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Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000897101-00-001222.txt : 20001227
<SEC-HEADER>0000897101-00-001222.hdr.sgml : 20001227
ACCESSION NUMBER: 0000897101-00-001222
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20000930
FILED AS OF DATE: 20001226
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: MTS SYSTEMS CORP
CENTRAL INDEX KEY: 0000068709
STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829]
IRS NUMBER: 410908057
STATE OF INCORPORATION: MN
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 000-02382
FILM NUMBER: 795560
BUSINESS ADDRESS:
STREET 1: 14000 TECHNOLOGY DR
CITY: EDEN PRAIRIE
STATE: MN
ZIP: 55344-2290
BUSINESS PHONE: 6129374000
MAIL ADDRESS:
STREET 1: 14000 TECHNOLOGY DR
CITY: EDEN PRAIRIE
STATE: MN
ZIP: 55344
FORMER COMPANY:
FORMER CONFORMED NAME: RESEARCH INC
DATE OF NAME CHANGE: 19670216
</SEC-HEADER>
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<FILENAME>0001.txt
<TEXT>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
[ ] 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 0-2382
MTS SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 952-937-4000 41-0908057
(STATE OR OTHER JURISDICTION OF (TELEPHONE NUMBER (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) OF REGISTRANT IDENTIFICATION NO.)
INCLUDING AREA CODE)
14000 TECHNOLOGY DRIVE, EDEN PRAIRIE, MINNESOTA 55344-9763
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
-------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK (PAR VALUE OF 25(CENTS) PER SHARE)
INDICATE BY CHECK MARK WHETHER 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 PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
__X__YES _____ NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K 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. ( )
AS OF DECEMBER 4, 2000, 20,722,568 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING AND THE AGGREGATE MARKET VALUE OF SUCH COMMON STOCK (BASED UPON
THE AVERAGE OF THE HIGH AND LOW PRICES) HELD BY NON-AFFILIATES WAS $81,271,700.
-------------------
DOCUMENTS INCORPORATED BY REFERENCE
ANNUAL REPORT TO SHAREHOLDERS FOR FISCAL YEAR ENDED SEPTEMBER 30, 2000 - PARTS
I, II AND IV.
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS, STATEMENT DATED PRIOR TO
JANUARY 30, 2001 - PART III.
================================================================================
MTS SYSTEMS CORPORATION
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
PART I
ITEM 1. BUSINESS
MTS Systems Corporation (hereafter called "MTS", or "the Company" or "the
Registrant") is a technology-based, market-driven company providing hardware,
software, and engineering services to researchers, designers and manufacturers.
MTS bases its business on a set of building-block technologies and business
processes. Technologies include sensors for measuring machine and process
parameters, control technologies for test and process automation, hydraulic and
electric servodrives for precise actuation, and application software to tailor a
test or automation system to the customer's needs and to analyze results.
Business processes include project and product styles of operations on a
worldwide basis. In combination, they offer solutions to customers in a variety
of markets.
In the Mechanical Testing and Simulation segment, customers use the Company's
products and services in research, product development and quality control to
determine the mechanical properties and performance of materials, products and
structures. Many of the Company's products and services support the customers'
mechanical design automation processes. In the Factory Automation segment,
customers use the Company's measurement and control instrumentation to measure
process variables and to automate production processes.
CUSTOMERS AND PRODUCTS BY BUSINESS SEGMENT
The Company's operations are organized into two reportable business segments: 1)
Mechanical Testing and Simulation (MT&S), and 2) Factory Automation (FA). The
operational alignment of the segments allows the Company to maintain a strategic
focus on markets with different applications of the Company's technologies and
with different competitors.
Mechanical Testing and Simulation Reportable Segment: Customers in this segment
use MTS's systems and software for research, product development and quality
control in the design and manufacture of materials, products and structures.
Customer industries in this segment include:
AIRCRAFT AND AEROSPACE VEHICLE MANUFACTURERS AND THEIR SUPPLIERS: These
customers use the Company's systems and software for full-scale structural tests
on complete vehicles and principal subsystems such as landing gear.
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In the aircraft industry, the Company's customers include manufacturers of
commercial, military and general aviation planes and their suppliers, such as
engine manufacturers.
The space vehicle industry utilizes the Company's systems and software for such
applications as solid fuel development and heat shield studies.
Both aircraft and space vehicle manufacturers and their suppliers use the
Company's systems and software to perform research on new materials and to
control quality in the manufacturing of materials.
CIVIL ENGINEERING: This market is comprised of university and government
laboratories, and construction and mineral/petroleum production companies.
Systems sold in this market include seismic (earthquake) simulators, civil
construction component (e.g., beam) testing systems, pavement material testing
systems, and specialized systems for rock and soil studies in construction and
mineral/petroleum production.
CONSUMER AND BIOMECHANICAL PRODUCTS/MATERIAL PRODUCERS: Customers use the
Company's electromechanical and servohydraulic material testing systems in
research, product development and extensively for quality control during
production. In addition, customers use the Company's nanoindentation systems to
test and measure mechanical properties of products where microscopic precision
is required.
Typical consumer products are made of textiles, paper products and plastic films
of many types. Biomechanical products include implants, prostheses and other
medical and dental devices and materials. Material producers include metal,
ceramic, composite, paper and plastic manufacturers.
GROUND VEHICLE INDUSTRY: This market consists of automobile, truck, motorcycle
and off-road vehicle manufacturers and their suppliers. This market is the
largest within the MT&S sector.
Applications of the Company's systems and software include the design and
production testing of engines and drivetrains, suspension and steering
components, body and chassis, tires and wheels, and fuel storage and exhaust
components. Vehicle manufacturers strive to improve performance, durability and
safety while eliminating noise and vibration from their products. Customers also
integrate MTS modeling software and physical testing systems to accelerate
prototype design and decrease manufacturing costs of their products and
components.
ADVANCED SYSTEMS: The Company also offers highly customized systems for
simulation and testing through its Advanced Engineering Solutions Division
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(AESD). These systems frequently embody technology, which is new to the
application. Customers of AESD come from all industries served by the MT&S
sector - aerospace and advanced materials, civil engineering, and ground
vehicles - as well as customers from other industries interested in the
development of new manufacturing technologies and systems such as welding and
material processing.
MT&S sector accounted for 77% of revenue in 2000, 80% of revenue in 1999, and
79% of revenue in 1998. It represents the oldest and is the principal market for
the Company's technology.
Factory Automation Reportable Segment: FA customers use MTS products in discrete
part manufacturing and chemical process industries. Products in this segment
include:
DISPLACEMENT POSITION AND LIQUID-LEVEL SENSORS BASED ON MAGNETOSTRICTIVE
TECHNOLOGY. Displacement sensors accurately measure position up to 25 feet. They
are used where accurate positioning and continuous control are critical, such as
in discrete (piece part) manufacturing machinery, mobile equipment, process
control elements and continuous measurement devices. Major applications include
injection molding machines, servo-hydraulic cylinders, and presses of all types,
sawmills, logging and other mobile machinery and valve or flow control.
Displacement sensors are also used in high volume applications requiring low
cost position feedback. MTS builds a version of its technology in various
lengths and configurations, but at very high rates affording on-board low cost
solutions to industries such as automotive, appliance, medical, agricultural,
marine, aeronautic and other non-manufacturing markets.
Liquid level sensors accurately measure the level of liquids in tanks and other
vessels up to 60 feet. These sensors are marketed to control continuous
processes in chemical, pharmaceutical, bio-technology and other related markets.
The need for highly reliable accurate measurement of one or more fluid levels is
common in most of these applications. MTS markets liquid level sensors to both
end users, such as chemical producing companies, and to original equipment
manufacturers and private label companies who build level measurement or leak
detection into their control systems or as accessories for remote indication and
control devices.
SERVO MOTORS, AMPLIFIERS AND CONTROLLERS: Customers use high-performance
brushless servo motors and amplifiers for challenging factory automation
applications in a wide range of industries, including machine tools, fabrication
and packaging. Specialized plug-in amplifiers are used in light duty
applications such as the semiconductor and textile industries. The Company's
controllers are used for precise control of a wide variety of applications
ranging from simple applications requiring only one axis of control to
high-speed, complex operations requiring up to 28 axes of control. These
combined product lines address the need for high performance systems and are
used primarily by original equipment manufacturers and large end users.
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<PAGE>
TITANIUM PRODUCTS: The Company, through its wholly owned subsidiary, AeroMet
Corporation has developed an innovative laser direct metal deposition process
for manufacturing titanium parts. The process uses a laser to fuse titanium
powder, layer upon layer, into solid structures. This computer driven process
significantly reduces the time required to produce large complex parts.
The FA sector accounted for 23% of revenue in 2000, 20% of revenue in 1999, and
21% of revenue in 1998.
COMMON TECHNOLOGIES
MTS' systems and products in all segments are constructed using employees'
application engineering know-how with common technology building block
components generally composed of measuring and actuation devices, electronic
controls and application software. Many of these components are proprietary and
are developed and manufactured within the Company.
MTS employees engineer or configure the components into products and systems to
match the application called for in the customer's order. Frequently,
special-purpose software is developed to meet a customer's unique requirements.
Such software often represents a significant part of the value added by the
Company. Services offered to system customers include on-site installation,
training of customer personnel, technical manuals and continuing maintenance.
Such services are often included in the contract amount charged for completed
systems, but these services may be purchased separately, during and after the
system warranty period.
Certain proprietary products, such as sensors, process controls, motors,
actuators and process software and firmware are sold as products to end users
and to other companies for incorporation into their systems, machines or
processes. All products and most systems are sold on fixed-price contracts.
Complex systems and applied research in the MT&S sector are in some cases
undertaken on "cost-plus-fixed-fee" contract basis.
2000 PRODUCT DEVELOPMENT HIGHLIGHTS
The Company funds new application and product development within its market
sectors. Highlights of product development undertaken or completed in 2000
include:
Mechanical Testing and Simulation Reportable Segment
o The Company introduced the FlexTest GT and TestStar IIm control products.
These controllers employ distributed processors and digital transducer
conditioners and are configurable for multiple channels and stations. The
vehicle, material, & aerospace markets all take advantage of its
flexibility to perform multiple types of tests required for product
development.
4
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o The Company introduced AeroPro for Data Acquisition. The software is to be
used by Aerospace Structural Test laboratories and other customers with
large channel count needs. The software incorporates a modern explorer-like
user interface, has an open architecture and has the capability to
integrate data from our load controllers. The software supports multiple
hardware platforms and is designed to greatly improve data display and data
handling capabilities.
o The Company introduced the SWIFT Ultra product. This is a new, smaller
configuration of the SWIFT wheel force transducer originally introduced in
1998. The SWIFT Ultra product is designed for lighter weight vehicles and
complements our existing Passenger Car SWIFT and Light Truck SWIFT
versions. The system's primary purpose is to collect force and moment data
in vehicle data acquisitions, and develop simulations in the laboratory.
This technology greatly simplifies and compresses development cycles for
new vehicles and associated products.
o The Company introduced the Jury Evaluation software product. This software
is used to evaluate product sound quality based on human responses and is
key to our customers' strategy to "listen as their customers listen" to
engineer their products to be best in class.
o The Company introduced a new long stoke passenger car road simulator to
simulate both rough road durability and maneuvering events to help develop
new body structures. This simulator makes use of MTS's newly developed Six
Degree of Freedom technology.
Factory Automation Reportable Segment
o The Company introduced a new family of intelligent digital servo amplifiers
for use in both the general factory automation and semi conductor
industries.
o The company introduced a high current (700 volt) amplifier to the Magnetic
Resonance Imaging market. This product facilitates enhanced imaging
resolution or increased imaging speed.
o The Company developed very long sensors, in excess of 60 feet active
length, with multiple measurement points (up to 30) for monitoring soil and
rock movement in slide prone areas of Japan.
o The Company developed an integrated electronics, environmental housing and
sensor product that is the first to use an overmolding process. This sensor
is designed to address high volume commercial applications. It uses an
automatically produced sensor cartridge and is targeted for Commercial
customers in the medical, HVAC, off-road machinery, and appliance markets.
o The Company developed a modular Liquid Level Product line, the M-Series, to
replace existing models and provide common design elements across the
5
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line. The M-Series reduces time to market for new models by eliminating
redesign and reduces costs across the line by increasing common module
production volumes.
o The Company developed enhanced Profibus models to address a much broader
range of challenging applications. This revamped software is housed within
the sensor, manages large numbers of magnets, and provides robust
measurement as well as extensive diagnostic functionality during the
measurement cycle. The plastics injection molding market is the first
target for this enhanced product.
o The Company developed a new E-Series product line for machine control that
provides the features of Magnetostrictive measurement at the lower end of
the pricing spectrum.
CHARACTERISTICS OF SALES
The Company's systems and products are sold and delivered throughout the world,
and its customer base covers a broad spectrum of industries, government
agencies, institutions, applications and geographic locations. As such, MTS is
not dependent upon any single customer for its business.
MT&S systems range in price from less than $20,000 to over $30 million. Large,
individual, fixed-price orders, generally considered to be over $10 million,
although important to the Company's image and technical advancement, can produce
volatility in both backlog and quarterly operating results. The majority of the
orders received in any one year are based on fixed-price quotations and some
require extensive technical communication with potential customers prior to
receipt of an order. The current typical delivery time for a system ranges from
one to twelve months, depending upon the complexity of the system and the
availability of components in the Company's or suppliers' inventories. Larger
system contracts can run as long as three years and cost-plus-fixed-fee
contracts have run longer.
FA products are sold in quantity at unit prices ranging from $500 to $10,000.
Delivery varies from several days to several months.
Approximately 50% of revenue in fiscal 2000, 51% of revenue in fiscal 1999, and
55% of revenue in fiscal 1998 was from domestic customers. The balance of the
revenue, some of which was sold in currencies other than the U.S. dollar, was to
customers located outside the United States--mainly in Europe, Asia-Pacific,
Latin America and Canada. The Company's foreign operations and foreign revenues
may be affected by local political conditions, export licensing problems and/or
currency restrictions.
Sales Channels: MTS markets its products using a number of sales channels. The
Company sells its MT&S equipment through an employee sales network, independent
sales representatives and a direct mail (catalog) operation. Sales
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personnel are generally graduate engineers or highly skilled technicians and are
specially trained to sell MT&S products and services. Employee salespersons are
compensated with salary and sales incentives, and independent representatives
are paid a commission.
A list of major domestic and international offices for the Company's MT&S
reportable segment follows:
Domestic offices:
Akron Dayton Pittsburgh
Austin Denver Raleigh
Baltimore Detroit Rockford
Boston Los Angeles San Francisco
Charlotte Minneapolis Seattle
Chicago Milwaukee Washington, D.C
Cincinnati Newark
Dallas Philadelphia
International offices:
Beijing and other cities, Paris, France
Peoples Republic of China Seoul, South Korea
Berlin and other cities, Singapore
Germany Tokyo and other cities, Japan
Gloucester, United Kingdom Torino, Italy
Gothenburg, Sweden
In addition, MT&S works with sales and service representative organizations in
nearly all industrialized countries of the world and in the developing countries
of Latin America, Asia, Africa and the Middle East.
The Company offers a mail-order catalog of material testing components,
accessories and products. The catalog includes products of complementary vendors
and aims to reach a broad range of customers involved in mechanical testing and
simulation.
The FA segment sells its products through sales channels separate from the MT&S
segment. A network of employees, direct sales, external domestic distributors,
representatives and system houses market the products of these divisions.
International revenue currently accounts for 44% of this segment's volume.
Efforts continue to expand sales channels in international markets.
International Operations and Export Sales: The sections entitled Geographic
Analysis of New Orders and Business Segment Information on pages 15 and 26 of
the Company's 2000 Annual Report to Shareholders, which sections are
incorporated by reference herein, contain information regarding the Company's
operations by geographic area.
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Export Licensing: The Company's foreign shipments in fiscal 2000, 1999, and 1998
included sales to Asia-Pacific, Europe and other regions that may require the
Company to obtain export permission from the U.S. government. The Company does
not undertake manufacturing on custom systems or projects until it is assured
that permission will be granted. However, due to the extended time to process
and receive a license, design work is performed on some systems during the
licensing period. Changes in political relations between the U.S. and countries
requiring import licenses, as well as other factors, can adversely affect the
Company's ability to complete a sale should a previously issued license be
withdrawn. While political reform occurring internationally may relax export
controls, the U.S. government still maintains multilateral controls in agreement
with allies and unilateral controls based on U.S. initiatives and foreign policy
that could cause delays for certain shipments or the rejection of orders by the
Company.
BACKLOG
The Company's backlog, which it defines as firm orders remaining unfilled,
totaled $163.0 million at September 30, 2000, $146.8 million at September 30,
1999, and $187.2 million at September 30, 1998. The Company believes that
approximately $155.0 million of the backlog at September 30, 2000 will become
revenue during fiscal 2001. Delays may occur due to technical difficulties,
export licensing approval or the customer's preparation of the installation
site. Any such delay can affect the period when backlog is recognized as
revenue.
COMPETITION
In the MT&S segment, customers may choose to buy equipment from the Company or
from competitors, principally: Instron (U.S.-based), Interlachen (U.S.), AVL
(Austria), Zwick (Germany), Saganomiya and Shimadzu (Japan). There are also
smaller local competitors in most major countries.
In lieu of buying equipment from the Company or its competitors, customers may
contract with testing laboratories such as EG&G, Peabody, Wyle, or with
universities. Government laboratories also market testing services to the
public.
Finally, customers may choose to construct their own testing equipment from
commercially available components. Customers in the aerospace and automotive
industries and universities sometimes choose this approach, purchasing equipment
from companies such as Parker Hannifin, Moog and Mannesman (Germany).
In the FA segment, the Company competes directly with small to medium-sized
specialty suppliers and also with divisions of the large control system
companies such as Kollmorgen, Emerson Electric, Indramat (Germany) and Fanuc
(Japan).
MANUFACTURING AND ENGINEERING
The Company conducted a significant portion of its fiscal 2000 MT&S
manufacturing and engineering activities in Minneapolis. Certain engineering,
project management, final system assembly and quality testing may be done in
Berlin, Germany, and Tokyo, Japan. Electromechanical material testing systems
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are assembled in the Raleigh, NC, facility. The Company's MTS-Powertrain
Division engineers and assembles dynamometer control systems and provides
related services from Ann Arbor, MI. Manufacturing and engineering activities
for the FA reportable segment occur in Raleigh, NC, New Ulm, MN, Horsham, PA,
Ludenscheid, Freiburg, and Stralsund, Germany, and at the Company's
majority-owned subsidiary in Nagoya, Japan.
PATENTS AND TRADEMARKS
The Company holds a number of patents, patent applications, licenses, trademarks
and copyrights that it considers, in the aggregate, to constitute a valuable
asset. The Company's system business is not dependent upon any single patent,
license, trademark or copyright.
RESEARCH AND DEVELOPMENT
The Company does not do basic research, but does fund significant product,
system and application developments. Costs of these development programs are
expensed as incurred, and amounted to $24.6, $27.0, and $24.3 million for fiscal
years 2000, 1999, and 1998, respectively. Additionally, the Company also
undertakes "first of their kind" high-technology, customer-funded contracts
which contain considerable technical pioneering. The combination of internally
sponsored product development and system or application innovation on customer
contracts approaches 10% of annual sales volume.
EMPLOYEES
MTS employed 2,350 persons as of September 30, 2000, including 446 employees in
Europe, 61 in Japan, 8 in China, 4 in Canada, 12 in Korea, and 3 in Singapore.
None of the Company's U.S. employees are covered by a collective bargaining
agreement, and MTS has experienced no work stoppages at any location.
SOURCES AND AVAILABILITY OF RAW MATERIALS AND COMPONENTS
A major portion of products and systems delivered to a customer may consist of
equipment and component parts purchased from vendors. The relationship which the
Company promotes with its vendors is partnership based with an emphasis on
continuous improvement. The Company is dependent upon certain computing hardware
and software devices and certain raw materials which have limited sources.
However, the Company has not experienced significant problems in procurement or
delivery of any essential materials, parts or components in the last several
years.
Due to the manner in which the Company sells the majority of its products, on a
fixed-price contract agreed upon at the time the order is obtained, wide
fluctuations up or down in cost of materials and components from order date to
delivery date, if not accurately forecast by the Company at an early date, can
change the expected profitability of any sale. The Company believes that such
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fluctuations have not had a material effect on reported earnings, except as
affected by changes in foreign currency rates, which have been reported.
