10-Q 1 e10-q.txt 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 1, 2000 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 (I.R.S. Employer incorporation or organization) Identification No.) 100 ROYALL STREET 02021 CANTON, MASSACHUSETTS (Zip Code) (Address of Principal executive offices) (781) 828-2500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of July 1, 2000, the Registrant had 557,164 shares outstanding of common stock, all of which was held by affiliates of the Registrant. ================================================================================ 2 FORM 10-Q PART I ITEM I INSTRON CORPORATION Consolidated Balance Sheets (In thousands, except shares and per share data) July 1, December 31, 2000 1999 ---------- ------------ (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 3,636 $ 10,978 Accounts receivable (net of allowance for doubtful accounts of $855 in 2000 and $830 in 1999) 55,591 65,481 Inventories 32,860 31,117 Income tax receivable 5,158 3,594 Deferred income taxes 3,888 3,879 Prepaid expenses and other current assets 1,885 2,428 -------- -------- Total current assets 103,018 117,477 Property, plant and equipment, net 21,775 23,143 Goodwill 10,130 10,879 Deferred income taxes 988 832 Other assets 4,725 5,551 Deferred financing costs, net 8,237 8,793 -------- -------- Total assets $148,873 $166,675 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Short term borrowings and current portion of $ 51,063 $ 5,815 long-term debt Accounts payable 8,321 11,947 Accrued liabilities 26,812 27,129 Accrued employee compensation and benefits 4,634 5,280 Advance payments received on contracts 9,750 6,907 -------- -------- Total current liabilities 100,580 57,078 Long-term debt - revolver 0 28,818 Senior debt - term loan 0 27,000 13-1/4% senior subordinated notes due 2009 60,000 60,000 -------- -------- Total long-term debt 60,000 115,818 Pension and other long-term liabilities 10,363 9,532 -------- -------- Total liabilities 170,943 182,428 -------- -------- Stockholders' deficit: Common stock, $0.01 par value; 1,000,000 shares authorized; 557,164 shares issued and outstanding 557 557 Additional paid in capital 49,881 49,881 Accumulated deficit (64,071) (59,043) Accumulated other comprehensive loss (8,437) (7,148) -------- -------- Total stockholders' deficit (22,070) (15,753) -------- -------- Total liabilities and stockholders' deficit $148,873 $166,675 ======== ======== See accompanying Notes to Consolidated Financial Statements 2 3 FORM 10-Q PART I ITEM I INSTRON CORPORATION Consolidated Statements of Operations (Unaudited) (In thousands, except per share data)

See accompanying Notes to Consolidated Financial Statements 3 4 FORM 10-Q PART I ITEM I INSTRON CORPORATION Consolidated Statements of Cash Flows (Unaudited) (In thousands) Six Months Ended -------------------- July 1, July 3, 2000 1999 -------- -------- Cash flows from operating activities: Net income (loss) $ (5,028) $ 3,456 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 4,669 4,213 Provision for bad debts 141 44 Deferred taxes (176) (300) Changes in assets and liabilities, excluding the effects from purchase of business: (Increase) decrease in accounts receivable 8,354 8,027 (Increase) decrease in inventories (2,538) (2,842) (Increase) decrease in income tax receivable (1,666) -- (Increase) decrease in prepaid expenses and other current assets 503 208 Increase (decrease) in accounts payable, accrued expenses and advance payments (840) (3,871) Other, net 611 (1,631) -------- -------- Net cash provided by operating activities 4,030 7,304 -------- -------- Cash flows from investing activities: Proceeds from the sale of property, plant and equipment -- 25 Capital expenditures (1,669) (2,699) Capitalized software costs (340) (1,247) Other, net 140 206 -------- -------- Net cash used in investing activities (1,869) (3,715) -------- -------- Cash flows from financing activities: Net borrowings (payments) under short-term lines of credit (1,448) 4,115 Net borrowings (payments) under revolving line of credit (6,391) (6,252) Payments under Senior Term Loan (1,500) -- Cash dividends paid -- (268) Proceeds from exercise of stock options -- 386 -------- -------- Net cash used in financing activities (9,339) (2,019) -------- -------- Effect of exchange rate changes on cash (164) (296) -------- -------- Net increase (decrease) in cash and cash equivalents (7,342) 1,274 Cash and cash equivalents at beginning of year 10,978 7,209 -------- -------- Cash and cash equivalents at end of period $ 3,636 $ 8,483 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $5,958 $ 847 Income taxes 306 3,156 See accompanying Notes to Consolidated Financial Statements 4 5 FORM 10-Q PART I ITEM I INSTRON CORPORATION Consolidated Statements of Comprehensive Operations (Unaudited) (In thousands)

