-----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, AZOZt23XoLT6S9aZ0CXzvFaUPgfDL+o2nPIFPrvQraeX+IsqfktM1V0KpDakkYe+ gOZ4JQWxdG4hVMeklbyjIw== 0000950135-99-004120.txt : 19990817 0000950135-99-004120.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950135-99-004120 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990816 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-Q SEC ACT: SEC FILE NUMBER: 001-05641 FILM NUMBER: 99693420 BUSINESS ADDRESS: STREET 1: 100 ROYALL ST CITY: CANTON STATE: MA ZIP: 02021 BUSINESS PHONE: 7818282500 MAIL ADDRESS: STREET 1: 100 ROYALL STREET CITY: CANTON STATE: MA ZIP: 02021 10-Q 1 INSTRON CORPORATION 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JULY 3, 1999 ------------ OR TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number 1-5641 ------ INSTRON CORPORATION (Exact name of registrant as specified in its Charter) Massachusetts 04-2057203 (State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization) 100 Royall Street 02021 Canton, Massachusetts (Zip Code) (Address of Principal executive offices)
(781) 828-2500 (Registrant's telephone number, including area code) --------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 number of shares outstanding of each of the issuer's classes of common stock as of July 29, 1999. Common Stock, $1 par value -- 6,978,448 shares ================================================================================ 2 INSTRON CORPORATION FORM 10-Q Consolidated Statements of Income PART I (unaudited) ITEM I (In Thousands)
Three Months Ended ---------------------------------- July 3, 1999 June 27, 1998 ---------------------------------- Revenue: Sales $43,034 $30,933 Service 9,226 6,828 ------- ------- Total revenue 52,260 37,761 ------- ------- Cost of revenue: Sales 26,600 17,573 Service 6,019 4,454 ------- ------- Total cost of revenue 32,619 22,027 ------- ------- Gross profit 19,641 15,734 ------- ------- Operating expenses: Selling and administrative 14,128 11,014 Research and development 2,593 1,718 ------- ------- Total operating expenses 16,721 12,732 ------- ------- Income from operations 2,920 3,002 ------- ------- Other (income) expense: Interest (income) expense 109 (89) Foreign exchange (gains) losses (193) 177 ------- ------- Total other (income) expense (84) 88 ------- ------- Income before income taxes 3,004 2,914 Provision for income taxes 1,141 1,107 ------- ------- Net income $ 1,863 $ 1,807 ======= ======= Weighted average number of basic common shares 6,769 6,623 ======= ======= Earnings per share - basic $ 0.28 $ .27 ======= ======= Weighted average number of diluted common shares 7,146 7,151 ======= ======= Earnings per share - diluted $ 0.26 $ 0.25 ======= =======
See Accompanying Notes to Consolidated Financial Statements 2 3 INSTRON CORPORATION FORM 10-Q Consolidated Statements of Income PART I (unaudited) ITEM I (In Thousands)
Six Months Ended ----------------------------- July 3, 1999 June 27, 1998 ----------------------------- Revenue: Sales $ 83,411 $ 58,437 Service 17,594 13,193 -------- -------- Total revenue 101,005 71,630 -------- -------- Cost of revenue: Sales 49,626 33,176 Service 11,847 8,978 -------- -------- Total cost of revenue 61,473 42,154 -------- -------- Gross profit 39,532 29,476 -------- -------- Operating expenses: Selling and administrative 28,617 21,075 Research and development 5,301 3,167 Special items charge 0 4,975 -------- -------- Total operating expenses 33,918 29,217 -------- -------- Income from operations 5,614 259 -------- -------- Other (income) expense: Interest (income) expense 253 (15) Foreign exchange (gains) losses (212) 277 Gain on sale of land 0 (11,076) -------- -------- Total other (income) expense 41 (10,814) -------- -------- Income before income taxes 5,573 11,073 Provision for income taxes 2,117 5,355 -------- -------- Net income $ 3,456 $ 5,718 ======== ======== Weighted average number of basic common shares 6,762 6,553 ======== ======== Earnings per share - basic $ .51 $ 0.87 ======== ======== Weighted average number of diluted common shares 7,112 7,106 ======== ======== Earnings per share - diluted $ .49 $ 0.80 ======== ========
See Accompanying Notes to Consolidated Financial Statements 3 4 INSTRON CORPORATION FORM 10-Q Consolidated Balance Sheets PART I (unaudited) ITEM I (In Thousands)