ENVIRONMENTAL MATTERS
Management believes the Company's operations are in compliance with federal,
state and local provisions relating to the protection of the environment.
BUSINESS SYSTEMS DEVELOPMENT
The Company undertook the development and deployment of an enterprise-wide
financial and business operations software system in 1997. The company completed
the first phase of implementation in early 1999, with subsequent phases to
follow. This system is expected to improve business processing and to provide
software processing capability beyond the end of the century.
ITEM 2. PROPERTIES
Domestic Facilities:
The Company's corporate headquarters and main MT&S plant, occupying 420,000
square feet, are located on 56 acres of land in Eden Prairie, Minnesota, a
suburb of Minneapolis. The original plant was completed in 1967. Six additions,
the most recent completed in 1997, have expanded the plant to its present size.
Approximately 50% of the Eden Prairie facility is used for manufacturing and
assembly while the balance of the facility is used for office space. In 1998,
17,000 square feet of manufacturing space was leased in Chanhassen, Minnesota
under a five year operating lease expiring in 2003. The Chanhassen site was
sublet during fiscal 2000 through the duration of the lease.
Electronic design and component assembly is conducted in a 57,000 square foot
facility in Chaska, Minnesota, approximately 10 miles west of the headquarters
in Eden Prairie. The building was completed in 1996. MTS has a five-year
operating lease with provisions to extend, purchase or terminate at the end of
the lease period. The terms of the lease agreement do not require capitalization
of the asset and the related obligation.
MTS Automation occupies a 30,000 square foot plant in New Ulm, Minnesota (65
miles southwest of Minneapolis). The plant provides assembly operations and
office space. The facility was constructed in 1993 by the New Ulm Economic
Development Corporation and expanded in 1995. MTS has a seven-year operating
lease for the facility with provisions to extend the lease, purchase the
property, or terminate the lease. The terms of the lease agreement do not
require capitalization of the asset and the related obligation.
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In addition, MTS Automation occupies 30,000 square feet in Horsham,
Pennsylvania, a suburb of Philadelphia. Plant and office space in two buildings
is leased under conventional operating lease terms, expiring in 2001. During
fiscal 2000, a 90,000 square foot building was leased in another suburban
location, which will house this enterprise beginning in 2001. Approximately,
one-third of the space will be sublet until needed. The new lease term is five
years.
MTS Sensors Division is located near the Research Triangle Park in Cary, North
Carolina, a suburb of Raleigh. A 40,000 square foot plant constructed in 1988
provides manufacturing and office space. In 1992, 25,000 square feet was added
to the plant.
MTD Raleigh is located adjacent to the MTS Sensors Division site in Cary, North
Carolina. A 25,000 square foot plant, constructed in 1991, provides
manufacturing and office space. In 2000, an additional 10,000 square was leased
in nearby Morrisville for quality assurance, warehousing and office space. This
lease expires in 2003.
MTS Noise and Vibration Division operates in two facilities. A 16,000 square
foot facility in Madison Heights, Michigan and a 13,000 square foot facility in
Milford, Ohio. Plant and office space in both facilities is leased under
conventional operating lease terms.
MTS-DSP Technology occupies a 57,200 square foot facility in Ann Arbor,
Michigan. The property and building carry a mortgage until 2015. Other
facilities include leased space of 13,000 square feet in Ann Arbor and 16,000
square feet in Fremont, California. Both locations are covered by conventional
operating lease terms.
The Company leases space in other U.S. cities for sales and service offices.
Neither the space nor the rental obligations is significant.
International Facilities:
MTS Systems GmbH is located in an 80,000 square foot facility in Berlin,
Germany. As of September 30, 2000--6,500 square feet has been leased to other
companies. The building is situated on land leased by MTS from the city
government. The lease expires in 2052.
MTS Systems (France) operates in a leased facility in Paris, France, of
approximately 38,000 square feet. Approximately, 40% of this space is used for
warehousing and service with the remainder used for offices. The current lease
expires at the end of calendar 2000.
MTS Sensors Technologie operates in a leased facility in Ludenscheid, Germany on
approximately six acres of land. The manufacturing and office facilities were
expanded in 1999 and now occupy 35,000 square feet at this location.
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Custom Servo Motors Antriebstechnik GmbH & Co. KG operates in two leased
facilities in Germany, one in Freiburg, and a new facility in Stralsund. The
Freiburg facility totals about 7,000 square feet and the Stralsund location is
about 16,000 square feet. All of the Freiburg facility is used for offices while
70% of the Stralsund facility is used for assembly with the remainder used as
office space.
The Company also leases office and general purpose space for its sales and
service subsidiaries in Gloucester, United Kingdom; Torino, Italy; Seoul, South
Korea; Tokyo and other cities, Japan; Gothenburg, Sweden; Beijing and other
cities, Peoples Republic of China; and Singapore. No manufacturing is conducted
at these locations.
Expansion Opportunities:
Capacity remains in Eden Prairie for limited facility expansion. Also, the sites
in Cary, North Carolina can be expanded. Other suitable commercial real property
is available for purchase or lease in metropolitan areas where the Company is
presently located. The Company considers its current facilities adequate to
support its operations in 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various claims, legal actions and complaints arising
in the ordinary course of business. Management believes that the final
resolution of these matters will not have a material adverse effect on the
financial position or results of operation of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended September
30, 2000, for a vote by the shareholders.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's stock is traded on The Nasdaq Stock Market's National Market
(Nasdaq) under the symbol MTSC. The following table shows the Company's low and
high closing sale transactions as reported by Nasdaq.
Quarter Ended Low * High *
------------- ----- ------
December 31, 1998 $ 10.88 $ 15.44
March 31, 1999 $ 9.63 $ 14.38
June 30, 1999 $ 9.81 $ 13.25
September 30, 1999 $ 10.00 $ 14.63
December 31, 1999 $ 7.50 $ 10.63
March 31, 2000 $ 5.38 $ 9.59
June 30, 2000 $ 6.19 $ 7.88
September 30, 2000 $ 6.00 $ 7.50
* Source: The Nasdaq Stock Market, Inc. Summary of Activity Report
At December 4, 2000 there were 2,229 holders of record of the Company's $.25 par
value common stock. The Company estimates that there are an additional 3,000
beneficial shareholders whose stock is held by nominees or broker dealers.
The Company has a history of paying quarterly dividends and expects to continue
such payments in the future. During 2000, 1999, and 1998, the Company paid
dividends totaling $.24 per share, per year to holders of its common stock.
Under the terms of the Company's credit agreements, certain covenants require
that tangible net worth, as defined, must exceed a defined minimum amount and
limit repurchases of its common stock to a defined maximum amount. As of
September 30, 2000, tangible net worth exceeded the minimum by $29.9 million and
the Company had $17.9 million available for repurchases of its common stock. The
Company has flexibility to declare and pay dividends in the future similar to
recent dividends.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
A comprehensive summary of selected financial information is presented in the
"Six Year Financial Summary" on page 14 of the Company's 2000 Annual Report to
Shareholders. Data included in the summary is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 15 through 19 of the Company's 2000 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Disclosures are included in Management's Discussion and Analysis of Financial
Condition and Results of Operations on page 17 and in Note 1 to the Consolidated
Financial Statements included in the Company's 2000 Annual Report to
Shareholders. This information is incorporated herein by reference.
MARKET RISK ON CHANGES IN FOREIGN CURRENCY EXCHANGE RATES
Market risk from changes in foreign currency exchange rates may cause
fluctuations on the translation of orders, net revenue and net income. Currency
gains and losses from the settlement of foreign currency denominated
transactions are reported in the Consolidated Statements of Income as "Other
expense (income), net". The following table illustrates the impact of such
market risk on the above financial items for the respective years:
<TABLE>
<CAPTION>
(expressed in thousands)
- ---------------------------------------------------------- ------------- ------------- --------------
2000 1999 1998
- ---------------------------------------------------------- ------------- ------------- --------------
<S> <C> <C> <C>
Increase (Decrease) from translation:
- ---------------------------------------------------------- ------------- ------------- --------------
New orders $(2,324) $4,961 $(10,838)
- ---------------------------------------------------------- ------------- ------------- --------------
Net revenue (3,924) 3,313 (6,704)
- ---------------------------------------------------------- ------------- ------------- --------------
Net income (111) 60 (236)
- ---------------------------------------------------------- ------------- ------------- --------------
- ---------------------------------------------------------- ------------- ------------- --------------
Transaction Gain (Loss) in
- ---------------------------------------------------------- ------------- ------------- --------------
"Other expense (income), net" $ (538) $ (375) $ 2,340
- ---------------------------------------------------------- ------------- ------------- --------------
</TABLE>
The Company regularly assesses risks from foreign currency exchange rates and
has practices to protect against the adverse effects of these and other
potential exposures. To manage such risk, the Company, when deemed appropriate,
enters into forward contracts. The Company is principally exposed to foreign
currency movements related to non-U.S. dollar denominated assets and uncertainty
related
14
<PAGE>
to future revenues that are denominated in foreign currencies. The Company's
most significant foreign currency exposures relate to contracts in backlog and
unbilled receivables in the Japanese yen, the Euro, and the German mark, which
are undelivered or outstanding at the end of fiscal 2000. A hypothetical 10
percent increase in the levels of foreign currency exchange rates against the
U.S. dollar with all other variables held constant would result in a decrease in
future revenues and asset balances of approximately $ 1.5 million. Conversely, a
hypothetical 10 percent decrease in the levels of foreign currency exchange
rates against the U.S. dollar with all other variables held constant would
result in an increase to future revenues and asset balances of approximately $
1.6 million.
MARKET RISK ON CHANGES IN INTEREST RATES
The Company also experiences interest rate risk on its fixed and variable
indebtedness. MTS manages such risk by balancing the amount of fixed and
variable rate debt. For fixed rate debt, interest rate changes affect the fair
market value of such debt but do not impact earnings. In contrast, interest rate
risk on variable rate debt generally does not affect the fair market value of
such debt but does impact future earnings and cash flows, assuming other factors
are held constant.
At September 30, 2000 the Company had fixed rate debt of $58.4 million and
variable rate debt of $17.5 million. Holding other variables constant (such as
foreign exchange rates and debt levels), a one percentage point increase in
interest rates would have decreased the unrealized fair market value of fixed
rate debt at September 30, 2000 by approximately $800 thousand. The impact on
variable rate debt would decrease income before income taxes and increase cash
outflows for the next year by approximately $200 thousand.
FORWARD LOOKING STATEMENTS
Statements included or incorporated by reference in this Form 10-K (including
the 2000 Annual Report to Shareholders) and in the Company's press releases and
in oral statements made with the approval of an authorized executive officer,
which are not historical or current facts are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and are subject to certain risks and uncertainties that could
cause actual results to differ materially from historical results and those
presently anticipated or projected. The following important facts, among others,
could affect the Company's actual results in the future and could cause the
Company's actual financial performance to differ materially from that expressed
in any forward-looking statement:
(i) With regard to the Company's 2000 product developments, there
may be uncertainties unknown to the Company concerning the
expected results.
15
<PAGE>
(ii) Possible significant volatility in both backlog and quarterly
operating results may result from large, individual, fixed
price orders, generally over $10 million, in connection with
sales of MT&S systems.
(iii) Export controls based on U.S. initiatives and foreign policy,
as well as import controls imposed by foreign governments, may
cause delays for certain shipments or the rejection of orders
by the Company. Such delays could create material fluctuations
in quarterly results and could have a material adverse effect
on results of operations. Foreign revenues may also be
affected by local political conditions and/or currency
restrictions.
(iv) Delays in realization of $163.0 million in backlog orders as
of September 30, 2000 (approximately $155.0 million of which
are anticipated to be recognized during fiscal 2001) may occur
due to technical difficulties, export licensing approval or
the customer's preparation of the installation site, any of
which can affect the quarterly or annual period when backlog
is recognized as revenue and could materially affect the
results of any such period.
(v) The Company experiences competition on a worldwide basis.
Customers may choose to purchase equipment from the Company or
from its competitors. For the MT&S reportable segment,
customers may also contract with testing laboratories or
construct their own testing equipment, purchasing commercially
available components. Factors which influence the customer's
decision include price, service and required level of
technology.
(vi) The Company's short-term borrowings carry interest rate risk
that is generally related to either LIBOR or the prime rate.
The Company has minimal earnings and cash flow exposure due to
market risks on its long-term debt obligations as a result of
the primarily fixed-rate nature of the debt.
The foregoing list is not exhaustive, and the Company disclaims any obligation
subsequently to revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Report of Independent Public Accountants,
Quarterly Financial Information (unaudited), and Six Year Financial
16
<PAGE>
Summary (unaudited) included in the Company's 2000 Annual Report to Shareholders
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Corporate Executive Officers of the Registrant on the date of this report
are:
Name and Age Position Officer Since
- ------------ -------- -------------
S. W. Emery, Jr. (54) Chairman, President and 1998
Chief Executive Officer
K. D. Zell (58) Executive Vice President 1979
D. E. Hoffman (53) Vice President and CFO 1999
W. G. Anderson (44) Vice President 1998
S. M. Cohoon (46) Vice President 1996
K.D. Donaldson, Jr. (48) Vice President 2000
J. M. Egerdal (49) Vice President 1996
L.B. Hamilton (39) Vice President 2000
D.G. Krantz (45) Vice President 2000
K.M. Staby (54) Vice President 2000
M. G. Togneri (63) Vice President 1991
Officers serve at the discretion of and are elected annually by the board of
directors and serve until their successors are elected. Business experience of
the Executive Officers for at least the last 5 years (consisting of positions
with the Company unless otherwise indicated) is as follows:
<TABLE>
<CAPTION>
Officer Business Experience
------- -------------------
<S> <C>
S. W. Emery, Jr. Chairman since January 1999. President and Chief Executive Officer since
March 17, 1998. Management and executive positions with Honeywell, Inc.
from 1985 to 1997. (Area Vice President Western and Southern Europe from
1994 to 1997; Group Vice President, Military Avionics Systems from 1989 to
1994; Vice President and General Manager, Space Systems Division from 1988
to 1989; Vice President Operations, Process Controls Division from 1985 to
1988.
K. D. Zell Executive Vice President since 1993. Vice President of Materials Testing
Division from 1988 to 1993. Vice President, Sales and Service from 1984
18
<PAGE>
Officer Business Experience
------- -------------------
to 1988. Vice President, Product Group from 1979 to 1984.
D. E. Hoffman Vice President and CFO since July 1999. Prior to MTS, he was Vice
President and CFO of MVE, Inc. from 1998 to 1999, CFO for the Harmon
Limited Group of Apogee Enterprises, Inc. from 1994 to 1997, and he
held various management positions with ABB Ltd. from 1983 to 1994.
W. G. Anderson Vice President, MTS Automation Division, since 1998. President of
Custom Servo Motors from 1992 to 1998.
S. M. Cohoon Vice President of Vehicles Dynamics Division since 1996. Prior to his
employment at MTS he held various engineering and management positions
at General Motors Corporation.
K.H. Donaldson, Jr. Vice President of Strategic Planning and Product Development since 2000.
Sales engineer, Aerospace from 1995 to 2000.
J. M. Egerdal Vice President, MTS Services and Support Division since 1997; Vice
President, North American Sales from 1996 to 1997; Regional Sales and
Service Management from 1988 to 1996.
L.B. Hamilton Vice President of Material Testing and Aerospace Divisions since 2000.
Director of Re-engineering from 1999 to 2000. Vice President, Anatomic
Pathology Business, Quest Diagnostics from 1997 to 1999. Executive
Director Revenue Services, Quest Diagnostics (Division of Corning, Inc.)
from 1995 to 1997.
D.G. Krantz Vice President of Advanced Engineering Solutions Division since 2000.
Program
19
<PAGE>
Officer Business Experience
------- -------------------
manager, Advanced Systems from 1995 to 2000.
K. M. Staby Vice President of Human Resources since 2000. Various management
positions at Medtronic, Inc. from 1974 to 1999--Vice President, Human
Resources for Cardiac Rhythm Management 1991-1999 and for Worldwide
Distribution 1989 to 1991).
M.G. Togneri Vice President of Sensors Division since 1998. Vice President of Factory
Automation sector from 1991 to 1997.
Prior to his employment at MTS was Vice President at Square D Corporation
and General Manager of Crisp Automation. Has extensive experience in the
industrial instrumentation and control business in the U.S. and
internationally.
</TABLE>
(a) Information concerning the Company's Directors, including business
experience, can be found in the Company's Proxy Statement, a definitive
copy of which will be filed with the Securities and Exchange Commission
prior to January 30, 2001, and is incorporated herein by reference.
(b) There are no family relationships between and among directors or
officers.
(c) Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated herein by reference from the
Company's Proxy Statement, a definitive copy of which will be filed
with the Securities and Exchange Commission prior to January 30, 2001,
pursuant to Regulation 14A under the Securities Exchange Act of 1934.
ITEM 11. EXECUTIVE COMPENSATION
See Item 12.
20
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Items 11 and 12 is incorporated herein by reference
from the Company's Proxy Statement, a definitive copy of which will be filed
with the Securities and Exchange Commission prior to January 30, 2001, pursuant
to Regulation 14A under the Securities Exchange Act of 1934.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
The following documents are filed as part of this report:
(a) Financial Statements:
See accompanying Index to Financial Statements on Page F-1.
(b) Reports on Form 8-K: None.
(c) Exhibits:
2.a Agreement and Plan of Merger among MTS Systems
Corporation , Badger Merger Corp., and DSP Technology
Inc., filed on Form S-4 (File No. 333-77277) on April
28, 1999, is incorporated by reference herein.
3.a Restated and amended Articles of Incorporation, adopted
January 30, 1996, incorporated by reference from
exhibit 3.a of Form 10-K for the fiscal year ended
September 30, 1996.
3.b Restated Bylaws, reflecting amendments through May 26,
1998, incorporated by reference from exhibit 3.b. of
Form 10-K for the fiscal year ended September 30, 1998.
10.a Management Variable Compensation Plan and Long Range
Incentive Plan for fiscal 2000, dated November 30,
1999.
10.b 1985 Employee Stock Option Incentive Plan, incorporated
by reference to exhibit 4(a) from Form S-8, File No.
2-99389.
10.c 1987 Stock Option Plan, as amended, incorporated by
reference from exhibit 10.c of Form 10-K for the fiscal
year ended September 30, 1996.
10.d 1990 Stock Option Plan, as amended, incorporated by
reference from exhibit 10.d of Form 10-K for the fiscal
year ended September 30, 1996.
10.e 1994 Stock Plan, as amended, incorporated by reference
from exhibit 10.e of Form 10-K for the fiscal year
ended September 30, 1996.
22
<PAGE>
Exhibits:
10.f 1997 Stock Option Plan, as amended, incorporated by
reference from exhibit 10.p of Form 10-K for the fiscal
year ended September 30, 1999.
10.g Severance Agreement, dated December 3, 1990 between the
Registrant and Kenneth E. Floren, incorporated by
reference to exhibit 10.k of Form 10-K for the fiscal
year ended September 30, 1990.
10.h Severance Agreement, dated May 1, 1990 between the
Registrant and Werner Ongyert, incorporated by
reference to exhibit 10.m of Form 10-K for the fiscal
year ended September 30, 1990.
10.i Severance Agreement, dated July 28, 1999 between the
Registrant and David E. Hoffman, incorporated by
reference to exhibit 10.k of Form 10-K for the fiscal
year ended September 30, 1999.
10.j Severance Agreement, dated March 27, 1998 between the
Registrant and Keith D. Zell, as amended, incorporated
by reference from exhibit 10.m of Form 10-K for the
fiscal year ended September 30, 1998.
10.k Severance Agreement, dated March 24, 1998 between the
Registrant and Mauro G. Togneri, as amended,
incorporated by reference from exhibit 10.n of Form
10-K for the fiscal year ended September 30, 1998.
10.l 1992 Employee Stock Purchase Plan, incorporated by
reference to exhibit 4(a) from Form S-8, File No.
33-45386.
10.m Severance Agreement, dated March 18, 1998 between the
Registrant and Steven M. Cohoon as amended,
incorporated by reference from exhibit 10.q of Form
10-K for the fiscal year ended September 30, 1998.