See accompanying Notes to Consolidated Financial Statements 5 6 FORM 10-Q PART I ITEM 1 INSTRON CORPORATION Notes to Consolidated Financial Statements (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. 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, 1999. 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. 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 three month and six month periods ended July 1, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. Certain prior year amounts have been reclassified to conform with the fiscal 2000 presentation. 2. MERGER AGREEMENT AND RECAPITALIZATION On May 6, 1999, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Kirtland Capital Partners III L.P. ("Kirtland") and ISN Acquisition Corporation, a corporation newly formed by Kirtland ("MergerCo"), pursuant to which Kirtland and certain affiliates, together with members of Instron's management and certain members of Instron's Board of Directors who are also stockholders (collectively, the "Rollover Stockholders"), agreed to acquire the Company. On September 3, 1999, the Company's stockholders approved the Agreement and Plan of merger dated as of May 6, 1999, as amended. The Company completed its merger by and among Instron Corporation, ISN Acquisition Corporation and Kirtland Capital Partners III L.P. on September 29, 1999. The merger and related transactions were treated as a Recapitalization (the "Recapitalization") for financial reporting purposes. Accordingly, the historical basis of the Company's assets and liabilities was not affected by these transactions. Under the Merger Agreement, the MergerCo merged with and into the Company with the Company continuing as the surviving corporation (the "Merger"). Pursuant to the Merger, each outstanding share of the Company's common stock (except for shares held by the Company, its subsidiaries and MergerCo), was converted into the right to receive a cash payment of $22.00, without interest. Certain shares of the Company's Series B Preferred Stock held by the Rollover Stockholders were converted into shares of common stock of the surviving corporation. In the third quarter of fiscal 1999, the Company incurred compensation expenses of $13.0 million as a result of the Recapitalization. In addition, the Company incurred costs of $13.1 million directly related to the Recapitalization. Of these transaction costs, $9.0 million was capitalized and is being amortized over the life of the 13 1/4% Senior Subordinated Notes (the "Notes") and the Senior Credit Facility, and $4.1 million was charged to stockholders' equity. The Notes were originally issued as part of a unit offering. Each unit ("Unit") consisted of a $1,000 principal amount Note and one warrant to purchase 0.5109 shares of Instron's recapitalized common stock (the "Warrants"). On February 14, 2000, the Notes were registered with the Securities and Exchange Commission, at which time the Units separated into their component Notes and Warrants. The Notes and Warrants may now be traded separately and the Units have ceased to exist. 6 7 3. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 was amended on July 7, 1999 by the issuance of Statement of Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133". In June 2000, the FASB issued SFAS No. 138 ("SFAS 138"), "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133. SFAS No. 133, as amended, is effective for fiscal quarters beginning after January 1, 2001 for Instron, and we do not expect its adoption to have a material impact on our financial position or results of operations. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulleting No. 101, "Revenue Recognition in Financial Statement" ("SAB 101"). This bulletin provides guidance from the staff on applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101A was subsequently issued in March 2000, deferring the requirement to adopt the revised guidance until the second quarter of 2000, retroactive to the first quarter of 2000. In June 2000, the SEC issued SAB101B which further defers the effective date for calender year companies to the fourth quarter of 2000, still retroactive to the first quarter of 2000. The Company is currently in the process of assessing the impact that SAB 101 may have on the financial statements. In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions involving Stock Compensation." FIN 44 clarifies the application of APB Opinion No. 25 regarding (a) the definition of employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a stock option plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. The adoption of FIN 44, effective July 1, 2000, did not have a material impact on the financial position or results of operations of the Company. 4. 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." For the three months and six months ended July 1, 2000, outstanding options and warrants totaling 76,559 shares have been excluded from the diluted earnings per share computation as their inclusion would be antidilutive. The following is a reconciliation of the basic and diluted EPS calculations: (in thousands, except per share data)