July 3, 1999 December 31,1998 ------------ ---------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 8,483 $ 7,209 Accounts receivable (net of allowance for doubtful accounts of $718 in 1999 and $800 in 1998) 56,998 65,766 Inventories 38,279 36,121 Deferred income taxes 2,409 3,060 Prepaid expenses and other current assets 1,982 2,223 -------- -------- Total current assets 108,151 114,379 Property, plant and equipment, net 23,535 24,001 Goodwill 11,619 12,384 Deferred income taxes 1,800 904 Other assets 7,486 6,586 -------- -------- Total assets $152,591 $158,254 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short term borrowings $ 10,175 $ 6,416 Accounts payable 13,570 15,807 Accrued liabilities 21,790 22,958 Accrued employee compensation and benefits 4,889 6,798 Accrued income taxes (705) 93 Advance payments received on contracts 8,303 7,066 -------- -------- Total current liabilities 58,022 59,138 Long-term debt 6,648 13,216 Pension and other long-term liabilities 7,061 6,316 -------- -------- Total liabilities 71,731 78,670 -------- -------- Commitments and Contingencies -- -- Stockholders' equity: Preferred stock, $1 par value; 1,000,000 shares authorized, none issued -- -- Common stock, $1 par value; 10,000,000 shares authorized; 7,086,710 and 7,051,968 shares issued, respectively 7,087 7,052 Additional paid in capital 9,080 8,727 Deferred compensation (2,419) (2,662) Retained earnings 75,684 72,496 Accumulated other comprehensive loss (7,242) (4,699) -------- -------- 82,190 80,914 Less: Treasury stock of 108,262 shares at cost 1,330 1,330 -------- -------- Total stockholders' equity 80,860 79,584 -------- -------- Total liabilities and stockholders' equity $152,591 $158,254 ======== ========
See Accompanying Notes to Consolidated Financial Statements 4 5 INSTRON CORPORATION FORM 10-Q Consolidated Statements of Cash Flows PART I (unaudited) ITEM I (In Thousands)
Six Months Ended -------------------------------- July 3, 1999 June 27, 1998 -------------------------------- Cash flows from operating activities: Net income $ 3,456 $ 5,718 Adjustments to reconcile net income to net cash provided by operating activities: Gain on the sale of property, plant and equipment 0 (11,104) Depreciation and amortization 4,213 3,250 Provision for losses on accounts receivable 44 23 Deferred taxes (300) (235) Changes in assets and liabilities: Decrease in accounts receivable 8,027 4,754 Increase in inventories (2,842) (6,729) Decrease in prepaid expenses and other current assets 208 1,165 Decrease in accounts payable and accrued expenses (3,871) (1,217) Other (1,631) 67 ------- -------- Net cash provided by (used in) operating activities 7,304 (4,308) ------- -------- Cash flows from investing activities: Proceeds from the sale of property, plant and equipment 25 13,471 Capital expenditures (2,699) (3,695) Capitalized software costs (1,247) (635) Other 206 7 ------- -------- Net cash provided by (used in) investing activities (3,715) 9,148 ------- -------- Cash flows from financing activities: Net payments under revolving credit and term loan facility (6,252) (5,050) Net short-term borrowings 4,115 4,174 Cash dividends paid (268) (527) Proceeds from exercise of stock options 386 1,814 Treasury stock purchases 0 (616) ------- -------- Net cash used by financing activities (2,019) (205) ------- -------- Effect of exchange rate changes on cash (296) (7) ------- -------- Net increase in cash and cash equivalents 1,274 4,628 Cash and cash equivalents at beginning of year 7,209 2,566 ------- -------- Cash and cash equivalents at end of period $ 8,483 $ 7,194 ======= ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 847 $ 873 Income taxes 3,156 4,214
See accompanying Notes to Consolidated Financial Statements 5 6 INSTRON CORPORATION FORM 10-Q Consolidated Statements of Comprehensive Income PART I (unaudited) ITEM I (In Thousands) Three Months Ended ------------------------------ July 3, 1999 June 27, 1998 ------------------------------ Net income $ 1,863 $ 1,807 Other comprehensive income(loss): Foreign currency translation adjustments (730) (527) ------- ------- Comprehensive income $ 1,133 $ 1,280 ======= ======= Six Months Ended ------------------------------ July 3, 1999 June 27, 1998 ------------------------------ Net income $ 3,456 $ 5,718 Other comprehensive income(loss): Foreign currency translation adjustments (2,543) 161 ------- ------- Comprehensive income $ 913 $ 5,879 ======= ======= See Accompanying Notes to Consolidated Financial Statements 6 7 INSTRON CORPORATION FORM 10-Q PART I Notes to Consolidated Financial Statements ITEM 1 July 3, 1999 (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Certain reclassifications were made to the prior year amounts to conform with the 1999 presentation. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 1998. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect 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. The consolidated results for the second quarter and the first six months of 1999 include the results of Satec which was acquired in August, 1998 and the results of IST due to Instron acquiring the remaining 49% of IST in September 1998. In the opinion of management, all adjustments (which include only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six month period ended July 3, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. Regarding the disclosure related to the consolidated statements of comprehensive income, the Company does not record tax provisions or benefits for the net changes in foreign currency translation adjustment, as the Company intends to permanently reinvest undistributed earnings in its foreign subsidiaries. 2. 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 any potential common shares outstanding using the "treasury stock method." 7 8 INSTRON CORPORATION FORM 10-Q PART I Notes to Consolidated Financial Statements ITEM 1 July 3, 1999 (Unaudited) The following is a reconciliation of the basic and diluted EPS calculations:
