calculated in accordance with Section 280G of the Code, of the benefits and payments received by the Executive as a result of a Change in Control under any other agreement or plan (the "Other 280G Benefits") (the sum of such Severance Payment and the Other 280G Benefits are referred to as the "Total Severance Benefits"), exceed 330% of the Base Amount (the "Threshold Amount"). 2 3 (a) In the event the Total Severance Benefits exceed the Threshold Amount, then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of the excise tax imposed by Section 4999 of the Code (the "Excise Tax") on the Total Severance Benefits, any Federal, state and local income tax, employment tax and Excise Tax upon the payment provided by this subsection, and any interest and/or penalties assessed with respect to such Excise Tax, shall be equal to the Total Severance Benefits. (b) Subject to the provisions of Section 5A(c), all determinations required to be made under this Section 5A, including the amount of such Gross-Up Payment, shall be made by the Company's independent accounting firm (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the Date of Termination, if applicable, or at such earlier time as is reasonably requested by the Company or the Executive. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation applicable to individuals for the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of individual taxation in the state and locality of the Executive's residence on the Date of Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. The Gross-Up Payment, as determined pursuant to this Section 5A(b), shall be paid to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"). In the event that the Company exhausts its remedies pursuant to Section 5A(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred, consistent with the calculations required to be made hereunder, and any such Underpayment, and any interest and penalties imposed on the Underpayment and required to be paid by the Executive in connection with the proceedings described in Section 5A(c), shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in 3 4 writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 5A(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issues raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5A(c), the Executive becomes entitled to receive any refund with respect to 4 5 such claim, the Executive shall (subject to the Company's complying with the requirements of Section 5A(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5A(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 5B. Limitation on Benefits. This Section 5B shall apply solely to the extent the Total Severance Benefits are less than or equal to the Threshold Amount. (a) Solely in the event the Total Severance Benefits are less than or equal to the Threshold Amount, it is the intention of the Executive and of the Company that no payments of the Total Severance Benefits by the Company to or for the benefit of the Executive under this Agreement or any other agreement or plan shall be non-deductible to the Company by reason of the operation of Section 280G of the Code relating to parachute payments. Accordingly, and notwithstanding any other provision of this Agreement or any such agreement or plan, if by reason of the operation of said Section 280G, any such payments exceed the amount which can be deducted by the Company, the Severance Payment which the Executive is entitled to receive under this Agreement shall be reduced by that amount which exceeds the maximum amount deductible by the Company under Section 280G. To the extent that Severance Payments exceeding such maximum deductible amount have been made to or for the benefit of the Executive, such excess payments shall be refunded to the Company with interest thereon at the applicable federal rate determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order that no such payments shall be non-deductible to the Company by reason of the operation of said Section 280G. (b) If any dispute between the Company and the Executive as to any of the amounts to be determined under this Section 5B, or the method of calculating such amounts, cannot be resolved by the Company and the Executive, either the Company or the Executive, after giving three (3) days' written notice to the other, may refer the dispute to a partner in the Boston office of a firm of independent certified public accountants selected jointly by the Company and the Executive. The determination of such partner as to the amount to be determined under Section 5B(a) and the method of calculating such amounts shall be final and binding on both the Company and the Executive. The Company shall bear the costs of any such determination if the amount determined by such partner differs to any material degree from the final amount proposed by the Company to the Executive before submission to such partner. If there is no such material difference, the costs of any such determination shall be evenly divided between the Company and the Executive. 5 6 6. Term. This Agreement shall take effect on the date first set forth above and shall terminate upon the earlier of (a) the termination by the Company of the employment of the Executive prior to a Change in Control because of (A) a willful act of dishonesty by the Executive with respect to any matter involving the Company or any subsidiary or affiliate, or (B) conviction of the Executive of a crime involving moral turpitude, or (C) the gross or willful failure by the Executive to substantially perform the Executive's duties with the Company, or (b) the resignation or termination of the Executive for any reason prior to a Change in Control. 7. Withholding. All payments made by the Company under this Agreement shall be net of any tax or other amounts required to be withheld by the Company under applicable law. 8. Notice and Date of Termination; Disputes; Etc. (a) Notice of Termination. After a Change in Control and during the term of this Agreement, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with this Section 8. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the reason for termination and the Date of Termination. (b) Date of Termination. "Date of Termination", with respect to any purported termination of the Executive's employment after a Change in Control and during the term of this Agreement, shall mean the date specified in the Notice of Termination. In the case of a termination by the Company, The Date of Termination shall not be less than thirty (30) days after the Notice of Termination is given. In the case of a termination by the Executive, the Date of Termination shall not be less than fifteen (15) days from the date such Notice of Termination is given. In the event that the Executive gives a Notice of Termination to the Company, the Company may unilaterally accelerate the Date of Termination. (c) No Mitigation. The Company agrees that, if the Executive's employment by the Company is terminated during the term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 4(a) and (b) hereof. Further, the amount of any payment provided for in this Agreement shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or otherwise. (d) Settlement and Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled exclusively by arbitration in accordance with the laws of the Commonwealth of Massachusetts by three arbitrators, one of whom shall be appointed by the Company, one by the Executive and the third by the first two 6 7 arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the American Arbitration Association in the City of Boston. Such arbitration shall be conducted in the City of Boston in accordance with the rules of the American Arbitration Association for commercial arbitrations, except with respect to the selection of arbitrators which shall be as provided in this Section 8(d). Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 9. Assignment; Prior Agreements. Neither the Company nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party, and without such consent any attempted transfer shall be null and void and of no effect. This Agreement shall inure to the benefit of and be binding upon the Company and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. In the event of the Executive's death after a Terminating Event but prior to the completion by the Company of all payments due him under Section 4(a) and (b) of this Agreement, the Company shall continue such payments to the Executive's beneficiary designated in writing to the Company prior to his death (or to his estate, if the Executive fails to make such designation). This Agreement reflects the entire agreement of the parties with respect to its subject matter and supersedes all prior written or oral negotiations, commitments, agreements and writings. 10. Enforceability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 11. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 12. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by registered or certified mail, postage prepaid, to the Executive at the last address the Executive has filed in writing with the Company, or to the Company at its main office, attention of the Board of Directors. 13. Effect on Other Plans. An election by the Executive to resign after a Change in Control under the provisions of this Agreement shall not be deemed a voluntary termination of employment by the Executive for the purpose of interpreting the provisions of any of the Company's benefit plans, programs or policies. Nothing in this Agreement shall be construed 7 8 to limit the rights of the Executive under the Company's benefit plans, programs or policies except as otherwise provided in Section 5 hereof, and except that the Executive shall have no rights to any severance benefits under any severance pay plan. 14. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a duly authorized representative of the Company. 15. Governing Law. This is a Massachusetts contract and shall be construed under and be governed in all respects by the laws of the Commonwealth of Massachusetts. 16. Obligations of Successors. In addition to any obligations imposed by law upon any successor to the Company, the Company will use its best efforts to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. 17. Confidential Information. The Executive shall never use, publish or disclose in a manner adverse to the Company's interests, any proprietary or confidential information relating to (a) the business, operations or properties of the Company or any subsidiary or other affiliate of the Company, or (b) any materials, processes, business practices, technology, know-how, research, programs, customer lists, customer requirements or other information used in the manufacture, sale or marketing of any of the respective products or services of the Company or any subsidiary or other affiliate of the Company; provided, however, that no breach or alleged breach of this Section 17 shall entitle the Company to fail to comply fully and in a timely manner with any other provision hereof. Nothing in this Agreement shall preclude the Company from seeking money damages, or equitable relief by injunction or otherwise without the necessity of proving actual damage to the Company, for any breach by the Executive hereunder. 18. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be an original, but all of which together will constitute one instrument binding upon the parties hereto. [Signature Page Follows Next] 8 9 IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company by its duly authorized officer, and by the Executive, as of the date first above written. INSTRON CORPORATION By: /s/ John R. Barrett ------------------------------- Name: John R. Barrett Title: Treasurer /s/ James M. McConnell ----------------------------------- James M. McConnell DOCSC\703646.2 9 EX-10.(J) 3 FORM OF EXECUTIVE SEVERANCE AGREEMENT 1 Exhibit 10(j) EXECUTIVE SEVERANCE AGREEMENT ----------------------------- AGREEMENT made as of the 14th day of May, 1998, by and between Instron Corporation, a Massachusetts corporation with its principal place of business in Canton, Massachusetts (the "Company"), and [Name of Executive] of [Address of Executive] (the "Executive"). 1. Purpose. The Company considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. The Board of Directors of the Company (the "Board") recognizes, however, that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined in Section 2 hereof) exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. Therefore, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control. Nothing in this Agreement shall be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 2. Change in Control. A "Change in Control" shall be deemed to have occurred in any one of the following events: (a) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the "Act")) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the Act) (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; (b) persons who, as of March 4, 1998, constituted the Company's Board (the "Incumbent Board") cease for any reason, including without limitation as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Board, provided that any person becoming a director of the Company subsequent to March 4, 1998 whose election was approved by at least a majority of the directors then comprising the Incumbent Board shall, for purposes of this Agreement, be considered a member of the Incumbent Board; 2 (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation or other entity, other than (a) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (b) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 3. Terminating Event. A "Terminating Event" shall mean any of the events provided in this Section 3 occurring subsequent to a Change in Control as defined in Section 2: (a) termination by the Company of the employment of the Executive with the Company for any reason other than (A) a willful act of dishonesty by the Executive with respect to any matter involving the Company or any subsidiary or affiliate, or (B) conviction of the Executive of a crime involving moral turpitude, or (C) the gross or willful failure by the Executive to substantially perform the Executive's duties with the Company, or (D) the failure by the Executive to perform his full-time duties with the Company by reason of his death, disability or retirement; provided, however, that a Terminating Event shall not be deemed to have occurred pursuant to this Section 3(a) solely as a result of the Executive being an employee of any direct or indirect successor to the business or assets of the Company, rather than continuing as an employee of the Company following a Change in Control. For purposes of clauses (A) and (C) of this Section 3(a), no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and its subsidiaries and affiliates. For purposes of this Agreement, "disability" shall mean the Executive's incapacity due to physical or mental illness which has caused the Executive to be absent from the full-time performance of his duties with the Company for a period of six (6) consecutive months if the Company shall have given the Executive a Notice of Termination and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of his duties. For purposes of this Agreement, "retirement" shall mean termination of the Executive's employment in accordance with the Company's retirement policy, not including early retirement, generally applicable to its salaried employees, as in effect immediately prior to the Change in Control, or 2 3 in accordance with any retirement arrangement established with respect to the Executive with the Executive's express written consent; (b) termination by the Executive of the Executive's employment with the Company for Good Reason. Good Reason shall mean the occurrence of any of the following events: (i) a substantial adverse change, not consented to by the Executive, in the nature or scope of the Executive's responsibilities, authorities, powers, functions or duties from the responsibilities, authorities, powers, functions or duties exercised by the Executive immediately prior to the Change in Control; or (ii) a reduction in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all or substantially all management employees; or (iii) the relocation of the Company's offices at which the Executive is principally employed immediately prior to the date of a Change in Control to a location more than fifty (50) miles from such offices, or the requirement by the Company for the Executive to be based anywhere other than the Company's offices at such location, except for required travel on the Company's business to an extent substantially consistent with the Executive's business travel obligations immediately prior to the Change in Control; or (iv) the failure by the Company to pay to the Executive any portion of his compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company within fifteen (15) days of the date such compensation is due without prior written consent of the Executive; or (v) the failure by the Company to obtain an effective agreement from any successor to assume and agree to perform this Agreement. 