-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HQ/TSwZ+GZTQGc9mecqczZMrMNsYZWdzs0RRl+ulG3A9JICY7puTAoiejZ51Cibt 84uPvfoXioyRSQE4Y723XA== 0000897101-96-001094.txt : 19961220 0000897101-96-001094.hdr.sgml : 19961220 ACCESSION NUMBER: 0000897101-96-001094 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961219 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-02382 FILM NUMBER: 96683183 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 10-K 1 United States SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-K Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 (Fee Required) For The Fiscal Year Ended September 30, 1996 Commission File Number 0-2382 MTS SYSTEMS CORPORATION (Exact name of registrant as specified in its charter) MINNESOTA 41-0908057 (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 612-937-4000 (Telephone number of registrant 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 PER SHARE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 November 29, 1996, 9,151,794 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 $160,148,437. DOCUMENTS INCORPORATED BY REFERENCE Annual Report to Shareholders for Fiscal Year ended September 30, 1996 - Parts I, II and IV. Proxy Statement for Annual Meeting of Shareholders, statement dated prior to January 28, 1997 - 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") designs, manufactures, markets and services computer-based testing and simulation systems for determining the mechanical behavior of materials, products and structures (the Mechanical Testing and Simulation sector), and measurement and control products for measuring process variables and automating manufacturing processes (the Industrial Measurement and Automation sector). MTS's customers use these systems and products to improve product quality, accelerate product development, increase machine and worker productivity and protect the environment. The Company's systems and products share common technologies: 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 the test or automation system to the customer's needs and to analyze results. These technologies offer the customer solutions to problems in a variety of markets. CUSTOMERS AND PRODUCTS BY MARKET SECTOR The Company's operations are organized into two business sectors: 1) Mechanical Testing and Simulation, and 2) Industrial Measurement and Automation. The operational alignment of the sectors 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 Sector: Customers in this sector 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 (markets, market niches or niches) in this sector 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 principle subsystems such as landing gear. 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 control quality in the manufacturing of materials. BIOMECHANICS: This market is comprised of university and government research laboratories and manufacturers of implants, prostheses and other medical and dental devices and materials. These organizations use the Company's systems and software to determine the durability and performance of such products in use, which frequently requires the Company's systems to replicate conditions within and forces withstood by the human body. 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 PRODUCTS/MATERIAL PRODUCERS: These organizations are grouped together because they primarily purchase the Company's electromechanical and servohydraulic material testing systems which are used in research, product development and extensively for quality control during production. Typical consumer products are made of textiles, paper products and plastic films of many types. Material producers include metal, ceramic, composite, paper and plastic manufacturers. GROUND VEHICLE INDUSTRY: This market consists of automobile, truck, and off-road vehicle manufacturers and their suppliers. This market niche is the largest within the Mechanical Testing and Simulation 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 and durability, accelerate design development work and decrease the cost to manufacture their products and components. Occupant safety is another purpose for use of the Company's systems and software to test vehicle designs and prototypes. ADVANCED SYSTEMS: The Company also offers highly customized systems for simulation and testing through its Advanced Systems Division. These systems frequently embody technology which is new to the application. Customers of the Advanced Systems Division come from all industries served by the Mechanical Testing and Simulation sector - aerospace and defense, biomechanics, civil engineering, material suppliers, and ground vehicles. The Advanced Systems Division aids customers in the development of new manufacturing technologies and systems such as welding and material processing. Mechanical Testing and Simulation sector accounted for 82% of revenue in 1996, 81% of revenue in 1995 and 82% of revenue in 1994. It represents the oldest and is the principal market for the Company's technology. This sector is responsible for the Company's traditional corporate image: "a leading supplier of test equipment to laboratories". Industrial Measurement and Automation Products: Measurement and Automation customers use MTS products in discrete part and fluid process manufacturing. Product niches in this sector include: DISPLACEMENT POSITION AND LIQUID-LEVEL SENSORS BASED ON MAGNETOSTRICTIVE TECHNOLOGY. Displacement sensors accurately measure position up to 50 feet. They are used in discrete (piece part) manufacturing where accurate positioning is critical. Major applications include injection molding and die casting machines, printing and packaging machines and presses of all types. Liquid level sensors accurately measure levels of liquids in containers. These sensors are sold in three markets: the underground storage tank (UST) market, the process storage tank (PST) market and the large, above-ground inventory storage tank (AST) market. The UST market consists primarily of retail gas stations. It is served by original equipment manufacturers (OEM's) who purchase MTS sensing probes and incorporate them with their proprietary electronic unit to monitor fuel inventory and detect leaks. The PST market includes a wide variety of applications in the chemical, petroleum refining, pharmaceutical, and food industries. This market generally requires sensors less than 25 feet in length. The AST market of above ground liquid storage tanks and tank farms is the newest application for these sensors. This market requires sensors up to 100 feet in length. MTS also sells controlling and indicating instruments to this market for use on installations of up to several hundred tanks. SERVO MOTORS AND CONTROLLERS. Customers use high-performance, permanent magnet brushless servo motors and amplifiers to automate discrete-part manufacturing machines and systems such as machine tools and converting and packaging machines. Customers also use the Company's control products for accurate control of complex, multi-axis, rotary and linear machine motions. These motors, amplifiers and motion control products create systems that are applied to a wide variety of automation tasks by both end-users and OEM's. The Industrial Measurement and Automation sector accounted for 18% of revenue in 1996, 19% of revenue in 1995 and 18% of revenue in 1994. COMMON TECHNOLOGIES MTS' systems and products in both sectors 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 Mechanical Testing and Simulation sector are in some cases undertaken on "cost-plus-fixed-fee" contract basis. 1996 PRODUCT DEVELOPMENT HIGHLIGHTS The Company funds new application and product development within its market sectors. Highlights of product development undertaken or completed in 1996 include: Mechanical Testing and Simulation Sector * The Company introduced the Tytron(TM) microforce testing system, our first testing system designed specifically for very low-force testing and which can accommodate very small specimens. The microelectronics industry is the primary target market for this product. * The Company introduced the Flat-Trac(R) III tire performance testing system. Tire engineers use this product to research tread wear and rolling resistance to develop longer lasting, safer tires. * The Company introduced a twelve-station human hip simulator for use in testing materials and prosthetic designs. This product offers customers additional testing capacity at a price comparable to our previous eight-station hip simulator. Industrial Measurement and Automation Sector * The Company completely redesigned the basic elements of its Temposonics(R) linear displacement sensors. The new, patented design features modular construction for unprecedented precision and improved configurability and ruggedness. * The Company introduced the XDC 720 multi-axis controller, which can control up to 28 independent machine axes, making it ideal for complex packaging operations. * The Company introduced a new, larger (12 inch frame) motor in its Max Plus(TM) line of permanent magnetic servo motors designed for spindle drive applications for use primarily in the machine tool industry. The design is able to operate at full torque over a range of speeds, thereby eliminating the need for mechanical transmissions on machine tools. CHARACTERISTICS OF SALES The Company's systems are sold and delivered throughout the world and its customer orders cover a broad spectrum of industries, government agencies, institutions, applications, and geographic locations. As such, MTS was not dependent upon any single customer for its business. Mechanical Testing and Simulation systems range in price from less than $20,000 to as much as $20 million. Large, individual, fixed-price orders, although important to the Company's image and technical advancement, tend to 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. Industrial Measurement and Automation products are sold in quantity at unit prices ranging from $500 to $10,000. Delivery varies from several days to several months. Approximately 49% of revenue in fiscal 1996, 54% of revenue in 1995, and 51% of revenue in 1994 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 it products using a number of sales channels. The Company sells its Mechanical Testing and Simulation equipment through an employee sales network, independent sales representatives, and a direct mail (catalog) operation. Sales personnel are generally graduate engineers or highly skilled technicians and are specially trained to sell MTS products and services. Employee salespersons are compensated with salary and sales incentives, and independent representatives are paid commissions only. A list of domestic and international offices for the Company's Mechanical Testing and Simulation sector follows: Domestic offices: Akron Dayton Philadelphia Austin Denver Raleigh Baltimore Detroit Pittsburgh Boston Huntsville San Diego Chicago Los Angeles San Jose Cincinnati Minneapolis Seattle Dallas Washington, D.C. International offices: Beijing and other cities, Paris, France Peoples Republic of China Sao Paulo, Brazil Berlin and other cities, Seoul, Korea Germany Torino, Italy Gothenburg, Sweden Stroud, United Kingdom Hong Kong Nagoya and Tokyo, Japan Singapore In addition, MTS 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 comprehensive mail-order catalog of MTS 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 Industrial Measurement and Automation sector sells its products through sales channels separate from the Mechanical Testing and Simulation sector. A network of employees, direct sales, external domestic distributors, representatives, and system houses market the products of these divisions. International revenue currently accounts for 31% of this sector'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 Geographic Segment Information on pages 17 and 27 of the Company's 1996 Annual Report to Shareholders, which sections are incorporated by reference herein, contain information regarding the Company's operations by geographic area. Export Licensing: The Company's foreign shipments in fiscal 1996, 1995 and 1994 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 may 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 $120.5 million at September 30, 1996; $98.8 million at September 30, 1995; and $84.6 million at September 30, 1994. The Company believes that nearly all of the backlog at September 30, 1996 will become revenue during fiscal 1997. 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 Mechanical Testing and Simulation sector, customers may choose to buy equipment from the Company or from competitors, principally: Instron (U.S. based), Instron Schenck Testing Systems (U.S.-German joint venture) Interlachen (U.S.), SATEC (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 Industrial Measurement and Automation sector, the Company competes directly with small to medium-sized specialty suppliers and also with divisions of the large control system companies such as Rockwell, Emerson Electric, Mannesman (Germany) and Fanuc (Japan). MANUFACTURING AND ENGINEERING The Company conducted a significant portion of its fiscal 1996 Mechanical Testing and Simulation 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 are assembled in the Raleigh, NC, facility and in the Paris, France (Adamel-Lhomargy) facility. The Company's MTS-PowerTek subsidiary engineers and assembles dynamometer control systems and provides related services from Detroit. Manufacturing and engineering activities for the Industrial Measurement and Automation sector occur in Raleigh, NC, in Ludenscheid, Germany, in New Ulm, MN, 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 which 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 $17.7, $13.7 and $12.6 million for fiscal years 1996, 1995 and 1994, 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 approximates 10% of annual sales volume. Executive Officers of the Company The Corporate Executive Officers of the Registrant on September 30, 1996 were: Name and Age Position Officer Since - ------------ -------- ------------- D. M. Sullivan (61) Chairman, President and 1976 Chief Executive Officer K. D. Zell (54) Executive Vice President 1979 W. G. Beduhn (55) Vice President 1983 M. L. Carpenter (59) Vice President 1973 and Chief Financial Officer M. G. Togneri (59) 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. EMPLOYEES MTS employed 1,725 persons as of September 30, 1996, including 286 employees in Europe, 48 in Japan, 13 in China, 3 in Canada, 12 in Korea and 4 in Hong Kong. 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 purchased from vendors. The relationship which the Company promotes with its vendors is one of close cooperation. 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 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. ITEM 2. PROPERTIES Domestic Facilities: The Company's main plant and corporate headquarters, occupying 380,000 square feet, is located on 52 acres of land in Eden Prairie, Minnesota, a suburb of Minneapolis. The original plant was completed in 1967. Five additions, the most recent of which was in 1990, have expanded the plant to its present size. Approximately 45% of the Minneapolis facility is used for manufacturing and assembly while the balance of the facility is used for office space. 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. Custom Servo Motors, Inc. 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 five 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. 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. SINTECH Division is located adjacent to the Sensors Division site in Cary, North Carolina. A 25,000 square foot plant, constructed in 1991, provides manufacturing and office space. MTS-PowerTek, Inc. occupies 20,000 square feet in Farmington Hills, Michigan, a suburb of Detroit. Plant and office space in two buildings is leased under 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 (Berlin) is located in a 80,000 square foot facility. As of September 30, 1996 3,000 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 2069. MTS Adamel Lhomargy S.A., operates in a leased facility in Paris, France, of approximately 38,000 square feet. Approximately 40% of this space is used for manufacturing with the remainder used as offices. The current lease expires at the end of fiscal 1998. MTS Sensors Technologie operates in a leased facility in Ludenscheid, Germany on approximately six acres of land. The manufacturing and office facilities occupy 18,000 square feet at this location. The Company also leases office and general purpose space for its sales and service subsidiaries in Stroud, United Kingdom; Paris, France; Torino, Italy; Seoul, South Korea; Tokyo and Nagoya, Japan; Toronto, Canada; Sao Paulo, Brazil; Gothenburg, Sweden; Beijing and Shanghai, Peoples Republic of China; Singapore; and Hong Kong. No manufacturing is conducted at these locations. Expansion Opportunities: The Company owns an additional 55 acres of land adjacent to its Minneapolis facility. This site could house expanded manufacturing operations. Also, the sites in Cary could 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 1997. ITEM 3. LEGAL PROCEEDINGS No material legal proceedings were pending or threatened against the Company or its subsidiaries as of September 30, 1996. 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, 1996, for a vote by the shareholders. 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 under the symbol MTSC. The following table shows the Company's low and high closing sale transactions as reported by The Nasdaq. Share prices for 1996 and prior have been restated retroactively for the two-for-one stock split effected in the form of a 100% stock dividend effective April 1, 1996. Quarter Ended Low * High* ------------- ----- ----- December 31, 1994 $10.125 $12.375 March 31, 1995 $11.00 $12.875 June 30, 1995 $11.75 $13.875 September 30, 1995 $13.375 $14.625 December 31, 1995 $13.875 $17.75 March 31, 1996 $14.00 $19.375 June 30, 1996 $17.50 $22.50 September 30, 1996 $18.50 $21.50 *Source: The Nasdaq Stock Market, Inc. Summary of Activity Report As of November 29, 1996 there were 1,523 holders of record of the Company's $.25 par value common stock. The Company estimates that there are an additional 1,900 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 1996, 1995, and 1994, the Company paid dividends totaling $.32, $.28, and $.28 per share, per year, respectively, 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, 1996, tangible net worth exceeded the minimum by $17.4 million and the Company had $3.4 million available for repurchases of its common stock. Thus, the Company has flexibility to declare and pay dividends in the future similar to recent dividends. ITEM 6. SELECTED FINANCIAL DATA A comprehensive summary of selected financial information is presented in the "Six Year Financial Summary" on page 16 of the Company's 1996 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 17 through 21 of the Company's 1996 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, Report of Independent Public Accountants, Quarterly Financial Information (unaudited), and Six Year Financial Summary (unaudited) included in the Company's 1996 Annual Report to Shareholders are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT (a) Information concerning the Company's directors may 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 28, 1997, and is incorporated herein by reference. (b) See Item 1. Business, on page 9 for information on the Company's Executive Officers. (c) The Company has no other significant employees requiring disclosure in this Form 10-K. (d) There are no family relationships between and among directors or officers. (e) Business experience of Directors may 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 28, 1997, and is incorporated herein by reference. 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: Officer Business Experience D. M. Sullivan Chairman in 1994. Chief Executive Officer since 1987. President and Chief Operating Officer since 1982. Vice President from 1976 to 1982. Has extensive prior experience in the management of technology intensive businesses. K. D. Zell Executive Vice President of Mechanical Testing and Simulation sector in 1993. Vice President of Materials Testing Division from 1988 to 1993. Vice President, Sales and Service from 1984 to 1988. Vice President, Product Group from 1979 to 1984. Division manager, Hydro-mechanical Products from 1978 to 1979. W. G. Beduhn Vice President of Advanced Systems Division since 1991. Vice President of Technology Development from 1983 to 1991. Division manager of various marketing and operating divisions from 1977 to 1983. M. L. Carpenter Vice President and Chief Financial Officer since 1991. Vice President and Treasurer since 1973. M.G. Togneri Vice President of Industrial Measurement and Automation sector since 1991. Prior to his employment at MTS was V.P. 