(In thousands, except per share data) For the three months ended - ------------------------------------- --------------------------------- July 3, 1999 June 27, 1998 ------------ ------------- Net income $1,863 $1,807 ====== ====== Weighted average number of basic common shares outstanding 6,769 6,623 Dilutive effect of potential common stock outstanding 377 528 ------ ------ Weighted average of common and dilutive shares 7,146 7,151 ====== ====== Basic earnings per share $ 0.28 $ 0.27 ====== ====== Diluted earnings per share $ 0.26 $ 0.25 ====== ====== (In thousands, except per share data) For the six months ended - ------------------------------------- --------------------------------- July 3, 1999 June 27, 1998 ------------ ------------- Net income $3,456 $5,718 ====== ====== Weighted average number of basic common shares outstanding 6,762 6,553 Dilutive effect of potential common stock outstanding 350 553 ------ ------ Weighted average of common and dilutive shares 7,112 7,106 ====== ====== Basic earnings per share $ 0.51 $ 0.87 ====== ====== Diluted earnings per share $ 0.49 $ 0.80 ====== ======
8 9 INSTRON CORPORATION FORM 10-Q PART I Notes to Consolidated Financial Statements ITEM 1 July 3, 1999 (Unaudited) 3. INVENTORIES (In thousands) July 3, 1999 December 31, 1998 ------------ ----------------- Raw Materials $13,603 $13,257 Work-in-process 16,923 16,560 Finished goods 7,753 6,304 ------- ------- $38,279 $36,121 ======= ======= Inventories are valued at the lower of cost or market (net realizable value). The last-in, first-out (LIFO) method of determining cost is principally used for inventories in the United States and the Asian branches. The Company uses the first-in, first-out (FIFO) method for all other inventories. Inventories valued at LIFO amounted to $8,169,000 and $9,056,000 at July 3, 1999 and December 31, 1998, respectively. The excess of current cost over stated LIFO value was $5,631,000 at July 3, 1999 and $5,205,000 at December 31, 1998. 4. SPECIAL ITEMS CHARGE During the first quarter of 1998 the Company recorded a special items charge to operations to undertake a consolidation of its European operations and write-down the value of certain non-performing assets. A pre-tax charge of $5.0 million was taken in the quarter ended March 28, 1998 to cover these actions. The special items charge includes termination benefits, the costs to exit a manufacturing facility, other asset impairments and other related costs. The Company closed down a manufacturing plant in Germany, relocated sales and service support personnel to another location in Germany and moved the manufacturing operation to the United Kingdom. During fiscal year 1998 and the first six months of 1999, the Company has paid $1.4 million for termination benefits and related costs and $1.8 million for the costs to shut down 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. 5. SALE OF LAND On March 27, 1998, the Company completed the sale of 42 acres of its 66-acre site off Route 128 in Canton, Massachusetts for $13.5 million. As a result of this transaction, a non-operating pre-tax gain of $11.1 million was recorded in the first quarter of 1998. 9 10 INSTRON CORPORATION FORM 10-Q PART I Notes to Consolidated Financial Statements ITEM 1 July 3, 1999 (Unaudited) 6. RECAPITALIZATION On May 6, 1999, Instron Corporation (the "Company") entered into an Agreement and Plan of Merger (the "Merger Agreement") with Kirtland Capital Partners III L.P. ("Kirtland") and ISN Acquisition Corporation, a corporation newly formed by Kirtland (MergerCo"), pursuant to which Kirtland and certain affiliates, together with members of the Company's management and certain members of the Company's Board of Directors who are also stockholders (collectively, the "Rollover Stockholders"), will acquire the Company. Under the Merger Agreement, the MergerCo will be merged with and into the Company with the Company continuing as the surviving corporation (the "Merger"). Pursuant to the Merger, each outstanding share of the Company's common stock (except for shares held by the Company, its subsidiaries, MergerCo, and those dissenting stockholders who exercise and perfect their appraisal rights) will be converted into the right to receive a cash payment of $22.00, without interest. Certain shares of the Company's common stock held by the Rollover Stockholders will be converted into shares of stock of the surviving corporation. The merger will be accounted for as a