5. INVENTORIES (IN THOUSANDS) July 1, December 31, 2000 1999 ------- ------------ Raw materials $13,046 $13,346 Work-in-process 12,409 9,823 Finished goods 7,405 7,948 ------- ------------ $32,860 $31,117 ======= ============ 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 certain Asian branches. The Company uses the first-in, first-out (FIFO) method for all other inventories. Inventories valued at LIFO amounted to $8,062,000 and $7,845,000 at July 1, 2000 and December 31, 1999, respectively. The excess of current cost over stated LIFO value was $5,635,000 at July 1, 2000 and $5,588,000 at December 31, 1999. 7 8 6. DEBT (IN THOUSANDS) July 1, December 31, 2000 1999 -------- ------------ Short-term borrowings $ 1,349 $ 2,815 Long-term debt - revolver 21,214 28,818 Senior debt - term loan 28,500 30,000 13-1/4% senior subordinated notes due 2009 60,000 60,000 -------- ------------ Total debt 111,063 121,633 Less: current portion (51,063) (5,815) -------- ------------ Long-term debt $ 60,000 $115,818 ======== ============ As part of the Recapitalization, the Company entered into a Senior Credit Facility providing for a Revolving Credit Facility of up to $50.0 million (subject to an available borrowing base) and a Term Loan Facility of $30.0 million, maturing in five and one-half years, unless terminated sooner upon certain events of default. If terminated upon an event of default, all outstanding advances under the credit facility may be required to be immediately repaid. The revolving portion of the Senior Credit Facility can be used to complete permitted acquisitions or for working capital and other general corporate purposes. Borrowings under the Senior Credit Facility currently bear interest, at our option, at either the higher of the federal funds rate plus 1.0% or the prime rate plus 1.75%, or a LIBOR rate plus 3.25%. In addition, as part of the Recapitalization, the Company issued $60 million of 13 1/4% Senior Subordinated Notes due 2009 and Warrants (the "Senior Subordinated Notes"). The Warrants, when exercised, will entitle the holder thereof to receive 0.5109 of a fully paid and non-assessable share of common stock, par value $0.01 per share, at an exercise price of $0.01 per share, subject to adjustment. The Warrants will be exercisable on or prior to September 15, 2009. The value of the Warrants on the date of the Recapitalization was $2.3 million and this value is being amortized over 10 years. Under the Term Loan Facility, the Company is required to make scheduled repayments in twenty-two quarterly installments of principal and interest on the first day of each January, April, July and October, commencing January 1, 2000. The Senior Subordinated Notes, which mature in 2009, require interest to be paid semi-annually in arrears each March 15 and September 15. The interest on the Revolving Credit Facility is due quarterly in arrears. The Company is also required, under the Terms of the Senior Credit Facility, to pay a commitment fee based on the unused amount of the Revolving Credit Facility at an annual rate of 0.50%, paid quarterly in arrears. All of our obligations under the Senior Credit Facility are and will be secured by a first priority lien on substantially all of the properties and assets of the Company and our existing and future domestic subsidiaries. In addition, our obligations under the Senior Credit Facility are and will be secured by a first priority pledge of and security interest in all of the outstanding capital stock of our existing domestic subsidiaries and future domestic subsidiaries and a pledge of 65% of the outstanding capital stock of some foreign subsidiaries. Certain of our foreign subsidiaries have also granted a lien on substantially all of their properties and assets. The Senior Credit Facility requires that the Company meet and maintain certain financial ratios and tests, which include minimum consolidated net worth, consolidated adjusted EBITDA, consolidated capital expenditure, consolidated interest coverage ratio, consolidated fixed charge coverage ratio, maximum consolidated leverage ratio and senior leverage ratio. The Senior Subordinated Notes are governed by negative covenants that are less restrictive than those of the Senior Credit Facility. In addition, the Senior Subordinated Notes contain a provision whereby the Notes are in default if there is an acceleration of payment under the terms of the Senior Credit Facility. The Senior Credit Facility also contains covenants that limit the ability of the Company and its operating subsidiaries to take various actions without the consent of the Senior Lenders, including incurring additional indebtedness and liens and entering into some leases, fundamentally changing corporate