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. (f) 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 28, 1997, pursuant to Regulation 14A under the Securities Exchange Act of 1934. ITEM 11. EXECUTIVE COMPENSATION See Item 12. 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 28, 1997, pursuant to Regulation 14A under the Securities Exchange Act of 1934. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 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: No reports on Form 8-K were filed during the fourth quarter of fiscal 1996. (c) Exhibits: 3.a Amended and restated Articles of Incorporation, adopted January 30, 1996. 3.b Restated Bylaws, reflecting amendments through May 15, 1995, incorporated by reference to exhibit 3.b of Form 10-K for the fiscal year ended September 30, 1995. 10.a Management Variable Compensation Plan-Fiscal 1996, dated November 20, 1995. 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. 10.d 1990 Stock Option Plan, as amended. 10.e 1994 Stock Plan, as amended. 10.f Severance Agreement, dated May 1, 1990 between the registrant and William G. Beduhn, incorporated by reference to exhibit 10.g of Form 10-K for the fiscal year ended September 30, 1990. 10.g Severance Agreement, dated May 1, 1990 between the registrant and Marshall L. Carpenter, incorporated by reference to exhibit 10.i of Form 10-K for the fiscal year ended September 30, 1990. 10.h 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.i 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.j Severance Agreement, dated May 1, 1990 between the registrant and J. Howell Owens, incorporated by reference to exhibit 10.n of Form 10-K for the fiscal year ended September 30, 1990. 10.k Severance Agreement, dated May 1, 1990 between the registrant and Donald M. Sullivan, incorporated by reference to exhibit 10.p of Form 10-K for the fiscal year ended September 30, 1990. 10.l Severance Agreement, dated May 1, 1990 between the registrant and Richard S. White, incorporated by reference to exhibit 10.q of Form 10-K for the fiscal year ended September 30, 1990. 10.m Severance Agreement, dated May 1, 1990 between the registrant and Keith D. Zell, incorporated by reference to exhibit 10.r of Form 10-K for the fiscal year ended September 30, 1990. 10.n Severance Agreement, dated April 1, 1991 between the registrant and Mauro G. Togneri, incorporated by reference to exhibit 10.s of Form 10-K for the fiscal year ended September 30, 1991. 10.o 1992 Employee Stock Purchase Plan, incorporated by reference to exhibit 4(a) from Form S-8, File No. 33-45386. 10.p 1997 Stock Option Plan. 10.q Severance Agreement, dated September 30, 1996 between the registrant and Steven M. Cohoon. 13. Annual Report to Shareholders for the fiscal year ended September 30, 1996. 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. 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/ Donald M. Sullivan ------------------------------------------ Donald M. Sullivan Chairman, Chief Executive Officer, President and Director By: /s/ Marshall L. Carpenter ------------------------------------------ Marshall L. Carpenter Vice President and Chief Financial Officer By: /s/ Marvin R. Eckerle ------------------------------------------ Marvin R. Eckerle Controller Date: December 19, 1996 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/ E. T. Binger ------------------------------------------ E. T. Binger, December 19, 1996 Director By: /s/ Charles A. Brickman ------------------------------------------ Charles A. Brickman, December 19, 1996 Director By: /s/ Bobby I. Griffin ------------------------------------------ Bobby I. Griffin, December 19, 1996 Director By: /s/ Russell A. Gullotti ------------------------------------------ Russell A. Gullotti, December 19, 1996 Director By: /s/ Thomas E. Holloran ------------------------------------------ Thomas E. Holloran, December 19, 1996 Director By: /s/ Thomas E. Stelson ------------------------------------------ Thomas E. Stelson, December 19, 1996 Director By: /s/ Linda Hall Whitman ------------------------------------------ Linda Hall Whitman, December 19, 1996 Director 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 1996 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) 21 --- Consolidated Balance Sheets - September 30, 1996 22 --- and 1995 Consolidated Statements of Income and Shareholders' Investment for the Years Ended September 30, 1996, 1995 and 1994 23 --- Consolidated Statements of Cash Flows for the Years Ended September 30, 1996, 1995 and 1994 24 --- Notes to Consolidated Financial Statements 25 --- Report of Independent Public Accountants 32 --- B. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE --- F-3 C. CONSOLIDATED SCHEDULE Schedule Description II Summary of Consolidated Allowances for Doubtful Accounts --- 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. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To MTS Systems Corporation: We have audited in accordance with generally accepted auditing standards, 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 22, 1996. 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 financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic 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 financial statements taken as a whole. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, November 22, 1996 MTS SYSTEMS CORPORATION AND SUBSIDIARIES SCHEDULE II - SUMMARY OF CONSOLIDATED ALLOWANCES FOR DOUBTFUL ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 Balance Provision Amounts Balance Beginning Charged to Written End of of Year Operations Off Year --------- ---------- ------- ------- (expressed in thousands) 1996 $1,824 $ 330 $ (413) $1,742 1995 1,439 620 (235) 1,824 1994 1,461 110 (132) 1,439 EXHIBIT INDEX Exhibit No. Description -------- ----------- 3.a Amended and restated Articles of Incorporation, adopted Janurary 30, 1996. 10.a Management Variable Compensation Plan-Fiscal 1996 10.c 1987 Stock Option Plan, as amended 10.d 1990 Stock Option Plan, as amended 10.e 1994 Stock Plan, as amended 10.p 1997 Stock Option Plan 10.q Severance Agreement Dated September 30, 1996 13. Annual Report to Shareholders for the fiscal year ended September 30, 1996 21. Subsidiaries of the Company 23. Consent of Independent Public Accountants 27. Financial Data Schedule EX-3.A 2 AMENDED AND RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.a AMENDED AND RESTATED ARTICLES OF INCORPORATION OF MTS SYSTEMS CORPORATION ----------------------- ARTICLE I The name of this corporation shall be MTS SYSTEMS CORPORATION. ARTICLE II The purpose of this corporation shall be: (a) To engage in the research, experimentation, development, designing, production, manufacturing, compounding, processing, fabrication, application, utilization, installation, repair, servicing, buying, selling, distributing, and dealing in and with test systems, structural loading systems, plastics and plastic materials, chemicals, paper products, metals, electronic and electrical components and products, machinery, instruments, equipment, devices, implements, tools, and all other articles and products of commerce; and to engage in such incidental, convenient, or necessary functions as may be deemed advisable therewith, either within or without the State of Minnesota or the United States of America, or both; (b) To render consultative, engineering and expert advice and service to others; (c) To apply for, prosecute, acquire, own, employ, transfer, sell, license and otherwise deal in or with patents, trademarks, and copyrights relating in any manner to the business or activities of the corporation; (d) To deal in and distribute, either as principal or agent, and either as manufacturer, jobber, wholesaler or retailer, commodities, goods, wares and merchandise and other articles of every kind, character and description; (e) To acquire, own, hold, manage and operate either separately or as part of the business of this corporation, other businesses, firms, corporations or enterprises; (f) To acquire, hold, pledge, vote, sell and dispose of shares, bonds, securities and other evidences of indebtedness of any person or domestic or foreign corporation, firm or government, whether for the purpose of investment of the funds of this corporation or for the purpose of exercising control or management over the affairs of other persons, firms or corporations, or for both purposes; (g) To purchase, lease or otherwise acquire, to own, hold, manage, operate or employ, to mortgage, pledge, or otherwise encumber, and to sell, let, exchange or otherwise dispose of real property or personal property or mixed real and personal property; (h) To enter into partnerships, joint ventures, and agreements of all kinds with other persons, firms, partnerships and corporations; (i) To borrow money and secure credit upon such terms and security as may be deemed necessary or advantageous, and if deemed necessary or appropriate, to pledge or mortgage any or all of the assets of the corporation to secure such loan or credit; (j) To do any and all other acts and things in addition to those enumerated and specified above which may be advantageous, necessary, expedient or convenient to the conduct of the business or the attainment of the purposes of the corporation. The foregoing clauses and statement of purposes shall also be a statement of the powers of this corporation, but the declaration of purposes and powers herein set forth shall not be deemed to limit or restrict in any manner the powers of this corporation, which shall possess all of the powers bestowed upon or permitted to it by law which are not inconsistent with those set forth herein. ARTICLE III The duration of this corporation shall be perpetual. ARTICLE IV The location and post office address of this corporation in the State of Minnesota shall be at such place as may be designated for that purpose by the Board of Directors from time to time. Until some other place is so designated, the location and post office address of the office of this corporation is: 14000 Technology Drive, Eden Prairie, Minnesota 55344-2290. ARTICLE V The amount of stated capital with which this corporation will begin business will be not less than $1,000.00. ARTICLE VI The number of shares of the total authorized capital stock of the corporation shall be thirty-two million (32,000,000), all of which are common shares of capital stock. Each common share of capital stock shall have the par value of twenty-five cents ($.25). Each share shall entitle the holder thereof to one vote for each share held by the shareholder, but shareholders shall have no pre-emptive right to subscribe for or purchase securities of the corporation; and all shares shall be equal in all respects and shall conver equal rights upon the holders thereof, including equal rights in and to dividends and distributions and upon dissolution. ARTICLE VII Section 1. The management and conduct of the business of this corporation shall be vested in a Board of Directors and in such officers and agents as may be elected or designated by the Board of Directors. Such officers and agents shall have the authority and duties in the management of the business of the corporation as may be prescribed in the By-Laws, or, in the absence of a controlling provision therein, as determined by the Board of Directors. Section 2. The Board of Directors shall consist of such number of Directors, not less than three, as shall be stated in the By-Laws, or, in the absence of a controlling provision therein, as determined by the shareholders at any annual meeting or meeting called for the purpose of electing a Director or Directors. Section 3. The terms of office of the Directors of this corporation shall be for one year and until their respective successors are elected and qualified except that the terms of office of the Directors named herein shall be for the period stated herein subject to the right of the shareholders to remove any of said Directors in the manner provided by statute prior to the end of their respective terms and thereupon to elect a new Director or Directors for the remainder of such term or terms. Section 4. The Board of Directors shall have the power and authority to fill any vacancy caused by the death, resignation or inability to serve of any director. Newly created directorships resulting from an increase in the authorized number of directors by action of the board of directors may be filled by a two-thirds vote of the directors serving at the time of such increase. ARTICLE VIII Section 1. The Board of Directors shall have the general management and control of the business and affairs of this corporation and shall exercise all of the powers that may be exercised or performed by this corporation. The Board of Directors shall have the power and authority to delegate such duties, power and authority relating to the management and conduct of the business and affairs of this corporation to such officers and agents elected or designated by it as it may deem proper or appropriate, and as may be permitted by the By-Laws or applicable statutes or laws. Section 2. The Board of Directors shall have the authority to accept or reject subscriptions for shares made before or after incorporation, and may grant rights to convert any securities of this corporation into shares of any class or classes or grant options to purchase or subscribe for shares or other securities of the corporation. The Board of Directors shall from time to time fix and determine the consideration for which the corporation shall issue and sell its shares, and also the dividends to be paid by the corporation upon its shares. Section 3. The Board of Directors shall have the authority to make and alter the By-Laws, subject to the power of the shareholders to change or repeal such By-Laws. ARTICLE IX The holders of a majority of the outstanding voting shares of capital stock of this corporation shall have power to authorize the sale, lease, exchange or other disposition of all or substantially all of the property and assets of this corporation, including its good will, to amend the Articles of Incorporation of this corporation, and to adopt or reject an agreement of consolidation or merger. ARTICLE X No director of this Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) under sections 302A.559 or 80A.23 of the Minnesota Statutes; (iv) for any transaction from which the director derived any improper personal benefit; or (v) for any act or omission occurring prior to the date when this provision becomes effective. The provision of this Article shall not be deemed to limit or preclude indemnification of a director by the Corporation for any liability of a director which has not been eliminated by the provisions of this Article. If the Minnesota Statutes hereafter are amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the amended Minnesota Statutes. EX-10.A 3 MANAGEMENT VARIABLE COMPENSATION PLAN EXHIBIT 10.a Rev: Nov. 20, 1995 Approved by Board 21 November 1995 MANAGEMENT VARIABLE COMPENSATION (MVC) PLAN FISCAL '96 1. PURPOSE OF PLAN To focus efforts on achievement of 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 costs (salary plus variable) to the financial results of the enterprise. The Plan's payout is primarily related to achievement of Corporate/Sector/Division/Niche profit objectives. Other measurable objectives may be included at the discretion of the cognizant officer with approval by the CEO. 2. RELATIONSHIP TO OTHER COMPENSATION PLANS 2.a SALARY PLAN The midpoint of a given salary range will be suppressed by 1/4th of the average competitive payout potential of participants in that range to conform to the Company's fixed vs. variable compensation strategy (i.e., if the participants in a range have an average competitive payout potential of 20%, the midpoint of that range will be suppressed 5%). 2.b "NON MANAGEMENT" VARIABLE COMPENSATION PLAN (NMVC) Certain units may have a variable compensation plan for certain employees who are not eligible for the MVC, sales commissions, or other variable compensation plans. Payout in these NMVC Plans is linked directly to payout on the unit's vice president'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 NMVC plans must adhere. They are included in this MVC Plan for reference only. 2.b(1) NMVC 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. 2.b(2) NMVC payout will be based on the results of the employee's unit vice president's profit objective(s) for the year. If the unit's vice president has more than one such objective, the payout will be based on the weighted average of the officer's objectives. 2.b(3) The entire 3% NMVC payout potential is eligible for overranging for participating employees. The overranging will be at the same ratio as the unit officer's profit objective(s) overranging , if any. 2.b(4) Eligibility and participation rules for NMVC will be the same as those for MVC, where appropriate. 2.c RETIREMENT PLAN The calculations for the Management Variable Compensation Plan (and "Non Management") are made after deductions for retirement plans. Payout to a U.S. based participant in the Management Variable Compensation Plan (and "Non Management") is included in the calculation of the Company's contribution to that employee's retirement 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 - defined as beginning at SAM 15 and TE 5, or equivalent. 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. Certain subsidiaries may have other management variable compensation plans approved by the cognizant corporate vice president, corporate HR manager and CEO. An officer may recommend that an employee, who is otherwise eligible, not participate but such a recommendation must be agreed to by the CEO. Participants are eligible for payout in proportion to the % of the fiscal year the participant is responsible for the qualifying position, unless otherwise authorized by the CEO. 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. The participant must be on MTS' payroll at the end of the fiscal year for which the objective applies to qualify for a payout. Employees resigning or terminated before the end, regardless of cause, are not eligible unless otherwise authorized by the CEO. (An example of an exception could be early retirement or voluntary separation under a workforce reduction plan.) No employment contract is implied by participation in this Plan. 4. ESTABLISHMENT OF OBJECTIVES a. The Board of Directors sets the CEO's Corporate profit objectives (Return on Beginning Equity [ROBE]/share and Return on Average Net Assets [ROANA]) and the revenue growth objective at their November meeting. b. Profit objectives for other participants (typically also ROANA, but may be contribution or pretax for other than officers) and sector revenue growth objective will also be finalized by the November Board of Directors' meeting. They are not renegotiable. All other objectives must be finalized by 15 December. The cognizant officers and CEO approve the financial objectives for other participants. The purpose of these approvals is to: * Integrate objectives into Company operating plan * Guard against conflicting objectives * Help to assure consistency in degree of difficulty The CEO approves the sector growth objectives The cognizant vice president and one other manager approve all other objectives c. Each participant will have a mix of objectives per the attached Schedule. 