4. Severance Payment. In the event a Terminating Event occurs within twenty-four (24) months after a Change in Control, (a) the Company shall pay to the Executive an amount equal to two (2) times the "base amount" (as such term is defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code")) applicable to the Executive (the "Base Amount"), payable in one lump-sum payment. Said amount shall be paid no later than thirty-one (31) days following the Date of Termination (as such term is defined in Section 8(b)); and (b) the Company shall pay to the Executive all reasonable legal and arbitration fees and expenses incurred by the Executive in successfully obtaining or enforcing any right or benefit provided by this Agreement. 3 4 5A. Additional Benefits. This Section 5A shall apply solely to the extent the sum of (i) the payments made by the Company to or for the benefit of the Executive under this Agreement (the "Severance Payment") and (ii) the value, as calculated in accordance with Section 280G of the Code, of the benefits and payments received by the Executive as a result of a Change in Control under any other agreement or plan (the "Other 280G Benefits") (the sum of such Severance Payment and the Other 280G Benefits are referred to as the "Total Severance Benefits"), exceed 330% of the Base Amount (the "Threshold Amount"). (a) In the event the Total Severance Benefits exceed the Threshold Amount, then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of the excise tax imposed by Section 4999 of the Code (the "Excise Tax") on the Total Severance Benefits, any Federal, state and local income tax, employment tax and Excise Tax upon the payment provided by this subsection, and any interest and/or penalties assessed with respect to such Excise Tax, shall be equal to the Total Severance Benefits. (b) Subject to the provisions of Section 5A(c), all determinations required to be made under this Section 5A, including the amount of such Gross-Up Payment, shall be made by the Company's independent accounting firm (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the Date of Termination, if applicable, or at such earlier time as is reasonably requested by the Company or the Executive. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation applicable to individuals for the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of individual taxation in the state and locality of the Executive's residence on the Date of Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. The Gross-Up Payment, as determined pursuant to this Section 5A(b), shall be paid to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"). In the event that the Company exhausts its remedies pursuant to Section 5A(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred, consistent with the calculations required to be made hereunder, and any such Underpayment, and any interest and penalties imposed on the Underpayment and required to be paid by the Executive in connection with the proceedings 4 5 described in Section 5A(c), shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 5A(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax 5 6 basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issues raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5A(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 5A(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5A(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 5B. Limitation on Benefits. This Section 5B shall apply solely to the extent the Total Severance Benefits are less than or equal to the Threshold Amount. (a) Solely in the event the Total Severance Benefits are less than or equal to the Threshold Amount, it is the intention of the Executive and of the Company that no payments of the Total Severance Benefits by the Company to or for the benefit of the Executive under this Agreement or any other agreement or plan shall be non-deductible to the Company by reason of the operation of Section 280G of the Code relating to parachute payments. Accordingly, and notwithstanding any other provision of this Agreement or any such agreement or plan, if by reason of the operation of said Section 280G, any such payments exceed the amount which can be deducted by the Company, the Severance Payment which the Executive is entitled to receive under this Agreement shall be reduced by that amount which exceeds the maximum amount deductible by the Company under Section 280G. To the extent that Severance Payments exceeding such maximum deductible amount have been made to or for the benefit of the Executive, such excess payments shall be refunded to the Company with interest thereon at the applicable federal rate determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order that no such payments shall be non-deductible to the Company by reason of the operation of said Section 280G. 6 7 (b) If any dispute between the Company and the Executive as to any of the amounts to be determined under this Section 5B, or the method of calculating such amounts, cannot be resolved by the Company and the Executive, either the Company or the Executive, after giving three (3) days' written notice to the other, may refer the dispute to a partner in the Boston office of a firm of independent certified public accountants selected jointly by the Company and the Executive. The determination of such partner as to the amount to be determined under Section 513(a) and the method of calculating such amounts shall be final and binding on both the Company and the Executive. The Company shall bear the costs of any such determination if the amount determined by such partner differs to any material degree from the final amount proposed by the Company to the Executive before submission to such partner. If there is no such material difference, the costs of any such determination shall be evenly divided between the Company and the Executive. 6. Term. This Agreement shall take effect on the date first set forth above and shall terminate upon the earlier of (a) the termination by the Company of the employment of the Executive because of (A) a willful act of dishonesty by the Executive with respect to any matter involving the Company or any subsidiary or affiliate, or (B) conviction of the Executive of a crime involving moral turpitude, or (C) the gross or willful failure by the Executive to substantially perform the Executive's duties with the Company, or (D) the failure by the Executive to perform his full-time duties with the Company by reason of his death, disability (as defined in Section 3(a)) or retirement (as defined in Section 3(a)), (b) the resignation or termination of the Executive for any reason prior to a Change in Control, or (c) the resignation of the Executive after a Change in Control for any reason other than the occurrence of any of the events enumerated in Section 3(b)(i)-(v) of this Agreement. 