structure, including mergers, consolidations and liquidations, acquiring and disposing of property, making principal payments on indebtedness prior to maturity, dividends and capital stock purchases, investments, capital expenditures, some modifications to organizational documents, changing fiscal periods, entering into sale and leaseback transactions, entering into affiliate transactions, entering into agreements restricting distributions, amending the acquisition documents, granting negative pledges and making a material change in the nature of the Company's business. At July 1, 2000, the Company was not in compliance with three of the Senior Credit Facility covenants: the minimum consolidated net worth covenant, the minimum consolidated adjusted EBITDA covenant and the maximum consolidated leverage ratio covenant. The Company requested and was granted waivers of these covenants as of and for the period ended July 1, 2000, for which the Company will pay an administrative fee of $80,000 to the lenders. The Company did not obtain waivers of covenants of the Senior Credit Facility that extend over the next twelve months and does not believe it will be able to achieve compliance with the current covenants of the Senior Credit Facility. Accordingly, the amounts outstanding under the Senior Credit Facility have been reclassified from long term liabilities to current liabilities. The Company and its lenders are currently discussing amending and restating the covenants which would bring the Company back into compliance. As the Company has obtained waivers of the covenants under the Senior Credit Facility as of and for the period ended July 1, 2000, the Company continues to be in compliance with the covenants of the Senior Subordinated Notes. Therefore, the amounts outstanding under the Senior Subordinated Notes continue to be classified as long term liabilities. 8 9 7. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION Some of our wholly owned subsidiaries are not guarantors of our Senior Subordinated Notes. In the event of a bankruptcy, liquidation or reorganization of any of these non-guarantor subsidiaries, these non-guarantor subsidiaries will pay the holders of their debts and their trade creditors before they will be able to distribute any of their assets to us. Summarized below is selected financial information for the guarantor subsidiaries and the non-guarantor subsidiaries as of July 1, 2000 and for the six month period then ended:

8. RESTRUCTURING During the first and second quarters of 2000, the Company completed a workforce reduction of 84 people, of which 24 were in the U.S. and 60 were in Germany and the UK. The personnel reductions were primarily in engineering, manufacturing and administration. Severance costs associated with the workforce reductions were $0.3 million and $1.5 million during the first and second quarter of 2000, respectively. As of July 1, 2000, the liability remaining related to the workforce reduction was approximately $1.2 million, consisting entirely of severance costs. Remaining severance costs are expected to be paid through the second quarter of 2001. 9 10 FORM 10-Q PART I ITEM 2 INSTRON CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Second Quarter Ended July 1, 2000 vs. Second Quarter Ended July 3, 1999 Revenues for the second quarter of 2000 were $49.2 million, compared to $52.3 million for the second quarter of last year, a decrease of 5.8%. The decrease in revenues was primarily due to lower Structures shipments. Foreign sales were 58% of revenues in the second quarter of 2000, compared with 56% for the second quarter of 1999. Gross margin, as a percentage of revenue, was 37.0% for the second quarter of 2000, compared to 37.6% for the second quarter of 1999. The lower gross margin was primarily due to continued higher costs of major Structures orders. Selling and administrative expenses for the second quarter of 2000 were $13.3 million, or 27.1% of revenues, compared to $14.1 million, or 27.0% of revenues, in the second quarter of last year, a decrease of 5.6%. The lower expenses are a result of reduced selling and administrative costs at our IST operations, as well as the benefit of integrating the sales and support functions of our Satec acquisition with our North America operations. Research and development expenses were $2.5 million, or 5.3% of revenues, in the second quarter of 2000, compared to $2.6 million, or 5.0% of revenues, in the second quarter of last year. Software development costs of $0.1 million were capitalized during the second quarter of 2000, compared to $0.7 million in the second quarter of last year. If software development costs were reported as period expenses, research and development expenses would have decreased by 20.3% in 2000. The higher 1999 expenses reflect the investment we made in certain key product development programs. In addition, the