recapitalization and accordingly, the historical basis of the Company's assets and liabilities will not be affected by the recapitalization. The Company's Board of Directors has approved the Merger Agreement and the transactions contemplated thereby, including the Merger. Consummation of the transactions, including the Merger, is subject to the approval of the Company's stockholders, certain regulatory approvals and other conditions. As of July 3, 1999, the Company has deferred costs of $1.2 million reported in Other Assets, which relate to expenses associated with the Merger Agreement. On August 6, 1999, Instron Corporation and Kirtland Capital Partners III L.P. have agreed to certain amendments to the previously announced merger agreement. These amendments permit the closing of the transaction to occur in September of 1999 rather than in the latter part of August 1999 as originally contemplated by the parties. In addition, pursuant to the amendments, the parties agreed that Kirtland would make certain payments to Instron in the event that the merger agreement is terminated under certain circumstances. 10 11 INSTRON CORPORATION FORM 10-Q July 3, 1999 PART I ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS QUARTER ENDED JULY 3, 1999 VS. QUARTER ENDED JUNE 27, 1998 Revenues for the second quarter of 1999 were $52,260,000, an increase of 38.4% over the same period last year, due primarily to the inclusion of Satec and IST products and services. Satec was acquired by the Company in August 1998. In September 1998, the Company acquired a 100% interest in IST, which was initially established as a joint venture between the Company and Schenck AG. If revenues attributable to Satec and IST were excluded for both the second quarter of 1999 and the second quarter of 1998, total revenues for the second quarter of 1999 would have been $33,893,000 compared to $34,513,000 in 1998, a decrease of 1.8%, due primarily to lower shipments in N. America. Foreign sales accounted for approximately 56% of consolidated second quarter revenues including Satec and IST, compared with 54% for the second quarter of 1998. The Company's consolidated gross margin as a percentage of revenue decreased to 37.6% for the second quarter of 1999 compared to 41.7% for the second quarter of 1998. This decrease is due primarily to lower than expected margins on several large, technically complex contracts for IST. Total selling and administrative expenses, for the second quarter of 1999, increased by 28.3% compared to the second quarter of 1998, due primarily to the inclusion of Satec and IST in 1999. As a percentage of revenue, selling and administrative expenses decreased to 27.0% in the second quarter of 1999 compared to 29.2% for the comparable period last year. Research and development expenses, for the second quarter of 1999, increased by 50.9% compared with the second quarter of 1998. This increase is primarily due to the inclusion of Satec and IST in 1999. In addition, certain software development costs of $660,000 were capitalized during the second quarter of 1999, compared with $360,000 in the second quarter of last year. This increase is due primarily to the capitalization of costs associated with an integrated software suite for our Structures business. On a pro forma basis, as if Satec and IST were wholly owned in 1998 and software development costs were reported as period expenses, research and development costs would have increased by 6.2% in 1999. This increase reflects Instron's current investment in upgrading its core product platforms. 11 12 RESULTS OF OPERATIONS (CONTINUED) During the second quarter of 1999, the Company recorded net interest expense of $109,000 compared with net interest income of $89,000 in the second quarter of 1998. This net increase was due to an increase in interest expense resulting from higher average borrowings (related to the purchase of Satec and IST) and to lower interest income received on notes receivable. Foreign exchange gains of $193,000 in the second quarter of 1999 resulted primarily from movements of the British pound against certain European currencies. In the second quarter of 1998, the Company had foreign exchange losses of $177,000. Net income increased by 3.1% to $1,863,000 or 26 cents per diluted share for the second quarter of 1999, compared to net income of $1,807,000, or 25 cents per diluted share, for the same period in 1998. SIX MONTHS ENDED JULY 3, 1999 VS. SIX MONTHS ENDED JUNE 27, 1998 Revenues for the six months ended July 3, 1999, increased by 41.0% from the same period in 1998. This increase is due primarily to the inclusion of Satec and IST products and services. If revenue attributable to Satec and IST were excluded for both the first six months of 1999 and the first six months of 1998, total revenue for the first six months of 1999 would have been $68,535,000 compared to $65,787,000, an increase of 4.2%. This increase is due to higher