10.n Severance Agreement, dated March 16, 1998 between the
Registrant and Sidney W. Emery, incorporated by
reference from exhibit 10.r of Form 10-K for the fiscal
year ended September 30, 1998.
10.o Change in Control Agreement, dated March 16, 1998
between the Registrant and Sidney W. Emery incorporated
23
<PAGE>
Exhibits:
by reference from exhibit 10.s of Form 10-K for the
fiscal year ended September 30, 1998.
10.p Change in Control Agreement, dated March 27, 1998
between the Registrant and Keith D. Zell incorporated
by reference from exhibit 10.t of Form 10-K for the
fiscal year ended September 30, 1998.
10.q Change in Control Agreement, dated March 24, 1998
between the Registrant and Mauro G. Togneri
incorporated by reference from exhibit 10.v of Form
10-K for the fiscal year ended September 30, 1998.
10.r Change in Control Agreement, dated July 28, 1999
between the Registrant and David E. Hoffman
incorporated by reference from exhibit 10.y of Form
10-K for the fiscal year ended September 30, 1999.
10.s Change in Control Agreement, dated March 18, 1999
between the Registrant and Steven M. Cohoon
incorporated by reference from exhibit 10.z of Form
10-K for the fiscal year ended September 30, 1999.
10.t Severance Agreement, dated March 13, 1998 between the
Registrant and William G. Anderson incorporated by
reference from exhibit 10.aa of Form 10-K for the
fiscal year ended September 30, 1998.
10.u Severance Agreement, dated March 14, 1998 between the
Registrant and James M. Egerdal incorporated by
reference from exhibit 10.ab of Form 10-K for the
fiscal year ended September 30, 1998.
10.v Change in Control Agreement, dated March 13, 1998
between the Registrant and William G. Anderson
incorporated by reference from exhibit 10.ac of Form
10-K for the fiscal year ended September 30, 1998.
10.w Change in Control Agreement, dated March 14, 1998
between the Registrant and James M. Egerdal
incorporated by reference from exhibit 10.ad of Form
10-K for the fiscal year ended September 30, 1998.
10.x Severance Agreement, dated January 3, 2000 between the
Registrant and Kathleen M. Staby.
24
<PAGE>
Exhibits:
10.y Change in Control Agreement, dated January 3, 2000
between the Registrant and Kathleen M. Staby.
13. Annual Report to Shareholders for the fiscal year ended
September 30, 2000.
21. Subsidiaries of the Company.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule.
(d) Financial Statement Schedules:
See accompanying Index to Financial Statements on page F-1.
25
<PAGE>
SIGNATURES
Pursuant to the requirement 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.
MTS SYSTEMS CORPORATION
By: /s/ Sidney W. Emery, Jr.
-----------------------------------
Sidney W. Emery Jr.
Chairman, President and Chief
Executive Officer
By: /s/ David E. Hoffmann
-----------------------------------
David E. Hoffman
Vice President and Chief Financial Officer
Date: December 21, 2000
26
<PAGE>
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:
By: /s/ Charles A. Brickman
--------------------------------------------
Charles A. Brickman, December 21, 2000
Director
By: /s/ Jean Lou Chameau
-----------------------------------
Jean Lou Chameau, December 21, 2000
Director
By: /s/ Bobby I. Griffin
-----------------------------------
Bobby I. Griffin, December 21, 2000
Director
By: /s/ Russell A. Gullotti
--------------------------------------------
Russell A. Gullotti, December 21, 2000
Director
By: /s/ Brendan Hegarty
-----------------------------------
Brendan Hegarty, December 21, 2000
Director
By: /s/ Linda Hall Whitman
--------------------------------------------
Linda Hall Whitman, December 21, 2000
Director
27
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
A. CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to the consolidated financial statements in the
Company's 2000 Annual Report to Shareholders, which are incorporated by
reference in accordance with Rule 12b-23 under the Securities Exchange
Act of 1934 and attached hereto.
Annual
Report 10-K
Page Page
Quarterly Financial Information (Unaudited) 19 ---
Consolidated Balance Sheets - September 30, 2000 20 ---
and 1999
Consolidated Statements of Income and Shareholders'
Investment for the Years Ended September 30, 2000,
1999 and 1998 21 ---
Consolidated Statements of Cash Flows for the
Years Ended September 30, 2000, 1999 and 1998 22 ---
Notes to Consolidated Financial Statements 23 ---
Report of Independent Public Accountants 33 ---
F-1
<PAGE>
Annual
Report 10-K
Page Page
B. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SCHEDULE --- F-3
C. CONSOLIDATED SCHEDULE
Schedule Description
- -------- -----------
II Summary of Consolidated Allowances for
Doubtful Accounts and Restructuring Reserves --- F-4
All schedules except the one listed above have been omitted as
not required, not applicable, or the information required
therein is contained in the financial statements or the
footnotes thereto.
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To MTS Systems Corporation:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in MTS Systems
Corporation's annual report to shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated November 28, 2000. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedule (page F-4) listed as a part of Item 14 in this Form 10-K is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Minneapolis, Minnesota,
November 28, 2000
F-3
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
SCHEDULE II - SUMMARY OF CONSOLIDATED ALLOWANCES
FOR DOUBTFUL ACCOUNTS AND RESTRUCTURING RESERVES
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998
<TABLE>
<CAPTION>
Balance Amounts Balance
Beginning Written-Off/ End of
of Year Provisions Payments Year
--------------- ---------- --------- --------
(expressed in thousands)
Allowance for Doubtful Accounts:
- --------------------------------
<S> <C> <C> <C> <C>
2000 $2,232 $566 $(543) $2,255
1999 2,285 679 (732) 2,232
1998 2,160 344 (219) 2,285
Restructuring Reserves:
- -----------------------
2000 $3,101 $1,210 $(3,101) $1,210
1999 - 5,711 (2,610) 3,101
1998 - - - -
</TABLE>
F-4
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
10.a Management Variable Compensation Plan and Long Range
Incentive Plan for fiscal 2000
10.x Severance Agreement, dated January 3, 2000 between the
Registrant and Kathleen M. Staby
10.y Change in Control Agreement, dated January 3, 2000
between the Registrant and Kathleen M. Staby
13. Annual Report to Shareholders for the fiscal year ended
September 30, 2000
21. Subsidiaries of the Company
23. Consent of Independent Public Accountants
27. Financial Data Schedule
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.A
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>MANAGEMENT VARIABLE COMPENSATION (MVC) PLAN
<TEXT>
Final Approved by HR Board Committee
November 30, 1999
EXHIBIT 10.a
MANAGEMENT VARIABLE COMPENSATION (MVC) PLAN
FISCAL 2000
1. PURPOSE OF PLAN
To focus efforts on achievement of near term financial objectives which
are critical to the success of the Company; to reward accomplishment at
a level above competition when performance is above that of comparable
companies; to more closely couple total compensation (salary plus
variable) to the financial results of the enterprise.
The Plan's payout is primarily related to achievement of annual
Corporate and Division/Niche profit, resource utilization, and growth
objectives.
2. PLAN CONSTRUCTION
The attached chart provides an overview of the plan (See attachment A).
Details follow regarding each of the components of the plan.
3. ELIGIBILITY AND PARTICIPATION
* Corporate officers
* Unit vice presidents
* Market and functional unit managers
* Managers, technical supervisors and key marketing or technical
employees who meet certain minimum responsibilities for
profitability, financial/human resource acquisition and
allocation, balance sheet control, and/or market/technical
direction - positions defined as beginning at SAM 15 and TE 5, or
equivalent and above.
* This plan does not apply to the employees of the Aeromet
Corporation.
An employee must be in such a position by the November Board of
Directors meeting in order to be eligible for the fiscal year plan
beginning the preceding 1 October, unless otherwise authorized by the
CEO.
An officer may recommend that an employee, who is otherwise eligible,
not participate but such a recommendation must be authorized by the
CEO.
Participants are eligible for payout in proportion to the percentage of
the fiscal year the participant is responsible for the qualifying
position, unless otherwise authorized by the CEO.
Employees who transfer to a different officer's unit during the year
are paid according to the proportion of the year spent under each plan.
Employees who work less than full time during a year (e.g., due to a
personal leave, but not due to illness) would earn a proportionately
reduced payout.
Unless authorized by the CEO, no payout will be made to employees who
work less than 1,000 hours in the fiscal year.
Page 1
<PAGE>
The participant must be on MTS' payroll at the end of the fiscal year
to qualify for a payout. Employees resigning or terminated before the
end, regardless of cause, are not eligible unless otherwise authorized
by the CEO
No employment contract is implied by participation in this Plan.
4. ESTABLISHMENT OF OBJECTIVES
a. The Board of Directors sets the Corporate Earnings per Share
(EPS), Corporate Return on Average Net Assets (ROANA), and the
corporate Working Capital Rate to Revenue objectives at their
November meeting.
b. ROANA, Revenue, and Working Capital Rate to Revenue objectives
for Division heads will be approved by the Human Resource
Committee of the Board of Directors at the November meeting.
All other objectives must be finalized by December 15.
Other objectives for participants below the direct reports to
the CEO require one over one approval levels to:
* Integrate objectives into Company operating plan
* Guard against conflicting objectives
* Help to assure consistency in degree of difficulty
The CEO has the final approval over all participants other
than himself.
5. CRITERIA FOR OBJECTIVES
5.a CORPORATE LONG RANGE PLANNING
The Corporate Profit and Growth Objectives are set by the Board based
on the current 3- year Long Range Plan (LRP) for the period FY1999
through 2001. Growth rates are set against 1998 actual results as the
baseline. These are:
EPS: 20% compounded annual growth
ROANA: 21% average across the three years of the plan
REVENUE: 15% compounded annual growth
For annual MVC purposes, EPS and revenue objectives are adjusted
annually as recommended by the CEO and approved by the Board of
Directors. All objectives include all transactions, acquisitions,
write-offs, sales of assets, etc. unless specifically excluded by the
Board in writing.
5.b CORPORATE '00 MVC
FUNDAMENTAL PHILOSOPHY IS THAT ACHIEVING THE FY00 PLAN WILL RESULT IN
100% MVC PAYOUT.
Page 2
<PAGE>
For FY00 this translates to MVC corporate level objectives of:
EPS: $0.95
ROANA: 16.2%
REVENUE: $391.1M
WORKING CAP
RATE TO REV: 41%
(Mpls-based ops)
5.c MVC IMPLEMENTATION
EPS:
EPS Payout
--- ------
$0.90 0%
$0.95 100%
$1.05 200%
ROANA:
ROANA Payout
----- ------
0.8x Base 0%
Base = 16.2% 100%
1.2x Base 200%
1.4x Base 300%
WCRR (Mpls-based operations):
WCRR Payout
---- ------
42% 0%
41% 100%
39% 200%
5.d UNIT
Unit financial goals (ROANA & Working Capital Rate to Revenue) are
expressed as Corp/Division/Niche goals. Such goals are set as part of
an integrated plan for the overall corporation.
Approved Unit levels for FY00 are:
Type
----
CORP Corporate
DIV AESD/Entertainment
DIV Automation
DIV DSPT
DIV MTD/Aero
DIV NVD
DIV Sensors
DIV Service
DIV Vehicles Dynamics
Page 3
<PAGE>
5.d UNIT(CONT.)
Additional NICHES as approved by CEO
Other "Non-Financial" objectives are locally established, must be
stated in measurable terms and must not be activities (i.e. number of
sales calls or technical society presentations).
6. COMPETITIVE PAYOUT POTENTIAL
The competitive payout potential, expressed as a % of the midpoint of
the salary structure, is shown below:
<TABLE>
<CAPTION>
POSITION COMPETITIVE PAYOUT POTENTIAL %
-------- ------------------------------
<S> <C> <C>
CEO E5 70%
Exec VP, MT&S E4 50%
Vice President E3 25-50, depending on revenue level (profit potential)
Vice President E2 25-50, depending on revenue level (profit potential)
Vice President (Unit) E1 15-45, depending on revenue level (profit potential)
Mkt Div P&L Mgrs SAM 17-21 15-35, depending on revenue level (profit potential)
All Other Mgmt SAM 18-21 10-25, depending on profit impact
SAM 15-17 6-20, depending on profit impact
T/E 5/5S - 9/9S 6-15, depending on profit impact
</TABLE>
7. OVERRANGING/MAXIMUM POTENTIAL PAYOUT
The objectives are set at challenging but realistic levels that are
used in the overall process of planning and resource allocation. This
is not meant to be a limit to our aspirations, and performance above of
those objectives should be rewarded as it is to the benefit of all
stakeholders in the enterprise. Payout above the competitive payout
potential is termed overranging.
Two MVC mixes are possible for participants based on position and
salary level. Exceptions must be approved by the CEO.
FOR THE MTS EXECUTIVE MANAGEMENT TEAM
Corporate Earnings per share (EPS) at 30% with 200%
overranging.
Corporate or Division ROANA at 50% with 300% overranging.
Mpls-based Operations Working Capital Rate to Revenue or
Approved Revenue for the Business Unit at 20% with 200%
overranging.
Base payout potential: 30 + 50 + 20 = 100
Max payout potential: (30x2) + (50x3) + (20x2) = 250
FOR ALL OTHER POSITIONS
Corporate earnings per share (EPS) at 20% with 200%
overranging.
Corporate, Division, or Niche(as applicable) ROANA at 50% with
300% overranging.
Corporate, Division, or Niche Working Capital Rate to Revenue
at 20% with 200% overranging.
Other objectives at 10% with no overranging.
Base payout potential: 20 + 50 + 20 + 10 = 100
Max payout potential: (20x2) + (50x3) + (20x2) + (10x1) = 240
Page 4
<PAGE>
8. RELATIONSHIP TO OTHER COMPENSATION PLANS
8.a "NON MANAGEMENT" VARIABLE COMPENSATION PLAN (VC)
Certain units may have a variable compensation plan for employees who
are not eligible for the MVC, sales commissions, or other variable
compensation plans. Payout in these VC Plans is linked directly to
payout on the unit's MVC profit objectives. These non-management plans
are subject to the approval of the unit vice president, corporate Human
Resources manager and CEO.
The following is an outline summary to which these VC plans must
adhere. They are included in this MVC Plan for reference only.
8.a(1) VC Competitive payout potential is 3% of the midpoint of the salary
range in which the employee is placed at the beginning of the fiscal
year.
8.a(2) VC payout will normally be based on the combination of the results of
the Corporation's earnings per share (EPS) and employee's unit vice
president's (in some cases the unit manager's) ROANA objective(s) for
the year. If the unit's vice president (manager)has more than one such
objective, the payout will be based on the weighted average of the
officer's objectives.
8.a(3) The entire 3% VC payout potential is eligible for overranging for
participating employees.
8.a(4) Eligibility and participation rules for VC will be the same as those
for MVC, where appropriate.
8.b RETIREMENT PLAN
The calculations for the Management Variable Compensation Plan (and VC)
are made after deductions for retirement plans.
Payout to a U.S. based participant in the Management Variable
Compensation Plan (and VC) is included in the calculation of the
Company's contribution to that employee's retirement plan.
9. PAYOUT
Payouts under this Plan along with VC are considered costs for the
calculation of actual performance against objectives.
Payouts are audited by the manager of internal audit and approved by
the CFO. Payouts for the Executive Management Team must be approved by
the CEO.
Payout will be made in cash within 90 days of the end of the fiscal
year, expected to be on or before December 31, 2000.
Page 5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.X
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>SEVERANCE AGREEMENT
<TEXT>
EXHIBIT 10.x
SEVERANCE AGREEMENT
AGREEMENT made as of this 3rd day of January, 2000 by and between MTS
Systems Corporation, a Minnesota corporation ("MTS") and Kathleen M. Staby (the
"Executive").
WHEREAS, MTS desires to employ Executive as its Vice President and
Executive is willing to become employed by MTS in such capacity; and
WHEREAS, Executive is expected to make a significant contribution to
the profitability, growth and financial strength of MTS; and
WHEREAS, MTS considers the establishment and maintenance of a sound and
vital management and an orderly succession plan to be essential to protecting
and enhancing the best interests of MTS and its shareholders; and
WHEREAS, this Agreement is consistent with the requirements of the
executive/high policymaking exception to the Age Discrimination in Employment
Act, 29 U.S.C. Section 631(c)(1) (the "Executive Exemption"), benefits in
connection therewith are pursuant to pension, profit sharing and deferred
compensation plans as defined therein, and Executive, by virtue of his or her
duties and responsibilities on behalf of MTS, qualifies under said exception for
mandatory retirement on or after his or her 65th birthday; and
WHEREAS, MTS is providing Executive, simultaneously with this
Agreement, in addition to Executive's employment with MTS and the special
benefits associated therewith, additional consideration in the form of a Change
in Control Agreement, to provide additional benefits to Executive in the event
of a change in control;
NOW THEREFORE, in consideration of the foregoing and other respective
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. Term of Agreement. This Agreement shall commence on the date hereof
and shall continue in effect until the earlier of (a) the date on which the
Executive and MTS agree in writing to terminate this Agreement, or (b) the Date
of Termination indicated in paragraph 2, 3, or 4 hereunder. If a change in
control occurs, as defined in that certain agreement between the Executive and
MTS of even date herewith (the "Change in Control Agreement", attached as
Exhibit 1), this Agreement shall be superseded by the provisions of the Change
in Control Agreement except as provided in the following sentence. MTS's right
under this Agreement to terminate the Executive's employment pursuant to the
Executive Exemption shall not be superceded by the Change in Control Agreement
and the Executive
<PAGE>
Sevarance Agreement
Page 2
shall be entitled to receive the benefits to which he is entitled under
subparagraph 4(d) hereunder if such termination occurs.
2. Termination by Reason of Death or Disability. In the event of the
Executive's death or disability during the Term of this Agreement, Executive
shall be entitled to such benefits provided under any policy, plan or program
governing death or disability maintained by MTS and covering such Executive and
this Agreement shall not apply. The determination of disability and the amount
and entitlement of benefits shall be governed by the terms of such policy, plan
or program. In the event of the Executive's disability, the Executive's Date of
Termination shall be the date on which Executive has been unable, by reason of
physical or mental disability, to perform the services required of him or her
for his or her position, even with reasonable accommodation, for the period of
time indicated in MTS's group long term disability plan (in which the Executive
is a participant) during which a participant must be disabled before benefits
become payable. In connection with Executive's termination due to disability, a
qualified physician must certify the disability and MTS shall at all times
comply with the Americans With Disabilities Act and any other applicable
disability discrimination law.
3. Resignation or Termination for Cause.
(a) The Executive may resign his or her employment or MTS may
terminate the Executive's employment for Cause, effective as of the
Date of Termination set forth in the Notice of Termination. If
Executive resigns or his or her employment is terminated by MTS for
Cause, MTS shall pay to Executive his or her full base salary through
the Date of Termination at the rate in effect at the time of Notice of
Termination is given and MTS shall have no further obligation to
Executive under this Agreement.
(b) Termination by MTS of Executive's employment for "Cause"
shall mean termination as a result of:
(i) the conviction of the Executive by a court of
competent jurisdiction for felony criminal conduct; or
(ii) willful misconduct by the Executive; or
(iii) violation by the Executive of any employment
agreement applicable to the Executive.
4. Termination Other Than for Cause. MTS may terminate Executive's
employment for a reason other than Cause, including pursuant to the Executive
Exemption on or after Executive's 65th birthday, effective as of the Date of
Termination set forth in the Notice of Termination. If Executive's employment is
terminated by MTS other than for Cause, death or disability, Executive shall be
entitled, subject to subparagraph 4(d)(v) and paragraph 9 of this Agreement, to
the benefits described in subparagraphs (a), (b) and (c) below and, if
applicable, subparagraph (d) below.
<PAGE>
Sevarance Agreement
Page 3
(a) Executive shall be paid a monthly Severance Payment equal
to the Executive's Monthly Gross Income, as defined in subparagraph (i)
below for 6 months. If Executive's employment is terminated pursuant to
the Executive Exemption as described in subparagraph 4(d) hereunder,
"12" shall be substituted for "15" in the preceding sentence.
(i) For purposes of this Agreement, Monthly Gross
Income shall mean the sum of the following amounts, subject to
applicable federal and state withholding.