7. Withholding. All payments made by the Company under this Agreement shall be net of any tax or other amounts required to be withheld by the Company under applicable law. 8. Notice and Date of Termination; Disputes, Etc. (a) Notice of Termination. After a Change in Control and during the term of this Agreement, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with this Section 8. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and the Date of Termination. Further, a Notice of Termination pursuant to one or more of clauses (A) through (C) of Section 3(a) hereof is required to include a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds (2/3) of the entire membership of the Board at a meeting of the Board (after reasonable notice to the Executive and an opportunity for the Executive, accompanied by the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the 7 8 Board, the termination met the criteria set forth in one or more of clauses (A) through (C) of Section 3(a) hereof. (b) Date of Termination. "Date of Termination", with respect to any purported termination of the Executive's employment after a Change in Control and during the term of this Agreement, shall mean (i) if the Executive's employment is terminated for disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period) and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination. In the case of a termination by the Company other than a termination pursuant to one or more of clauses (A) through (C) of Section 3(a) (which may be effective immediately), the Date of Termination shall not be less than thirty (30) days after the Notice of Termination is given. In the case of a termination by the Executive, the Date of Termination shall not be less than fifteen (15) days from the date such Notice of Termination is given. Notwithstanding Section 3(a) of this Agreement, in the event that the Executive gives a Notice of Termination to the Company, the Company may unilaterally accelerate the Date of Termination and such acceleration shall not result in a Terminating Event for purposes of Section 3(a) of this Agreement. (c) No Mitigation. The Company agrees that, if the Executive's employment by the Company is terminated during the term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 4(a) and (b) hereof. Further, the amount of any payment provided for in this Agreement shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or otherwise. (d) Settlement and Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled exclusively by arbitration in accordance with the laws of the Commonwealth of Massachusetts by three arbitrators, one of whom shall be appointed by the Company, one by the Executive and the third by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the American Arbitration Association in the City of Boston. Such arbitration shall be conducted in the City of Boston in accordance with the rules of the American Arbitration Association for commercial arbitrations, except with respect to the selection of arbitrators which shall be as provided in this Section 8(d). Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 9. Assignment; Prior Agreements. Neither the Company nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party, and without such consent any attempted transfer shall be null and void and of no effect. This Agreement shall inure to the 8 9 benefit of and be binding upon the Company and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. In the event of the Executive's death after a Terminating Event but prior to the completion by the Company of all payments due him under Section 4(a) and (b) of this Agreement, the Company shall continue such payments to the Executive's beneficiary designated in writing to the Company prior to his death (or to his estate, if the Executive fails to make such designation). 10. Enforceability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 11. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 12. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by registered or certified mail, postage prepaid, to the Executive at the last address the Executive has filed in writing with the Company, or to the Company at its main office, attention of the Board of Directors. 13. Effect on Other Plans. An election by the Executive to resign after a Change in Control under the provisions of this Agreement shall not be deemed a voluntary termination of employment by the Executive for the purpose of interpreting the provisions of any of the Company's benefit plans, programs or policies. Nothing in this Agreement shall be construed to limit the rights of the Executive under the Company's benefit plans, programs or policies except as otherwise provided in Section 5 hereof, and except that the Executive shall have no rights to any severance benefits under any severance pay plan. 14. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a duly authorized representative of the Company. 15. Governing Law. This is a Massachusetts contract and shall be construed under and be governed in all respects by the laws of the Commonwealth of Massachusetts. 16. Obligations of Successors. In addition to any obligations imposed by law upon any successor to the Company, the Company will use its best efforts to require any successor 9 10 (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. 17. Confidential Information. The Executive shall never use, publish or disclose in a manner adverse to the Company's interests, any proprietary or confidential information relating to (a) the business, operations or properties of the Company or any subsidiary or other affiliate of the Company, or (b) any materials, processes, business practices, technology, know-how, research, programs, customer lists, customer requirements or other information used in the manufacture, sale or marketing of any of the respective products or services of the Company or any subsidiary or other affiliate of the Company; provided, however, that no breach or alleged breach of this Section 17 shall entitle the Company to fail to comply fully and in a timely manner with any other provision hereof. Nothing in this Agreement shall preclude the Company from seeking money damages, or equitable relief by injunction or otherwise without the necessity of proving actual damage to the Company, for any breach by the Executive hereunder. IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company by its duly authorized officer, and by the Executive, as of the date first above written. INSTRON CORPORATION By: ----------------------------- Name: Title: ----------------------------- [Name of Executive] 29680.c3 10 EX-10.(K) 4 LEASE AGREEMENT 1 LEASE AGREEMENT between Schenck Immobilien & Services GmbH with registered Office situated at Landwehrstrasse 55, 64273 Darmstadt, Federal Republic of Germany hereinafter called "Schenck" or "Landlord" and Instron Schenck Testing Systems GmbH with registered Office situated Landwehrstrasse 55, 64273 Darmstadt, Federal Republic of Germany hereinafter called "IST" or "Tenant" Whereas, IST has acquired certain assets and related liabilities of Schenck's affiliated company Schenck Atis GmbH, Structural Testing Business pursuant to a Joint Venture Agreement dated October 25, 1996; Whereas, IST has conducted its Structural Testing Business at its headquarter at Landwehrstrasse, 64273 Darmstadt since such date; Whereas, Landlord is the owner of these premises; Whereas, IST has let from Landlord office and factory facilities at the Landlord's premises located in Darmstadt pursuant to a Lease Agreement of October 25, 1996; Whereas, therefore IST will continue to lease from Landlord these office and factory facilities in accordance with the terms and conditions hereafter set forth. Landlord and Tenant hereby agree with each other as follows: 2 1. PREMISES AND PARKING LOTS Landlord hereby leases and lets to Tenant, and Tenant hereby takes and hires from Landlord, upon and subject to the terms, conditions, covenants and provisions hereof, certain facilities situated at Landwehrstrasse, 64273 Darmstadt, more particularly described on EXHIBIT "A" annexed hereto and made part hereof (all the foregoing hereinafter sometimes referred to. as the "Leased Premises" and sometimes referred to as the "Premises") and Tenant is entitled to use a certain amount of parking lots, situated at the Premises or nearby. The number and the situation of the parking lots is. listed and particularly described in EXHIBIT "B". 