shipment volume in North America and Asia. Foreign sales accounted for approximately 56% of the consolidated first six months' revenue compared to 57% in 1998. Gross margin as a percentage of revenue decreased to 39.1% compared with 41.1% in the first half of 1998. This decrease is primarily due to lower than expected margins on several large, technically complex contracts for IST. Total selling and administrative expenses, for the first six months of 1999, increased by 35.8% compared to the same period in 1998 due primarily to the inclusion of Satec and IST in 1999. As a percentage of revenue, selling and administrative expenses were 28.3% compared to 29.4% for the same period last year. Research and development expenses, for the first six months of 1999, increased by 67.4% compared with the same period in 1998. This increase is primarily due to the inclusion of Satec and IST in 1999. In addition, software development costs of $1,247,000 were capitalized during the first half of 1999 compared with $635,000 in the first half of last year. This increase is due primarily to the capitalization of costs associated with an integrated software suite for our Structures business. On a pro forma basis, as if Satec and IST were wholly owned in 1998 and software development costs were reported as period expenses, research and development costs would have increased by 9.7%. This increase reflects Instron's current investment in upgrading its core product platforms. 12 13 RESULTS OF OPERATIONS (CONTINUED) Operating expenses in the first half of 1998 included a special items charge of $4,975,000, to reflect the cost of consolidating European operations and to write down the value of certain non-performing assets. The special items charge includes termination benefits, the costs to shut down and exit a manufacturing facility, other asset impairments and other related costs. The Company closed down a manufacturing plant in Germany, relocated sales and service personnel to another location in Germany and moved the manufacturing operation to the United Kingdom. During fiscal year 1998 and the first half of 1999, the Company has paid $1.4 million for termination benefits and related costs and $1.8 million for the costs to shut down 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. During the first six months of 1999, the Company recorded net interest expense of $253,000 compared with interest income of $15,000 for the same period in 1998. This net increase was due to an increase in interest expense resulting from higher average borrowings (related to the purchase of Satec and IST) and to lower interest income received on notes receivable. Foreign exchange gains of $212,000 for the first six months of 1999 resulted primarily from movements of the British pound against certain European currencies. In the first six months of 1998, the Company had foreign exchange losses of $277,000. A non-operating gain of $11,076,000 was recorded in the first quarter of 1998 on the sale of excess land in Canton, Massachusetts. Net income for the first six months of 1999 was $3,456,000, or 49 cents per diluted share, compared to net income of $5,718,000, or 80 cents per diluted share, for the same period last year. For comparison purposes, when the after-tax effect of the gain on sale of land and the special items charge are excluded, net income of the ongoing business was $3,083,000 or 43 cents per diluted share in the first half of 1998. The consolidated effective tax rate was 38% for the first half of 1999 compared to 48% in 1998. The higher tax rate in 1998 was due to certain non-deductible expenses relating to the special items charge. Excluding the effect of the special items charge, the ongoing effective tax rate was 38% for the first half of 1998. FINANCIAL CONDITION In the first six months of 1999, the Company generated cash flows from operating activities of $7.3 million, due primarily to an $8.0 million decrease in accounts receivable, partially offset by a reduction of accounts payable and accrued expenses. 13 14 FINANCIAL CONDITION (CONTINUED) These operating funds were primarily used to pay down bank borrowings of $2.1 million, fund capital expenditures of $2.7 million and software development costs of $1.2 million. At July 3, 1999, the Company had $28.4 million of available credit under its $35.0 million multicurrency revolving credit and term loan facility. The Company's subsidiaries have other short term borrowing facilities totaling approximately $32.0 million of which $10.2 million were outstanding at July 3, 1999. The ratio of total debt to debt plus equity at July 3, 1999, decreased to 17.2% from 19.8% at year-end 1998. Given the Company's present capital structure, 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. Bookings for the second quarter of 1999 increased by 50.3% and by 37.3% in the first half of 1999 from the corresponding periods in 1998, respectively. The increase