(A) 1/12 of the highest average base salary
for any 12-consecutive month period during the 36
calendar month period ending immediately prior to the
Date of Termination; plus
(B) the monthly average of the total
Management Variable Compensation (MVC) earned during
the lesser of the 3 most recent or the actual number
of fiscal years participating in the MVC plan ending
immediately prior to the Date of Termination; plus
(C) the product of the average percentage of
MTS profit sharing contributions to the MTS Systems
Corporation Profit Sharing Retirement Plan and Trust
(as a percent of Compensation as defined in the Plan
up to the federal limit) for the lesser of the 3 most
recent or the actual number of participating Plan
Years ending immediately prior to the Date of
Termination multiplied by the sum of (A) and (B)
above.
(b) Executive shall be entitled to continue any of said
benefits which qualify as group health and life insurance benefits for
continuation coverage under the Comprehensive Omnibus Budget
Reconciliation Act ("COBRA") or applicable state law and pursuant to
the terms of the plan. Following the Executive's Date of Termination
and while severance payments are being paid to the Executive or, if
earlier, until Executive is covered under other group plans, MTS shall
continue to pay the employer share of the Executive's MTS group life
and health insurance premiums. All premium payments made on Executive's
behalf following his or her Date of Termination and Executive's
continued participation in the plans are contingent upon Executive
making the appropriate timely written elections to continue his or her
group benefits following his or her Date of Termination, said group
benefits continuing in effect for active MTS employees, Executive
continuing to be eligible under the terms of the plans and applicable
laws, and Executive's payment of the employee portion of the premiums
for such benefits. Benefits otherwise receivable by Executive pursuant
to this subparagraph (b) shall be reduced or eliminated to the extent
comparable benefits are actually received by Executive during such
period from a source outside MTS, and any such benefits actually
received by Executive shall be reported to MTS.
<PAGE>
Sevarance Agreement
Page 4
(c) The Executive's rights under any existing Employee Stock
Option Agreement and any future such agreements, including particularly
his or her vesting rights and his or her right to exercise his or her
options following his or her termination of employment, shall continue
to be fully effective hereunder. In addition, if the Executive's
termination of employment occurs pursuant to the Executive Exemption on
or after he has reached his or her 65th birthday, the Executive shall
continue to vest in any stock options in which he is not fully vested,
as though he were continuing his or her employment with MTS as an
active employee, subject at all times to the exercise times and other
terms and conditions set forth in said Stock Option Agreements and to
Executive's signing the release agreement described in paragraph 9
herein.
(d) If Executive's termination of employment occurs pursuant
to the Executive Exemption on or after he has reached his or her 65th
birthday, Executive shall be entitled to receive the lump sum
equivalent of the amount necessary to purchase a $44,000 pre-tax
straight life annuity, said lump sum to be taken from MTS contributions
and earnings thereon to Executive's accounts in MTS sponsored pension,
profit sharing, and deferred compensation plans, as applicable. If
Executive is entitled to less than that amount from the applicable MTS
plans in which he is a participant as of his or her Date of
Termination, then MTS shall make an additional contribution on
Executive's behalf to Executive's Deferral Account in the MTS Systems
Corporation Executive Deferred Compensation Plan, pursuant to Section
3.4 of said Plan. The amount to which Executive is entitled under
subparagraph 4(a) of this Agreement shall be reduced by MTS's Section
3.4 contribution to the MTS Systems Corporation Executive Deferred
Compensation Plan, as described in subparagraph (v) below. Calculation
of the Executive's benefit shall be as follows:
(i) The benefits to which Executive is entitled, as
of his or her Date of Termination, under all MTS sponsored
pension, profit sharing and deferred compensation plans shall
be added together.
(ii) Amounts in said plans, as determined in
accordance with 29 Code of Federal Regulations ss. 1627.17,
attributable to Social Security, employee contributions,
contributions of prior employers, and rollover contributions,
shall be subtracted from the subparagraph (i) amount and the
resulting figure shall be the "Qualified Retirement Benefit".
(iii) MTS shall determine the lump sum equivalent of
the amount necessary to purchase a straight life annuity for
Executive, effective as of his or her Date of Termination,
which would provide Executive with $44,000 a year for life
(the "ADEA Benefit"). MTS shall retain a certified actuary to
determine said lump sum equivalent amount, using the
applicable mortality table and applicable interest rate under
Section 417(e) of the Internal Revenue Code and Regulations
issued thereunder.
<PAGE>
Sevarance Agreement
Page 5
(iv) If the Qualified Retirement Benefit exceeds the
ADEA Benefit, the Executive shall have the option (but is not
required) to receive the Qualified Retirement Benefit in a
lump sum, as provided under the applicable plans, within 60
days following his or her Date of Termination. The Executive
may elect to receive the Qualified Retirement Benefit in
either a lump sum or a series of periodic payments pursuant to
the terms of the applicable plans. The Executive may also
receive the payments and benefits set forth in subparagraphs
4(a) and (b) of this Agreement provided he executes the
release agreement required in paragraph 9 of this Agreement.
The benefits set forth in subparagraph 4(c) shall at all times
be available to the Executive.
(v) If the Qualified Retirement Benefit is less than
the ADEA Benefit, MTS shall make a contribution to Executive's
Deferral Account in the MTS Systems Corporation Executive
Deferred Compensation Plan, pursuant to Section 3.4 of said
Plan, in an amount equal to the difference between the
Qualified Retirement Benefit and the ADEA Benefit (the
"Qualified Retirement Benefit Supplement"). The Executive
shall have the option (but is not required) to receive the
Qualified Retirement Benefit and, if applicable, the Qualified
Retirement Benefit Supplement from said Plan within 60 days
following his or her Date of Termination. The Executive may
elect to receive the Qualified Retirement Benefit and, if
applicable, the Qualified Retirement Benefit Supplement, in
either a lump sum or a series of periodic payments pursuant to
the terms of the applicable plans. The payments to Executive
described in subparagraph 4(a) of this Agreement shall be
reduced by the amount of MTS's contribution to Executive's
Deferral Account in the MTS Systems Corporation Executive
Deferred Compensation Plan, pursuant to Section 3.4 of said
Plan, to create the Qualified Retirement Benefit Supplement.
All payments remaining in subparagraph 4(a) after this
reduction and the subparagraph 4(b) and (c) benefits shall be
paid to Executive in accordance with the terms of those
subparagraphs, provided Executive executes the release
agreement required in paragraph 9 of this Agreement.
(vi) Executive's Qualified Retirement Benefit and, if
applicable, the Qualified Retirement Benefit Supplement, shall
be nonforfeitable and not subject to reduction or elimination
by MTS for any reason.
5. No Mitigation. Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise; nor shall the amount of any payment or benefit provided for in
this Agreement be reduced by any compensation earned by Executive as the result
of employment by another employer or by retirement benefits after the Date of
Termination or otherwise except as specifically provided herein.
6. Non-Competition and Confidentiality.
(a) Executive agrees that, as a condition of receiving
benefits under this Agreement, he will not render services directly or
indirectly to any competing
<PAGE>
Sevarance Agreement
Page 6
organization located in any market in which MTS is doing business as of
Executive's Date of Termination for the period of time during which
Executive is receiving benefits under this Agreement or the Change in
Control Agreement, in connection with the design, implementation,
development, manufacture, marketing, sale, merchandising, leasing,
servicing or promotion of any "Conflicting Product" which as used
herein means any product, process, system or service of any person,
firm, corporation, organization other than MTS, in existence or under
development, which is the same as or similar to or competes with, or
has a usage allied to, a product, process, system, or service produced,
developed, or used by MTS.
(b) Executive further agrees and acknowledges his or her
existing obligation that, at all times during and subsequent to his or
her employment with MTS, he will not divulge or appropriate to his or
her own use or the uses of others any secret or confidential
information pertaining to the business of MTS, or any of its
subsidiaries, obtained during his or her employment by MTS or any of
its subsidiaries.
(c) If Executive violates his or her obligations under
subparagraphs (a) and (b) above, any remaining payments or benefits
otherwise due Executive pursuant to subparagraphs 4(a) and (b) of this
Agreement shall not be paid. This subparagraph (c) specifically does
not apply to the subparagraph 4(a) reduction amount equal to the
Qualified Retirement Benefit Supplement, as described in subparagraph
4(d)(v).
7. Binding Agreement. This Agreement shall inure to the benefit of and
be enforceable by Executive's personal or legal representatives, heirs, and
designated beneficiaries. If Executive should die while any amount would still
be payable to Executive hereunder if the Executive had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's designated beneficiaries, or, if
there is no such designated beneficiary, to the Executive's estate.
8. Notice of Termination.
(a) Any purported termination of Executive's employment by
either Executive or MTS under this Agreement, except as otherwise
provided in paragraph 2 of this Agreement, shall be communicated by
written notice to the other party.
(b) For purposes of this Agreement, "Date of Termination"
shall mean the date specified in the written Notice of Termination
which shall not be less than 10 nor more than 60 days from the date
such Notice of Termination is given.
(c) Notice of Termination and all other communications
provided for in the Agreement shall be deemed to have been duly given
when delivered or mailed by United States registered or certified mail,
return receipt requested, postage pre-paid, addressed to the last known
residence address of the Executive or in the case of MTS, to its
principal office to the attention of each of the then directors of MTS
with a copy to its Secretary, or to such other address as either party
may have furnished to the
<PAGE>
Sevarance Agreement
Page 7
other in writing in accordance herewith, except that notice of change
of address shall be effective only upon receipt.
9. Release of Claims. Executive's right to the benefits and payments
described in subparagraphs 4(a), (b) and (c) of this Agreement, except as
otherwise provided in subparagraph 4(d)(v) hereof, is contingent upon
Executive's execution of a severance release agreement which shall be provided
to Executive by MTS with or following his or her Notice of Termination. The
severance release agreement shall require a full release of all claims which
Executive may have against MTS or any MTS affiliate or individual associated
with MTS, to the extent permitted by and consistent with applicable laws. Such
release agreement shall prohibit Executive from recovering any amount in
connection with a charge or lawsuit filed against MTS or any MTS affiliate,
employee, shareholder, officer, director or other agent by Executive, EEOC or
any other agency or entity on Executive's behalf based upon any act occurring
prior to execution of said release agreement. The release agreement will be
available for Executive's review, consideration and execution at least 45 days
prior to his or her Date of Termination.
10. Injunctive Relief. Executive consents that, in the case of any
violation or threatened violation of paragraph 6 of this Agreement, MTS may
apply for and secure injunctive relief, temporary or provisional, in court,
without bond but upon due notice, pending final resolution on the merits
pursuant to arbitration as set forth in paragraph 11 hereof. No waiver of any
violation of this Agreement shall be implied from any failure by MTS to take
action under this paragraph.
11. Arbitration. Any and all claims or disputes between Executive and
MTS (including the validity, scope, and enforceability of this paragraph),
except as otherwise provided under paragraph 10 or prohibited under applicable
law, shall be submitted for arbitration and resolution to an arbitrator. No
demand for arbitration may be made after the date when the institution of legal
or equitable proceedings based on such claim or dispute would be barred by the
applicable statute of limitation. The arbitrator shall be selected by mutual
agreement of the parties. Unless otherwise provided for in this Agreement, the
Expedited Labor Arbitration Rules of the American Arbitration Association shall
apply. If the parties are unable to agree upon an arbitrator, any such dispute
shall be solely and finally settled by arbitration in accordance with the
Expedited Labor Arbitration Rules of the American Arbitration Association
("AAA"). The parties agree that no punitive damages shall be awarded hereunder.
The parties also agree that all awards, decisions and remedies in favor of a
winning party hereunder with respect to any issue shall be proportional to the
violation caused by the losing party with respect to that issue. All costs in
conducting the arbitration, including but not limited to the arbitration filing
fee, the arbitrator's fees and expenses, and the reasonable attorney's fees and
expenses of the prevailing party (including the attorney's fees and costs
incurred by the prevailing party in seeking or resisting temporary or
provisional court relief as set out in paragraph 10 above), shall be the
responsibility of the losing party. In the event there is more than one issue in
dispute and there is no one prevailing party with respect to all issues in
dispute, costs and attorney's fees shall be prorated by the arbitrator according
to the relative dollar value of each issue. The arbitrator's Award shall be
final and binding. In the event either party must resort to the judicial process
to enforce the provisions of this Agreement, the award of an arbitrator or
equitable relief
<PAGE>
Sevarance Agreement
Page 8
granted by an arbitrator, the party seeking enforcement shall be entitled to
recover from the other party all costs of litigation including, but not limited
to, reasonable attorney's fees and court costs. The arbitration proceedings and
Award shall be maintained by both parties as strictly confidential, except as
otherwise required by court order and with respect to the parties' attorneys and
tax advisors, and, with respect to MTS, members of its management, and, with
respect to Executive, his or her family.
12. Miscellaneous.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the parties. No waiver by either party hereto
at any time of any breach by the other party to this Agreement of, or
compliance with, any other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
similar time.
(b) No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been
made by either party which are not expressly set forth in this
Agreement.
(c) The validity, interpretation, construction and performance
of this Agreement shall be governed by the laws of the State of
Minnesota.
(d) Any provision of this Agreement which conflicts with
applicable law shall be modified to the extent necessary to ensure its
enforceability. The invalidity or unenforceability or any provision of
this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and
effect.
This Agreement supersedes any and all prior oral and written
understandings and agreements between the Executive and MTS.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the
Executive have executed this Agreement as of the day and date first above
written.
EXECUTIVE: MTS SYSTEMS CORPORATION
/s/ Kathleen M. Staby By /s/ Sidney W. Emery, Jr.
- --------------------- ------------------------
Kathleen M. Staby
Its Chairman and CEO
-----------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.Y
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>CHANGE IN CONTROL AGREEMENT
<TEXT>
EXHIBIT 10.y
CHANGE IN CONTROL AGREEMENT
AGREEMENT made as of this 3rd day of January, 2000 by and between MTS
Systems Corporation, a Minnesota corporation ("MTS") and Kathleen M. Staby (the
"Executive").
WHEREAS, MTS considers the establishment and maintenance of a sound and
vital management to be essential to protecting and enhancing the best interests
of MTS and its shareholders; and
WHEREAS, the Executive has made and is expected to make, due to
Executive's intimate knowledge of the business and affairs of MTS, its policies,
methods, personnel and problems, a significant contribution to the
profitability, growth and financial strength of MTS; and
WHEREAS, MTS, as a publicly held corporation, recognizes that the
possibility of a Change in Control may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of the Executive in the performance of the Executive's
duties to the detriment of MTS and its shareholders; and
WHEREAS, Executive is becoming employed by MTS upon the understanding
that MTS will provide income security if the Executive's employment is
terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of MTS and its stockholders to
reinforce and encourage the continued attention and dedication of management
personnel, including Executive, to their assigned duties without distraction and
to ensure the continued availability to MTS of the Executive in the event of a
Change in Control;
THEREFORE, in consideration of the foregoing and other respective
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. Term of Agreement. This Agreement shall commence on the date hereof
and shall continue in effect until the earlier of (A) the date that any and all
benefits due to Executive under this Agreement upon the happening of the events
set forth herein have been paid and satisfied and all obligations of MTS to the
Executive have been performed or (B) the date the Executive and MTS agree in
writing to terminate this Agreement. Notwithstanding the preceding sentence, if
a Change in Control occurs, this Agreement shall remain in effect for a period
of 36 months from the date of the occurrence of a Change in Control.
<PAGE>
Change in Control Agreement
Page 2
2. Change in Control. If a Change in Control shall have occurred during
the term of this Agreement, the provisions of this Agreement shall become
operative and MTS agrees to employ the Executive and to provide the benefits
stated in this Agreement.
(a) Change in Control, shall, for purposes of this Agreement,
means a change in control of MTS which would be required to be reported
in response to Item 1 of Form 8-K promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), whether or not
MTS is then subject to such reporting requirement, including, without
limitation, if:
(i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act, including any affiliate
or associate as defined in Rule 12(b)-2 under the Exchange Act
of such person, other than MTS, any trustee or other fiduciary
holding securities under an employee benefit plan of MTS, or
any corporation owned, directly or indirectly, by the
stockholders of MTS in substantially the same proportions as
their ownership of stock of MTS) becomes a "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of MTS representing 35% or more of
the combined voting power of MTS' then outstanding securities;
or
(ii) the Board of Directors is comprised of fewer
than 65% of the individuals described in subsection (b) below;
or
(iii) the stockholders of MTS approve a definitive
agreement to merge or consolidate MTS with or into another
corporation or other enterprise in which the holders of
outstanding stock of MTS entitled to vote in elections of
directors immediately before such merger or consolidation hold
less than 80% of the voting power of the survivor of such
merger or consolidation or its parent, or approve a plan of
liquidation; or
(iv) at least 60% of MTS' assets are sold and
transferred to another corporation or other enterprise that is
not a subsidiary, direct or indirect, or other affiliate of
MTS; or
(v) the Board of Directors of MTS determines, by a
vote of a majority of its entire membership, that a tender
offer statement by any person (as defined above) indicates an
intention on the part of such person to acquire control of
MTS.
(b) Board of Directors shall, for purposes of subsection (a),
mean:
(i) individuals who on the date hereof constituted
the Board of MTS, and
<PAGE>
Change in Control Agreement
Page 3
(ii) any new director who subsequently was elected or
nominated for election by a majority of the directors who held
such office immediately prior to a Change in Control.
(c) Friendly Change in Control shall mean a Change in Control
which arises from a transaction or series of transactions authorized,
recommended or approved at the time by formal action of the Board of
Directors.
(d) Unfriendly Change in Control shall mean a Change in
Control that is not a "Friendly Change in Control" as defined above. An
Unfriendly Change in Control shall not thereafter become a Friendly
Change in Control.
3. Termination by Reason of Death or Disability. If Executive's
employment shall be terminated by MTS by reason of death or disability, MTS
shall immediately commence payment to the Executive (or Executive's designated
beneficiaries or estate, if no beneficiary is designated) of any and all
benefits to which the Executive is entitled under MTS retirement and insurance
programs them in effect. Except for such benefits, MTS shall have no further
obligations to Executive under this Agreement.
4. Termination for Cause.
(a) If Executive's employment with MTS shall be terminated by
MTS for Cause as defined below, MTS shall pay to Executive his or her
full base salary through the Date of Termination at the rate in effect
at the time Notice of Termination is given and MTS shall have no
further obligation to Executive under this Agreement.
(b) Termination by MTS of Executive's employment for "Cause"
shall mean termination as a result of:
(i) the conviction of the Executive by a court of
competent jurisdiction for felony criminal conduct; or
(ii) willful gross misconduct or gross negligence in
the performance of his duties by the Executive; or
(iii) material violation by the Executive of any
employment agreement applicable to the Executive.
5. Termination Following Friendly Change in Control.
(a) If, after a Friendly Change in Control, Executive's
employment with MTS shall be terminated (1) by MTS other than for
cause, death or disability or (2) by Executive for Good Reason, then
Executive shall be entitled to the following benefits:
(i) Severance. MTS shall pay the Executive as a
severance payment (the "Severance Payment") an amount equal to
the product of 18 multiplied by the Executive's Monthly Gross
Income as defined below. The
<PAGE>
Change in Control Agreement
Page 4
Severance Payment shall be made in a single lump sum within 30
days after the Date of Termination, subject to all applicable
federal and state withholding.
For purposes of this Agreement, Monthly Gross Income shall
mean the sum of the following amounts:
(A) 1/12 of the highest average base salary
for any 12-consecutive month period during the 36
calendar month period ending immediately prior to the
Date of Termination (without taking into account any
reduction in such base salary that would constitute
Good Reason); plus
(B) the monthly average of the total
Management Variable Compensation (MVC) earned during
the lesser of the 3 most recent or the actual number
of fiscal years participating in the MVC plan ending
immediately prior to the Date of Termination; plus
(C) the product of the average percentage of
MTS profit sharing contributions to the MTS Systems
Corporation Profit Sharing Retirement Plan and Trust
(as a percent of Compensation as defined in the Plan
up to the federal limit) for the lesser of the 3 most
recent or the actual number of participating Plan
Years ending immediately prior to the Date of
Termination multiplied by the sum of (A) and (B)
above.