5. CRITERIA FOR OBJECTIVES The Corporate Profit Objectives are set by the Board based on the current 3 Year Business Plan. Currently they are: ROBE/Share: 15% return on beginning equity/share (span -1/3 to + 2/3) ROANA: 21% (span -1/3 to + 2/3) (Both ROBE and ROANA may be increased in '97-'98 based on an analysis of comparable company performance and MTS's cost of capital.) Revenue Growth 8-12%/year All objectives include all transactions, acquisitions, write-offs, sale of assets, etc. unless specifically excluded by the Board in writing. Sector profit and growth objectives are set as appropriate for the 3 Year Business Plan for the unit. For example, (MT&S + MTS PowerTek + ASD) ROANA objectives are 16% for '96; 18.5% for '97; and 21% for;'98. (The 21% may change if the corporate ROANA number changes. In no case will a sector/division/niche MVC ROANA objective be set higher than the current Corporate ROANA - even if the sector/division/niche's current year business plan is higher) Revenue growth objectives are set on a year-to-year basis. Other objectives must be stated in equally 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, when added to the mid-point of the salary range is intended to yield total cash compensation somewhat above that of comparable companies to compensate for the salary suppression (ref. 2a). The competitive payout potential, expressed as a % of the midpoint of the salary structure, or actual salary in the case of subsidiary management, is shown below: POSITION COMPETITIVE PAYOUT POTENTIAL % CEO E5 70 Executive Vice President, MT&S E-4 55 Vice President E-3 25-50, depending on revenue level (profit potential) Vice President E-2 25-50, depending on revenue level (profit potential) Vice President (Unit) E-1 15-45, depending on revenue level (profit potential) Market Division P&L Mgrs. SAM 17-21 15-35, depending on revenue level (profit potential) All Other Management/ Leadership SAM 18-21 10-25, depending on profit impact SAM 15-17 6-20, depending on profit impact TE 5/5S -9/9S 6-15, depending on profit impact 7. OVERRANGING/MAXIMUM POTENTIAL PAYOUT The objectives are set at challenging but realistic levels which 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. Overranging of profit objective can earn an additional payout of equal to a factor of 2 if that objective is exceeded by an amount up to twice the lower limit span. Overranging is limited to profit objectives equaling up to 70% of the competitive full payout per the attached Schedule. Linear interpolation is used between the overranging amount and the objectives. The maximum payout potential for all positions, given full overranging, is 2.4 x the competitive payout potential [(.7 x 3) + (.3 x 1)]. 8. PAYOUT Payouts under this Plan (and the Non Management Variable Compensation Plan) are considered costs for the calculation of profit objectives (EPS/ROANA/Pretax/Contribution); so simultaneous equations are used for calculations. Payouts are audited by the manager of internal audit and approved by the CFO. Payout will be made within 90 days of the end of the fiscal year. 9. APPROVAL OF PLAN The Plan, and participation therein, are subject to annual review and approval by the Board of Directors. Attachments: FY '96 MVC Plan Participation and Short Form Schedule of Objectives EX-10.C 4 1987 STOCK OPTION PLAN EXHIBIT 10.c MTS SYSTEMS CORPORATION 1987 STOCK OPTION PLAN 1. Purpose. The purpose of the MTS Systems Corporation 1987 Stock Option Plan is to provide a continuing, long-term incentive to selected eligible officers and key employees of MTS Systems Corporation (the "Corporation") and of any subsidiary corporation of the Corporation ("Subsidiary"), as herein defined; and to non-employee directors of the Corporation, to provide a means of rewarding outstanding performance; and enable the Corporation to maintain a competitive position to attract and retain key personnel necessary for continued growth and profitability. 2. Definitions. The following words and phrases as used herein shall have the meanings set forth below: 2.1 "Board" shall mean the Board of Directors of the Corporation as it may be comprised from time to time. 2.2 "Change in Control" shall mean the time at which any entity, person or group (other than the Corporation, any subsidiary of the Corporation or any savings, pension or other benefit plan for the benefit of any employees of the Corporation or its subsidiaries) which prior to such time beneficially owned less than twenty percent (20%) of the then outstanding Common Stock acquires such additional shares of Common Stock in one or more transactions, or a series of transactions, such that following such transaction or transactions such entity, person or group beneficially owns, directly or indirectly, twenty percent (20%), or more, of the outstanding Common Stock. 2.3 "Code" shall mean the Internal Revenue Code of 1986, as amended. 2.4 "Committee" shall mean the Committee referred to in Section 4.1 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board, unless the Plan specifically states otherwise. 2.5 "Common Stock" shall mean the common Stock, par value $.25 per share, of the Corporation. 2.6 "Corporation" shall mean MTS Systems Corporation, a Minnesota corporation. 2.7 "Fair Market Value" of any security on any given date shall be determined by the Committee as follows: (a) if the security is listed for trading on one or more national securities exchanges (including the Nasdaq National Market System), the reported last sales price on the principal such exchange on the date in question, or if such security shall not have been traded on such principal exchange on such date, the reported last sales price on such principal exchange on the first day prior thereto on which such security was so traded; or (b) if the security is not listed for trading on a national securities exchange (including the Nasdaq National Market System) but is traded in the over-the-counter market, the mean of the highest and lowest bid prices for such security on the date in question, or if there are no such bid prices for such prices for such security on such date, the mean of the highest and lowest bid prices on the first day prior thereto on which such prices existed; or (c) if neither (a) nor (b) is applicable, by any means deemed fair and reasonable by the Committee, which determination shall be final and binding on all parties. 2.8 "ISO" shall mean any Option granted pursuant to this Plan and intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Code. 2.9 "Non-Employee Director" shall mean a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934. 2.10 "NQO" shall mean any Option granted pursuant to this Plan which is not an ISO. 2.11 "Option" shall mean any stock Option granted pursuant to this Plan, whether an ISO or a NQO. 2.12 "Optionee" shall mean any person who is the holder of an Option granted pursuant to this Plan. 2.13 "Outside Director" means a director who: (a) is not a current employee of the Company or any member of an affiliated group which include the Company; (b) is not a former employee of the Company who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (c) has not been an officer of the Company; (d) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director, except as otherwise permitted under Code Section 162(m) and regulations thereunder. For this purpose, remuneration includes any payment in exchange for goods or services. This definition shall be further governed by the provisions of Code Section 162(m) and regulations promulgated thereunder. 2.14 "Plan" shall mean this 1987 Stock Option Plan of the Corporation. 2.15 "Subsidiary" shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation if each of the corporations (other than the last corporation in the unbroken chain) owns stock possession 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 3. Shares Available Under Plan. The number of shares which may be issued pursuant to Options granted under this Plan shall not exceed 600,000 shares (post two-for-one stock split effective April 1, 1996) of the Common Stock of the Corporation; provided, however, that shares which become available as a result of cancelled, unexercised, lapsed or terminated Options granted under this Plan shall be available for issuance pursuant to Options subsequently granted under this Plan. In the event of any stock dividend or stock split with respect to the Common Stock of the Corporation, such adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan as may be determined to be appropriate by the Board. The shares issued upon exercise of Options granted under this Plan may be authorized and unissued shares or shares previously acquired or to be acquired by the Corporation. 4. Administration. 4.1 The Plan will be administered by a Committee appointed by the Board of Directors of the Company consisting of at least two Directors, all of whom shall be Outside Directors and Non-Employee Directors, who shall serve at the pleasure of the Board. 4.2 The Committee will have plenary authority, subject to provisions of the Plan, to determine when and to whom Options will be granted, the term of each Option, the number of shares covered by it, the participation by the optionee in other plans, and any other terms or conditions of each Option. The Committee shall determine with respect to each grant of an Option whether a participant shall receive an ISO or an NQO. The number of shares the term and the other terms and conditions of a particular kind of Option need not be the same, even as to Options granted at the same time. The Committee's recommendations regarding Option grants and terms and conditions thereof will be conclusive. No ISO shall be granted under the Plan after November 26, 1996. 4.3 The Committee will have the sole responsibility for construing and interpreting the Plan, for establishing and amending any rules and regulations as it deems necessary or desirable for the proper administration of the Plan, and for resolving all questions arising under the Plan. Any decision or action taken by the Committee arising out of or about the construction, administration, interpretation and effect of the plan and of its rules and regulations will, to the extent permitted by law, be within its absolute discretion, except as otherwise specifically provided herein, and will be conclusive and binding on all Optionees, all successors, and any other person, whether that person is claiming under or through any Optionee or otherwise. 4.4 The Committee will designate one of its members as chairman. It will hold its meeting at the times and places as it may determine. A majority of its members will constitute a quorum, and all determinations of the Committee will be made by a majority of its members. Any determination reduced to writing and signed by all members will be fully as effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary, who need not be a member of the Committee, and may make such rules and regulations for the conduct of its business as it may deem advisable. 4.5 No member of the Committee will be liable, in the absence of bad faith, for any act or omission with respect to his service on the Committee. Service on the Committee will constitute service as a member of the Board, so that the members of the Committee will be entitled to indemnification and reimbursement as Board members pursuant to its Bylaws. 4.6 The Committee will regularly inform the Board as to its actions with respect to all Options granted under the Plan and the terms and conditions and any such Options in a manner, at any times, and in any form as the Board may reasonably request. 4.7 Any other provision of the Plan to the contrary notwithstanding, the Committee is authorized to take such action as it, in its discretion, may deem necessary or advisable and fair and equitable to Optionees in the event of: a Change in Control of the Corporation; a tender, exchange or similar offer for all or any part of the Common Stock made by any entity, person or group (other than the Corporation, any Subsidiary of the Corporation or its Subsidiaries); a merger of the Corporation into, a consolidation of the Corporation with, or an acquisition of the Corporation by another corporation; or a sale or transfer of all or substantially all of the Corporation's assets. Such action, in the Committee's discretion, may include (but shall not be deemed limited to), establishing, amending or waiving the forms, terms, conditions or duration of Options so as to provide for earlier, later, extended or additional terms for exercise of the whole, or any installment, thereof; alternate forms of payment, or other modifications. The Committee may take any such actions pursuant to this Section 4.7 by adopting rules or regulations of general applicability to all Optionees, or to certain categories of Optionees, by amending or waiving terms and conditions in stock option agreements, or by taking action with respect to individual Optionees. The Committee may take any such actions before or after the public announcement of any such Change in Control, tender offer, exchange offer, merger, consolidation, acquisition or sale or transfer of assets. 5. Participants. 5.1 Participation in this Plan shall be limited to key personnel of the Corporation or of a Subsidiary, who are employees of the Corporation or of a Subsidiary. Officers will be employees for this purpose, whether or not they are also members of the Board. 5.2 Subject to other provisions of this Plan, Options may be granted to the same participants on more than one occasion. 5.3 The Committee's determination under the Plan including, without limitation, determination of the persons to receive Options, the form, amount and type of such Options, and the terms and provisions of Options need not be uniform and may be made selectively among otherwise eligible participants whether or not the participants are similarly situated. 6. Terms and Conditions. 6.1 Each Option granted under the Plan shall be evidenced by a written agreement, which shall be subject to the provisions of this Plan and to such other terms and conditions as the Corporation may deem appropriate. 6.2 Each Option agreement shall specify the period for which the Option thereunder is granted (which in no event shall exceed ten years from the date of the grant for options granted pursuant to Section 6.3(a) and 6.3(c) hereof and five years from the date of grant for Options granted pursuant to 6.3(b) hereof) and shall provide that the Option shall expire at the end of such period; provided, however, the term of each Option shall be subject to the power of the Committee, among other things, to accelerate or otherwise adjust the terms for exercise of Options pursuant to Section 4.7 hereof in the event of the occurrence of any of the events set forth therein. 6.3 The exercise price per share shall be determined by the Committee at the time any Option is granted and shall be determined as follows: (a) For employees who do not own Stock possessing more than ten percent (10%) of the total combined voting power of all classes of Stock of the Corporation or of any Subsidiary, the ISO exercise price per share shall not be less than one hundred percent (100%) of Fair Market Value of the Common Stock of the Corporation on the date the option is granted, as determined by the Committee. (b) For employees who own Stock possessing more than ten percent (10%) of the total combined voting power of all classes of Stock of the Corporation or of any Subsidiary, the ISO exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value of the Common Stock of the Corporation on the date the Option is granted, as determined by the Committee. (c) The NQO exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value of the Common Stock of the Corporation on the date the Option is granted, as determined by the Committee. 6.4 The aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which an ISO granted under this Plan or any other plan of the Corporation or its Subsidiaries is exercisable for the first time by an Optionee during any calendar year shall not exceed $100,000. 6.5 An Option shall be exercised at such time or times, and with respect to such number of shares, as may be determined by the Corporation at the time of the grant. The Option agreement may require, if so determined by the Corporation, that no part of the Option may be exercised until the Optionee shall have remained in the employ of the Corporation or of a Subsidiary for such period after the date of the Option as the Corporation may specify. 6.6 The Corporation may prescribe the form of legend which shall be affixed to the Stock certificate representing shares to be issued and the shares shall be subject to the provisions of any repurchase agreement or other agreement restricting the sale or transfer thereof. Such agreements or restrictions shall be noted on the certificate representing the shares to be issued. 7. Exercise of Option. 7.1 Each exercise of an Option granted hereunder, whether in whole or in part, shall be by written notice thereof, delivered to the Secretary of the Corporation (or such other person as he may designate). The notice shall state the number of shares with respect to which the Options are being exercised and shall be accompanied by payment in full for the number of shares so designated. Shares shall be registered in the name of the Optionee unless the Optionee otherwise directs in his or her notice of election. 7.2 Payment shall be made to the Corporation either (i) in cash, including certified check, bank draft or money order, (ii) at the discretion of the Corporation, by delivering Corporation Common Stock already owned by the participant or a combination of Common Stock and cash, or (iii) at the discretion of the Corporation by delivering a promissory note, containing such terms and conditions acceptable to the Corporation, for all or a portion of the purchase price of the share so purchased. With respect to (ii), the Fair Market Value of Stock so delivered shall be determined as of the date immediately preceding the date of exercise. 7.3 Upon notification of the amount due and prior to, or concurrently with, the delivery to the Optionee of a certificate representing any shares purchased pursuant to the exercise of an Option, the Optionee shall promptly pay to the Corporation any amount necessary to satisfy applicable federal, state or local tax requirements. 8. Adjustments of Option Stock. In case the shares issuable upon exercise of any Option granted under the Plan at any time outstanding shall be subdivided into a greater or combined into a lesser number of shares (whether with or without par value), the number of shares purchasable upon exercise of such Option immediately prior thereto shall be adjusted so that the Optionee shall be entitled to receive a number of shares which he or she would have owned or have been entitled to receive after the happening of such event had such Option been exercised immediately prior to the happening of such subdivision or combination or any record date with respect thereto. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such subdivision or combination retroactive to the record date, if any, for such subdivision or combination. The option price (as such amount may have theretofore been adjusted pursuant to the provisions hereof) shall be adjusted by multiplying the option price immediately prior to the adjustment of the number of shares purchasable upon the exercise of the Option immediately prior to such adjustment, and of which the denominator shall be the number of shares so purchasable immediately thereafter. Substituted shares of Stock shall be deemed shares under Section 2 of the Plan. 9. Assignments. Any Option granted under this Plan shall be exercisable only by the Optionee to whom granted during his or her lifetime and shall not be assignable or transferable otherwise than by will or by the laws of descent and distribution. 10. Severance; Death; Disability. An Option shall terminate, and no rights thereunder may be exercised, if the person to whom it is granted ceases to be employed by the Corporation or by a Subsidiary except that: 10.1 If the employment of the Optionee is terminated by any reason other than his or her death or disability, the Optionee may at any time within not more than three months after termination of his or her employment, exercise his or her Option rights but only to the extent they were exercisable by the Optionee on the date of termination of his or her employment; provided, however, that if the employment is terminated by deliberate, willful or gross misconduct as determined by the Committee, all rights under the Option shall terminate and expire upon such termination. 10.2 If the Optionee dies while in the employ of the Corporation or a Subsidiary, or within not more than three months after termination of his or her employment, the Optionee's rights under the Option may be exercised at any time within three months following such death by his or her personal representative or by the person or person to whom such rights under the Option shall pass by will by the laws of descent and distribution. 10.3 If the employment of the Optionee is terminated because of permanent disability, the Optionee, or his or her legal representative may at any time within not more than one (1) year after termination of his or her employment, exercise his or her Option rights but only to the extent they were exercisable by the Optionee on the date of termination of his or her employment. 10.4 Notwithstanding anything contained in Sections 10.1, 10.2 and 10.3 to the contrary, no Option rights shall be exercisable by anyone after the expiration of the term of the Option. 