in both periods is due primarily to the inclusion of Satec and IST in 1999. Bookings, excluding Satec and IST, increased by 11% in the second quarter compared to the same period last year due to higher activity in all our major markets, including the Far East. The Company's order backlog was $63.5 million at the end of the second quarter of 1999, compared to $65.4 million for the first quarter of 1999 and compared to $74.5 million at year-end 1998. Prior to the acquisition of IST, we generally experienced a close correlation between backlog at the end of a specific quarter and our shipments for the subsequent quarter. IST's structures business is characterized by relatively larger contract values and longer delivery periods and because our current backlog now includes IST, we believe that our total backlog at the end of a quarter is no longer a predictable indicator of shipments for the next quarter. If order backlog attributable to Satec and IST was excluded from both the first and second quarters of 1999 and 1998, order backlog would have been $28.0 million at the end of the second quarter of 1999, compared to $24.3 million for the first quarter of 1999 and compared to $29.5 million at year-end 1998. The increase in backlog for the second quarter of 1999, excluding IST and Satec, compared to the first quarter of 1999 was due to increased bookings in North America and Europe. 14 15 FINANCIAL CONDITION (CONTINUED) MERGER AGREEMENT. On May 6, 1999, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Kirtland Capital Partners III L.P. ("Kirtland") and ISN Acquisition Corporation, a corporation newly formed by Kirtland (MergerCo"), pursuant to which Kirtland and certain affiliates, together with members of the Company's management and certain members of the Company's Board of Directors who are also stockholders (collectively, the "Rollover Stockholders"), will acquire the Company. Under the Merger Agreement, the MergerCo will be merged with and into the Company with the Company continuing as the surviving corporation (the "Merger"). Pursuant to the Merger, each outstanding share of the Company's common stock (except for shares held by the Company, its subsidiaries, MergerCo, and those dissenting stockholders who exercise and perfect their appraisal rights) will be converted into the right to receive a cash payment of $22.00, without interest. Certain shares of the Company's common stock held by the Rollover Stockholders will be converted into shares of stock of the surviving corporation. The Merger will be accounted for as a recapitalization and accordingly, the historical basis of the Company's assets and liabilities will not be affected by the recapitalization. The Company's Board of Directors has approved the Merger Agreement and the transactions contemplated thereby, including the Merger. Consummation of the transactions, including the Merger, is subject to the approval of the Company's stockholders, certain regulatory approvals and other conditions. As of July 3, 1999, the Company has deferred costs of $1.2 million reported in Other Assets, which relate to expenses associated with the Merger Agreement. RECENT EVENTS. On August 6, 1999, the Company announced that, as a result of recent market conditions, the Company and Kirtland have agreed to certain amendments to the Merger Agreement. These amendments permit the closing of the transaction to occur in September 1999 rather than in the latter part of August 1999 as originally contemplated by the parties. In addition, pursuant to the amendments, the parties agreed that Kirtland would make certain payments to the Company in the event that the merger agreement is terminated under certain circumstances. In connection with the amendments and to give the Company's stockholders additional time to review the proxy materials provided by the Company, the Company has rescheduled the Special Meeting of Stockholders, at which stockholders are being asked to approve the transaction, to Friday, September 3, 1999, at 10:00 a.m., local time, at the Hilton Dedham Place, 25 Allied Drive, Dedham, Massachusetts 02026. 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 15 16 FINANCIAL CONDITIONS (CONTINUED) 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, (1) the need to adapt computer and other business systems and equipment to accommodate euro-denominated transactions; and (2) the competitive impact of cross-border price transparency, which may make it more difficult for businesses to charge different prices for the same products on a country-by-country basis, particularly once the euro currency is issued in 2002. The Company anticipates that the euro conversion will not have a material adverse impact on its financial condition or results of operations. YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT. The Company 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. The Company has not independently verified the contents of these republications and takes no responsibility for the accuracy or completeness of information contained in such republications. 