(ii) Benefits. For an 18-month period after the Date
of Termination, MTS shall continue to pay its portion of
Executive's life and health insurance benefits which the
Executive is receiving immediately prior to the Notice of
Termination. Executive shall be responsible for payment of his
or her portion of the premiums for such benefits. The MTS
portion and the Executive's portion shall be the respective
percentages of such premiums paid immediately prior to the
Date of Termination. Benefits otherwise receivable by
Executive pursuant to this paragraph shall be reduced to the
extent comparable benefits are actually received by Executive
during this period, and any such benefits actually received by
Executive shall be reported to MTS. At the expiration of said
18-month period, Executive shall be entitled to continue any
of said benefits which qualify as group insurance benefits for
continuation coverage under the Comprehensive Omnibus
Reconciliation Act ("COBRA") or applicable state law.
(b) Good Reason. Executive shall be entitled to terminate his
or her employment for Good Reason. For purposes of this Agreement,
"Good Reason" shall mean, without Executive's express written consent,
any of the following:
(i) the assignment to Executive of any duties
inconsistent with Executive's status or position with MTS, or
a substantial alteration in the nature or status of
Executive's responsibilities; or
<PAGE>
Change in Control Agreement
Page 5
(ii) a reduction by MTS in Executive's annual base
salary other than a reduction comparable to other senior
Executives of MTS in connection with a company-wide cost
reduction program; or
(iii) the relocation of MTS' principal executive
offices to a location more than fifty miles from Eden Prairie,
Minnesota or MTS requiring Executive to be based anywhere
other than MTS' principal executive offices except for
required travel on MTS' business to an extent substantially
consistent with Executive's prior business travel obligations;
or
(iv) the failure by MTS to continue to provide
Executive with benefits at least as favorable to those enjoyed
by Executive under any of MTS' pension, life insurance,
medical, health and accident, disability, deferred
compensation, incentive awards, incentive stock options, or
savings plans in which Executive was participating at the time
of the Change in Control, the taking of any action by MTS
which would directly or indirectly materially reduce any of
such benefits or deprive Executive of any material fringe
benefit enjoyed by him or her at the time of the Change in
Control, or the failure by MTS to provide Executive with the
number of paid vacation days to which Executive is entitled at
the time of the Change in Control, provided, however, that MTS
may amend any such plan or programs as long as such amendments
do not reduce any benefits to which Executive would be
entitled upon termination; or
(v) the failure of MTS to obtain a satisfactory
agreement from any successor to assume and agree to perform
this Agreement, as contemplated in Section 12; or
(vi) MTS requests Executive's resignation from
employment; or
(vii) any purported termination of Executive's
employment which is not made pursuant to a Notice of
Termination satisfying the requirements of this Agreement; for
purposes of this Agreement, no such purported termination
shall be effective; or
(viii) any material violation by MTS of this
Agreement.
(c) Voluntary Termination Deemed Good Reason. Notwithstanding
anything herein to the contrary, during the period commencing on the
30th day following a Change in Control (whether Friendly or Unfriendly)
and ending on the 180th day following a Change in Control, Executive
may voluntarily terminate his or her employment for any reason, and
such termination shall be deemed "Good Reason" for all purposes of this
Agreement.
<PAGE>
Change in Control Agreement
Page 6
6. Termination - Unfriendly Change in Control.
(a) If, after an Unfriendly Change in Control, Executive's
employment with MTS is terminated (1) by MTS other than for Cause,
death or disability, or (2) by Executive for Good Reason, the Executive
shall be entitled to the following benefits:
(i) Severance. MTS shall pay the Executive as a
severance payment (the "Severance Payment") an amount equal to
the product of 36 multiplied by the Executive's Monthly Gross
Income as defined in Section 5(a)(i) above. The Severance
Payment shall be made in a single lump sum within 30 days
after the Date of Termination, subject to all applicable
federal and state withholding.
(ii) Benefits. For a 36-month period after the Date
of Termination, MTS shall continue to pay its portion of
Executive's life and health insurance benefits which the
Executive is receiving immediately prior to the Notice of
Termination. Executive shall be responsible for payment of his
or her portion of the premiums for such benefits. The MTS
portion and the Executive's portion shall be the responsive
percentages of such premiums paid immediately prior to the
Date of Termination. Benefits otherwise receivable by
Executive pursuant to this paragraph shall be reduced to the
extent comparable benefits are actually received by Executive
shall be reported to MTS. At the expiration of said 36-month
period, Executive shall be entitled to continue any of said
benefits which qualify as group insurance benefits for
continuation coverage under the Comprehensive Omnibus Budget
Reconciliation Act ("COBRA") or applicable state law.
(b) If the Executive voluntarily terminates his or her
employment other than for Good Reason but more than 180 days after an
Unfriendly Change in Control, Executive shall be entitled to the
following benefits:
(i) Severance. MTS shall pay to Executive as a
severance payment (the "Severance Payment") an amount equal to
the product of 18 multiplied by the Executive's monthly Gross
Income as defined in Section 5(a)(i) above. The Severance
Payment shall be made in a single lump sum within 30 days
after the Date of Termination, subject to all applicable
federal and state withholding.
(ii) Benefits. For 18-month period after the Date of
Termination, MTS shall continue to pay its portion of
Executive's life and health insurance benefits which the
Executive is receiving immediately prior to the Notice of
Termination. Executive shall be responsible for payment of his
or her portion of the premiums for such benefits. The MTS
portion and the Executive's portion shall be the respective
percentages of such premiums paid immediately prior to the
Date of Termination. Benefits otherwise receivable by
Executive pursuant to this paragraph shall be reduced to the
extent comparable benefits are actually received by Executive
during such period,
<PAGE>
Change in Control Agreement
Page 7
and any such benefits actually received by Executive shall be
reported to MTS. At the expiration of said 18-month period,
Executive shall be entitled to continue any of said benefits
which qualify as group insurance benefits for continuation
coverage under the Comprehensive Omnibus Budget Reconciliation
Act ("COBRA") or applicable state law.
7. Additional Benefits. In addition to all other amounts payable and
benefits receivable to Executive upon termination of employment covered under
this Agreement, Executive shall be entitled to the following benefits:
(a) Legal Fees. In the event of any termination of employment
under this Agreement, other than termination for Cause, MTS shall pay
to Executive all legal fees and expenses reasonably incurred by
Executive in contesting or disputing any such termination or in seeking
to obtain or enforce any right or benefit provided by this Agreement.
(b) Retirement Plan. Executive shall, upon termination of
employment, be entitled to receive all benefits payable to the
Executive under the MTS Systems Corporation Profit Sharing Retirement
Plan and any other plan or agreement relating to retirement benefits.
(c) Employee Stock Option Certificate. The Executive's rights
under any existing Employee Stock Option Agreement and any future such
agreements, including particularly his or her right to exercise his or
her option rights following his or her termination of employment, shall
continue to be fully effective hereunder.
8. No Mitigation. Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise, nor shall the amount of any payment or benefit provided for in
this Agreement be reduced by any compensation earned by Executive as the result
of employment by another employer or by retirement benefits after the Date of
Termination, or except as otherwise provided in this Agreement.
9. Potential Excise Tax; Indemnification
(a) Excise Tax. Should any payments hereunder or contemplated
hereby be subject to excise tax pursuant to Section 4999 of the
Internal Revenue Code of 1986, as may be amended, or any successor or
similar provision thereto, or comparable state or local tax laws, MTS
shall pay to the Executive such additional compensation as is necessary
(after taking into account all federal, state and local income taxes
payable by the Executive as a result of the receipt of such
compensation) to place the Executive in the same after-tax position he
would have been in had no such excise tax (or any interest or penalties
thereon) been paid or incurred. MTS shall pay such additional
compensation upon the earlier of:
(i) the time at which MTS withholds such excise tax
from any payments to the Executive; or
<PAGE>
Change in Control Agreement
Page 8
(ii) 30 days after the Executive notifies MTS that
the Executive has paid such excise tax pursuant to a tax
return filed by the Executive which takes the position that
such excise tax is due and payable in reliance on a written
opinion of the Executive's tax counsel that it is more likely
than not that such excise tax is due and payable, or, if
later, the date the IRS notifies Executive that such amount is
due and payable.
Without limiting the obligation of MTS hereunder, the Executive agrees,
in the event the Executive makes any payment pursuant to the preceding
sentence, to negotiate with MTS in good faith with respect to
procedures reasonably requested by MTS which would afford MTS the
ability to contest the imposition of such excise tax; provided,
however, that the Executive will not be required to afford MTS any
right to contest the applicability of any such excise tax to the extent
that the Executive reasonably determines that such contest is
inconsistent with the overall tax interests of the Executive.
MTS agrees to hold in confidence and not to disclose, without the
Executive's prior written consent, any information with regard to the
Executive's tax position which MTS obtains pursuant to this subsection.
(b) Indemnification. MTS will indemnify the Executive (and his
or her legal representative or other successors) to the fullest extent
permitted (including payment of expenses in advance of final
disposition of the proceeding) by the laws of the State of Minnesota,
as in effect at the time of the subject act or omission, or the
Articles of Incorporation and By-Laws of MTS as in effect at such time
or on the date of this Agreement, whichever affords or afforded greater
protection to the Executive; and the Executive shall be entitled to the
protection of any insurance policies MTS may elect to maintain
generally for the benefit of its directors and officers, against all
costs, charges and expenses whatsoever incurred or sustained by him or
her legal representatives in connection with any action, suit or
proceeding to which he (or his or her legal representative or other
successors) may be made a party by reason of his or her being or having
been a director, officer or employee of MTS or any of its subsidiaries
or his or her serving or having served any other enterprise as a
director, officer or employee at the request of MTS, provided that MTS
shall cause to be maintained in effect for not less than six years from
the date of a Change in Control (to the extent available) policies of
directors' and officers' liability insurance of at least the same
coverage as those maintained by MTS on the date of this Agreement and
containing terms and conditions which are no less advantageous than
such policies.
10. Non-Competition and Confidentiality.
(a) Noncompetition. Except as provided in subsection (c)
below, Executive agrees that, as a condition of receiving benefits
under this Agreement, he will not render services directly or
indirectly to any competing organization, wherever located, for a
period of one year following the Date of Termination, in connection
<PAGE>
Change in Control Agreement
Page 9
with the design, implementation, development, manufacture, marketing,
sale, merchandising, leasing, servicing or promotion of any
"Conflicting Product" which as used herein means any product, process,
system or service of any person, firm, corporation, organization other
than MTS, in existence or under development, which is the same as or
similar to or competes with, or has a usage allied to, a product,
process, system, or service produced, developed, or used by MTS.
Executive agrees that violation of this covenant not to compete with
MTS shall result in immediate cessation of all benefits hereunder,
other than insurance benefits, which Executive may continue where
permitted under federal and state law at his or her own expense.
(b) Confidentiality. Executive further agrees and
acknowledges his or her existing obligation that at all times during
and subsequent to his or her employment with MTS, he will not divulge
or appropriate to his or her own use or the uses of others any secret
or confidential information or knowledge pertaining to the business of
MTS, or any of its subsidiaries, obtained during his or her employment
by MTS or any of its subsidiaries.
(c) Waiver - Unfriendly Change in Control. Notwithstanding
anything herein to the contrary: the restriction on competition under
subsection (a) shall not apply if the Executive's employment terminates
following an Unfriendly Change in Control. Furthermore, in such event,
MTS waives any other restriction on Executive's employment and consents
unconditionally to any employment Executive may subsequently obtain.
11. Funding of Payments. In order to assure the performance of MTS or
its successor of its obligations under this Agreement, MTS may deposit in a
so-called "rabbi" trust an amount equal to the maximum payment that will be due
the Executive under the terms hereof; provided, however, that MTS shall deposit
in trust the amount equal to the maximum payment due Executive immediately upon
an Unfriendly Change in Control. Under such written trust instrument, the
Trustee shall be instructed to pay to the Executive (or the Executive's legal
representative, as the case may be) the amount to which the Executive shall be
entitled under the terms hereof, and the balance, if any, of the trust not so
paid or reserved for payment shall be repaid to MTS. If MTS deposits funds in
trust, payment shall be made no later than the occurrence of a Change in
Control. The written instrument governing the trust shall be irrevocable from
and after such Change in Control and shall contain such provisions protective of
the Executive as are contained in similar trust agreements approved by the
Internal Revenue Service in published private letter rulings (provided that the
assets of the trust shall be reachable by creditors of MTS as required by such
rulings). The trustee shall be a national bank selected by MTS with the consent
of the Executive, with trust powers and whose principal officers are located in
the Minneapolis/St. Paul metropolitan area. The trustee shall invest the assets
of the trust in any readily marketable securities of U.S. corporations (other
than MTS, its successor, or any affiliate of MTS or its successor). If and to
the extent there are not amounts in trust sufficient to pay Executive under this
Agreement, MTS shall remain liable for any and all payments due to Executive.
12. Successors; Binding Agreement.
<PAGE>
Change in Control Agreement
Page 10
(a) Successors. MTS will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of MTS to expressly
assume and agree to perform this Agreement in the same manner and to
the same extent that MTS would be required to perform it if no such
succession had taken place. Failure of MTS to obtain such assumption
and agreement prior to the effectiveness of any such succession shall
be a breach of this Agreement and shall entitle Executive to
compensation from MTS in the same amount and on the same terms as he
would be entitled hereunder if he terminated his or her employment for
Good Reason following a Change in Control, except that for purposes of
implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Date of Termination.
(b) Binding Agreement. This Agreement shall inure to the
benefit of and be enforceable by Executive's personal or legal
representatives, successors, heirs, and designated beneficiaries. If
Executive should die while any amount would still be payable to
Executive hereunder if the Executive had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to the Executive's designated
beneficiaries or, if there is no such designated beneficiary, to the
Executive's estate.
13. Notice.
(a) Form and Delivery. All notices and other communications
provided for in the Agreement shall be in writing and shall be deemed
to have been duly given when delivered or mailed by United States
registered or certified mail, return receipt requested, postage
prepaid, addressed to the last known residence address of the Executive
or in the case of MTS, to its principal office to the attention of each
of the then directors of MTS with a copy to its Secretary, or to such
other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address
shall be effective only upon receipt.
(b) Notice of Termination. Any purported termination of
Executive's employment by MTS or by Executive shall be communicated by
written Notice of Termination to the other party hereto, which shall
indicate the specific termination provision in this Agreement relied
upon and shall set forth the facts and circumstances claimed to provide
a basis for termination of Executive's employment.
(c) Date of Termination. For purposes of this Agreement, "Date
of Termination" shall mean the date specified in the Notice of
Termination which shall not be less than 10 nor more than 30 days,
respectively, from the date such Notice of Termination is given.
(d) Dispute of Termination. If, within 10 days after any
Notice of Termination is given, the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning
the termination, the Date of Termination shall be the date on which the
dispute is finally determined, either by mutual written
<PAGE>
Change in Control Agreement
Page 11
agreement of the parties, or by a final judgment, order or decree of a
court of competent jurisdiction (which is not appealable or the time
for appeal therefrom having expired and no appeal having been
perfected); provided, that the Date of Termination shall be extended by
a notice of dispute only if such notice is given in good faith and the
party giving such notice pursues the resolution of such dispute with
reasonable diligence in accordance with Section 14 below.
Notwithstanding the pendency of any such dispute, MTS shall continue to
pay Executive full compensation in effect when the notice giving rise
to the dispute was given (including, but not limited to, base salary)
and continue Executive as a participant in all compensation, benefit
and insurance plans in which the Executive was participating when the
notice giving rise to the dispute was given, until the dispute is
finally resolved in accordance with this subsection or at the end of a
period of 180 days, whichever first occurs. Amounts paid under this
subsection are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts
under this Agreement.
14. Arbitration. Any dispute arising under or in connection with this
Agreement (including without limitation, the making of this Agreement or the
Executive's termination of employment) shall be resolved by final and binding
arbitration to be held in Minneapolis, Minnesota in accordance with the rules
and procedures of the American Arbitration Association. The parties shall select
a mutually acceptable single arbitrator to resolve the dispute or if they fail
or are unable to do so, each side shall within the following ten business days
select a single arbitrator and the two so selected shall select a third
arbitrator within the following ten business days. The arbitrator shall have no
power to award any punitive or exemplary damages. The arbitrator may construe or
interpret, but shall not ignore or vary the terms of this Agreement, and shall
be bound by controlling law. The arbitration award or other resolution may be
entered as a judgment at the request of the prevailing party by any court of
competent jurisdiction in Minnesota or elsewhere.
15. Miscellaneous.
(a) Modification and Waiver. Except as otherwise specifically
provided in this Agreement, no provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing and signed by the parties. No waiver
by either party hereto at any time of any breach by the other party to
this Agreement of, or compliance with, any other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or similar time.
(b) Entire Agreement. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter
hereof have been made by either party which are not expressly set forth
in this Agreement.
(c) Governing Law. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the
State of Minnesota.
<PAGE>
Change in Control Agreement
Page 12
(d) Severability. The invalidity or unenforceability or any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the
Executive have executed this Agreement as of the day and date first above
written.
EXECUTIVE: MTS SYSTEMS CORPORATION
/s/ Kathleen M. Staby By /s/ Sidney W. Emery, Jr.
- --------------------- ------------------------
Kathleen M. Staby
Its Chairman and CEO
----------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>2000 ANNUAL REPORT
<TEXT>
EXHIBIT 13
SIX YEAR FINANCIAL SUMMARY
(SEPTEMBER 30)
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBERS OF SHAREHOLDERS AND EMPLOYEES)
OPERATIONS(5)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue $ 391,853 $ 390,542 $362,163 $ 323,424 $278,170 $ 247,793
United States revenue 194,056 200,556 200,490 156,877 140,249 136,862
International revenue 197,797 189,986 161,673 166,547 137,921 110,931
Gross profit 134,000 151,171 142,227 132,073 116,047 99,923
Income before income taxes 6,095 18,770 33,448 29,986(1) 21,813 15,244
Net income 3,624 12,445 21,539 19,237(1) 15,170 11,105
Net income per share, diluted basis .17 .59 1.01 .92(1) .72 .55
Research and development expense 24,619 26,966 24,348 19,798 19,776 15,471
Net interest expense 4,892 4,597 1,948 1,125 1,123 2,424
Depreciation and amortization 15,294 14,424 10,880 9,608 8,673 7,912
FINANCIAL POSITION
- --------------------------------------------------------------------------------------------------------------------------------
Current assets $ 225,273 $ 223,651 $204,311 $ 162,814 $137,584 $ 138,159
Current liabilities 108,648 104,713 110,223 83,413 63,465 69,312
Current ratio 2.1:1 2.1:1 1.9:1 2.0:1 2.2:1 2.0:1
Net working capital 116,625 118,938 94,088 79,401 74,119 68,847
Property and equipment, net 72,081 73,633 69,942 51,790 49,476 49,465
Total assets 330,234 333,347 313,022 229,075 197,679 198,320
Interest bearing debt 75,712 71,637 74,682 12,865 11,836 22,965
Shareholders' investment 157,854 162,859 152,689 133,524 120,578 113,311
Shareholders' investment per share 7.61 7.80 7.39 6.56 5.90 5.54
OTHER STATISTICS AND RATIOS
- --------------------------------------------------------------------------------------------------------------------------------
Diluted shares outstanding(2) 20,935 21,184 21,330 20,945 21,184 20,258
Number of common shareholders of record 2,229(3) 2,055 1,760 1,575 1,523 1,395
Number of employees 2,350 2,436 2,424 2,125 1,866 1,729
New orders $ 415,879 $ 350,190 $352,282 $ 380,870 $302,824 $ 261,487
Backlog of orders $ 162,955 $ 146,833 $187,185 $ 190,784 $130,621 $ 105,967
Gross profit percent 34.2% 38.7% 39.3% 40.8% 41.7% 40.3%
Research and development costs
as a percent of net revenue 6.3% 6.9% 6.7% 6.1% 7.1% 6.2%
Net income as a percent of net revenue .9% 3.2% 5.9% 5.9%(1) 5.5% 4.5%
Effective tax rate 41% 34% 36% 36% 31% 27%
Interest bearing debt to shareholders'
investment percent 48.0% 44.0% 48.9% 9.6% 9.8% 20.3%
Return on average net assets(4) 4.9% 10.7% 20.9% 22.7% 17.6% 13.2%
Return on beginning
shareholders' investment per share 2.2% 8.0% 15.4% 15.6%(1) 13.0% 10.6%
Cash dividends paid per share $ .24 $ .24 $ .24 $ .20 $ .16 $ .14
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) EXCLUDES AN AFTER-TAX GAIN OF $2,654,000 FROM THE SALE OF LAND IN MAY 1997,
WHICH IS EQUAL TO $.13 PER SHARE.