lower expense levels in 2000 reflect the benefit of integrating the development processes of our past acquisitions. During the first and second quarters of 2000, the Company completed a workforce reduction of 84 people, of which 24 were in the U.S. and 60 were in Germany and the UK. The personnel reductions were primarily in engineering, manufacturing and administration. Severance costs associated with the workforce reductions were $0.3 million and $1.5 million during the first and second quarter of 2000, respectively. As of July 1, 2000, the liability remaining related to the workforce reduction was approximately $1.2 million, consisting entirely of severance costs. Remaining severance costs are expected to be paid through the second quarter of 2001. Net interest expense was $3.7 million in the second quarter of 2000, compared to $0.1 million in the second quarter of 1999. The significantly higher interest costs reflect the debt assumed by the Company as a result of its recapitalization in September 1999. The loss before taxes for the second quarter of 2000 was $2.8 million, compared to income before taxes of $3.0 million for the second quarter last year. The decline in profitability is due to a combination of higher interest costs, lower revenues and severance costs related to the workforce reduction. The tax benefit of $0.6 million, or 20% of the pre-tax loss, for the second quarter of 2000 reflects the expected recovery of income taxes paid in prior years from loss carry-back availability. Each quarter, the Company estimates its annual effective tax rate and adjusts the provision or benefit for the cumulative effect of the change in the estimate. The tax provision for the second quarter of 1999 was 38% of pre-tax income. Net loss for the second quarter of 2000 was $2.3 million, or $4.09 per diluted share compared to net income of $1.9 million, $0.26 per diluted share for the second quarter of last year. Six Months Ended July 1, 2000 vs. Six Months Ended July 3, 1999 Revenues for the first half of 2000 were $90.0 million compared to $101.0 million for the first half of 1999, a decrease of 10.9%. The lower revenues were largely due to a $9.7 million decline in Structures shipments and lower European revenues. Foreign sales were 58% of total revenues for the first half of 2000 compared to 56% for the first half of 1999. 10 11 Gross margin as a percentage of revenues was 36.7% for the first half of 2000 compared to 39.1% for the first half of 1999. The lower gross margin is primarily a result of the higher costs associated with major Structures orders during the first half of 2000. Selling and administrative expenses were $26.7 million, or 29.6% of revenues, for the first half of 2000, compared to $28.6 million, or 28.3% of revenues, for the first half of 1999, a decrease of 6.8%. The lower expenses are largely a result of lower expenses at our IST operations, as well as the benefit from integrating the sales and support functions of our Satec acquisition with our North America operations. Research and development expenses were $5.0 million, or 5.5% of revenues, for the first half of 2000, compared to $5.3 million, or 5.3% of revenues, for the first half of 1999. Software development costs of $0.3 million were capitalized during the first half of 2000, compared to $1.2 million during the first half of 1999. If software development costs were reported as period expenses, research and development expenses would have declined $1.2 million, or 19.2%, from 1999. The higher 1999 expense levels reflect the investment we made in certain key product development programs. In addition, the lower 2000 expenses reflect the benefit from integrating the development processes of our past acquisitions. During the first half of 2000, the Company completed a workforce reduction of 84 people, of which 24 were in the U.S. and 60 were overseas. The personnel reductions were primarily in engineering, manufacturing and administration. Total severance costs in the first half of 2000 related to this workforce reduction was $1.8 million. As of July 1, 2000, the liability remaining related to the workforce reduction was approximately $1.2 million, consisting entirely of severance costs. Remaining severance costs are expected to be paid through the second quarter of 2001. Net interest expense was $7.2 million for the first half of 2000, compared to $0.3 million for the first half of 1999. The significantly higher interest costs reflect the debt assumed by the Company as a result of its recapitalization in September 1999. The tax benefit of $2.6 million, or 34% of the pre-tax loss, for the first half of 2000 reflects the expected recovery of income taxes paid in prior years from loss carry-back availability. Each quarter, the Company estimates its annual effective tax rate and adjusts the provision or benefit for the cumulative effect of the change in the