2. TERM The initial term of this lease shall be for a period of five (5) years from April 1, 1998 and shall automatically be extended for subsequent five year periods unless terminated by Landlord with a notice period of three (3) years or by Tenant with a notice period of one (1) year. 3. RENT (a) Tenant covenants and agrees to pay Landlord for the Leased Premises without previous demand therefor, during the term of this Lease the basic rent at the rate per annum equal to the sums as set forth on EXHIBIT "C" annexed hereto and made a part hereof. For the first period of five years the Basic Rent is reduced by a discount of DM 9.500,-- per month. Should the Index for an average four person employee household with average income ("Vier Personen Arbeitnehmer-Haushalt mit durchschnittlichem 2 3 Einkommen") with the base year 1991= 100 as established by the German Statistic Authority ("Statistisches Bundesarnt") increase or decrease by more than ten (10) points the parties agree to enter into good faith negotiations for an adaption of the rent in order to reflect such inflation. If the parties do not reach an agreement within 90 day from the beginning of negotiations the parties will forward the matter to an independent arbitrator whose decision shall be final and binding. All basic, rent per annum shall be due and payable by Tenant in advance equal monthly installments on the third day of each and every calendar month during the term of this Lease and shall be payable by bank transfer to Landlord's Bank Account. BANK: LANDESBANK HESSEN-TH[UPSILON]FIRINGEN, DARMSTADT BANK CODE: 508 500 49 ACCOUNT NO.: 5010559002 (b) As herein used the term "rent" shall be deemed to include the above said rent and the Utility Expenses payable by Tenant to Landlord hereunder Section 5.(a). 4. USE OF PREMISES The Leased Premises may be used for office and manufacturing, assembly and testing purposes. 5. TAXES AND UTILITY EXPENSES 3 4 (a) Tenant shall, during the term of this Lease pay simultaneously as an "Additional Rent" and when rent shall become due and payable pursuant to Section 3.(a) on a monthly basis the Utility Expenses, such as rates and charges for cold water, hot water, steam, heat, gas, electricity power, insurance fees, taxes and other services and services furnished to the Leased Premises or occupants thereof during the term of this Lease conclusively listed by category in EXHIBIT "D" annexed hereto and made a part, hereof. Tenant or Landlord may terminate certain or all of the following services: Hausmeister, Gebauddereinigung und Werksreninigung furnished to the leased Premises or occupants thereof with a notice period of one (1) year. (b) During the term of this Lease for the period covering each calendar year, the landlord shall only once a year until August 30 calculate all actual cost pursuant to Section 5(a), If the sum of the above said payments made by the Tenant exceeds the sum of the actual cost for the items stated in Section 5 (a), then the Landlord shall promptly refund the excess payment to the Tenant. If the sum of the actual cost for the items stated in Section 5 (a) are in excess of the sum of the payments made by the Tenant pursuant to Section 5 (a), then the Tenant shall promptly pay the Landlord the excess. (c) For each year the Additional Rent payments stated in Section 5 (a) shall be based on the prior years actual cost. 6. IMPROVEMENTS, REPAIRS, ADDITIONS, REPLACEMENTS (a) Tenant shall, at all times during the term of this Lease and at its own cost and expense keep the Leased Premises clean, safe and free of waste. Tenant shall keep and maintain or cause to be kept and maintained in repair and good condition the interior of the Leased Premises including the interior decorations normal wear and tear excepted. 4 5 (b) Landlord shall, at all times during the term of this Lease, and at its own cost and expense, keep and maintain or cause to be kept and maintained in repair and good condition (ordinary wear and tear excepted) the Leased Premises with the exception of installations and equipment as listed in EXHIBIT "E". Landlord shall not be liable for damages which result from or arise out of or in connection with Tenant's fault negligence, acts or omissions, which shall be remedied or caused to be remedied by Tenant at its own costs and expense. (c) Tenant is only entitled to make alterations, changes, replacements, improvements and additions in and to the Landlord's Premises, the buildings and improvements thereon as far as Landlord provides its written consent. (d) On the last day or sooner termination of the term of this Lease, Tenant shall quit and surrender the Leased Premises broom clean and in good condition (ordinary wear and tear excepted). 7. REQUIREMENTS OR PUBLIC AUTHORITY During the term of this Lease, each Party with respect to its sphere of responsibility shall, at its own cost and expense, promptly observe and comply with all present and future laws, ordinances, requirements, orders, directives, rules and regulations and of all other governmental authorities affecting the Leased Premises thereto or any part thereof whether the same are in force at the commencement of the term of this Lease or may in the future be passed, enacted or directed, and Tenant shall pay the costs, expenses, liabilities, losses, damages, fines, penalties, claims and demands including reasonable counsel fees, that may in any manner arise out of or be imposed because of the failure of Tenant to comply with the covenants of this Section 7. 5 6 8. LANDLORD'S ACCESS TO PREMISES Landlord or Landlord's agents and designees shall have the right, but not the obligation, to enter upon the Leased Premises at all reasonable times subject to reasonable notice to examine same and to exhibit the Leased Premises to prospective purchasers and prospective Tenants, but in the case of prospective Tenants only during the last year of the term of this Lease. Tenant allows Landlord, Landlord's employees, officers, servants or visitors the unrestricted access to areas which are jointly used according to the Leased Premises, such as floors, cellars, toilets, restrooms etc. 9. ASSIGNMENT AND SUBLETTING, EXTENSIONS (a) Tenant may not assign, sublease (in whole or in part or parts), mortgage or otherwise encumber this Lease (in whole or in part or parts) without Landlord's written consent therefor. The Tenant, however, shall have the right to sublease the Leased Premises within the Instron group of companies. (b) Should the parties agree that Landlord leases and lets additional premises to Tenant, and that Tenant takes and hires additional premises from Landlord, the terms, conditions, covenants and provisions of such extension of the lease shall. follow the terms, conditions, covenants and provisions of this Agreement. 10. SIGNS Tenants shall have the right to install, maintain and replace in, on or over or in front of the Leased Premises or in any part thereof such signs and advertising matter as Tenant may desire, provided that Landlord shall give its written consent, which consent shall not be unreasonably withheld by Landlord. If required Landlord shall apply public permissions affecting the installation of signs and Tenant shall pay such cost and expenses. 6 7 11. SECURITY, SAFETY, TENANT'S ACCESS TO LANDLORD'S FACILITIES Tenant, its officers, agents, servants, employees, contractors, sublessees or visitors are obliged to obey the regulation related to safety, environmental matters and security at the Premises and Parking Lots. The regulations are laid down in writing and will be furnished by Landlord to Tenant on demand. Landlord shall furnish Tenant and Tenant's employees with separate ID-cards and all necessary keys to enter Premises, Parking Lots and Landlord's facilities in Darmstadt if required. 