(2) PRESENTED ON A WEIGHTED AVERAGE BASIS OF COMMON SHARES ASSUMING CONVERSION
OF POTENTIAL COMMON SHARES DURING EACH YEAR AFTER RETROACTIVE ADJUSTMENTS FOR
ISSUED SHARES, FOR STOCK SPLITS AND FOR REDUCTION OF SHARES FROM TREASURY STOCK
PURCHASES (IN THOUSANDS OF SHARES).
(3) ON DECEMBER 4, 2000, THERE WERE 2,229 COMMON SHAREHOLDERS OF RECORD, WITH
ANOTHER ESTIMATED 3,000 BENEFICIAL SHAREHOLDERS WHOSE STOCK IS HELD BY NOMINEES
OR BROKER DEALERS.
(4) (INCOME BEFORE INCOME TAXES PLUS NET INTEREST EXPENSE) DIVIDED BY (AVERAGE
QUARTERLY ASSETS MINUS NON-INTEREST BEARING LIABILITIES).
(5) ALL AMOUNTS HAVE BEEN RESTATED TO REFLECT THE 1999 ACQUISITION OF DSP
TECHNOLOGY, INC., ACCOUNTED FOR UNDER THE POOLING-OF-INTEREST METHOD.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All amounts have been restated to reflect the 1999 acquisition of DSP
Technology, Inc., accounted for under pooling-of-interest method.
BACKLOG/NEW ORDERS
2000 1999 1998
--------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
New Orders:
North America* $ 233,679 $ 196,367 $ 195,206
International 182,200 153,823 157,076
--------------------------------------------------------------
Total $ 415,879 $ 350,190 $ 352,282
--------------------------------------------------------------
Backlog $ 162,955 $ 146,833 $ 187,185
--------------------------------------------------------------
*INCLUDES U.S. AND CANADA
Orders in 2000 of $415.9 million increased $65.7 million or 18.8% from 1999.
This is compared to orders for 1999 of $350.2 million which represents a
decrease of $2.1 million or .6% from the previous year. Orders in 2000 included
an $18.6 million contract with one customer within the MT&S sector. There were
no orders over $10 million in 1999 or 1998.
In 2000, new orders for the Mechanical Test and Simulation sector
(MT&S) were $314.9 million representing an increase of $37.5 million or 13.5%.
This is compared to orders for 1999 of $277.4 million which represents an
increase of $3.6 million or 1.3% from the previous year. Orders from the ground
vehicle industry and for aerospace applications were particularly strong in
2000. Orders from the Asian/Pacific region, especially Japan, were very strong
compared to 1999 for Vehicle Testing Systems and Aerospace applications. Orders
in 2000 from Europe were consistent with levels in 1999.
New orders in the Factory Automation sector (FA) in 2000 of $101.0
million increased $28.2 million or 38.7% from 1999. This is compared to orders
for 1999 of $72.8 million which represents a decrease of $5.7 million or 7.3%
from the previous year. The European and Japanese markets for FA products
continued solid growth in 2000. Orders for industrial automation applications
(servo motors, amplifiers and motion controllers) and industrial sensors were
strong, reversing the 1999 and 1998 soft North American market.
North American orders for 2000 of $233.7 increased $37.3 million or
19.0% from 1999. This is compared to orders for 1999 of $196.4 which represents
an increase of $1.2 million or .6% from the previous year. International orders
for 2000 of $182.2 million increased $28.4 million or 18.5% from 1999. This is
compared to orders for 1999 of $153.8 million which represents a decrease of
$3.3 million or 2.1% from the previous year. The increase in international
orders was due to the strong MT&S activity in Asia. See Geographic Analysis of
New Orders (below) for the percentage breakdown by geographic area.
The backlog of undelivered orders at September 30, 2000 amounted to
$163.0 million, representing an increase of $16.1 million or a 11.0% from 1999.
The order backlog for 1999 of $146.8 million decreased $40.4 million or 21.6%
from the previous year.
NET REVENUE
2000 1999 1998
--------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
United States $ 194,056 $ 200,556 $ 200,490
International 197,797 189,986 161,673
--------------------------------------------------------------
Total $ 391,853 $ 390,542 $ 362,163
--------------------------------------------------------------
Record 2000 net revenue of $391.9 million increased $1.3 million or .3% from
1999.This is compared to net revenue for 1999 of $390.5 which represents an
increase of $28.4 million or 7.8% from the previous year. For 2000, MT&S revenue
of $302.4 million decreased $11.3 million or 3.6% from 1999. This is compared to
net revenue for 1999 of $313.7 which represents an increase of $25.9 million or
9.0% from the previous year. FA net revenue for 2000 of $89.5 million increased
$12.6 million or 16.5% from the previous year. This is compared to net revenue
for 1999 of $76.9 million which represents an increase of $2.5 million or 3.3%
from the previous year. For industry sector and geographic information, see
Note 2 of "Notes to Consolidated Financial Statements."
Net revenue in the United States for 2000 of $194.1 million decreased
$6.5 million or 3.2% from 1999. This is compared to net revenue for 1999 of
$200.6 which remained relatively flat with the previous year's net revenue.
International net revenue for 2000 of $197.8 increased $7.8 million or 4.1% from
1999. This is compared to net revenue for 1999 of $190.0 million which
represents an increase of $28.3 million or 17.5% from the previous year.
International revenue grew at a faster rate from 1998 to 1999 and 2000
reflective of improved economic conditions, a broader product offering, and
stronger vehicle dynamics and aerospace activity.
The MT&S sector revenue decrease from 1999 to 2000 is attributable to a
reduction in demand for our electromechanical test products and powertrain
systems sold by the recently acquired DSPT business to the vehicle markets. The
MT&S sector revenue increase of $25.9 million from 1999 to 1998 reflected
positive worldwide demand from our ground vehicle customers and solid growth in
entertainment projects.
The FA sector revenue increase of $12.6 million over the previous year
was a result of strong European demand for sensors and an expansion of our
product line offerings for amplifiers, servo-electric motors and motion control
products. Strong order demand and associated revenues were the result of sales
to microchip, pick-in-place and injection molding machine manufacturers.
Selective price changes were implemented in all three years. However,
the overall impact of pricing changes did not have a material effect on reported
revenue volume.
GEOGRAPHIC ANALYSIS OF NEW ORDERS
2000 1999 1998
-------------------------------------------------------------
North America 56% 56% 55%
-------------------------------------------------------------
Europe/Africa/Middle East 26 30 29
-------------------------------------------------------------
Asia Pacific/Japan 18 13 14
-------------------------------------------------------------
Latin America/Rest of the World 0 1 2
-------------------------------------------------------------
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GROSS PROFIT
2000 1999 1998
--------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Gross Profit $ 134,000 $ 151,171 $ 142,227
--------------------------------------------------------------
% of Net Revenue 34.2% 38.7% 39.3%
--------------------------------------------------------------
The gross profit percentage for 2000 decreased to 34.2% from 38.7% in 1999 and
39.3% in 1998. This decline in gross profit percentage was caused by higher than
expected costs to complete certain custom entertainment and large complex
custom projects. The decrease in gross profit margins in 1999 to 1998 was
attributable to differing margins on the mix of products sold.
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES
2000 1999 1998
--------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Selling Expense $ 61,654 $ 61,490 $ 56,479
General &
Administrative Expense 34,684 32,276 27,833
--------------------------------------------------------------
Total $ 96,338 $ 93,766 $ 84,312
--------------------------------------------------------------
% of Net Revenue 24.6% 24.0% 23.3%
--------------------------------------------------------------
Selling and general & administrative (SG&A) expenses for 2000 as a percentage of
net revenue was .6% higher than 1999 and 1.3% higher than 1998. Full year
spending for 2000 totaled $96.3 million, which represented an increase of $2.6
million or 2.7% over 1999 and an increase of $9.5 million or 11.2% over 1998.
All three years were similar in that cost control and alignment of
existing resources with markets having the greatest potential were heavily
emphasized. Increases in administrative expense and selling expenses in 2000
from 1999 were realized in the FA segment, and reduced in the MT&S segment. The
administrative expenses for 2000 also include a provision of $1.8 million
associated with the closure of the laboratory instrument business.
RESEARCH AND DEVELOPMENT EXPENSE
2000 1999 1998
--------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
R & D Expense $ 24,619 $ 26,966 $ 24,348
--------------------------------------------------------------
% of Net Revenue 6.3% 6.9% 6.7%
--------------------------------------------------------------
The Company provides funds for product, system and application developments
(R&D) in both the MT&S and FA sectors. The majority of the R&D expenditures in
all three years were for new systems and system components such as software,
controls and mechanical products; new measurement products; servo motors and
amplifiers; and accessories.
The R&D as a percentage of net revenue reflected above are
representative of the range the Company normally commits to in its annual
planning process. The decline in expenditures in 2000 from 1999 is due to
specific decisions to curtail certain R&D programs that did not have adequate
return on investment. These programs were generally reduced in the MT&S segment.
INCOME
2000 1999 1998
--------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
Income Before
Income Taxes $ 6,095 $18,770 $ 33,448
--------------------------------------------------------------
% of Net Revenue 1.6% 4.8% 9.2%
--------------------------------------------------------------
Net Income $ 3,624 $12,445 $ 21,539
--------------------------------------------------------------
% of Net Revenue .9% 3.2% 5.9%
--------------------------------------------------------------
Effective Tax Rate 41% 33.7% 35.6%
--------------------------------------------------------------
Return On Beginning
Shareholder's Investment
Per Share 2.2% 8.0% 15.4%
--------------------------------------------------------------
Basic Earnings Per Share $ .17 $ .60 $ 1.05
--------------------------------------------------------------
Diluted Earnings Per Share $ .17 $ .59 $ 1.01
--------------------------------------------------------------
Income before income taxes (pre-tax income) in 2000 of $6.1 million decreased
$12.7 million or 67.5% from 1999. This is compared to a pre-tax for 1999 of
$18.8 million which represents a decrease of $14.7 million or 43.9% from the
previous year. 2000 pre-tax income included a $1.2 million provision for closure
of the laboratory business classified as restructuring, and an additional $1.8
million for the same action included in administrative expenses.
1999 pre-tax income included $5.7 million for restructuring (see note 8
of "Notes to Consolidated Financial Statements") and $1.4 million for
acquisition expenses (see Note 7 of "Notes to Consolidated Financial
Statements"). Also, leading to a decline in the 2000 pre-tax income was higher
interest expense due to higher interest rates in 2000. Interest income of $1.5
million was $1.0 million higher than 1999 and was a direct result of a $.7
million receipt of interest from a prior period tax overpayment.
16
<PAGE>
The MT&S 2000 income from operations, before one-time restructuring
charge of $1.2 million and $1.8 million related general and administrative
expense was $6.3 million. This is a decrease of $17.6 million or 73.5% from
1999. The decrease in income from operations reflects the leveraged effect of a
5.5% decline in gross mar gin percent resulting from cost overruns and a 3.6%
decrease in sector revenue, both discussed previously. FA 2000 income from
operations of $8.6 million increased $2.2 million or 34.4% from 1999 reflecting
strong revenue growth.
Net income in 2000 decreased $8.8 million or 70.9% from 1999 to $3.6
million or $.17 per diluted share (includes $.09 for restructuring and related
general and administrative expenses). Net income in 1999 decreased $9.1 million
or 42.2% from 1998.
The effective tax rate is influenced by the level of tax credits
available from the Company's Foreign Sales Corporation and qualified R&D
expense; and on the level of foreign-sourced income which is taxed at a higher
rate than domestic-sourced income. 2000 had a higher level of foreign-sourced
income than 1999 or 1998 contributing to the higher tax rate.
FOREIGN CURRENCIES EFFECTS
The Company is exposed to market risk from changes in foreign currency exchange
rates which can affect its results from operations and financial condition. To
minimize that risk, the Company manages exposure to changes in foreign currency
rates through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments, principally
forward exchange contracts. Foreign exchange contracts are used to hedge the
Company's overall exposure to exchange rate fluctuations, since the gains and
losses on these contracts offset gains and losses on the assets, liabilities,
and transactions being hedged.
Approximately 50% of the Company's revenue occurs outside of the
United States and about 65% (approximately 30% of the Company's net revenue) of
these revenues are denominated in currencies other than the U.S. dollar. As a
result, a strengthening of the U.S. dollar decreases translated foreign currency
denominated revenues and earnings. Conversely, weakening of the U.S. dollar has
the reverse impact on revenues and earnings. During 2000, 1999 and 1998, the
U.S. dollar was generally stronger against other major currencies. Gains and
losses attributed to translating the financial statements for all non-U.S.
subsidiaries are included in the currency translation adjustments. The gains and
losses on forward exchange contracts used to hedge these exposures, are included
in other expense (income).
LIQUIDITY AND CAPITAL RESOURCES
2000 1999 1998
---------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
Total Interest
Bearing Debt $ 75,712 $ 71,637 $ 74,682
% of Total
Capitalization 32.4% 30.5% 32.8%
---------------------------------------------------------------
Shareholders'
Investment $ 157,854 $162,859 $ 152,689
---------------------------------------------------------------
Per Share $ 7.61 $ 7.80 $ 7.39
---------------------------------------------------------------
At September 30, 2000, the Company's capital structure was comprised of $17.6
million of current debt, $58.1 million of long-term debt and $157.8 million of
shareholders' investment. The ratio of total debt to total capitalization was
32.4% compared to 30.5% at September 30, 1999.
Total debt increased $4.1 million during 2000 to $75.7 million. This
resulted from an increase of $6.2 million in notes payable and the current
portion of long term debt offset by a $2.1 million payment of long term debt.
Shareholders' investment decreased $5.0 million in 2000 to $157.9
million. The decrease was a result of a $5.0 million dividend payment, a $2.2
million treasury stock purchase, and a $2.5 million reduction in accumulated
other comprehensive income. These decreases were offset by a $3.6 million
increase in retained earnings from the current years net earnings and $1.0
million from the Company's employee stock option and purchase plan.
The Company believes that the combination of present capital resources,
internally generated funds, and unused financing sources will be adequate to
finance on-going operations, allow for reinvestment in the business and
strategic acquisitions.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CASH FLOWS
During 2000, $3.0 million of cash was generated from operating activities,
compared with $26.7 million generated in 1999 and $3.1 million used in 1998. The
decrease in 2000 was primarily due to an increase in inventory of $6.8 million,
an increase in accounts receivable of $9.6 million, and likewise a decrease in
customer advanced billings of $5.9 million from the prior year.
In addition to cash generated from operating activities, the Company
obtained an additional $1.9 million in short-term debt and $3.3 million in net
long-term debt. These cash flows were primarily used to support $13.2 million
for capital expenditures and other assets, $2.2 million for stock repurchases,
and $5.0 million for dividend payments. Cash and cash equivalents decreased $9.9
million during 2000.
Capital expenditures for property, plant, and equipment totaled $12.4
million in 2000, compared to $16 million in 1999 and $25.5 million in 1998.
Capital spending in 2001 is planned to be about $8.3 million. Planned
expenditures include investments in facilities and manufacturing equipment. It
is anticipated that 2001 capital expenditures will be financed primarily with
funds from operations.
DIVIDENDS
The Company's dividend policy is to maintain a payout ratio, which allows
dividends to increase with the long-term growth of earnings per share, while
sustaining dividends in down years. The Company's dividend payout ratio target
is about 25 percent of earnings per share over the long term. The current
quarterly dividend of 6 cents per share equates to 40.7% of the 1998 through
2000 average net earnings per share.
SHARE REPURCHASE PLAN
In 2000, the Company repurchased 299,000 shares of common stock on the open
market for $2.2 million, at an aver age cost of $7.28 per share. In 1999, the
Company repurchased 8,292 shares of common stock on the open market for $.1
million, at an average cost of $11.36 per share. The Company's purpose for share
repurchases is to offset the dilutive effect of shares of common stock issued
from the Company's stock option and stock purchase plans, and for other
corporate stock-based programs. During the past two years, the Company issued
398,000 shares of its common stock from these stock option and stock purchase
plans.
In November 1996, the Company's Board of Directors authorized the
repurchase of 1,000,000 shares of common stock in the open market within the
Securities and Exchange Commission guidelines. At September 30, 2000, the number
of shares which remained under this authorization were 232,488.
QUARTERLY STOCK ACTIVITY(1)
The Company's common shares trade on The Nasdaq Stock Market's National Market
under the symbol MTSC. The following table sets forth the high, low and volume
of shares traded (expressed in thousands) for the periods indicated:
2000 1999
----------------------------------------------------------------------
Shares Shares
High Low Traded High Low Traded
----------------------------------------------------------------------
1st Quarter 10 5/8 7 1/2 3,526 15 7/16 10 7/8 2,631
2nd Quarter 9 19/32 5 3/8 4,318 14 3/8 9 5/8 2,486
3rd Quarter 7 7/8 6 3/16 4,648 13 1/4 9 13/16 2,379
4th Quarter 7 1/2 6 3,385 14 5/8 10 3,259
----------------------------------------------------------------------
(1) SOURCE: THE NASDAQ STOCK MARKET
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarter-to-quarter revenue and earnings comparisons do not necessarily reflect
changes in the demand for the Company's products or its operating efficiency.
Revenues and earnings in any quarter can be significantly affected by delivery
delays or acceleration of one or more high-value systems, not accounted for
using the percentage-of-completion accounting method. The use of the
percentage-of-completion revenue recognition method for large long-term projects
helps alleviate those fluctuations. (See Note 1 of "Notes to Consolidated
Financial Statements"). High-value, state-of-the-art custom orders can also
contain leading-edge applications of the Company's technology, which in some
cases have resulted in lower gross profit margins, albeit not necessarily low
marginal profit contribution. Product development in these state-of-the-art
custom orders is as essential to the Company's long term growth as is Company
funded research and development.
Quarterly earnings also vary based on the use of estimated, effective
income tax rates for providing federal, state, and foreign income taxes. See
Note 4 of "Notes to Consolidated Financial Statements" for more information on
the Company's income taxes.
EURO CONVERSION
On January 1, 1999, certain member countries of the European Economic and
Monetary Union (EMU) adopted the "Euro" as a form of common currency. For a
three-year transition period, both the Euro and individual participants'
currencies will remain in use. The Company is upgrading systems, where
necessary, to properly handle the Euro. The Company's European operations will
begin reporting in Euro currency in October, 2001. Effective January 1, 1999,
the Company began processing Euro transactions with its customers. The cost of
addressing the Euro conversion did not have a material impact on the Company's
financial condition or operating results.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selected quarterly financial information, for the three fiscal years ended
September 30, 2000, is presented below.
<TABLE>
<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
Net revenue $ 87,214 $ 95,291 $ 94,988 $114,360 $391,853
Gross profit 22,786 34,470 34,797 41,947 134,000
Income (loss) before income taxes (9,221) 2,213 5,831 7,272 6,095
- ----------------------------------------------------------------------------------------------
Net income (loss) $ (6,040) $ 1,371 $ 3,697 $ 4,596 $ 3,624
- ----------------------------------------------------------------------------------------------
Net income (loss) per share
Basic $ (.29) $ .07 $ .18 $ .18 $ .17
Diluted (.29) .07 .18 .18 .17
- ----------------------------------------------------------------------------------------------
1999
Net revenue $ 96,142 $ 93,262 $ 95,363 $105,775 $390,542
Gross profit 38,064 36,775 37,818 38,514 151,171
Income before income taxes 5,722 4,666 8,269 113 18,770
- ----------------------------------------------------------------------------------------------
Net income $ 3,726 $ 3,146 $ 5,293 $ 280 $ 12,445
- ----------------------------------------------------------------------------------------------
Net income per share
Basic $ .18 $ .15 $ .25 $ .01 $ .60
Diluted .18 .15 .25 .01 .59
- ----------------------------------------------------------------------------------------------
1998
Net revenue $ 80,338 $ 87,160 $ 91,899 $102,766 $362,163
Gross profit 33,753 34,560 35,691 38,223 142,227
Income before income taxes 7,937 8,009 8,521 8,981 33,448
- ----------------------------------------------------------------------------------------------
Net income $ 5,192 $ 4,921 $ 5,667 $ 5,759 $ 21,539
- ----------------------------------------------------------------------------------------------
Net income per share(1)
Basic $ .25 $ .24 $ .28 $ .28 $ 1.05
Diluted .24 .23 .27 .27 1.01
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Net income per share has been restated retroactively for the two-for-one
stock split effective February 2, 1998.