estimate. The tax provision for the first half of 1999 was 38% of pre-tax income. The net loss for the first half of 2000 was $5.0 million, or $9.03 per diluted share compared to net income of $3.5 million, or $0.49 per diluted share for the first half of 1999. FINANCIAL CONDITION During the first half of 2000, the Company generated $4.0 million of cash from operating activities, compared to $7.3 million for the same period in the prior year. The Company used $2.0 million of cash for capital expenditures and capitalized software development costs during the first half of 2000, compared to $3.9 million of cash used for similar purposes during the same period in the prior year. The Company used $9.3 million of cash to repay bank borrowings during the first half of 2000, compared to $2.1 million of cash used to repay bank borrowings, $0.3 million of cash used to pay dividends and $0.4 million of cash proceeds from stock option exercises during the same period in the prior year. The cash generated from operating activities during the first half of 2000 was largely a result of the reduction in accounts receivable during the period, partially offset by an increase in inventories and income tax receivable. Accounts receivable declined from $65.5 million at December 31, 1999 to $55.6 million at July 1, 2000. The lower level of accounts receivable was primarily due to the lower level of revenues in the three months ended July 1, 2000, as compared to the three months ended December 31, 1999. When compared to the first half of 1999, cash generated from operating activities during the first half of 2000 was lower by $3.3 million. The year-to-year reduction was largely a result of the higher interest costs during the first half of 2000, partially offset by a higher level of advance payments. Capital expenditures during the first half of 2000 were $1.7 million, compared to $2.7 million in the first half of 1999. The lower level of capital expenditures reflects the Company's lower fiscal 2000 capital requirements, including the absence of equipment purchases relating to Y2K compliance. The Company plans to make capital expenditures of approximately $2.75 million during the current fiscal year. In addition, the Company plans to continue to develop and enhance its software products and pursue its strategy of acquisitions. At July 1, 2000, the Company had borrowings of $21.2 million, and additional borrowing availability of $21.4 million, under its $50.0 million multi-currency revolving credit facility, compared to $28.8 million in borrowings at December 31, 1999. The Company had $28.5 million outstanding under its term loan at July 1, 2000, compared to $30.0 million outstanding at December 31, 1999. At July 1, 2000 and December 31, 1999, the Company also had $60.0 million of 13 1/4% Senior Subordinated Notes Due 2009 outstanding. The Company's Senior Credit Facility, which includes the Term Loan Facility and Revolving Credit Facility, contains seven restrictive financial covenants. At July 1, 2000, the Company was not in compliance with three of the Senior Credit Facility covenants: the minimum consolidated net worth covenant, the minimum consolidated adjusted EBITDA covenant and the maximum consolidated leverage ratio covenant. The Company requested and was granted waivers of these covenants as of and for the period ended July 1, 2000, for which the Company will pay an administrative fee of $80,000 to the lenders. The Company did not obtain waivers of covenants of the Senior Credit Facility that extend over the next twelve months and does not believe it will be able to achieve compliance with the current covenants of the Senior Credit Facility. Accordingly, the amounts outstanding under the Senior Credit Facility have been reclassified from long term liabilities to current liabilities. The Company and its lenders are currently discussing amending and restating the covenants which would bring the Company back into compliance. To this end and in connection with the granting of the waivers, the Company has committed to hold a meeting with its lenders to discuss certain financial projections by September 6, 2000 and the failure to meet this commitment will result in an automatic increase of the lending rate of 0.5%. No assurances can be given that the Company will obtain any such amendments or future noncompliance waivers from its lenders in the future or that the proposed terms applicable to such amendments or waivers will be satisfactory to the Company. As the Company has obtained waivers of the covenants under the Senior Credit Facility as of and for the period ended July 1, 2000, the Company continues to be in compliance with the covenants of the Senior Subordinated Notes. Therefore, the amounts outstanding under the Senior Subordinated Notes continue to be classified as long term liabilities. 