12. INDEMNITY Tenant shall indemnify and save harmless Landlord from and against any and all liability, damage, penalties or judgments arising from injury to person or property sustained by anyone in and about the premises resulting from any act or omission of Tenant or its officers, agents, servants, employees, contractors (other than any company affiliated with the Landlord), visitors or sublessees. 13. INSURANCE (a) Tenant shall provide at its expense, and keep in force during the term of this Lease, a general liability insurance in an insurance company licensed to do business in the Federal Republic of Germany in the amount of at least one million DM with respect to injury or death to any one, person and two million DM with respect to injury or death to more than one person in any one accident or other occurrence and one million Dollars with respect to damages to property. Tenant agrees to deliver certificates of such insurance to Schenck at the beginning of the term of this lease and thereafter not less than ten (10) days prior to the expiration of my such policy. The general liability insurances shall include an insurance against all damages occurring to the Premises resulting 7 8 from any fault or negligence of Tenant as far as insurance coverage is available under usual German insurance terms and conditions. (b) During the term of this lease, Landlord shall keep the buildings insured against loss and damage by fire on a replacement cost basis. 14. ENVIRONMENTAL Each Party shall indemnify and bold harmless the other Party from any Environmental Liabilities resulting from any acts, omissions or circumstances caused by using the Premises after the date from which the tenant has initially let the Premises from the Landlord ("Commencement Date") or existing on the Premises prior to the Commencement Date. (a) The Parties shall indemnify and hold harmless each other from any Environmental Liabilities resulting from any acts, omissions or circumstances caused within the sphere, of responsibility of the relevant Party, each on or after the Commencement Date, and not already caused or existing prior to the Commencement Date. The Landlord shall indemnify and hold harmless the Tenant from any Environmental Liabilities existing on the Premises at any time and not caused within the sphere of responsibility of the Tenant. (b) With respect to Environmental Liabilities resulting both from (i) acts, omissions and circumstances caused prior to the Commencement Date or existing on the Premises and (ii) acts, omissions and circumstances caused on or after the Commencement Date and not caused or existing prior to the Commencement Date, the relevant Party shall bear the respective liability prorated in relation to the degree or level which was caused or existing prior to or which was caused on or after the Commencement Date. 8 9 (c) If it cannot be proven that the respective liability results from an act, omissions or circumstance for which one party is responsible, or if it cannot be proven for which level or degree each party is responsible then the respective Environmental Liability shall be prorated between Landlord and Tenant as follows:
Year of Discovery after the Commencement Date Share of the Landlord Share of the Tenant 2 80% 20% 3 60% 40% 4 40% 60% 5 20% 80% 0% 100%
15. FORCE MAJEURE In the event that Landlord or Tenant shall be delayed, hindered or prevented from the performance of any act required hereunder by reason of strikes, lock-outs, labour troubles, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrection, the act, failure to act or default of the other party, war or other reason beyond their control, then performance of such act shall be excused for the period of the delay and the period of the performance of any such act shall be extended for a period equivalent to the period of such delay. 16. GOVERNING LAW, ARBITRATION AND CONFIDENTIALITY With respect to Governing Law, Arbitration and Confidentiality the rules and regulations of Section 34 and 37 of the Joint Venture Agreement between Schenck Atis GmbH and Instron Corporation of October 25, 1996 shall be applicable. 9 10 17. ENTIRE AGREEMENT This Agreement together with its Exhibits hereto represents the complete Agreement and understanding between the parties with respect to the, subject matter herein and supersedes all prior written and oral Agreement and understandings between the parties with respect thereto. This Agreement may not be changed orally but only by an Agreement in writing signed by the parties hereto. Tenant agrees that it is not relying on any representations or Agreements other than those contained in this Lease. /s/ John J. F. Tattersfield /s/ Andreas Birk - --------------------------- ---------------------------- (Tenant) (Landlord) Instron Schenck Testing Schenck Immobilien Systems GmbH & Service GmbH 10 11 EXHIBIT C Rent IST
- -------------------------------------------------------------------------------------------------------- Building No. Gross Space Rent D.M. square Base Rent D.M. square meter meter - -------------------------------------------------------------------------------------------------------- 12 589.06 1.35 7,274.89 - -------------------------------------------------------------------------------------------------------- 12 Cellar 70.38 7.26 510.96 - -------------------------------------------------------------------------------------------------------- 13 135.12 2,261.00 - -------------------------------------------------------------------------------------------------------- 13 3 63,52 16.73 1,062.68 - -------------------------------------------------------------------------------------------------------- 71 1,683.05 18.16 30,564.19 - -------------------------------------------------------------------------------------------------------- 71 Cellar 396.76 7.26 2,880.48 - -------------------------------------------------------------------------------------------------------- 30 1,824.86 9.30 16,971.20 - -------------------------------------------------------------------------------------------------------- 30 2 184.74 9.30 1,718.08 - -------------------------------------------------------------------------------------------------------- 30 Cellar 549.11 3.87 2,125.06 - -------------------------------------------------------------------------------------------------------- 55 21.46 3.87 83.05 - -------------------------------------------------------------------------------------------------------- 96 Cellar 15.62 7.26 113.40 - -------------------------------------------------------------------------------------------------------- Group summation 5,535.68 65,564.89 -65,564.89 - -------------------------------------------------------------------------------------------------------- Discount for the first 5 years -9,500.00 -------------------------------------------------------------------------- Total 56,064.99 --------------------------------------------------------------------------