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
(SEPTEMBER 30)
<TABLE>
<CAPTION>
ASSETS 2000 1999
- -------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,211 $ 18,083
Accounts receivable, net of allowance for doubtful
accounts of $2,255 and $2,232 117,866 102,011
Unbilled contracts and retainage receivable 26,765 38,628
Inventories 62,520 56,948
Prepaid expenses 9,911 7,981
- -------------------------------------------------------------------------------------
Total current assets 225,273 223,651
- -------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Land 3,247 3,247
Buildings and improvements 44,733 42,332
Machinery and equipment 107,325 101,140
Accumulated depreciation (83,224) (73,086)
- -------------------------------------------------------------------------------------
Total property and equipment, net 72,081 73,633
- -------------------------------------------------------------------------------------
OTHER ASSETS 32,880 36,063
- -------------------------------------------------------------------------------------
Total Assets $ 330,234 $ 333,347
- -------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT 2000 1999
- -------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 11,945 $ 10,071
Current maturities of long-term debt 5,663 1,308
Accounts payable 22,755 21,062
Accrued compensation and benefits 29,285 28,662
Dividends Payable 1,251 --
Advance billings to customers 18,673 25,943
Accrued warranty 6,487 5,089
Other accrued liabilities 12,589 12,578
- -------------------------------------------------------------------------------------
Total current liabilities 108,648 104,713
- -------------------------------------------------------------------------------------
Deferred income taxes 5,628 5,517
Long-term debt, less current maturities 58,104 60,258
- -------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
SHAREHOLDERS' INVESTMENT:
Common stock, 25(cent) par; 64,000,000 shares authorized:
20,748,288 and 20,883,639 shares issued and outstanding 5,187 5,221
Additional paid-in capital 7,072 8,122
Retained earnings 146,228 147,555
Accumulated other comprehensive income (loss) (633) 1,961
- -------------------------------------------------------------------------------------
Total shareholders' investment 157,854 162,859
- -------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Investment $ 330,234 $ 333,347
- -------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated balance sheets.
20
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND SHAREHOLDERS' INVESTMENT
(FOR THE YEARS ENDED SEPTEMBER 30)
INCOME 2000 1999 1998
- --------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
NET REVENUE $ 391,853 $ 390,542 $ 362,163
COST OF REVENUE 257,853 239,371 219,936
- --------------------------------------------------------------------
GROSS PROFIT 134,000 151,171 142,227
- --------------------------------------------------------------------
OPERATING EXPENSES:
Selling 61,654 61,490 56,479
General and administrative 34,684 32,276 27,833
Research and development 24,619 26,966 24,348
Restructuring 1,210 5,711 --
Acquisition -- 1,391 --
- --------------------------------------------------------------------
INCOME FROM OPERATIONS 11,833 23,337 33,567
- --------------------------------------------------------------------
Interest expense 6,371 5,067 2,327
Interest income (1,479) (470) (379)
Other expense (income), net 846 (30) (1,829)
- --------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 6,095 18,770 33,448
PROVISION FOR INCOME TAXES 2,471 6,325 11,909
- --------------------------------------------------------------------
NET INCOME $ 3,624 $ 12,445 $ 21,539
- --------------------------------------------------------------------
NET INCOME PER SHARE
Basic $ .17 $ .60 $ 1.05
Diluted .17 .59 1.01
- --------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
Common Stock Accumulated
---------------------- Additional Other Total
Shares Paid-In Retained Comprehensive Shareholders'
Issued Amount Capital Earnings Income (Loss) Investment
- ---------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1997 11,213,471 $ 2,803 $ 4,012 $ 124,973 $ 1,736 $ 133,524
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 21,539
Foreign currency translation 189
Total Comprehensive income 21,728
Stock split 2 for 1 9,204,424 2,301 (2,301)
Exercise of stock options 300,091 75 3,405 3,480
Common stock purchased and retired (60,800) (15) (1,599) (1,614)
Cash dividends, 24(cent) per share (4,429) (4,429)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 20,657,186 $ 5,164 $ 5,818 $ 139,782 $ 1,925 $ 152,689
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 12,445
Foreign currency translation 36
Unrealized loss on investment, net of tax (60)
Total Comprehensive income 12,421
Exercise of stock options 234,745 59 2,396 2,455
Common stock purchased and retired (8,292) (2) (92) (94)
Cash dividends, 24(cent) per share (4,612) (4,612)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 20,883,639 $ 5,221 $ 8,122 $ 147,555 $ 1,961 $ 162,859
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 3,624
Foreign currency translation (2,594)
Unrealized loss on investment, net of tax 54
Total Comprehensive income 1,084
Exercise of stock options 163,649 41 1,048 1,089
Common stock purchased and retired (299,000) (75) (2,098) (2,173)
Cash dividends, 24(cent) per share (5,005) (5,005)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000 20,748,288 $ 5,187 $ 7,072 $ 146,228 $ (633) $ 157,854
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
21
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(FOR THE YEARS ENDED SEPTEMBER 30)
<TABLE>
<CAPTION>
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,624 $ 12,445 $ 21,539
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 15,294 14,424 10,880
Deferred income taxes 455 889 127
Changes in operating assets and liabilities, exclusive of acquisitions:
Accounts receivable, unbilled contracts and retainage receivable (9,559) (11,285) (27,765)
Inventories (6,759) 373 (7,644)
Prepaid expenses (2,395) (3,493) 647
Advance billings to customers (5,919) 8,711 (2,874)
Other liabilities, net 8,286 4,676 2,015
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,027 26,740 (3,075)
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property and equipment additions (12,399) (15,990) (25,545)
Acquisition of businesses, net of cash received -- (1,036) (29,012)
Other assets (841) (132) (1,026)
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (13,240) (17,158) (55,583)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net borrowings under notes payable to banks 1,853 (18,168) 23,770
Proceeds from issuance of long-term debt 4,271 16,837 38,637
Repayments of long-term debt (998) (924) (1,152)
Cash dividends (5,005) (4,612) (4,429)
Proceeds from employee stock option and stock purchase plans 1,089 2,455 3,480
Payments to purchase and retire common stock (2,173) (94) (1,614)
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (963) (4,506) (58,692)
- ---------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,304 418 (3)
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,872) 5,494 31
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 18,083 12,589 12,558
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,211 $ 18,083 $ 12,589
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest $ 6,298 $ 4,291 $ 1,881
Income taxes 5,105 6,731 8,756
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION AND TRANSLATION
The consolidated financial statements include the accounts of MTS Systems
Corporation (the Company) and its wholly and majority owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
All balance sheet accounts of foreign subsidiaries are translated to
U.S. dollars at the current exchange rates as of the end of the fiscal year.
Income statement items are translated at average exchange rates during the year.
The resulting translation adjustment is recorded as a separate component of
shareholders' investment. Gains and losses from translation of foreign currency
denominated trans actions and from foreign exchange hedge contracts are included
in "Other expense (income) net" in the Consolidated Statements of Income and
amounted to a loss of $538,000 in 2000, loss of $375,000 in 1999, a gain of
$2,340,000 in 1998.
REVENUE RECOGNITION
Revenue is recognized upon shipment of equipment when the customer's order can
be manufactured and delivered generally in less than twelve months. Revenue on
contracts requiring longer delivery periods (long-term contracts) and other
customized orders that permit progress billings is recognized using the
percentage-of-completion method based on the cost incurred to date relative to
estimated total cost of the contract (cost-to-cost method). The cumulative
effects of revisions of estimated total contract costs and impact on revenues
are recorded in the period in which the facts become known. When a loss is
anticipated on a contract, the amount is provided currently.
LONG-TERM CONTRACTS
The Company enters into long-term contracts for customized equipment sold to its
customers. Under terms of such contracts, revenue recognized using the
percentage of completion method may not be invoiced until completion of
contractual milestones, upon shipment of the equipment, or upon installation and
acceptance by the customer. Unbilled amounts for these contracts appear in the
Consolidated Balance Sheets as Unbilled Contracts and Retainage Receivable.
Amounts unbilled or retained at September 30, 2000 are expected to be invoiced
during fiscal 2001.
WARRANTY OBLIGATIONS
The Company warrants its products against defects in materials and workmanship
under normal use and service, generally for one year. The Company maintains
reserves for warranty costs based upon its past experience with warranty claims.
RESEARCH AND DEVELOPMENT
Research and product development costs associated with new products are charged
to operations as incurred.
CASH EQUIVALENTS
Cash equivalents represent short-term liquid investments, which have original
maturities of three months or less and approximate fair value.
ACCOUNTS RECEIVABLE
The Company grants credit to customers, but generally does not require
collateral or other security from domestic customers. International receivables,
where deemed necessary, are supported by letters of credit from banking
institutions.
INVENTORIES
Inventories consist of material, labor and overhead and are stated at the lower
of cost or market, determined by the first-in, first-out method. Inventory
components as of September 30, were as follows:
2000 1999
--------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Customer projects in
various stages of
completion $ 2,704 $ 3,625
Components,
assemblies and parts 59,816 53,323
--------------------------------------------------------------
Total $ 62,520 $ 56,948
--------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions, replacements and
improvements are capitalized at cost, while maintenance and repairs are charged
to operations as incurred. Depreciation is provided over the following estimated
useful lives of the property:
Buildings and improvements: 10 to 40 years.
Machinery and equipment: 3 to 15 years.
Most major building and equipment purchases are depreciated on a
straight-line basis for financial reporting purposes and on an accelerated basis
for income tax purposes.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company periodically enters into forward exchange contracts principally to
hedge the eventual dollar cash flow of foreign currency denominated transactions
(primarily the EURO, British Pound, Swedish Krona, and Japanese Yen). Gains and
losses on forward exchange contracts entered into to hedge foreign currency
denominated undelivered orders and net exposed assets are included in "Other
expense (income) net" in the Consolidated Statements of Income. The Company's
accounting policy for these contracts is based on the Company's designation of
foreign currency contracts as hedging transactions. The Company does not use
derivative financial instruments for speculative or trading purposes. The
criteria the Company uses for designating a contract as a hedge include the
contract's effectiveness in risk reduction and matching of contracts to
underlying transactions. On September 30, 2000, there were open hedge contracts
totaling $40,500,000 with an unrealized gain of $389,000. On September 30, 1999,
there were open hedge contracts totaling $7,300,000 with an unrealized loss of
$202,000.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
OTHER ASSETS
Other assets consist principally of patents and excess cost over net assets
acquired (goodwill), net of accumulated amortization. The carrying value of
goodwill less accumulated amortization was $24.2 million and $31.6 million in
2000 and 1999, respectively. These assets are being amortized over various
periods ranging from 7 to 40 years. Amortization expense was $3.2 million in
2000, $3.3 million in 1999 and $1.5 million in 1998.
The Company periodically evaluates whether events and circumstances
have occurred that may affect the estimated useful life of its goodwill and
other long-lived assets. If such events or circumstances were to indicate that
the carrying amount of these assets would not be recoverable, an impairment
loss would be recognized. No such impairment has been recognized for the year
ended September 30, 2000.
NET INCOME PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted earnings
per share is computed under the treasury stock method and is calculated to
compute the dilutive effect of potential common shares related to outstanding
stock options. Weighted average common shares and per share computations have
been restated retroactively for the two-for-one stock split effective February
2, 1998.
2000 1999 1998
----------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
Net income available
to common shareholders 3,624 12,445 21,539
Weighted average
common shares
outstanding 20,842 20,763 20,519
Dilutive potential
common shares 93 421 811
----------------------------------------------------------------
Total dilutive
common shares 20,935 21,184 21,330
----------------------------------------------------------------
Basic net income
per share $ .17 $ .60 $ 1.05
Diluted net income
per share .17 .59 1.01
----------------------------------------------------------------
COMPREHENSIVE INCOME
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." This statement
establishes rules for the reporting of comprehensive income and its components.
Comprehensive income consists of net income and foreign currency translation
adjustments and is presented in the Consolidated Statement of Shareholders'
Investment.
RECLASSIFICATIONS
Certain amounts included in the consolidated financial statements have been
reclassified in prior years to conform with the 2000 financial statement
presentation. These amounts had no effect on previously reported shareholder's
investment or net income.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.
The Company undertakes significant technological innovation on some of
its long-term contracts. These contracts involve performance risk which may
result in delayed delivery of product and/or in revenue and gross profit
variation from difficulties in estimating the ultimate cost of such contracts.
NEW ACCOUNTING STANDARDS
The Company will adopt Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS No.138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities--an amendment of FASB Statement No. 133," which becomes
effective for fiscal years beginning after June 15, 2000. Effective October 1,
2000, the Company will adopt SFAS No. 133 which requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
the hedged assets, liabilities or firm commitments are recognized through
earnings or in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative's change in fair value will
be immediately recognized in earnings. The Company has determined that the
effect of adopting SFAS 133 and SFAS 138 is immaterial to the earnings and the
financial position of the Company.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No.
101 "Revenue Recognition in Financial Statements." SAB No. 101 provides further
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB No. 101 is required for fiscal years
beginning after December 15, 1999. SAB No. 101 impacts the timing of revenue
recognition for the Company as it requires customer acceptance as a condition
for revenue recognition. The Company is in the process of fully evaluating the
effect that the adoption of SAB No. 101 will have on the Company's consolidated
financial position and results of operations. The Company expects certain
revenues will shift across quarters when SAB No. 101 is implemented. The Company
plans to adopt SAB No. 101 in the fourth quarter of fiscal year 2001.
24
<PAGE>
2. BUSINESS SEGMENT INFORMATION:
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 131,"Disclosures about Segments on an Enterprise and
Related Information." The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas
and major customers. The adoption of SFAS No. 131 did not affect results of
operations or financial condition but did affect the disclosure of segment
information.
The Company is organized into five operating business units: Vehicle
Testing Systems, Material Testing Systems, Advanced Systems, Automation and
Sensors. The Vehicle Testing business manufactures and markets systems for
vehicle and component manufacturers to aid in the acceleration of design
development work and to decrease the cost of product manufacturing. The Material
Testing business manufactures and markets systems to aid customers in product
development and quality control toward an effort of design improvement. The
Advanced Systems business offers highly customized systems primarily for
simulation and manufacturing. The Automation business manufactures and markets
products for high performance industrial machine applications in a wide range of
industries. The Sensor business manufactures and markets displacement and liquid
level sensors used in various applications to monitor and automate industrial
processes. The economic characteristics, nature of products and services,
production processes, type or class of customer, method of distribution and
regulatory environments are similar for the Vehicle Testing Systems, Material
Testing Systems and Advanced Systems operating units. As a result of these
similarities, these units have been aggregated into one reportable segment
called Mechanical Testing and Simulation (MT&S) for financial statement
purposes. Also, the economic characteristics, nature of products and services,
production processes, type or class of customer, method of distribution and
regulatory environments are similar for the Automation and Sensor business
divisions. As a result, these divisions have been aggregated into one reportable
segment called Factory Automation (FA).
The accounting policies of the business segments are the same as those
described in Note 1. In evaluating the segment performance, management focuses
on income from operations. This measurement excludes special charges (e.g.
restructuring charges, acquisition expenses, etc.), interest expense, interest
income, income tax expense and other non-operating income or expense. Corporate
expenses are allocated to segments primarily on the basis of revenue. This
allocation includes expenses for various support functions such as human
resource, information technology and finance. Financial information by
reportable segment follows:
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
2000 1999 1998
==========================================================================================
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
NET REVENUE BY SEGMENT
Mechanical Testing & Simulation $ 302,353 $ 313,685 $ 287,761
Factory Automation 89,500 76,857 74,402
- ------------------------------------------------------------------------------------------
Total $ 391,853 $ 390,542 $ 362,163
- ------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS BY SEGMENT
Mechanical Testing & Simulation
Before restructuring and acquisition $ 4,460 $ 23,809 $ 25,011
Restructuring (1,210) (5,510) --
Acquisition -- (1,391) --
- ------------------------------------------------------------------------------------------
Total $ 3,250 $ 16,908 $ 25,011
- ------------------------------------------------------------------------------------------
Factory Automation
Before restructuring and acquisition 8,583 6,630 8,556
Restructuring -- (201) --
- ------------------------------------------------------------------------------------------
Total $ 8,583 $ 6,429 $ 8,556
- ------------------------------------------------------------------------------------------
Total Income from Operations $ 11,833 $ 23,337 $ 33,567
- ------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS BY SEGMENT
Mechanical Testing & Simulation $ 267,666 $ 272,491 $ 255,816
Factory Automation 62,568 60,856 57,206
- ------------------------------------------------------------------------------------------
Total Assets $ 330,234 $ 333,347 $ 313,022
- ------------------------------------------------------------------------------------------
OTHER SEGMENT DATA
Mechanical Testing & Simulation:
Capital expenditures $ 10,057 $ 13,822 $ 21,251
Depreciation and Amortization 11,782 11,028 8,333
- ------------------------------------------------------------------------------------------
Factory Automation:
Capital expenditures $ 2,342 $ 2,168 $ 4,668
Depreciation and Amortization 3,512 3,396 2,547
- ------------------------------------------------------------------------------------------
</TABLE>
A geographic summary of the Company's operations and related year-end asset
information for the three years ended September 30 follows:
<TABLE>
<CAPTION>
2000 1999 1998
=========================================================================================
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
TOTAL NET REVENUE
United States $ 194,056 $ 200,556 $ 200,490
Germany 49,771 47,172 37,643
Other Europe 60,494 69,185 51,495
Far East 69,444 56,897 53,652
Other 18,088 16,732 18,883
- ------------------------------------------------------------------------------------------
Total $ 391,853 $ 390,542 $ 362,163
- ------------------------------------------------------------------------------------------
TOTAL LONG-LIVED ASSETS
United States $ 235,710 $ 232,177 $ 227,816
Germany 40,979 42,913 39,882
Other Europe 34,325 38,799 30,626
Far East 18,474 18,882 14,242
Other 746 576 456
- ------------------------------------------------------------------------------------------
Total $ 330,234 $ 333,347 $ 313,022
- ------------------------------------------------------------------------------------------
</TABLE>
Revenues by geographic location are based on revenues generated from each
country's operations. No individual country, other than the United States and
Germany, exceeded 10% of consolidated revenues on a recurrent annual basis. The
Company did not have sales to any individual customer greater than 10% of total
revenues in 2000, 1999 and 1998.
26
<PAGE>
3. FINANCING:
Long-term debt as of September 30 was as follows:
<TABLE>
<CAPTION>
2000 1999
- ------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Variable Rate Note, due May 2015, collateralized by building $ 5,519 $ 1,837
6.6% Notes, unsecured, due in July 2008 35,000 35,000
5.4% Mortgage, due in October 2015, collateralized by building 4,829 5,742
5.3% Note, unsecured, due in March 2003 905 1,503
6.0% Note, unsecured, due in May 2008 1,943 1,943
7.5% Note, unsecured, due in July 2009 15,000 15,000
Other 571 541
- ------------------------------------------------------------------------------------------
TOTAL $ 63,767 $ 61,566
LESS CURRENT MATURITIES (5,663 (1,308)
- ------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 58,104 $ 60,258
- ------------------------------------------------------------------------------------------
</TABLE>
Aggregate annual maturities of long-term debt for the next five fiscal years are
as follows: 2001--$5,663,000; 2002--$5,517,000; 2003--$7,082,000;
2004--$7,665,000; 2005--$7,690,000 and $30,150,000 thereafter. The carrying
value of the Company's long-term debt at September 30, 2000 is approximately
$1.6 million higher than the fair market value at current interest rates offered
to the Company for debt with the same remaining maturities.
The Company has a $35 million credit agreement with a domestic bank
that allows the Company to issue domestic and Euro-currency notes. As part of
the same credit agreement, the bank has agreed to issue term loans up to a
maximum of $10 million until March 30, 2002. This agreement provides for
repayment of these term loans through September 2005. The Company compensates
the bank with loan commitment fees for the unused portion of the credit line.
The Company also has a $15 million uncommitted line of credit with another bank.