11 12 The Company's subsidiaries have other overdraft and borrowing facilities allowing advances up to approximately $3.9 million. Short-term borrowings under these facilities were $1.3 million and $2.8 million at July 1, 2000 and December 31, 1999, respectively. The Company believes its present capital resources and anticipated operating cash flows are sufficient to finance its planned operations and investing activities for the next eighteen months. If the Company were to consider a significant acquisition, it would have to seek alternative sources of equity funds and or additional debt. Bookings for the second quarter of 2000 were $52.2 million and were approximately the same level as the second quarter of last year. For the first half of 2000, bookings were $97.7 million, an increase of 3% over the first half of last year. The year-to-year increase in bookings was primarily for Structures products. At July 1, 2000, the Company's order backlog was $73.5 million, compared to $71.6 million at April 1, 2000 and $68.9 million at December 31, 1999. YEAR 2000 To date, the Company has not incurred significant incremental costs in order to comply with Year 2000 requirements and does not believe it will incur significant incremental costs in the foreseeable future. However, there can be no assurance that Year 2000 errors or defects will not be discovered in the Company's products or internal software systems and, if such errors or defects are discovered, there can be no assurance that the costs of making such products or internal systems Year 2000 compliant will not have a material adverse effect on the Company's business, operating results and financial condition. 12 13 NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 was amended on July 7, 1999 by the issuance of Statement of Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133". In June 2000, the FASB issued SFAS No. 138 ("SFAS 138"), "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133. SFAS 138 amends the accounting and reporting standards of SFAS 133 for certain derivative instruments and certain hedging activities. SFAS No. 133, as amended, is effective for fiscal quarters beginning after January 1, 2001 for Instron, and we do not expect its adoption to have a material impact on our financial position or results of operations. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulleting No. 101, "Revenue Recognition in Financial Statement" ("SAB 101"). This bulletin provides guidance from the staff on applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101A was subsequently issued in March 2000, deferring the requirement to adopt the revised guidance until the second quarter of 2000, retroactive to the first quarter of 2000. In June 2000, the SEC issued SAB101B that further defers the effective date for calendar year companies to the fourth quarter of 2000, still retroactive to the first quarter of 2000. The Company is currently in the process of assessing the impact that SAB 101 may have on the financial statements. In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions involving Stock Compensation." FIN 44 clarifies the application of APB Opinion No. 25 regarding (a) the definition of employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a stock option plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. The adoption of FIN 44, effective July 1, 2000, did not have a material impact on the financial position or results of operations of the Company. ITEM 3. 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. There have been no material changes related to the quantitative or qualitative aspects of market risk since December 31, 1999. FORWARD LOOKING STATEMENTS This 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. No assurances can be given that actual results will not differ materially from those projected in the forward-looking statements contained in this Form 10-Q Report. Certain factors that might cause such a difference include: the fluctuations in interest rates; the stability of financial markets; the level of bookings worldwide for Instron and IST, particularly for Asia; the success of the automobile industry which is the major purchaser of IST products; 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 identify and successfully consummate strategic acquisitions; the Company's ability to meet the covenants and repayment schedules of its loan and debt facilities. 13 14 FORM 10-Q PART II INSTRON CORPORATION 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 None. ITEM 5. OTHER INFORMATION None. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K None 14 15 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 14, 2000 By /s/ James M. McConnell ------------------------------------- James M. McConnell President and Chief Executive Officer Date: August 14, 2000 By /s/ Linton A. Moulding ------------------------------------- Linton A. Moulding Chief Financial Officer 15

INSTRON CORP 10-Q