11 12 Exhibit D MIETNEBENKOSTEN 1 Klirna Heizung Kran Wasser Strom Werkschutz 12 13 Exhibit D MIETNEBENKOSTEN 2 Versicherung Betriebskosten Hausmeister Gebaudereinigung Werksreinigung Gebuhren, Abgaben 13 EX-10.(L) 5 STRATEGIC ALLIANCE 1 STRATEGIC ALLIANCE AGREEMENT BETWEEN 1. Instron Corporation, 100 Royall Street, Canton, Massachusetts 02021, - hereinafter called "Instron Corp." - 2. Instron Partners, 100 Royall Street, Canton, Massachusetts 02021, - hereinafter called "IP" - 3. Instron GmbH, Industriestrasse 19, 67063 Ludwigshafen am Rhein, - hereinafter called "Instron GmbH" - 4. Instron Schenck Testing Systems GmbH, LandwehrstraBe 55, 65273 Darmstadt, - hereinafter called "GmbH" 5. Instron Schenck Testing Systems, a Delaware general Partnership, - hereinafter called "Partnership" - - Instron Corp., IP and Instron GmbH are also jointly referred to as "Instron" - AND 6. Carl Schenck AG, Landwehrstrasse 55, Darmstadt, - hereinafter called "Schenck AG" - 7. Schenck Atis GmbH, Landwehrstrasse 55, Darmstadt, - hereinafter called "Schenck Atis" - 8. Schenck Pegasus Testing Inc., 535 Acorm Street, Deer Park, N. Y. 11729-3 69 8, USA, - hereinafter called "SPT" - 9. Schenck Fertigungs GmbH, Landwehrstrasse 55, Darmstadt, - hereinafter called "Schenck Fertigung" - - - Schenck AG, Schenck Atis and SPT are also jointly referred to as "Schenck" - 2 1. CURRENT STATUS 1.1 By notarial deed dated November 14, 1996 of the notary public Dr. P. Schmidt zur Nedden in Frankfurt/Main (A.Prot. 1996/574) (the "Deed 1"), Instron Corporation ("Instron Corp."), Carl Schenck AG ("Schenck AG") and other parties have entered into a Joint Venture Agreement ("JVA") on the formation of a Joint Venture reflected in joint ownership of a German GmbH with the name Instron Schenck Testing Systems GmbH and a US partnership with the name Instron Schenck Testing Systems. 1.2 By notarial deed dated November 14, 1996 of the notary public Dr. P. Schmidt zur Nedden in Frankfart/Main (A. Prot. 1996/573) Instron Corp., Schenck AG and other parties have entered into an Asset Purchase Agreement on the Sale of the Servohydraulic Machine Business from Schenck Atis to Instron Limited, a subsidiary of Instron Corp. 1.3 Instron GmbH and IP desire to purchase the shares and interests of Schenck Atis and SPT in the GmbH and the Partnership irrespective of the terms of the JVA but subject to the terms and conditions contained herein. Simultaneously, the parties intend to terminate the JVA. 2. SALE AND TRANSFER OF QUOTAS AND INTERESTS Instron GmbH and EP on the one hand and Schenck Atis and SPT on the other hand hereby enter into the Sale Agreement attached hereto as EXHIBIT 2, pursuant to which Schenck Atis and SPT sell to Instron GmbH and IP as of the date hereof and transfer to the Instron GmbH and IP, as of the Effective Date; all its interests in the GmbH and the Partnership, subject to the terms contained herein. 2 3 3. NAME LICENSE 3.1 For a transition period of 3 years from the Effective Date Schenck AG, Schenck Atis and SPT hereby grant the GmbH and the Partnership the right to use the name and mark "Schenck" in accordance with past practice, whether as part of their corporate or trade name or for use as a logo or otherwise in connection with the company's business and products of structural testing, including in brochures, leaflets and otherwise as usual in the Business in accordance with past practices. The license shall be royalty-free, non-exclusive and shall not be transferable. The GmbH and Partnership shall not have a right to sublicense the license. Upon terminate of such license, GmbH and the Partnership shall cease using the licensed name and mark as part of its corporate names and in any newly printed brochures, leaflets or other materials; existing brochures, leaflets or other materials may be used for a period of 18 months from termination of the license set out herein. 3.2 The GmbH and the Partnership shall have an option to renew the license by written notice to Schenck AG for two additional one year periods, in each case in consideration of a lump sum license fee of 100.000,- per year of extension. Such license fee shall be payable not later than three business days from beginning of the extension period for which such fee becomes due. The option must be exercised not less than two months before the expiration of the relevant license period. 3.3 Prior to the date referred to in Sections 3.1 and 3.2, Schenck shall only be entitled to terminate the license for cause (aus wichtigem Grund) subject to a two months notice period, and not to the extent that the licensees have taken appropriate action to remedy the reason for termination, and only if the continuation of the license can not be reasonably requested from Schenck (die Fortsetzung der Lizenz ist nicht mehr zumutbar). 3 4 3.4 The GmbH and Partnership shall promptly notify Schenck in the event that it becomes aware of any third party infringements of Schencles name rights with respect to the term "Schenck". 4. OTHER AGREEMENTS 4.1 The Contract Manufacturing and Supply Agreement between Schenck Fertigung and GmbH dated as of November 17, 1996 attached to the JVA as EXHIBIT 11.2.1 (the CMSA 1") and the Contract Manufacturing and Supply Agreement dated as of November 17, 1996 between Schenck Pegasus and the Partnership attached to the JVA as EXHIBIT 11.2.2 (the CMSA 2") will be continued. Effective as of the Effective Date, Section 4.1.2 of the CMSA 1 and Sec. 4.1 of the CMSA 2 will be amended to read as follows: "The price to be paid for Components delivered hereunder on or after September 27, 1998 shall be the price quoted by the supplying party which price shall be the price quoted by the supplying party, but which price shall not exceed 110% of the sum of the Manufacturing Cost plus the Other Cost of the Components." Sec. 4.1.2 of the CMSA I shall further be amended by the following language: "Capitalized terms used herein and not defined herein shall have the meaning ascribed to them in the Contract Manufacturing and Supply Agreement of November 17, 1996 between Schenck Pegasus Corporation and Instron Schenck Testing Systems." 4.2 The lease agreement between Schenck. Immobilien & Service GmbH (formerly: Schenck GmbH + Co. Immobilien & Service KG and GmbH) attached to the JVA as EXHIBIT 10.1, as amended on March 31, 1998, shall be further amended as follows: 4 5 (i) Instron Wolpert GmbH ("Wolpert") will become a party to the lease agreement. (ii) Wolpert will lease the space at the Schenck premises in Darmstadt, Landwehrstrasse 55, marked in EXHIBIT 4.2 (1) hereto. (iii) The lease payment for such space will be as set out in EXHIBIT 4.2 (iv) (2) hereto. Instron Corp and Schenck AG will cause QmbH, Wolpert and Schenck Immobilien & Service GmbH to amend the lease agreement accordingly effective as of October 1, 1998. 4.3 The Support Services Agreement between Schenck AG and GmbH of November 14, 1996 attached to the JVA as EXHIBIT 11.1.1 shall be continued. 4.4 The License Agreement between the Partnership, Schenck Pegasus, and Schenck AG dated as of November 17, 1996 attached to the JVA as EXHIBIT 15 shall be continued. 4.5 Effective as of the Effective Date all other Agreements attached to the JVA shall be terminated. These are the following agreements: (i) Research and Development Agreement between Schenck AG and GmbH and the Partnership dated as of November 14, 1996 (ii) After Sales Service Agreement between Schenck AG and GmbH and the Partnership dated as of November 17, 1996 (iii) Finder's Fee and Commission Sales Agreement between Schenck AG and GmbH and the Partnership dated as of November 17, 1996 5 6 (iv) Preferred Supplier and Joint Sales Agreement between GmbH and the Partnership and Schenck AG dated as of November 17, 1996 (v) Support Services Agreement between Schenck Pegasus and the Partnership dated as of November 14, 1996 (vi) Finder's Fee Agreement between Instron Limited and Schenck AG dated as of November 17, 1996 4.6 The parties agree that Schenck and its affiliates, GmbH, the Partnership and Instron Corp. and its affiliates are hereby released from any and all obligations and liabilities arising under, out of or in connection with the agreements terminated pursuant to Section 4.5. 5. TERMINATION OF JVA AND RELEASE 5.1 The parties agree that the JVA is terminated and that both Schenck and its affiliates and Instron Corp. and its affiliates are hereby released from any and all obligations and liabilities arising under, out of or in connection with the JVA, except for (i) obligations and liabilities under those agreements which will be continued pursuant to Section 4 hereof and (ii) obligations and liabilities under Section 32 and 34 of the JVA. 5.2 Schenck AG will ensure, and will cause its affiliates to ensure, that any board members of GmbH, the Partnership or any of their subsidiaries appointed by Schenck AG or any of its affiliates, or elected upon their proposal for election by Schenck AG or any of its affiliates, will resign on or immediately after the Effective Date. Instron Corp. will cause these board members to be discharged (entlastet) by appropriate corporate action without undue delay thereafter. 