16 17 FINANCIAL CONDITION (CONTINUED) 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 Company believes the exposure to be minimal. The second stage, begun in September 1997, is an audit of all departmental systems and network operating systems. This audit has been completed and formed the basis for the third stage which identifies the corrective actions required and outlines the necessary plan of action. The final stage, which is in progress, includes the implementation and testing of all required modifications. Accordingly, the Company is confident that its major internal business systems will be made Year 2000 compliant in a timely manner and in any event no later than August 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 its two recent acquisitions, Satec and IST. So far, there has been no indication of any material Year 2000 issue that cannot be resolved in a timely manner. 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 August 1999 and is currently reviewing office and facilities equipment such as machine tools, 17 18 FINANCIAL CONDITION (CONTINUED) 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, to 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. The information presented above sets forth the key steps taken by the Company to address the Year 2000 issue. There can be no 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. 18 19 FINANCIAL CONDITION (CONTINUED) 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. This quarterly report on Form 10-Q contains certain "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. Investors are cautioned that such statements are only predictions and speak only as of the date of this report. No assurances can be given that actual results will not differ materially from those projected in the forward-looking statements contained in this quarterly report on Form 10-Q. Certain factors that might cause such a difference include: the fluctuations in interest rates, the stability of financial markets, the level of bookings worldwide for Instron, Satec and IST, particularly in Asia; the success of the automobile industry which is the major purchaser of IST products, the operating results and profitability of Satec and IST; the impact of fluctuations in exchange rates and the uncertainties of operating in a global economy, including fluctuations in the economic conditions of the foreign and domestic markets served by the Company which can effect demand for its products and services; the Company's ability to successfully integrate the products and operations of Satec; the impact of the Year 2000 issue; the Company's ability to identify and successfully consummate strategic acquisitions; and the pendency of the proposed merger with Kirtland. For further discussion of the factors, investors are encouraged to review the Company's Form 10-K for the fiscal year ended December 31, 1998 and its other recent SEC filings. 19 20 INSTRON CORPORATION FORM 10-Q JULY 3, 1999 PART II ITEM 2 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Neither the Registrant nor any of its subsidiaries is a party to, nor is any of their property the subject of, any material pending legal proceedings. ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the 1999 Annual Meeting of Stockholders of the Registrant held on May 12, 1999, the two directors nominated by management, as listed in the Registrant's proxy statement, were elected. At the Annual Meeting, these two nominees received the following votes: George S. Burr: 5,561,584, For, 154,267, Withheld; John W. Lacey: 5,476,303 For, 239,548, Withheld. There were no abstentions or broker nonvotes with respect to the election of directors at the Annual Meeting. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. EXHIBITS None. b. REPORTS ON FORM 8-K The Company's current report on Form 8-K filed with the Securities and Exchange Commission on May 12, 1999. 20 21 FORM 10-Q SIGNATURES Pursuant to the requirements of the Securities and 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: August 12, 1999 BY /s/ James M. McConnell ----------------------------------- James M. McConnell President and Chief Executive Officer Date: August 12, 1999 BY /s/ Linton A. Moulding ----------------------------------- Linton A. Moulding Chief Financial Officer 21 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF INCOME, CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF CASH FLOWS AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE PERIOD ENDED JULY 3, 1999. 1,000 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUL-03-1999 1 8,483 0 56,998 718 38,279 108,151 67,076 43,541 152,591 58,022 0 7,087 0 0 73,773 152,591 83,411 101,005 49,626 61,473 0 44 253 5,573 2,117 0 0 0 0 3,456 0.51 0.49
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