10.5 Transfers of employment between the Corporation and a Subsidiary, or between Subsidiaries, will not constitute termination of employment for purposes of any Option granted under this Plan. The Committee may specify in the terms and conditions of an Option whether any authorized leave of absence or absence for military or government service or for any other reasons will constitute a termination of employment for purposes of the Option and the Plan. 11. Rights of Participants. Neither the participant nor the personal representatives, heirs, or legatees of such participant shall be or have any of the rights or privileges of a shareholder of the Corporation in respect of any of the shares issuable upon the exercise of an Option granted under this Plan unless and until certificates representing such shares shall have been issued and delivered to the participant or to such personal representatives, heirs or legatees. 12. Securities Registration. If any law or regulation of the Securities and Exchange Commission or of any other body having jurisdiction shall require the Corporation or the participant to take any action in connection with the exercise of an Option, then notwithstanding any contrary provision of an Option agreement or this Plan, the date for exercise of such Option and the delivery of the shares purchased thereunder shall be deferred until the completion of the necessary action. In the event that the Corporation shall deem it necessary, the Corporation may condition the grant or exercise of an Option granted under this Plan upon the receipt of a satisfactory certificate that the Optionee is acquiring the Option or the shares obtained by exercise of the Option for investment purposes and not with the view or intent to resell or otherwise distribute such Option or shares. In such event, the Stock certificate evidencing such shares shall bear a legend referring to applicable laws restricting transfer of such shares. In the event that the Corporation shall deem it necessary to register under the Securities Act of 1933, as amended, or any other applicable statute, any Options or any shares with respect to which an Option shall have been granted or exercised, then the participant shall cooperate with the Corporation and take such action as is necessary to permit registration or qualification of such Options or shares. 13. Duration and Amendment. 13.1 There is no express limitation upon the duration of the Plan, except for the requirement of the Code that all ISOs must be granted within ten years from the date the Plan is adopted by the Board. 13.2 The Board may terminate or may amend the Plan at any time, provided, however that the Board may not, without approval of the stockholders of the Corporation, (i) increase the maximum number of shares as to which Options may be granted under the Plan, (ii) permit the granting of Options at less than 100% of Fair Market Value at time of grant, (iii) change the class of employees eligible to receive Options under the Plan, or (iv) grant Options to Non-Employee Directors. 14. Approval of Shareholders. This Plan is subject to approval of the Corporation's shareholders, and if it is not so approved on or before one year after the date of adoption of this Plan by the Board, the Plan shall not come into effect, and any Options granted pursuant to this Plan shall be deemed cancelled. 15. Conditions of Employment. The granting of an Option to a participant under this Plan shall impose no obligation on the Corporation to continue the employment of any participant and shall not lessen or affect the right of the Corporation to terminate the employment of the participant. 16. Other Options. Nothing in the Plan will be construed to limit the authority of the Corporation to exercise its corporate rights and powers, including, by way of illustration and not by way of limitation, the right to grant options for proper corporate purposes otherwise than under the Plan to any employee or any other person, firm, corporation, association, or other entity, or to grant options to, or assume options of, any person for the acquisition by purchase, lease, merger, consolidation, or otherwise, of all or any part of the business and assets of any person, firm, corporation, association, or other entity. - ------------------------- Adopted by the Board of Directors on November 26, 1986. Adopted by the Corporation's Shareholders on January 27, 1987. Amendment adopted by the Board of Directors November 23, 1987. Amendment adopted by the Corporation's Shareholders on January 25, 1988. Amendment adopted by the Board of Directors on January 25, 1988. Amendment adopted by the Board of Directors on April 19, 1988. Amended by the Board of Directors on November 22, 1996. EX-10.D 5 1990 STOCK OPTION PLAN EXHIBIT 10.d MTS SYSTEMS CORPORATION 1990 STOCK OPTION PLAN 1. Purpose. The purpose of the MTS Systems Corporation 1990 Stock Option Plan is to provide a continuing, long-term incentive to selected eligible officers and key employees of MTS Systems Corporation (the "Corporation") and of any subsidiary corporation of the Corporation ("Subsidiary"), as herein defined; and to non-employee directors of the Corporation, to provide a means of rewarding outstanding performance; and enable the Corporation to maintain a competitive position to attract and retain key personnel necessary for continued growth and profitability. 2. Definitions. The following words and phrases as used herein shall have the meanings set forth below: 2.1 "Board" shall mean the Board of Directors of the Corporation as it may be comprised from time to time. 2.2 "Change in Control" shall mean the time at which any entity, person or group (other than the Corporation, any subsidiary of the Corporation or any savings, pension or other benefit plan for the benefit of any employees of the Corporation or its subsidiaries) which prior to such time beneficially owned less than twenty percent (20%) of the then outstanding Common Stock acquires such additional shares of Common Stock in one or more transactions, or a series of transactions, such that following such transaction or transactions such entity, person or group beneficially owns, directly or indirectly, twenty percent (20%), or more, of the outstanding Common Stock. 2.3 "Code" shall mean the Internal Revenue Code of 1986, as amended. 2.4 "Committee" shall mean the Committee referred to in Section 4.1 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board, unless the Plan specifically states otherwise. 2.5 "Common Stock" shall mean the common Stock, par value $.25 per share, of the Corporation. 2.6 "Corporation" shall mean MTS Systems Corporation, a Minnesota corporation. 2.7 "Fair Market Value" of any security on any given date shall be determined by the Committee as follows: (a) if the security is listed for trading on one or more national securities exchanges (including the Nasdaq National Market System), the reported last sales price on the principal such exchange on the date in question, or if such security shall not have been traded on such principal exchange on such date, the reported last sales price on such principal exchange on the first day prior thereto on which such security was so traded; or (b) if the security is not listed for trading on a national securities exchange (including the Nasdaq National Market System) but is traded in the over-the-counter market, the mean of the highest and lowest bid prices for such security on the date in question, or if there are no such bid prices for such prices for such security on such date, the mean of the highest and lowest bid prices on the first day prior thereto on which such prices existed; or (c) if neither (a) nor (b) is applicable, by any means deemed fair and reasonable by the Committee, which determination shall be final and binding on all parties. 2.8 "ISO" shall mean any Option granted pursuant to this Plan and intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Code. 2.9 "Non-Employee Director" shall mean a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934. 2.10 "NQO" shall mean any Option granted pursuant to this Plan which is not an ISO. 2.11 "Option" shall mean any stock Option granted pursuant to this Plan, whether an ISO or a NQO. 2.12 "Optionee" shall mean any person who is the holder of an Option granted pursuant to this Plan. 2.13 "Outside Director" means a director who: (a) is not a current employee of the Company or any member of an affiliated group which include the Company; (b) is not a former employee of the Company who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (c) has not been an officer of the Company; (d) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director, except as otherwise permitted under Code Section 162(m) and regulations thereunder. For this purpose, remuneration includes any payment in exchange for goods or services. This definition shall be further governed by the provisions of Code Section 162(m) and regulations promulgated thereunder. 2.14 "Plan" shall mean this 1990 Stock Option Plan of the Corporation. 2.15 "Subsidiary" shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation if each of the corporations (other than the last corporation in the unbroken chain) owns stock possession 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 3. Shares Available Under Plan. The number of shares which may be issued pursuant to Options granted under this Plan shall not exceed 600,000 shares (post two-for-one stock split effective April 1, 1996) of the Common Stock of the Corporation; provided, however, that shares which become available as a result of cancelled, unexercised, lapsed or terminated Options granted under this Plan shall be available for issuance pursuant to Options subsequently granted under this Plan. In the event of any stock dividend or stock split with respect to the Common Stock of the Corporation, such adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan as may be determined to be appropriate by the Board. The shares issued upon exercise of Options granted under this Plan may be authorized and unissued shares or shares previously acquired or to be acquired by the Corporation. 4. Administration. 4.1 The Plan will be administered by a Committee appointed by the Board of Directors of the Company consisting of at least two Directors, all of whom shall be Outside Directors and Non-Employee Directors, who shall serve at the pleasure of the Board. 4.2 The Committee will have plenary authority, subject to provisions of the Plan, to determine when and to whom Options will be granted, the term of each Option, the number of shares covered by it, the participation by the optionee in other plans, and any other terms or conditions of each Option. The Committee shall determine with respect to each grant of an Option whether a participant shall receive an ISO or an NQO. The number of shares the term and the other terms and conditions of a particular kind of Option need not be the same, even as to Options granted at the same time. The Committee's recommendations regarding Option grants and terms and conditions thereof will be conclusive. No ISO shall be granted under the Plan after November 27, 1999. 4.3 The Committee will have the sole responsibility for construing and interpreting the Plan, for establishing and amending any rules and regulations as it deems necessary or desirable for the proper administration of the Plan, and for resolving all questions arising under the Plan. Any decision or action taken by the Committee arising out of or about the construction, administration, interpretation and effect of the plan and of its rules and regulations will, to the extent permitted by law, be within its absolute discretion, except as otherwise specifically provided herein, and will be conclusive and binding on all Optionees, all successors, and any other person, whether that person is claiming under or through any Optionee or otherwise. 4.4 The Committee will designate one of its members as chairman. It will hold its meeting at the times and places as it may determine. A majority of its members will constitute a quorum, and all determinations of the Committee will be made by a majority of its members. Any determination reduced to writing and signed by all members will be fully as effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary, who need not be a member of the Committee, and may make such rules and regulations for the conduct of its business as it may deem advisable. 4.5 No member of the Committee will be liable, in the absence of bad faith, for any act or omission with respect to his service on the Committee. Service on the Committee will constitute service as a member of the Board, so that the members of the Committee will be entitled to indemnification and reimbursement as Board members pursuant to its Bylaws. 4.6 The Committee will regularly inform the Board as to its actions with respect to all Options granted under the Plan and the terms and conditions and any such Options in a manner, at any times, and in any form as the Board may reasonably request. 4.7 Any other provision of the Plan to the contrary notwithstanding, the Committee is authorized to take such action as it, in its discretion, may deem necessary or advisable and fair and equitable to Optionees in the event of: a Change in Control of the Corporation; a tender, exchange or similar offer for all or any part of the Common Stock made by any entity, person or group (other than the Corporation, any Subsidiary of the Corporation or its Subsidiaries); a merger of the Corporation into, a consolidation of the Corporation with, or an acquisition of the Corporation by another corporation; or a sale or transfer of all or substantially all of the Corporation's assets. Such action, in the Committee's discretion, may include (but shall not be deemed limited to), establishing, amending or waiving the forms, terms, conditions or duration of Options so as to provide for earlier, later, extended or additional terms for exercise of the whole, or any installment, thereof; alternate forms of payment, or other modifications. The Committee may take any such actions pursuant to this Section 4.7 by adopting rules or regulations of general applicability to all Optionees, or to certain categories of Optionees, by amending or waiving terms and conditions in stock option agreements, or by taking action with respect to individual Optionees. The Committee may take any such actions before or after the public announcement of any such Change in Control, tender offer, exchange offer, merger, consolidation, acquisition or sale or transfer of assets. 5. Participants. 5.1 Participation in this Plan shall be limited to key personnel of the Corporation or of a Subsidiary, who are employees of the Corporation or of a Subsidiary. Officers will be employees for this purpose, whether or not they are also members of the Board. 5.2 Subject to other provisions of this Plan, Options may be granted to the same participants on more than one occasion. 5.3 The Committee's determination under the Plan including, without limitation, determination of the persons to receive Options, the form, amount and type of such Options, and the terms and provisions of Options need not be uniform and may be made selectively among otherwise eligible participants whether or not the participants are similarly situated. 6. Terms and Conditions. 6.1 Each Option granted under the Plan shall be evidenced by a written agreement, which shall be subject to the provisions of this Plan and to such other terms and conditions as the Corporation may deem appropriate. 6.2 Each Option agreement shall specify the period for which the Option thereunder is granted (which in no event shall exceed ten years from the date of the grant for options granted pursuant to Section 6.3(a) hereof and five years from the date of grant for Options granted pursuant to 6.3(b) hereof) and shall provide that the Option shall expire at the end of such period; provided, however, the term of each Option shall be subject to the power of the Committee, among other things, to accelerate or otherwise adjust the terms for exercise of Options pursuant to Section 4.7 hereof in the event of the occurrence of any of the events set forth therein. 6.3 The exercise price per share shall be determined by the Committee at the time any Option is granted and shall be determined as follows: (a) For employees who do not own Stock possessing more than ten percent (10%) of the total combined voting power of all classes of Stock of the Corporation or of any Subsidiary, the ISO exercise price per share shall not be less than one hundred percent (100%) of Fair Market Value of the Common Stock of the Corporation on the date the option is granted, as determined by the Committee. (b) For employees who own Stock possessing more than ten percent (10%) of the total combined voting power of all classes of Stock of the Corporation or of any Subsidiary, the ISO exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value of the Common Stock of the Corporation on the date the Option is granted, as determined by the Committee. (c) The NQO exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value of the Common Stock of the Corporation on the date the Option is granted, as determined by the Committee. 6.4 The aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which an ISO granted under this Plan or any other plan of the Corporation or its Subsidiaries is exercisable for the first time by an Optionee during any calendar year shall not exceed $100,000. 6.5 An Option shall be exercised at such time or times, and with respect to such number of shares, as may be determined by the Corporation at the time of the grant. The Option agreement may require, if so determined by the Corporation, that no part of the Option may be exercised until the Optionee shall have remained in the employ of the Corporation or of a Subsidiary for such period after the date of the Option as the Corporation may specify. 6.6 The Corporation may prescribe the form of legend which shall be affixed to the Stock certificate representing shares to be issued and the shares shall be subject to the provisions of any repurchase agreement or other agreement restricting the sale or transfer thereof. Such agreements or restrictions shall be noted on the certificate representing the shares to be issued. 7. Exercise of Option. 7.1 Each exercise of an Option granted hereunder, whether in whole or in part, shall be by written notice thereof, delivered to the Secretary of the Corporation (or such other person as he may designate). The notice shall state the number of shares with respect to which the Options are being exercised and shall be accompanied by payment in full for the number of shares so designated. Shares shall be registered in the name of the Optionee unless the Optionee otherwise directs in his or her notice of election. 7.2 Payment shall be made to the Corporation either (i) in cash, including certified check, bank draft or money order, (ii) at the discretion of the Corporation, by delivering Corporation Common Stock already owned by the participant or a combination of Common Stock and cash, or (iii) at the discretion of the Corporation by delivering a promissory note, containing such terms and conditions acceptable to the Corporation, for all or a portion of the purchase price of the share so purchased. With respect to (ii), the Fair Market Value of Stock so delivered shall be determined as of the date immediately preceding the date of exercise. 7.3 Upon notification of the amount due and prior to, or concurrently with, the delivery to the Optionee of a certificate representing any shares purchased pursuant to the exercise of an Option, the Optionee shall promptly pay to the Corporation any amount necessary to satisfy applicable federal, state or local tax requirements. If the terms of an Option permit, an Optionee may elect by written notice to the Corporation to satisfy part or all of the withholding tax requirements associated with the exercise of the Option by (i) authorizing the Corporation to retain from the number of shares of Common Stock that would otherwise be deliverable to the Optionee, or (ii) delivering to the Corporation from shares of Common Stock already owned by the Optionee, that number of shares having an aggregate Fair Market Value equal to part or all of the tax payable by the Optionee under this Section 7.3. Any such election shall be in accordance with, and subject to, applicable tax and securities laws, regulations and rulings. 8. Adjustments of Option Stock. In case the shares issuable upon exercise of any Option granted under the Plan at any time outstanding shall be subdivided into a greater or combined into a lesser number of shares (whether with or without par value), the number of shares purchasable upon exercise of such Option immediately prior thereto shall be adjusted so that the Optionee shall be entitled to receive a number of shares which he or she would have owned or have been entitled to receive after the happening of such event had such Option been exercised immediately prior to the happening of such subdivision or combination or any record date with respect thereto. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such subdivision or combination retroactive to the record date, if any, for such subdivision or combination. The option price (as such amount may have theretofore been adjusted pursuant to the provisions hereof) shall be adjusted by multiplying the option price immediately prior to the adjustment of the number of shares purchasable upon the exercise of the Option immediately prior to such adjustment, and of which the denominator shall be the number of shares so purchasable immediately thereafter. Substituted shares of Stock shall be deemed shares under Section 2 of the Plan. 9. Assignments. Any Option granted under this Plan shall be exercisable only by the Optionee to whom granted during his or her lifetime and shall not be assignable or transferable otherwise than by will or by the laws of descent and distribution. 10. Severance; Death; Disability. An Option shall terminate, and no rights thereunder may be exercised, if the person to whom it is granted ceases to be employed by the Corporation or by a Subsidiary except that: 10.1 If the employment of the Optionee is terminated by any reason other than his or her death or disability, the Optionee may at any time within not more than three months after termination of his or her employment, exercise his or her Option rights but only to the extent they were exercisable by the Optionee on the date of termination of his or her employment; provided, however, that if the employment is terminated by deliberate, willful or gross misconduct as determined by the Committee, all rights under the Option shall terminate and expire upon such termination. 10.2 If the Optionee dies while in the employ of the Corporation or a Subsidiary, or within not more than three months after termination of his or her employment, the Optionee's rights under the Option may be exercised at any time within three months following such death by his or her personal representative or by the person or person to whom such rights under the Option shall pass by will by the laws of descent and distribution. 10.3 If the employment of the Optionee is terminated because of permanent disability, the Optionee, or his or her legal representative may at any time within not more than one (1) year after termination of his or her employment, exercise his or her Option rights but only to the extent they were exercisable by the Optionee on the date of termination of his or her employment. 10.4 If the Optionee retires at or after the age 55, all options held by the Optionee on his or her last day of employment shall, to the extent not previously exercised, become immediately exercisable, without regard to any vesting requirements or periods previously established, and may be exercised by the Optionee not later than the earlier of the date the option expires or two (2) years after the date of retirement. 10.5 Notwithstanding anything contained in Sections 10.1, 10.2, 10.3 and 10.4 to the contrary, no Option rights shall be exercisable by anyone after the expiration of the term of the Option. 10.6 Transfers of employment between the Corporation and a Subsidiary, or between Subsidiaries, will not constitute termination of employment for purposes of any Option granted under this Plan. The Committee may specify in the terms and conditions of an Option whether any authorized leave of absence or absence for military or government service or for any other reasons will constitute a termination of employment for purposes of the Option and the Plan. 11. Rights of Participants. Neither the participant nor the personal representatives, heirs, or legatees of such participant shall be or have any of the rights or privileges of a shareholder of the Corporation in respect of any of the shares issuable upon the exercise of an Option granted under this Plan unless and until certificates representing such shares shall have been issued and delivered to the participant or to such personal representatives, heirs or legatees. 12. Securities Registration. If any law or regulation of the Securities and Exchange Commission or of any other body having jurisdiction shall require the Corporation or the participant to take any action in connection with the exercise of an Option, then notwithstanding any contrary provision of an Option agreement or this Plan, the date for exercise of such Option and the delivery of the shares purchased thereunder shall be deferred until the completion of the necessary action. In the event that the Corporation shall deem it necessary, the Corporation may condition the grant or exercise of an Option granted under this Plan upon the receipt of a satisfactory certificate that the Optionee is acquiring the Option or the shares obtained by exercise of the Option for investment purposes and not with the view or intent to resell or otherwise distribute such Option or shares. In such event, the Stock certificate evidencing such shares shall bear a legend referring to applicable laws restricting transfer of such shares. In the event that the Corporation shall deem it necessary to register under the Securities Act of 1933, as amended, or any other applicable statute, any Options or any shares with respect to which an Option shall have been granted or exercised, then the participant shall cooperate with the Corporation and take such action as is necessary to permit registration or qualification of such Options or shares. 13. Duration and Amendment. 13.1 There is no express limitation upon the duration of the Plan, except for the requirement of the Code that all ISOs must be granted within ten years from the date the Plan is adopted by the Board. 13.2 The Board may terminate or may amend the Plan at any time, provided, however that the Board may not, without approval of the stockholders of the Corporation, (i) increase the maximum number of shares as to which Options may be granted under the Plan, (ii) permit the granting of Options at less than 100% of Fair Market Value at time of grant, (iii) change the class of employees eligible to receive Options under the Plan, or (iv) grant Options to Non-Employee Directors. 14. Approval of Shareholders. This Plan is subject to approval of the Corporation's shareholders, and if it is not so approved on or before one year after the date of adoption of this Plan by the Board, the Plan shall not come into effect, and any Options granted pursuant to this Plan shall be deemed cancelled. 15. Conditions of Employment. The granting of an Option to a participant under this Plan shall impose no obligation on the Corporation to continue the employment of any participant and shall not lessen or affect the right of the Corporation to terminate the employment of the participant. 16. Other Options. Nothing in the Plan will be construed to limit the authority of the Corporation to exercise its corporate rights and powers, including, by way of illustration and not by way of limitation, the right to grant options for proper corporate purposes otherwise than under the Plan to any employee or any other person, firm, corporation, association, or other entity, or to grant options to, or assume options of, any person for the acquisition by purchase, lease, merger, consolidation, or otherwise, of all or any part of the business and assets of any person, firm, corporation, association, or other entity. - ------------------------- Adopted by the Board of Directors on November 27, 1989. Adopted by the Corporation's Shareholders on January 23, 1990. Amended by the Board of Directors on November 22, 1996. EX-10.E 6 1994 STOCK PLAN EXHIBIT 10.e MTS SYSTEMS CORPORATION 1994 STOCK PLAN TABLE OF CONTENTS Page ---- SECTION 1. General Purpose of Plan; Definitions. .......................1 SECTION 2. Administration. .............................................3 SECTION 3. Stock Subject to Plan. ......................................4 SECTION 4. Eligibility. ................................................5 SECTION 5. Stock Options. ..............................................5 SECTION 6. Stock Appreciation Rights. ..................................8 SECTION 7. Restricted Stock. ...........................................9 SECTION 8. Deferred Stock Awards. .....................................11 SECTION 9. Other Awards. ..............................................12 SECTION 10. Transfer, Leave of Absence, etc. .......................12 SECTION 11. Amendments and Termination. ............................13 SECTION 12. Unfunded Status of Plan. ...............................13 SECTION 13. General Provisions. ....................................13 SECTION 14. Effective Date of Plan. ................................15 MTS SYSTEMS CORPORATION 1994 STOCK PLAN SECTION 1. General Purpose of Plan; Definitions. The name of this plan is the MTS Systems Corporation 1994 Stock Plan (the "Plan"). The purpose of the Plan is to enable MTS Systems Corporation (the "Company") and its Subsidiaries to retain and attract executives and other key employees and non-employee directors who contribute to the Company's success by their ability, ingenuity and industry, and to enable such individuals to participate in the long-term success and growth of the Company by giving them a proprietary interest in the Company. For purposes of the Plan, the following terms shall be defined as set forth below: a. "Agreement" means an agreement by and between the Company and an optionee or recipient of an award under the Plan setting forth the terms and conditions of the option or award. b. "Board" means the Board of Directors of the Company as it may be comprised from time to time. c. "Cause" means a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, or a participant's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company. d. "Code" means the Internal Revenue Code of 1986, as amended. e. "Committee" means the Committee referred to in Section 2 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board, unless the Plan specifically states otherwise. f. "Company" means the MTS Systems Corporation, a corporation organized under the laws of the State of Minnesota (or any successor corporation). g. "Deferred Stock" means an award made pursuant to Section 8 below of the right to receive Stock at the end of a specified deferral period. h. "Disability" means a physical or mental condition resulting from a bodily injury or disease or mental disorder rendering such person incapable of continuing to perform the employment duties of such person at the Company as such duties existed immediately prior to the bodily injury, disease or mental disorder. i. "Fair Market Value" means the value of the Stock on a given date as determined by the Committee in accordance with the applicable Treasury Department regulations under Section 422 of the Code with respect to "incentive stock options." j. "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. k. "Non-Employee Director" means a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934. l. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option, and is intended to be and is designated as a "Non-Qualified Stock Option." m. "Outside Director" means a Director who: (a) is not a current employee of the Company or any member of an affiliated group which include the Company; (b) is not a former employee of the Company who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (c) has not been an officer of the Company; (d) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director, except as otherwise permitted under Code Section 162(m) and regulations thereunder. For this purpose, remuneration includes any payment in exchange for goods or services. This definition shall be further governed by the provisions of Code Section 162(m) and regulations promulgated thereunder. n. "Other Awards" means those awards granted pursuant to Section 9 hereof. o. "Parent Corporation" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations (other than the Company) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. p. "Restricted Stock" means an award of shares of Stock that are subject to restrictions under Section 7 below. q. "Retirement" means retirement from active employment with the Company and any Subsidiary or Parent Corporation of the Company on or after age 55. r. "Stock" means the Common Stock, $.25 par value per share, of the Company. s. "Stock Appreciation Right" means the right pursuant to an award granted under Section 6 below to surrender to the Company all or a portion of a Stock Option in exchange for an amount equal to the difference between (i) the Fair Market Value, as of the date such Stock Option or such portion thereof is surrendered, of the shares of Stock covered by such Stock Option or such portion thereof, and (ii) the aggregate exercise price of such Stock Option or such portion thereof. t. "Stock Option" means any option to purchase shares of Stock granted pursuant to Section 5 below. u. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 2. Administration. The Plan shall be administered by the Board of Directors or by a Committee appointed by the Board of Directors of the Company consisting of at least two Directors, all of whom shall be Outside Directors and Non-Employee Directors, who shall serve at the pleasure of the Board. The Committee shall have the power and authority to grant to eligible employees and Board members, pursuant to the terms of the Plan: (i) Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock, (iv) Deferred Stock awards, or (v) Other Awards. The maximum aggregate number of shares which may be distributed under the Plan in any one calendar year pursuant to grants of Stock Appreciation Rights, Restricted Stock, Deferred Stock and/or Other Awards shall be 35,000 shares. In particular, the Committee shall have the authority: (i) to select the officers and other key employees and Board Members of the Company and its Subsidiaries to whom Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock awards and/or Other Awards may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock awards and/or Other Awards, or a combination of the foregoing, are to be granted hereunder; (iii) to determine the number of shares to be covered by each such award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, any restriction on any Stock Option or other award and/or the shares of Stock relating thereto), which authority shall be exclusively vested in the Committee (and not the Board) for purposes of establishing performance criteria used with Restricted Stock and Deferred Stock awards and Other Awards; and (v) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may delegate its authority to officers of the Company for the purpose of selecting employees who are not officers of the Company for purposes of (i) above. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. SECTION 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 1,000,000 (post two-for-one stock split effective April 1, 1996). Such shares may consist, in whole or in part, of authorized and unissued shares. Subject to paragraph (b)(iv) of Section 6 below, if any shares that have been optioned ceased to be subject to Options, or if any shares subject to any Restricted Stock or Deferred Stock award or Other Award granted hereunder are forfeited or such award otherwise terminates without a payment being made to the participant, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, other change in corporate structure affecting the Stock, or spin-off or other distribution of assets to shareholders, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding options granted under the Plan, and in the number of shares subject to Restricted Stock or Deferred Stock awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Option. SECTION 4. Eligibility. Officers, other key employees of the Company and Subsidiaries and Board members who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and its Subsidiaries are eligible to be granted Stock Options, Stock Appreciation Rights, Restricted Stock or Deferred Stock awards or Other Awards under the Plan. The optionees and participants under the Plan shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine, in its sole discretion, the number of shares covered by each award. SECTION 5. Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock Options shall be granted under the Plan after November 30, 2003. The Committee shall have the authority to grant any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of options (in each case with or without Stock Appreciation Rights). To the extent that any option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code. The preceding sentence shall not preclude any modification or amendment to an outstanding Incentive Stock Option, whether or not such modification or amendment results in disqualification of such Option as an Incentive Stock Option, provided the optionee consents in writing to the modification or amendment. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable. (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant. In no event shall the option price per share of Stock purchasable under an Incentive Stock Option or a Non-Qualified Stock Option be less than 100% of the Fair Market Value of the Stock on the date of the grant of the option. If an employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the option price shall be no less than 110% of the Fair Market Value of the Stock on the date the option is granted. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date the option is granted. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the term of such option shall be no more than five years from the date of grant. (c) Exercisability. Stock Options shall be exercisable at such time or times as determined by the Committee at or after grant. If the Committee provides, in its discretion, that any option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time. Notwithstanding the foregoing, unless the Stock Option Agreement provides otherwise, any Stock Option granted under this Plan shall be exercisable in full, without regard to any installment exercise provisions, for a period specified by the Company, but not to exceed sixty (60) days prior to or subsequent to the occurrence of any of the following events: (i) dissolution or liquidation of the Company other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization, or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 20% or more of the outstanding Stock of the Company. (d) Method of Exercise. Stock Options may be exercised in whole or in part at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by certified or bank check, or by any other form of legal consideration deemed sufficient by the Committee and consistent with the Plan's purpose and applicable law, including promissory notes or a properly executed exercise notice together with irrevocable instructions to a broker acceptable to the Company to promptly deliver to the Company the amount of sale or loan proceeds to pay the exercise price. As determined by the Committee, in its sole discretion, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee or, in the case of the exercise of a Non-Qualified Stock Option, Restricted Stock or Deferred Stock subject to an award hereunder (based, in each case, on the Fair Market Value of the Stock on the date immediately preceding the date the option is exercised, as determined by the Committee), provided, however, that, in the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares may be authorized only at the time the option is granted, and provided further that in the event payment is made in the form of shares of Restricted Stock or a Deferred Stock award, the optionee will receive a portion of the option shares in the form of, and in an amount equal to, the Restricted Stock or Deferred Stock award tendered as payment by the optionee. If the terms of an option so permit, an optionee may elect to pay all or part of the option exercise price by having the Company withhold from the shares of Stock that would otherwise be issued upon exercise that number of shares of Stock having a Fair Market Value equal to the aggregate option exercise price for the shares with respect to which such election is made. No shares of Stock shall be issued until full payment therefor has been made. An optionee shall generally have the rights to dividends and other rights of a shareholder with respect to shares subject to the option when the optionee has given written notice of exercise, has paid in full for such shares. (e) Non-transferability of Options. No Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (f) Termination by Death. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of death, the Stock Option may thereafter be immediately exercised, to the extent then exercisable (or on such accelerated basis as the Committee shall determine at or after grant), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of three years (or such shorter period as the Committee shall specify at grant) from the date of such death or until the expiration of the stated term of the option, whichever period is shorter. (g) Termination by Reason of Disability. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised, to the extent it was exercisable at the time of termination due to Disability (or on such accelerated basis as the Committee shall determine at or after grant), but may not be exercised after three years (or such shorter period as the Committee shall specify at grant) from the date of such termination of employment or the expiration of the stated term of the option, whichever period is the shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (h) Termination by Reason of Retirement. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Retirement, any Stock Option held by such optionee may thereafter be exercised to the extent it was exercisable at the time of such Retirement, but may not be exercised after three years (or such shorter period as Committee shall specify at grant) from the date of such termination of employment or the expiration of the stated term of the option, whichever period is the shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (i) Other Termination. Unless otherwise determined by the Committee, if an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates for any reason other than death, Disability or Retirement, the Stock Option may be exercised to the extent it was exercisable at such termination for the lesser of three months or the balance of the option's term, except that if the optionee is terminated for Cause by the Company or any Subsidiary or Parent Corporation, the Stock Option shall thereupon terminate. (j) Annual Limit on Incentive Stock Options. The aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which an Incentive Stock Option under this Plan or any other plan of the Company and any Subsidiary or Parent Corporation is exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. SECTION 6. Stock Appreciation Rights. (a) Grant and Exercise. Except as set forth in paragraph (k) of Section 5, Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of the option. A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, except that a Stock Appreciation Right granted with respect to less than the full number of shares covered by a related stock Option shall not be reduced until the exercise or termination of the related Stock Option exceeds the number of shares not covered by the Stock Appreciation Right. A Stock Appreciation Right may be exercised by an optionee, in accordance with paragraph (b) of this Section 6, by surrendering the applicable portion of the related Stock Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in paragraph (b) of this Section 6. Stock Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. (b) Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 6 of the Plan. (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive up to, but not more than, an amount in cash or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment; provided the Committee may not require the optionee to receive more than 50% of the aggregate value of such Stock Appreciation Rights in shares of Stock. (iii) Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under Section 5 of the Plan. (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Stock to be issued under the Plan, but only to the extent of the number of shares issued or issuable under the Stock Appreciation Right at the time of exercise based on the value of the Stock Appreciation Right at such time. (v) A Stock Appreciation Right granted in connection with an Incentive Stock Option may be exercised only if and when the market price of the Stock subject to the Incentive Stock Option exceeds the exercise price of such Option. (vi) Each award shall be confirmed by, and subject to the terms of, a Stock Appreciation Rights Agreement executed by the Company and the participant. SECTION 7. Restricted Stock. (a) Administration. Shares of Restricted Stock may be issued either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees of the Company and Subsidiaries to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the time or times within which such awards may be subject to forfeiture, and all other conditions of the awards. The Committee may also condition the grant of Restricted Stock upon the attainment of specified performance goals. The provisions of Restricted Stock awards need not be the same with respect to each recipient. (b) Awards and Certificates. The prospective recipient of an award of shares of Restricted Stock shall not have any rights with respect to such award, unless and until such recipient has executed an Agreement evidencing the award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the then applicable terms and conditions. (i) Each participant shall be issued a stock certificate in respect of shares of Restricted Stock awarded under the Plan. Such certificate shall be registered in the name of the participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the MTS Systems Corporation 1994 Stock Plan and an Agreement entered into between the registered owner and MTS Systems Corporation. Copies of such Plan and Agreement are on file in the offices of MTS Systems Corporation, 14000 Technology Drive, Eden Prairie, MN 55344. (ii) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to the Plan shall be subject to the following restrictions and conditions: (i) Subject to the provisions of this Plan and the award Agreement, during a period set by the Committee commencing with the date of such award (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. In no event shall the Restriction Period be less than one (1) year. Within these limits, the Committee may provide for the lapse of such restrictions in installments where deemed appropriate. (ii) Except as provided in paragraph (c)(i) of this Section 7, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a shareholder of the Company, including the right to vote the shares and the right to receive any cash dividends. The Committee, in its sole discretion, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested in additional shares of Restricted Stock (to the extent shares are available under Section 3 and subject to paragraph (f) of Section 13). Certificates for shares of unrestricted Stock shall be delivered to the grantee promptly after, and only after, the period of forfeiture shall have expired without forfeiture in respect of such shares of Restricted Stock. (iii) Subject to the provisions of the award Agreement and paragraph (c)(iv) of this Section 7, upon termination of employment for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the participant. (iv) In the event of special hardship circumstances of a participant whose employment is terminated (other than for Cause), including death, Disability or Retirement, or in the event of an unforeseeable emergency of a participant still in service, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to such participant's shares of Restricted Stock. (v) Notwithstanding the foregoing, all restrictions with respect to any participant's shares of Restricted Stock shall lapse on the date determined by the Committee, but in no event more than sixty (60) days prior to or subsequent to the occurrence of any of the following events: (i) dissolution or liquidation of the Company other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization, or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 20% or more of the outstanding Stock of the Company. SECTION 8. Deferred Stock Awards. (a) Administration. Deferred Stock may be awarded either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees of the Company and Subsidiaries to whom and the time or times at which Deferred Stock shall be awarded, the number of Shares of Deferred Stock to be awarded to any participant or group of participants, the duration of the period (the "Deferral Period") during which, and the conditions under which, receipt of the Stock will be deferred, and the terms and conditions of the award in addition to those contained in paragraph (b) of this Section 8. The Committee may also condition the grant of Deferred Stock upon the attainment of specified performance goals. The provisions of Deferred Stock awards need not be the same with respect to each recipient. (b) Terms and Conditions. (i) Subject to the provisions of this Plan and the award agreement, Deferred Stock awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Deferral Period. In no event shall the Deferral Period be less than one (1) year. At the expiration of the Deferral Period (or Elective Deferral Period, where applicable), share certificates shall be delivered to the participant, or his legal representative, in a number equal to the shares covered by the Deferred Stock award. (ii) Amounts equal to any dividends declared during the Deferral Period with respect to the number of shares covered by a Deferred Stock award will be paid to the participant currently or deferred and deemed to be reinvested in additional Deferred Stock or otherwise reinvested, all as determined at the time of the award by the Committee, in its sole discretion. (iii) Subject to the provisions of the award Agreement and paragraph (b)(iv) of this Section 8, upon termination of employment for any reason during the Deferral Period for a given award, the Deferred Stock in question shall be forfeited by the participant. (iv) In the event of special hardship circumstances of a participant whose employment is terminated (other than for Cause) including death, Disability or Retirement, or in the event of an unforeseeable emergency of a participant still in service, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all of the remaining deferral limitations imposed hereunder with respect to any or all of the participant's Deferred Stock. (v) A participant may elect to further defer receipt of the award for a specified period or until a specified event (the "Elective Deferral Period"), subject in each case to the Committee's approval and to such terms as are determined by the Committee, all in its sole discretion. Subject to any exceptions adopted by the Committee, such election must generally be made prior to completion of one half of the Deferral Period for a Deferred Stock award (or for an installment of such an award). (vi) Each award shall be confirmed by, and subject to the terms of, a Deferred Stock Agreement executed by the Company and the participant. SECTION 9. Other Awards. The Committee may from time to time grant Stock, other Stock based and non-Stock based awards under this Plan including without limitations those awards pursuant to which shares of Stock are or in the future may be acquired, awards denominated in Stock units, securities convertible into Stock, phantom securities and dividend equivalents. The Committee shall determine the terms and conditions of such Stock, Stock based and non-Stock based awards provided that such awards shall not be inconsistent with the terms of this Plan. SECTION 10. Transfer, Leave of Absence, etc. For purposes of the Plan, the following events shall not be deemed a termination of employment: (a) a transfer of an employee from the Company to a Parent Corporation or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or from one Subsidiary to another; (b) a leave of absence, approved in writing by the Committee, for military service or sickness, or for any other purpose approved by the Company if the period of such leave does not exceed ninety (90) days (or such longer period as the Committee may approve, in its sole discretion); and (c) a leave of absence in excess of ninety (90) days, approved in writing by the Committee, but only if the employee's right to reemployment is guaranteed either by a statute or by contract, and provided that, in the case of any leave of absence, the employee returns to work within 30 days after the end of such leave. SECTION 11. Amendments and Termination. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made (i) which would impair the rights of an optionee or participant under a Stock Option, Stock Appreciation Right, Restricted Stock, Deferred Stock or other Stock-based award theretofore granted, without the optionee's or participant's consent, or (ii) which without the approval of the stockholders of the Company would cause the Plan to no longer comply with Rule 16b-3 under the Securities Exchange Act of 1934, Section 422 of the Code or any other regulatory requirements. The Committee may amend the terms of any award or option theretofore granted, prospectively or retroactively, but, subject to Section 3 above, no such amendment shall impair the rights of any holder without his consent. SECTION 12. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. SECTION 13. General Provisions. (a) All certificates for shares of Stock delivered under the Plan pursuant to any Restricted Stock, Deferred Stock or other Stock-based awards shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Subject to paragraph (d) below, recipients of Restricted Stock, Deferred Stock and other Stock-based awards under the Plan (other than Stock Options) are not required to make any payment or provide consideration other than the rendering of services. (c) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any employee of the Company or any Subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. (d) Each participant shall, no later than the date as of which any part of the value of an award first becomes includible as compensation in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to the award. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. With respect to any award under the Plan, if the terms of such award so permit, a participant may elect by written notice to the Company to satisfy part or all of the withholding tax requirements associated with the award by (i) authorizing the Company to retain from the number of shares of Stock that would otherwise be deliverable to the participant, or (ii) delivering to the Company from shares of Stock already owned by the participant, that number of shares having an aggregate Fair Market Value equal to part or all of the tax payable by the participant under this Section 13(d). Any such election shall be in accordance with, and subject to, applicable tax and securities laws, regulations and rulings. (e) At the time of grant, the Committee may provide in connection with any grant made under this Plan that the shares of Stock received as a result of such grant shall be subject to a repurchase right in favor of the Company pursuant to which any participant who, at any time within a specified period after termination of employment with the Company, directly or indirectly competes with, or is employed by a competitor of, the Company, shall be required to offer to the Company any shares that the participant acquired under the Plan, with the price being the then Fair Market Value of the Stock, subject to such other terms and conditions as the Committee may specify at the time of grant. (f) The reinvestment of dividends in additional Restricted Stock (or in Deferred Stock or other types of Plan awards) at the time of any dividend payment shall only be permissible if the Committee (or the Company's chief financial officer) certifies in writing that under Section 3 sufficient shares are available for such reinvestment (taking into account then outstanding Stock Options and other Plan awards). SECTION 14. Effective Date of Plan. The Plan shall be effective on the date it is approved by a vote of the holders of a majority of the Stock present and entitled to vote at a meeting of the Company's shareholders. - --------------------------- Adopted by the Board of Directors on November 30, 1993 Adopted by the Company's shareholders on January 31, 1994 Amended by the Board of Directors on November 22, 1996 EX-10.P 7 1997 STOCK OPTION PLAN EXHIBIT 10.p MTS SYSTEMS CORPORATION 1997 STOCK OPTION PLAN TABLE OF CONTENTS SECTION PAGE - ------- ---- 1. General Purpose of Plan; Definitions ...............................1 2. Administration .....................................................3 3. Stock Subject to Plan ..............................................4 4. Eligibility ........................................................4 5. Stock Options ......................................................4 6. Transfer, Leave of Absence, etc. ...................................8 7. Amendments and Termination .........................................9 8. General Provisions .................................................9 MTS SYSTEMS CORPORATION 1997 STOCK OPTION PLAN SECTION 1. General Purpose of Plan; Definitions. The name of this plan is the MTS Systems Corporation 1997 Stock Option Plan (the "Plan"). The purpose of the Plan is to enable MTS Systems Corporation (the "Company") and its Subsidiaries to retain and attract executives, managers, key technical and functional employees, directors and consultants who contribute to the Company's success by their ability, ingenuity and industry, and to enable such individuals to participate in the long-term success and growth of the Company by giving them a proprietary interest in the Company. For purposes of the Plan, the following terms shall be defined as set forth below: a. "Agreement" means an agreement by and between the Company and an optionee or recipient of an award under the Plan setting forth the terms and conditions of the option or award. b. "Board" means the Board of Directors of the Company as it may be comprised from time to time. c. "Cause" means a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, willful misconduct, dishonesty or intentional violation of a statute, rule or regulation, any of which, in the judgment of the Company, is harmful to the business or reputation of the Company. d. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. e. "Committee" means the Committee referred to in Section 2 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board, unless the Plan specifically states otherwise. f. "Company" means MTS Systems Corporation, a corporation organized under the laws of the State of Minnesota (or any successor corporation). g. "Consultant" means any person, including an advisor, engaged by the Company or a Parent Corporation or Subsidiary of the Company to render services and who is compensated for such services and who is not an employee of the Company or any Parent Corporation or Subsidiary of the Company. A Non-Employee Director may serve as a Consultant. h. "Disability" means a physical or mental condition resulting from a bodily injury or disease or mental disorder rendering such person incapable of continuing to perform the employment duties of such person at the Company as such duties existed immediately prior to the bodily injury, disease or mental disorder. i. "Fair Market Value" of Stock on any given date shall be determined by the Committee as follows: (a) if the Stock is listed for trading on one of more national securities exchanges, or is traded on the Nasdaq Stock Market, the last reported sales price on the principal such exchange or the Nasdaq Stock Market on the date in question, or if such Stock shall not have been traded on such principal exchange on such date, the last reported sales price on such principal exchange or the Nasdaq Stock Market on the first day prior thereto on which such Stock was so traded; or (b) if the Stock is not listed for trading on a national securities exchange or the Nasdaq Stock Market, but is traded in the over-the-counter market, including the Nasdaq Small Cap Market, the closing bid price for such Stock on the date in question, or if there is no such bid price for such Stock on such date, the closing bid price on the first day prior thereto on which such price existed; or (c) if neither (a) or (b) is applicable, by any means fair and reasonable by the Committee, which determination shall be final and binding on all parties. j. "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. k. "Non-Employee Director" means a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934. l. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option, and is intended to be and is designated as a "Non-Qualified Stock Option." m. "Outside Director" means a Director who: (a) is not a current employee of the Company or any member of an affiliated group which includes the Company; (b) is not a former employee of the Company who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (c) has not been an officer of the Company; (d) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director, except as otherwise permitted under Code Section 162(m) and regulations thereunder. For this purpose, remuneration includes any payment in exchange for good or services. This definition shall be further governed by the provisions of Code Section 162(m) and regulations promulgated thereunder. n. "Parent Corporation" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations (other than the Company) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. o. "Retirement" means retirement from active employment with the Company and any Subsidiary or Parent Corporation of the Company on or after age 55. p. "Stock" means the Common Stock, $.25 par value per share, of the Company. q. "Stock Option" means any option to purchase shares of Stock granted pursuant to Section 5 below. r. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 2. Administration. The Plan shall be administered by the Board of Directors or by a Committee appointed by the Board of Directors of the Company consisting of at least two Directors, all of whom shall be Outside Directors and Non-Employee Directors, who shall serve at the pleasure of the Board. The Committee shall have the power and authority to grant Stock Options to eligible employees, Consultants and members of the Board pursuant to the terms of the Plan. In particular, the Committee shall have the authority: (i) to select the members of the Board, officers and other key employees of the Company and its Subsidiaries and other eligible persons to whom Stock Options may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options and Non-Qualified Stock Options are to be granted hereunder; (iii) to determine the number of shares to be covered by each such award granted hereunder; and (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, any restriction on any Stock Option); provided, however, that in the event of a merger or asset sale, the applicable provisions of Section 5(c) of the Plan shall govern the acceleration of the vesting of any Stock Option. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may delegate to executive officers of the Company the authority to exercise the powers specified in (i), (ii), (iii), and (iv) above with respect to persons who are not either the chief executive officer of the Company or the four highest paid officers of the Company other than the chief executive officer. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. SECTION 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 750,000. Such shares may consist, in whole or in part, of authorized and unissued shares. Upon a stock-for-stock exercise of a Stock Option or upon the withholding of stock for the payment of the option price or taxes, only the net number of shares issued to the Optionee shall be used to calculate the number of shares remaining available for distribution under the Plan. If any shares that have been optioned cease to be subject to Stock Options, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, other change in corporate structure affecting the Stock, or spin-off or other distribution of assets to shareholders, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding options granted under the Plan, as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. SECTION 4. Eligibility. Executives, managers, key technical and functional employees of the Company and Subsidiaries, members of the Board of Directors and Consultants who are responsible for or contribute to the management, growth and profitability of the business of the Company and its Subsidiaries are eligible to be granted Stock Options under the Plan. The optionees under the Plan shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine, in its sole discretion, the number of shares covered by each award. Notwithstanding the foregoing, no person shall receive grants of Stock Options under this Plan which exceed 50,000 shares during any fiscal year of the Company. SECTION 5. Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock Options shall be granted under the Plan after November 22, 2006. The Committee shall have the authority to grant any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of options. To the extent that any option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code. The preceding sentence shall not preclude any modification or amendment to an outstanding Incentive Stock Option, whether or not such modification or amendment results in disqualification of such Stock Option as an Incentive Stock Option, provided the optionee consents in writing to the modification or amendment. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable. (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant. In no event shall the option price per share of Stock purchasable under an Incentive Stock Option or a Non-Qualified Stock Option be less than 100% of Fair Market Value on the date the option is granted. If an employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the option price shall be no less than 110% of the Fair Market Value of the Stock on the date the option is granted. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than seven years after the date the option is granted. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the term of such option shall be no more than five years from the date of grant. (c) Exercisability. Stock Options shall be exercisable at such time or times as determined by the Committee at or after grant, subject to the restrictions stated in Section 5(b) above. If the Committee provides, in its discretion, that any option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time. Notwithstanding anything contained in the Plan to the contrary, the Committee may, in its discretion, extend or vary the term of any Stock Option or any installment thereof, whether or not the optionee is then employed by the Company, if such action is deemed to be in the best interests of the Company; provided, however, that in the event of a merger or sale of assets, the provisions of this Section 5(c) shall govern vesting acceleration. Notwithstanding the foregoing, unless the Stock Option provides otherwise, any Stock Option granted under this Plan shall be exercisable in full, without regard to any installment exercise provisions, for a period specified by the Committee, but not to exceed sixty (60) days, prior to the occurrence of any of the following events: (i) dissolution or liquidation of the Company other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization, or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 20% or more of the outstanding Stock of the Company. The grant of an option pursuant to the Plan shall not limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, exchange or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. (d) Method of Exercise. Stock Options may be exercised in whole or in part at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by certified or bank check, or by any other form of legal consideration deemed sufficient by the Committee and consistent with the Plan's purpose and applicable law, including promissory notes or a properly executed exercise notice together with irrevocable instructions to a broker acceptable to the Company to promptly deliver to the Company the amount of sale or loan proceeds to pay the exercise price. As determined by the Committee at the time of grant or exercise, in its sole discretion, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee (which in the case of Stock acquired upon exercise of an option have been owned for more than six months on the date of surrender), provided, however, that, in the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares may be authorized only at the time the option is granted. If the terms of an option so permit, an optionee may elect to pay all or part of the option exercise price by having the Company withhold from the shares of Stock that would otherwise be issued upon exercise that number of shares of Stock having a Fair Market Value equal to the aggregate option exercise price for the shares with respect to which such election is made. No shares of Stock shall be issued until full payment therefor has been made. An optionee shall generally have the rights to dividends and other rights of a shareholder with respect to shares subject to the option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in paragraph (a) of Section 8. (e) Non-transferability of Options. (i) Subject to Section 5(e)(ii) below, no Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (ii) The Committee may, in its discretion, authorize all or a portion of the options to be granted to an optionee to be on terms which permit transfer by such optionee to (a) the spouse, children or grandchildren of the optionees ("Immediate Family Members"), (b) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (c) a partnership or partnerships in which such Immediate Family Members are the only partners, provided that (i) there may be no consideration for any such transfer, (ii) the stock option agreement pursuant to which such options are granted must be approved by the Committee, and must expressly provide for transferability in a manner consistent with this Section 5(e)(ii), and (iii) subsequent transfers of transferred options shall be prohibited except those in accordance with Section 5(e)(i). Following transfer, any such options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that the term "optionee" herein shall in such event be deemed to refer to the transferee, except that the events of termination of employment of Sections 5(f), 5(g), 5(h) and 5(i) hereof shall continue to be applied with respect to the original optionee, following which the options shall be exercisable by the transferee only to the extent, and for the periods specified in such Sections. (f) Termination by Death. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of death, any Stock Option may thereafter be immediately exercised, to the extent then exercisable (or on such accelerated basis as the Committee shall determine at or after grant), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of three years from the date of such death or until the expiration of the stated term of the option, whichever period is shorter. In the event of termination of employment by reason of death, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (g) Termination by Reason of Disability. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised, to the extent it was exercisable at the time of termination due to Disability (or on such accelerated basis as the Committee shall determine at or after grant), but may not be exercised after three years from the date of such termination of employment or the expiration of the stated term of the option, whichever period is the shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (h) Termination by Reason of Retirement. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Retirement, any Stock Option held by such optionee may thereafter be exercised in full, but may not be exercised after three years from the date of such termination of employment or the expiration of the stated term of the option, whichever period is the shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (i) Other Termination. If an optionee's continuous status as an employee terminates (other than upon the optionee's death, Disability or Retirement), any Stock Option held by such optionee may thereafter be exercised to the extent it was exercisable at the time of such termination, but may not be exercised after 90 days after such termination, or the expiration of the stated term of the option, whichever period is the shorter. In the event of termination of employment by reason other than death, Disability or Retirement and if pursuant to its terms an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. In the event an Optionee's employment with the Company or any Subsidiary or Parent Corporation is terminated for Cause, all unexercised Stock Options granted to such Optionee shall immediately terminate. (j) Annual Limit on Incentive Stock Options. The aggregate Fair Market Value (determined as of the time the Stock Option is granted) of the Common Stock with respect to which an Incentive Stock Option under this Plan or any other plan of the Company and any Subsidiary or Parent Corporation is exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. (k) Directors Who Are Not Employees. Each person who (i) is not an employee of the Company, any Parent Corporation or any Subsidiary and (ii) is elected or re-elected as a director by the Board or the shareholders subsequent to November 22, 1996 shall automatically be granted an Option to purchase up to 3,000 shares of Stock (the actual number of which shall be determined by the Committee upon such election or re-election) as of the date of such election or re-election, at an option price per share equal to 100% of the Fair Market Value of a share of Stock on the date of such election or re-election. All such Options shall be designated as Non-Qualified Stock Options and shall be subject to the same terms and provisions as are then in effect with respect to the grant of Non-Qualified Stock Options to officers and key employees of the Company, except that (i) the term of each such Option shall be four (4) years after the date of grant, and (ii) the Option shall become exercisable as to all or any part of the shares subject to the Option beginning six (6) months after the date the option is granted. Subject to the foregoing, all provisions of this Plan not inconsistent with the foregoing shall apply to Options granted pursuant to this Section 5(k). The maximum aggregate number of shares as to which Options may be granted to Non-Employee Directors under this Plan shall be 90,000 shares. SECTION 6. Transfer, Leave of Absence, etc. For purposes of the Plan, the following events shall not be deemed a termination of employment: (a) a transfer of an employee from the Company to a Parent Corporation or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or from one Subsidiary to another; (b) a leave of absence, approved in writing by the Committee, for military service or sickness, or for any other purpose approved by the Company if the period of such leave does not exceed ninety (90) days (or such longer period as the Committee may approve, in its sole discretion); and (c) a leave of absence in excess of ninety (90) days, approved in writing by the Committee, but only if the employee's right to reemployment is guaranteed either by a statute or by contract, and provided that, in the case of any leave of absence, the employee returns to work within 30 days after the end of such leave. SECTION 7. Amendments and Termination. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made (i) which would impair the rights of an optionee under a Stock Option award theretofore granted without the optionee's consent, or (ii) which without the approval of the shareholders of the Company would cause the Plan to no longer comply with Rule 16b-3 under the Securities Exchange Act of 1934, Section 422 of the Code or any other regulatory requirements. The Committee may amend the terms of any award or option theretofore granted, prospectively or retroactively to the extent such amendment is consistent with the terms of this Plan, but no such amendment shall impair the rights of any holder without his or her consent except to the extent authorized under the Plan. SECTION 8. General Provisions. (a) The Committee may require each person purchasing shares pursuant to a Stock Option under the Plan to represent to and agree with the Company in writing that the optionee is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. (b) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any employee of the Company or any Subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. (c) Each participant shall, no later than the date as of which any part of the value of an award first becomes includible as compensation in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to the award. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. With respect to any award under the Plan, if the terms of such award so permit, a participant may elect by written notice to the Company to satisfy part or all of the withholding tax requirements associated with the award by (i) authorizing the Company to retain from the number of shares of Stock that would otherwise be deliverable to the participant, or (ii) delivering to the Company from shares of Stock already owned by the participant, that number of shares having an aggregate Fair Market Value equal to part or all of the tax payable by the participant under this Section 8(c). Any such election shall be in accordance with, and subject to, applicable tax and securities laws, regulations and rulings. (d) At the time of grant, the Committee may provide in connection with any grant made under this Plan that the shares of Stock received as a result of such grant shall be subject to a repurchase right in favor of the Company, pursuant to which the participant shall be required to offer to the Company upon termination of employment for any reason any shares that the participant acquired under the Plan, with the price being the then Fair Market Value of the Stock or, in the case of a termination for Cause, an amount equal to the cash consideration paid for the Stock, subject to such other terms and conditions as the Committee may specify at the time of grant. The Committee may, at the time of the grant of an award under the Plan, provide the Company with the right to repurchase, or require the forfeiture of, shares of Stock acquired pursuant to the Plan by any participant who, at any time within two years after termination of employment with the Company or any Subsidiary or Parent Corporation, directly or indirectly competes with, or is employed by a competitor of, the Company. (e) The Plan is expressly made subject to the approval by shareholders of the Company. If the Plan is not so approved by the shareholders on or before one year after this Plan's adoption by the Board of Directors, this Plan shall not come into effect. The offering of the shares hereunder shall be also subject to the effecting by the Company of any registration or qualification of the shares under any federal or state law or the obtaining of the consent or approval of any governmental regulatory body which the Company shall determine, in its sole discretion, is necessary or desirable as a condition to or in connection with, the offering or the issue or purchase of the shares covered thereby. The Company shall make every reasonable effort to effect such registration or qualification or to obtain such consent or approval. - ------------------------------ Adopted by the Board of Directors on November 22, 1996. Adopted by the Shareholders of the Company on ___________, 1997. EX-10.Q 8 SEVERANCE AGREEMENT EXHIBIT 10.q SEVERANCE AGREEMENT AGREEMENT made as of this 30th day of September, 1996 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and Steven M. Cohoon (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, Executive is willing to remain in the employ of MTS upon the understanding that MTS will provide income security if the Executive's employment is terminated under certain terms and conditions; 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, (B) the date the Executive and MTS agree in writing to terminate this Agreement, or (C) the date the Executive reaches age 65. Notwithstanding the preceding sentence, 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"), this Agreement shall be superceded by the Change in Control Agreement. 2. Termination By Reason of Death or Disability. This Agreement shall not apply if the Executive's termination of employment is the result of the Executive's death or disability. In the event of the Executive's death or disability while employed by MTS, 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. The determination of disability and the amount and entitlement of benefits shall be governed by the terms of such policy, plan or program. 3. Termination for Cause. (a) If Executive's employment shall be terminated by MTS for Cause, MTS shall pay to Executive his 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 misconduct by the Executive; or (iii) violation by the Executive of any employment agreement applicable to the Executive. 