6 7 5.3 Instron Corp. will, and will cause its affiliates to, grant Schenck AG and its affiliates reasonable access to the books and records of GmbH and the Partnership to the extent reasonably required by the Schenck AG and its affiliates (i) in order to be able to comply with reporting obligations imposed by applicable law or (ii) in connection with tax or similar audits of the party requesting access. Schenck AG will, and will cause its affiliates to, grant GmbH, the Partnership, Instron. Corp. and its affiliates reasonable access to the books and records of Schenck AG and its affiliates to the extent reasonably required by GmbH, the Partnership, Instron Corp. and its affiliates (i) in order to be able to comply with reporting obligations imposed by applicable law or (ii) in connection with tax or similar audits of the party requesting access. 5.4 Any claims relating to legal defects (Rechtsmangel) which GmbH and the Partnership may have against Schenck AG or any of its affiliates under Sections 7.3 and 7.4 of the German Schenck Contribution Agreement and the U.S. Schenck Contribution Agreement (as defined in the JVA) and any mutual claims under Section 3.2 of the German Schenck Contribution Agreement and under Section 3.3 of the U.S. Schenck Contribution Agreement shall remain unaffected. 6. EFFECTIVE DATE The Effective Date within the meaning of this Agreement shall be September 27, 1998. 7. COSTS AND FEES 7.1 The fees for the notarization of this Agreement shall be born equally by Schenck AG and Instron Corporation. 7.2 Each party shall bear its own professional advisers' fees and other costs. 7 8 8. MISCELLANEOUS 8.1 Amendments and modifications of this Agreement (including this clause) must be made in written or in notarial form, if such form is required. 8.2 All notices and other notifications pursuant to or in connection with this Agreement must be made in writing and must be hand delivered or sent by registered mail or by telecopy (with a confirmation copy to follow by mail) to the following address(es) or to the addresses which the respective party shall notify to the other in writing: to any Instron party: Instron Corporation 100 Royall Street Canton, MA 02021 U.S.A. Attn.: John Barrett Fax No.: (001) 781-821-2487 To any Schenck party: Carl Schenck AG Landwehrstrasse 55 D-64293 Darmstadt Federal Republic of Germany Attn.: Legal Department Fax No.: 06151-32 39 05 With copy to: Schenck Corporation 535 Acorn Street Deer Park, NY 11729-3698 Attn.: Blaise Sarcone Fax No.: (001) 516-242-4308 8 9 8.3 The partial or total invalidity of, or the impossibility to perform, individual provisions of this Agreement shall not impair the validity of the other provisions of the Agreement. The parties undertake to replace a provision that is or has become invalid in whole or in part by a valid provision, the economic result of which comes as close as possible to that, of the invalid provision. In the event that the Agreement does not deal with certain issues or certain provisions are impossible to be performed, the same procedure shall apply. 8.4 The parties undertake to take all actions and make declarations that are necessary and suitable to achieve the consummation of this Agreement. This shall apply in, particular to declarations to the Commercial Registers and the financial authorities. 8.5 Headings are inserted for convenience only, are not part of this Agreement and shall not modify the content of any provisions of this Agreement. 8.6 Rights and obligations arising from this Agreement shall not be assignable by any party without prior written consent of the other party. 8.7 As from the date on which the CMSA 1 terminates this Agreement shall no longer be referred to as the "Strategic Alliance Agreement" but only as the "Umbrella Agreement". 8.8 This Agreement shall be governed by the laws of the Federal Republic of Germany (with the exception of the provisions relating to the conflict of laws). 8.9 The courts of Frankfurt am Main shall have exclusive jurisdiction with respect to all disputes arising out of or in connection with this Agreement. 9 10 INSTRON CORPORATION By: /s/ John Barrett --------------------------------- John Barrett, Treasurer INSTRON PARTNERS By: /s/ John Barrett --------------------------------- John Barrett, Treasurer INSTRON GMBH By: /s/ John Barrett --------------------------------- John Barrett, Treasurer INSTRON SCHENCK TESTING SYSTEMS GMBH By: /s/ John Barrett --------------------------------- John Barrett, Treasurer INSTRON SCHENCK TESTING SYSTEMS By: /s/ John Barrett --------------------------------- John Barrett, Treasurer CARL SCHENCK AG By: /s/ Jan Wittstock By: /s/ Andreas Birk --------------------------------- ----------------------------- 10 11 Jan Wittstock, Financial Director Legal Counsel to Schenck SCHENCK ATIS GMBH By: /s/ Jan Wittstock By: /s/ Andreas Birk --------------------------------- ----------------------------- Jan Wittstock, Financial Director Legal Counsel to Schenck SCHENCK PEGASUS TESTING INC. By: /s/ Jan Wittstock By: /s/ Andreas Birk --------------------------------- ----------------------------- Jan Wittstock, Financial Director Legal Counsel to Schenck SCHENCK FERTIGUNGS GMBH By: /s/ Jan Wittstock By: /s/ Andreas Birk --------------------------------- ----------------------------- Jan Wittstock, Financial Director Legal Counsel to Schenck 11 EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT All of the subsidiaries listed below are included in the consolidated financial statements. Percentage of Organized Voting Securities Under the Incorporated Owned by Registrant Laws of - ------------------------------------------------------------------------------- IRT - II Trust 100% Massachusetts (1) Instron Realty Trust 100% Massachusetts (1) Instron Japan Company, Ltd. 100% Massachusetts (1) Instron Asia, Ltd. 100% Massachusetts (1) Instron Canada Inc. 100% Canada (1) Instron Foreign Sales Corporation 100% Jamaica (1) Equipamentos Cientificos Instron, Ltda. 100% Brazil (1) Instron Limited 100% United Kingdom (2) Instron S.A. 100% France (2) Instron Proprietary, Ltd. 100% Australia (2) Instron International, Ltd. 100% United Kingdom (2) Severn Furnaces, Ltd. 100% United Kingdom (2) Instron Singapore Pte Limited 100% Singapore (1) Instron Holdings, Ltd. 100% United Kingdom (1) Instron Wolpert GmbH 100% Germany (2) Instron Korea Co. Ltd. 100% Korea (1) Instron Schenck Testing Systems 100% Delaware (1) Instron Schenck Testing Systems - GmbH 100% Germany (3) (1) Subsidiaries of Instron Corporation (a Massachusetts corporation). (2) Subsidiaries of Instron Holdings Limited (United Kingdom). (3) Subsidiary of Instron GmbH 45 EX-23 7 CONSENT OF PRICEWATERHOUSECOOPERS L.L.P. 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements on Form S-3 (File No. 2-77062), and Forms S-8 (File Nos. 2-77060, 2-91694, 33-43955 and 33-48287) of our reports dated February 18, 1999, on our audits of the consolidated financial statements and related financial statement schedule of Instron Corporation as of December 31, 1998, and 1997, and for each of the three years in the period ended December 31, 1998, which reports are included in this Annual Report on Form 10-K. /s/ PriceWaterhouseCoopers L.L.P. --------------------------------- PriceWaterhouseCoopers L.L.P. Boston, Massachusetts March 31, 1999 46 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF INCOME, CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1998. 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 7,209 0 65,766 800 36,121 114,379 66,471 42,470 158,254 59,138 0 0 0 7,052 72,532 158,254 152,879 183,029 91,410 111,054 0 73 1,175 20,333 8,874 0 0 0 0 11,459 1.72 1.62
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