In addition, the Company has standby letter-of-credit lines totaling $30
million. At September 30, 2000, standby letters of credit outstanding totaled
$10,566,000.
Under the terms of its credit agreement, the Company has agreed, among
other matters, that (a) its defined cash flow or fixed charge coverage will
exceed a defined minimum level; (b) its interest bearing debt will not exceed a
defined percentage of total capital; (c) repurchases of its common stock will
not exceed a maximum amount. At September 30, 2000, net worth exceeded the
defined minimum amount by $29,915,000 and the Company had $17,875,000 available
for repurchases of its common stock. Effective September 30, 2000, the Company
was in compliance with or had obtained waivers or amendments with respect to all
such covenants.
Information on short-term borrowings for the years ended September 30
were as follows:
2000 1999 1998
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Balance outstanding at September 30 $ 11,945 $ 10,071 $ 28,243
Average balance outstanding 22,617 24,903 23,498
Maximum balance outstanding 37,500 34,700 51,216
Year-end interest rate 8.1% 6.0% 5.9%
Weighted-average interest rate 7.0% 5.7% 6.1%
- --------------------------------------------------------------------------------
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. INCOME TAXES:
The provision for income taxes for the years ended September 30 consisted of the
following:
<TABLE>
<CAPTION>
2000 1999 1998
- -----------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Current provision (benefit):
Federal $ (3,469) $ 2,239 $ 6,911
State (413) 432 1,129
Foreign 5,974 2,773 4,104
Deferred 379 881 (235)
- -----------------------------------------------------------------------------------------
Total provision $ 2,471 $ 6,325 11,909
- -----------------------------------------------------------------------------------------
A reconciliation from the Federal statutory income tax rate to the Company's
effective rate for the years ended September 30 were as follows:
2000 1999 1998
- -----------------------------------------------------------------------------------------
Statutory rate 35% 35% 35%
Tax benefit of Foreign Sales Corporation (9) (3) (2)
Foreign provision in excess of U.S. tax rate 32 4 3
State income taxes, net of Federal benefit (4) 2 2
Research and development tax credits (9) (5) (2)
Other, net (4) 1 --
- -----------------------------------------------------------------------------------------
Effective rate 41% 34% 36%
- -----------------------------------------------------------------------------------------
DEFERRED TAX ASSET:
2000 1999
- -----------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Accrued compensation and benefits $ 1,073 $ 1,017
Inventory reserves 3,649 2,398
Allowance for doubtful accounts 242 194
Other assets (1,229) (1,276)
- -----------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSET $ 3,735 $ 2,333
- -----------------------------------------------------------------------------------------
DEFERRED TAX LIABILITY:
- -----------------------------------------------------------------------------------------
Property and equipment $ 5,628 $ 5,517
- -----------------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $ 1,893 $ 3,184
- -----------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
5. STOCK OPTIONS:
The Company has made certain stock-based awards to its officers, non-employee
directors, and key employees under various stock plans. Awards under these plans
can include incentive stock options (qualified), non-qualified stock options,
stock appreciation rights, restricted stock, deferred stock, and other
stock-based and non stock-based awards.
At September 30, 2000, the Company had awarded incentive stock options,
non-qualified stock options and restricted stock. These were granted at exercise
prices that are 100% of the fair-market value at the day of grant. Beginning one
year after grant, the options generally can be exercised proportionately each
year for periods of three, four, or six years, as defined in the respective
plans. Options currently expire no later than seven years from the grant date,
as defined.
Option holders may exercise options by delivering Company stock already
owned, cash, or a combination of stock and cash. The shares tendered in the
exchange are cancelled and, therefore, reduce shares issued. During 2000 and
1999, option holders exchanged 7,145 and 25,029 shares, respectively, of the
Company's stock in payment of options exercised.
A summary of the status of the Company's stock option plans as of September 30,
2000, 1999, and 1998, and changes during the years ended were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
- ------------------------------------------------------------------------------------------------------
SHARES WAEP* SHARES WAEP* SHARES WAEP*
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,816 $ 11.21 2,143 $ 10.30 1,920 $ 8.35
- ------------------------------------------------------------------------------------------------------
Granted 1,115 $ 7.17 880 $ 12.95 545 $ 15.79
- ------------------------------------------------------------------------------------------------------
Exercised (19) $ 6.44 (138) $ 7.25 (295) $ 6.51
- ------------------------------------------------------------------------------------------------------
Forfeited (287) $ 11.30 (69) $ 13.38 (27) $ 10.40
- ------------------------------------------------------------------------------------------------------
Outstanding at end of year 3,625 $ 9.98 2,816 $ 11.21 2,143 $ 10.30
- ------------------------------------------------------------------------------------------------------
Options exercisable at year-end 1,891 $ 10.23 1,566 $ 9.46 1,156 $ 8.19
- ------------------------------------------------------------------------------------------------------
</TABLE>
SHARES IN THOUSANDS
*WEIGHTED-AVERAGE EXERCISE PRICE
The following table summarizes information concerning outstanding and
exercisable options as of September 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
RANGE OF REMAINING WEIGHTED WEIGHTED
EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE* EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.78-7.31 1,300 4.0 $ 6.87 284 $ 5.92
- ----------------------------------------------------------------------------------------------
$7.50-10.56 1,056 .8 $ 9.09 1,033 $ 9.08
- ----------------------------------------------------------------------------------------------
$11.12-14.63 916 3.9 $ 13.03 313 $ 12.93
- ----------------------------------------------------------------------------------------------
$15.38-19.37 353 2.3 $ 16.21 261 $ 16.21
- ----------------------------------------------------------------------------------------------
Total 3,625 2.9 $ 9.98 1,893 $ 10.23
- ----------------------------------------------------------------------------------------------
</TABLE>
SHARES IN THOUSANDS
*IN YEARS
The following number of options will expire if not exercised at
specific dates for fiscal years as follows: 2001: 702,884, 2002: 742,891, 2003:
441,130, 2004: 321,525, 2005: 1,054,185, 2006: 362,817.
Prices for options exercised during the three-year period ended
September 30, 2000 ranged from $5.78 to $15.75. Total options available for
future grant as of September 30, 2000 were 2,006,728.
In January 1992 the Company's shareholders authorized an Employee Stock
Purchase Plan (the Purchase Plan), whereby 1,000,000 shares of the Company's
common stock were reserved for sale to employees until April 2002. Participants
in the 2000 and 1999 phases, all at dates specified in the Purchase Plan, were
issued 157,818 shares in 2000 and 121,810 shares in 1999. During 2000,
participants subscribed to purchase 179,184 shares at 85% of market price for
issuance in 2001.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
PRO FORMA INFORMATION: The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting
for its employee stock options. Under this pronouncement, no compensation
expense is recognized in the Company's financial statements because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant. However, Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
requires the use of option valuation models to estimate compensation expense
from the granting of employee stock options and to present the pro forma effect
of such expense on reported net income and earnings per share.
SFAS No. 123 requires this information be determined as if the Company
had accounted for employee stock options granted in fiscal years beginning
subsequent to December 31, 1994 under the fair value method of that statement.
The fair value of options granted, as reported below, has been estimated at the
date of grant using the Black-Scholes option valuation model with the following
weighted average assumptions:
2000 1999 1998
-------------------------------------------------------------
Expected life (in years) 1.8 2.7 2.0
Risk-free interest rate 6.0% 5.8% 4.2%
Volatility .49 .49 .40
Dividend yield 3.4% 2.3% 1.6%
-------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models required the input of highly
subjective assumptions, including the expected stock price volatility. The
weighted average estimated fair value of employee stock options granted during
2000, 1999, and 1998 was $2.14, $4.47, and $4.39, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
net income, as reported, and pro forma net income per share are as follows (in
thousands, except per share amounts):
STOCK OPTION FOOTNOTE DISCLOSURE
YEARS ENDED SEPTEMBER 30TH
2000 1999 1998
- -------------------------------------------------------------
Net Income
As Reported - Basic $ 3,624 $12,445 $21,539
Pro forma $ 2,216 $10,553 $20,247
- -------------------------------------------------------------
Basic Earnings Per Share
As Reported $ .17 $ .60 $ 1.05
Pro forma $ .11 $ .51 $ .99
- -------------------------------------------------------------
Diluted Earnings Per Share
As Reported $ .17 $ .59 $ 1.01
Pro forma $ .11 $ .50 $ .95
- -------------------------------------------------------------
6. EMPLOYEE BENEFIT PLANS:
The Company offers a 401(k) Pay Conversion Plan for all of its U.S. employees.
Employees can supplement their retirement income by participating in this
voluntary pretax savings plan by designating a percentage of their gross income,
subject to limitations imposed by federal law. The Company will match $.50 per
each dollar of the first 3% that employees contribute capped at $500 per fiscal
year. Employees are automatically vested. The matching contributions under the
401(K) plan were $843,000 in 2000, $730,000 in 1999, and $557,000 in 1998.
The Company's profit sharing plan functions as a retirement program for
most U.S. and certain international employees. Employees who have completed
1,000 hours of service during the plan year are eligible to participate. The
formula for calculating the Company's contribution is approved annually by the
Board of Directors and is based primarily on operating results for the year,
before management variable compensation. The plan provides for a minimum
contribution of 4% of participant compensation, as defined, up to the social
security taxable wage base, and 8% of participant compensation in excess of the
taxable wage base up to the maximum profit sharing contribution allowed by
federal law, so long as the entire contribution calculation does not exceed
pretax income. The contributions were 4.4% of participant compensation in 2000,
4.3% in 1999 and 4.4% in 1998. The provisions for profit sharing were $4,396,000
in 2000, $3,883,000 in 1999 and $3,577,000 in 1998, and are distributed among
the various operating expenses shown in the accompanying Consolidated Statements
of Income.
Prior to 1998, two of the Company's international subsidiaries had
noncontributory, unfunded retirement plans for eligible employees. These plans
provide benefits based on the employee's years of service and compensation
during the years immediately preceding retirement, early retirement,
termination, disability, or death, as defined in the respective plans. In 1998,
one of the plans was modified to provide for contributions based solely on
annual compensation levels.
30
<PAGE>
The expenses for these plans consist of the following components:
2000 1999 1998
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Service cost-benefit earned during the period $188 $209 $178
Interest cost on projected benefit obligation 235 249 218
Net amortization and deferral 50 17 11
- --------------------------------------------------------------------------------
NET PERIODIC PENSION COST $473 $475 $407
- --------------------------------------------------------------------------------
The change in benefit obligation and plan assets consisted of the following for
the years ended September 30, 2000 and 1999:
2000 1999
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Change in benefit obligation:
Projected benefit obligation, beginning of year $ 5,877 $ 5,110
Service cost 177 173
Interest cost 211 212
Translation difference (156) 80
Actuarial (gain)loss 49 332
Benefits paid (38) (30)
- --------------------------------------------------------------------------------
PROJECTED BENEFIT OBLIGATION, END OF YEAR 6,120 $ 5,877
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets, beginning of year $ -- $ --
Actual return on plan assets -- --
Employer contributions 38 30
Benefits paid (38) (30)
- --------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS, END OF YEAR $ -- $ --
- --------------------------------------------------------------------------------
The funded status of the Company's benefit plans and the amounts recognized in
the consolidated financial statements are:
2000 1999
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Funded status (6,120) (5,877)
Unrecognized net gain (31) (88)
Unrecognized net liability being amortized 528 536
Adjustment required to recognize minimum liability (34) (33)
- --------------------------------------------------------------------------------
ACCRUED PENSION LIABILITY $(5,657) $(5,462)
- --------------------------------------------------------------------------------
Major assumptions at year-end are:
Discount rate 3.5 to 6.0% 3.5 to 6.0%
Rate of increase in future compensation levels 3% 3.0%
- --------------------------------------------------------------------------------
7. ACQUISITIONS:
On May 28, 1999, the Company completed a merger with DSP Technology, Inc. (DSP),
an enterprise that is active in automotive engine development market segments.
Under the terms of the agreement, the Company initially issued 2,076,913 shares
of common stock and subsequently issued an additional 792 shares of common stock
in exchange for all of the outstanding shares and vested stock options of DSPs'
common stock. In connection with the acquisition, the Company incurred
approximately $1.4 million of acquisition related costs which were charged to
operations in the third quarter of fiscal year 1999. The acquisition qualified
as a tax-free exchange and was accounted for as a pooling-of-interests.
Accordingly, all periods included in these historical consolidated financial
statements have been restated to give effect to the merger.
1999 1998
---------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Net Revenue:
MTS $ 362,708 $ 339,682
DSP 27,834 22,481
---------------------------------------------------------------
COMBINED NET REVENUE $ 390,542 $ 362,163
---------------------------------------------------------------
Income before income taxes (note A):
MTS $ 18,445 $ 31,473
DSP 325 1,975
---------------------------------------------------------------
COMBINED INCOME BEFORE
INCOME TAXES $ 18,770 $ 33,448
---------------------------------------------------------------
NOTE A: 1999 AMOUNTS INCLUDE $0.3 MILLION AND $1.1 MILLION IN ACQUISITION
RELATED COST FOR THE COMPANY AND DSP, RESPECTIVELY.
No significant adjustments were made to the prior years financial
statements of either the Company or DSP.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
On September 29, 1999 the Company acquired the exclusive license for
the PowerBlok product line technology, related inventory and fixed assets, and
trade names from Semipower, Inc. The transaction was accounted for by the
purchase method of accounting.
In fiscal 1998 the Company acquired three entities, all accounted for
by the purchase method of accounting, with an aggregate purchase price of
approximately $29 million, net of cash acquired. The Company acquired all the
outstanding stock of Performance Controls, Inc., a manufacturer of high
performance power amplifiers for factory automation and magnetic resonance
machine applications, in an all cash transaction. The Company acquired the stock
of Nano Instruments Inc., a manufacturer of instrumented indentation systems for
ultra-low force nanoindentation testing surfaces and thin films, for cash and
debt. In addition to the stock purchase of Nano Instruments Inc., the Company
purchased the rights to a patent from the two principal shareholders of Nano
Instruments, Inc. The Company also acquired the assets and technology of SDRC's
noise and vibration test software business along with a major portion of SDRC's
noise and vibration consulting engineering services, in an all cash transaction.
The total purchase price exceeded the fair value of the net assets
acquired by approximately $23.2 million. This amount was recorded as goodwill
and other intangibles with useful lives between 7 and 20 years. The results of
the operations of the acquired companies are included in the Company's financial
statements for the periods in which they were owned.
The pro forma results, exclusive of the DSP merger, for 1999 and 1998,
assuming these acquisitions had been made at the beginning of the year, would
not be materially different from reported results.
8. RESTRUCTURING AND OTHER CHARGES:
The Company has taken a series of actions to better align its organizational
structure with market elements, improve operational performance and reduce
costs. In 1999, the Company recorded a restructuring charge of $5.7 million. The
Company paid $3.1 million in 2000 and $2.6 million in 1999 related to such
charges. These charges were the result of the closure of our manufacturing
operations in France and the transfer of product to the electromechanical test
division in Raleigh, North Carolina.
In the fourth quarter of 2000, the Company announced a restructuring
charge related to the discontinuation of a line of data acquisition products
acquired as part of the DSPT transaction in 1999. A pre-tax provision of $3.0
million ($0.8 per share), of which $1.8 million was charged to general and
administrative expense, was established for the wind-down of this business.
While we expect no material impact to the Company going forward, this action
reflects our continuing efforts to focus our investments on those businesses
critical to our long-term strategic success.
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION: The Company is a party to various claims, legal actions and
complaints arising in the ordinary course of business. It is the opinion of
management that the final resolution of these matters will not have a material
adverse effect on the financial position or results of operation of the Company.
LEASES: The Company has noncancelable operating lease commitments for equipment
and facilities that expire on various dates through 2006. Minimum annual rental
commitments at September 30,2000 for the fiscal years 2001 through 2005 and
thereafter are $4.9, $5.0, $4.4, $3.2, $2.4 and $2.9 million, respectively.
Total lease expense was $3.9 million in 2000, $4.2 million in 1999, and $3.1
million in 1998.
32
<PAGE>
REPORTS ON CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO MTS SYSTEMS CORPORATION:
We have audited the accompanying consolidated balance sheets of MTS Systems
Corporation (a Minnesota corporation) and Subsidiaries as of September 30, 2000
and 1999, and the related consolidated statements of income, shareholders'
investment and cash flows for each of the three years in the period ended
September 30, 2000. 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 in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MTS Systems
Corporation and Subsidiaries as of September 30, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 2000 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
November 28, 2000
REPORT OF MANAGEMENT
The management of MTS Systems Corporation is responsible for the integrity and
objectivity of the financial information presented in this report. The financial
statements have been prepared in accordance with generally accepted accounting
principles and include certain amounts based on management's best estimates and
judgment.
Management is also responsible for establishing and maintaining the
Company's accounting systems and related internal controls, which are designed
to provide reasonable assurance that assets are safeguarded, transactions are
properly recorded, and the policies and procedures are implemented by qualified
personnel.
The Audit Committee of the Board of Directors, which is comprised
solely of outside directors, meets regularly with management and its independent
auditors to review audit activities, internal controls, and other accounting,
reporting, and financial matters. This Committee also recommends independent
auditors for appointment by the full Board, subject to shareholder ratification.
The financial statements included in this annual report have been
audited by Arthur Andersen LLP, independent public accountants. We have been
advised that their audits were conducted in accordance with generally accepted
auditing standards and included such reviews of internal controls and tests of
transactions as they considered necessary in setting the scope of their audits.
Sidney W. Emery, Jr.
Chairman and Chief Executive Officer
/s/ Sidney W. Emery, Jr.
David E. Hoffman
Vice President and
Chief Financial Officer
/s/ David E. Hoffman
33
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>6
<FILENAME>0006.txt
<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT
<TEXT>
EXHIBIT 21
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
OF THE COMPANY
Incorporation
Name Jurisdiction
MTS Systems (Hong Kong) Inc. Minnesota, U.S.A.
MTS Testing Systems (Canada) Ltd. Canada
MTS Systems GmbH Germany
MTS Sensor Technologie GmbH and Co. KG Germany
MTS Systems France
MTS Holdings France, SARL France
MTS (Japan) Ltd. Japan
MTS Sensor Technology K.K. Japan
MTS Systems Limited (UK) United Kingdom
MTS Systems SRL (Italy) Italy
MTS International, Ltd. West Indies
MTS Systems Norden AB Sweden
MTS Systems do Brasil, Ltda. Brazil
MTS Systems (China) Inc. Minnesota, U.S.A.
MTS Korea, Inc. Republic of Korea
MTS Systems (Singapore) Pte Ltd Singapore
MTS Services Ltd Japan
MTS Automotive Sensors GmbH Germany
MTS Sensor Technology Verwaltungs GmbH and Co. KG Germany
MTS Systems Holding for Europe GmbH Germany
Customer Servo Motors Antriebstechnik Verwaltungs GmbH Germany
Custom Servo Motors Antriebstechnik GmbH & Co. KG Germany
AeroMet Corporation Minnesota, U.S.A
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>7
<FILENAME>0007.txt
<DESCRIPTION>CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
<TEXT>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included or incorporated by reference in this Form 10-K, into the
Company's previously filed Registration Statements on Form S-8 (Registration
Nos. 333-28661, 2-99389, 33-21699, 33-35288, and 33-45386) and Form S-3
(Registration No. 33-60485).
Arthur Andersen LLP
Minneapolis, Minnesota,
December 21, 2000
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>8
<FILENAME>0008.txt
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> SEP-30-2000
<CASH> 8,211
<SECURITIES> 0
<RECEIVABLES> 144,631
<ALLOWANCES> 2,255
<INVENTORY> 62,520
<CURRENT-ASSETS> 225,273
<PP&E> 155,305
<DEPRECIATION> 83,224
<TOTAL-ASSETS> 330,234
<CURRENT-LIABILITIES> 108,648
<BONDS> 63,767
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 5,187
<OTHER-SE> 152,667
<TOTAL-LIABILITY-AND-EQUITY> 330,234
<SALES> 391,853
<TOTAL-REVENUES> 391,853
<CGS> 257,853
<TOTAL-COSTS> 385,758
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,371
<INCOME-PRETAX> 6,095
<INCOME-TAX> 2,471
<INCOME-CONTINUING> 6,095
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,624
<EPS-BASIC> .17
<EPS-DILUTED> .17
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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