4. Termination Other Than for Cause. If Executive's employment is terminated by MTS other than for Cause, death or disability, or if Executive voluntarily terminates his employment because a successor to the assets of MTS fails to assume MTS's obligations under this Agreement, Executive shall be entitled to the following benefits: (a) MTS shall pay the Executive for a period of 9 months or until the executive reaches age 65, whichever occurs first, a severance payment (the "Severance Payment") of an amount equal to the Executive's Monthly Gross Income, as below. All payments are subject to applicable federal and state withholding. For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts: (i) 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 (ii) 1/36 of the total Management Variable Compensation paid during the 3 most recent fiscal years ending immediately prior to the Date of Termination; plus (iii) 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) for the 3 most recent Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (i) and (ii) above. (b) For a 9-month period after the Date of Termination, or until Executive reaches age 65, whichever occurs first, MTS shall continue to pay its portion of Executive's life, disability, accident and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. MTS may deduct from its payment to the Executive those amounts. 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 subsection (b) shall be reduced to the extent comparable benefits are actually received by Executive during such 9 -month period, and any such benefits actually received by Executive shall be reported to MTS. At the expiration of said 9 -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. (c) MTS shall pay to Executive all legal fees and expenses reasonably incurred by Executive in seeking to obtain or enforce any right or benefit provided by this Agreement. (d) Executive shall 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. (e) The Executive's rights under any existing Employee Stock Option Agreement and any future such agreements, including particularly his right to exercise his option rights within three months following his termination of employment, shall continue to be fully effective hereunder. 5. No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Section by seeking other employment or otherwise; nor shall the amount of any payment or benefit provided for in this Section 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 Confidentialitv. (a) 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 12 months following the Date of Termination, 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. 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 own expense. (b) Executive further agrees and acknowledges his existing obligation that, at all times during and subsequent to his employment with MTS, he will not divulge or appropriate to his 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 employment by MTS or any of its subsidiaries. 7. Successors; Binding Agreement. (a) 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 terminate his employment by written Notice of Termination and to receive the compensation and benefits from MTS described in this Agreement as if his termination was by MTS other than for Cause. (b) 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 MTS under this Agreement shall be communicated by written notice to the Executive. (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 30 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 other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. 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) 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/ Steven M. Cohoon By /s/ Donald M. Sullivan - -------------------------------- ------------------------------------ Steven M.Cohoon Donald M. Sullivan Its Chairman and CEO ------------------------------------ EX-13 9 1996 ANNUAL REPORT TO SHAREHOLDERS MTS SYSTEMS CORPORATION 1996 ANNUAL REPORT TO SHAREHOLDERS [PHOTO] ADDING VALUE IN ALL WE DO OUR VISION To add significant value to the operations of our customers by providing them with products and services they can use to make their products better, faster, cheaper, and safer. In a very real sense, the employees of MTS contribute to the advancement of the living standards of the world's people. CONTENTS - ---------------------------------------------------- 1996 Highlights 1 - ---------------------------------------------------- Letter To Shareholders 2 - ---------------------------------------------------- Snapshot Of MTS 4 - ---------------------------------------------------- Market Niche Update 6 - ---------------------------------------------------- Six-year Financial Summary 16 - ---------------------------------------------------- Management's Discussion And Analysis 17 - ---------------------------------------------------- Financial Statements 22 - ---------------------------------------------------- Shareholder Survey 33 - ---------------------------------------------------- Corporate Information 33 - ---------------------------------------------------- [BAR CHART] Net Revenue $ Million $161 $189 $201 $234 $261 - -------------------------------------- 92 93 94 95 96 [BAR CHART] Net Income $ Million $4.9 $10.4 $8.7 $10.5 $14.1 - --------------------------------------- 92 93 94 95 96 [BAR CHART] Net Income Per Share $ Million $.54 $1.14 $.92 $1.15 $1.48 - --------------------------------------- 92 93 94 95 96 [BAR CHART] Return on Beginning Equity Per Share 5.9% 11.9% 9.0% 10.5% 12.8% - --------------------------------------- 92 93 94 95 96 Backlog of Orders $ Million $99 $89 $85 $99 $120 - --------------------------------------- 92 93 94 95 96 1996 HIGHLIGHTS 1996 1995 Change (expressed in thousands except per share data) - ------------------------------------------------------------------------- Net revenue $ 261,029 $ 234,131 11.5% Net income $ 14,109 $ 10,461 34.9% Net income per share $ 1.48 $ 1.15 28.7% - ------------------------------------------------------------------------- Return on sales 5.4% 4.5% Return on beginning equity per share 12.8% 10.5% Return on average net assets 17.2% 12.9% - ------------------------------------------------------------------------- Dividends per share $ .32 $ .28 14.3% Stockholders' equity per share $ 12.30 $ 11.60 6.0% Long-term capitalization ratio 9.5% 10.5% Weighted average shares outstanding (000's) 9,553 9,090 5.1% - ------------------------------------------------------------------------- New orders $ 282,753 $ 245,919 15.0% Backlog of orders at year end $ 120,481 $ 98,757 22.0% - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- 1996 NEW ORDERS [GRAPHIC OMITTED] * North America * Europe/Africa/Middle East * Asia Pacific * Latin America/Rest of World * Earnings per share grow 28.7% on 11.5% revenue growth; both earnings and revenues are records. * Company declares a quarterly dividend increase of 14% in November 1995 and a two-for-one stock split on April 1, 1996. * MTS names three new divisional vice presidents in its Mechanical Testing and Simulation sector: Daniel T. Sparks, Ph.D., for the Materials Testing Division, Steven M. Cohoon for the Vehicle Dynamics Division, and James M. Egerdal for North American Sales. * Joachim Hellwig is named vice president, Europe, for the company's Industrial Measurement and Automation Sector. * MTS's Advanced System Division to provide $10.8 million motion system for the National Advanced Driving Simulator, a major research program of the U.S. Department of Transportation. * MTS receives a $23.3 million order for an earthquake simulator from the Japanese government, the company's largest order ever. * Electronic products manufacturing moves to a new facility in Chaska, Minnesota, operating on a two-shift basis. * 32% of the year's revenues come from products or technologies first shipped in 1994-1996 -- an all-time "entrepreneuring and market creation" record. * In December 1996, MTS's Custom Servo Motors subsidiary acquires a majority interest with an option to purchase the balance of Bregenhorn-Butow & Co. of Freiberg, Germany, a growing supplier of low-power servo motors and drives to European machinery manufacturers. TO OUR SHAREHOLDERS December 1996 I am pleased to report fiscal 1996 was a record year for orders, revenue, net income and earnings per share. Just as important as the absolute numbers, fiscal 1996 showed the first back-to-back increase in net income and earnings per share in seven years. We think your company has now broken out of the earnings doldrums which our employees and shareholders have endured over those years. There are five principal reasons for this breakout. The first four are actions taken and well executed by our employees: * First, an increasing stream of new products and services coming to market with higher margins * Second, effective cost control in administrative areas * Third, pay-off from our investments in customer support, worldwide * Fourth, improved asset utilization and cash generation--sharply reducing the need for borrowing. The fifth reason, not under our control, is the slow and erratic, yet consistent growth of the world economies in which most of our customers operate. A BRIEF REVIEW OF THE YEAR The year proceeded according to plan, with some market niches above plan and some below. Our Industrial Measurement and Automation sector, primarily serving manufacturing industries in North America and Europe, saw a slowdown in their demand starting in January. This persisted through out the year. As a result, revenue and profit growth dropped well below the rate of the past several years, but they still grew. Conversely, our Mechanical Testing and Simulation sector results were above plan with an accelerating profit rate. This sector's business in Asia Pacific was particularly strong, with new orders up about 70 percent fueled by the $23 million seismic order in Japan (we recognized $4.5 million of revenue from that project in 1996). New orders in the Mechanical Testing and Simulation sector's worldwide ground vehicles (auto/truck) market niche were ahead of plan with exceptional growth coming in our ride and handling simulation testing product line. Our material testing business grew nicely. Our aerospace business was weak, but we think it will now turn up, as discussed elsewhere in this report. I mentioned better asset utilization and cash generation. A look at our balance sheet on page 22 will show we virtually eliminated the $10 million of short term debt we had one year ago and built our cash balance by another $10 million. Our debt to total ratio was under 10 percent at the end of the year. We have plenty of borrowing power when the time comes to use it. THE GROWTH QUESTION In this year's letter I want to focus on the question I am most frequently asked by investors, present and potential. Simply put, that question is, "Given that MTS presently serves (mostly) mature, slower growth markets, can you get your revenue growth rate up to a level which would sustain above average earnings growth?" First, I want to note again that our earnings in 1995 and 1996 were recovering from the quite low levels of the early 90's. Over that two year period our revenue grew 17 percent and 11 percent, respectively. The best starting point for this discussion is this year's revenue of $261 million and EPS of $1.48. Returning to the question, surely it's easier to grow fast if your customers are growing fast. But we challenge the implication behind the question that because some of our customers' markets are mature, MTS's business is also mature. Whereas it is true that, on average, our customers' businesses are not growing at Internet driven rates, there is great flux in the business processes and technologies within the customers in most of our market niches. That flux can drive the demand for our products and services at higher growth rates than the customer's output. The challenge we face is to find where in the customer's changing business processes or technology base we might add value, and then to provide those high-value products and services at a cost which gives us a high return. When asked where we look, I sum it up by saying, "Wherever the customer wants to make things better, faster, cheaper or safer." Although that's a short answer, it captures the essence of what drives MTS's business. As an example, much of our growth historically has come from creating a new demand and not from capturing market share from competition. Our tire testing system business is a case in point. It is growing because our customers can use the systems to obtain information which simply was not available before the advent of our Flat-Trac(TM) tire testing technology. The ability to get this information is driving demand for the systems in what is surely a mature industry. A further consideration is that, whereas our customers' markets may be mature in North America, Europe or Japan, they seldom are mature in the developing countries. Our growth in orders this year from customers in the developing countries was, again, well above growth in the developed ones, and there are still developing countries in Latin America and South Asia whose markets are just beginning to warrant our investment. Finally, over the last two years we've increased our investment for top-line revenue growth in new product development, selling/marketing and customer support by over 10 percent per year. These areas are definitely not being starved for the sake of short term earnings growth. To summarize, our current Business Plan shows revenue growth beyond 1996 at 10 percent per year or more. The Plan includes smaller acquisitions within our two market sectors but does not include major acquisitions nor entry into a new sector. We believe that, short of a major recession in North America or in the worldwide auto/truck industry, that revenue growth can be realized. With at least a 10 percent revenue growth, we should be able to continue to improve our after tax profit margins due to a combination of scale economies and the product cost reductions and moderate price increases we've implemented the last two years. Those efforts have resulted in our profit margin rising to 5.4 percent of revenue this year. We think that is still low and intend to get it over 6 percent. Putting this revenue growth and margin improvement together should deliver above average earnings growth. But certainly MTS has the financial, managerial and technical resources which can be leveraged to build a bigger business faster. We're adding staff to do more new business venturing and to do bigger acquisitions. Some of those could lead us into a new market sector within our broadly defined field of interest of industrial and scientific equipment, software and services. We expect to have more to report on these efforts during the year. A WORD OF CAUTION In this letter, and elsewhere throughout this report, we are making forward looking statements which reflect management's current expectations or beliefs. We caution our shareholders and other readers of this report that actual future results could differ materially from those in the forward looking statements depending on many factors, some beyond our control, including factors related to company competitive performance, industry conditions and international economic trends. STOCK SPLIT AND DIVIDEND INCREASE The Board of Directors declared a 100 percent stock dividend at its January 1996 meeting effective April 1, 1996. This was the first split since 1987 as the Board reaffirmed our past practice of splitting when the price of the stock holds near $30 per share. At its November 1996 meeting, the Board authorized a 25 percent increase in the quarterly cash dividend to 10 cents per share, payable to holders of record on December 9, 1996. This is consistent with our practice of paying out about one-third of the average earnings of the trailing two years. Since 1991, dividends per share have grown 15 percent per year. On behalf of our officers, I want to thank MTS's employees for their successful efforts and our shareholders for their commitment. /s/ Donald M. Sullivan Donald M. Sullivan CHAIRMAN, CHIEF EXECUTIVE OFFICER [PHOTO] Shown left to right William G. Beduhn VICE PRESIDENT Keith D. Zell EXECUTIVE VICE PRESIDENT Donald M. Sullivan CHAIRMAN, CHIEF EXECUTIVE OFFICER, PRESIDENT Marshall L. Carpenter VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Mauro Togneri VICE PRESIDENT J. Howell Owens VICE PRESIDENT SNAPSHOT OF MTS SYSTEMS CORPORATION For more than three decades MTS Systems has provided industrial and scientific laboratories with state-of-the-art mechanical testing and simulation systems, a market in which we are a recognized world leader. More recently, we entered the industrial measurement and auto mation market with products based on innovative technologies in which we also are recognized leaders. Our products and services are used around the world in basic research, product development, manufacturing, and quality control--adding value at each step. This snapshot gives a quick look at each of our market niches. MECHANICAL TESTING AND SIMULATION [PHOTO] Biomaterials And Biomechanics Our systems are used in the bio materials and biomechanics market to test biological and biocompatible materials, such as bone, collagen, cartilage, skin, polyethylene, and titanium. MTS equipment also enables engineers to test the dura bility of a broad range of medical and dental implants and prostheses. By simulating motions and stresses from physical activities such as chewing, walking, and running, our systems provide valuable information to academic and industrial researchers and product developers, including manufacturers of sports equipment. [PHOTO] Ground Vehicles Our ground vehicle customers include automobile, truck, motorcycle, and off-road vehicle manufacturers and their suppliers. We offer five types of system solutions to these customers: dynamometer systems to test engines and drive trains, durability systems that produce wear and failure data under accelerated service conditions, vehicle and occupant impact simulators for crash and safety testing, performance systems to determine ride and handling characteristics, and noise, vibration, and harshness testing systems to help evaluate ride quality. [PHOTO] Civil Engineering Designing bridges, dams, roads and other infrastructure requires a thorough understanding of the mechanical properties of substructures and diverse materials, including rock, soil, concrete, and other cement-based materials. We provide a comprehensive range of solutions for civil engineering needs, from low-force and high-force geomaterial testing systems to fully integrated structural testing laboratories including large-scale seismic (earthquake) simulation tables. [PHOTO] Advanced Systems Because our systems engineering expertise has applications beyond our established niches, we are continually looking for new application opportunities. Maintaining and exploiting these opportunities is the thrust of our advanced systems effort. Applications can be found in mechanical testing and simulation research, manufacturing, and elsewhere. Examples of recent custom projects include ocean wave simulators, laser-based material processing systems, and major amusement park rides. [PHOTO] Aerospace Using MTS testing equipment, aerospace engineers evaluate the strength of lightweight advanced materials, the durability of landing gear, the structural integrity of wings and other large structures and the performance of propulsion systems and other flight vehicle components. Such testing helps the industry produce aircraft that meet safety certification standards and performance requirements and are more economical to operate. [PHOTO] Material And Product Testing Material and product testing laboratories in diverse industries need to perform tests on many types of materials, including metals, plastics, composites, and textiles, as well as industrial and consumer products. Our full line of testing products helps these customers perform tests required to gain critical information about how materials perform and to develop higher quality products for their specific markets. INDUSTRIAL MEASUREMENT AND AUTOMATION [PHOTO] Measurement For precise measurement of produc tion variables, we offer two lines of sensors--both based on our core technology of magnetostriction. Our linear displacement sensors measure physical displacement over lengths up to fifty feet. They are used by manufacturers of injection molding and die casting machines, printing and packaging machines, and many other types of equipment. Our liquid-level sensors and instrumentation are used to sense liquid levels up to one hundred feet. Customers include fluid processing companies, such as refineries and chemical plants, as well as retail gas stations. [PHOTO] Automation Our servo motors, amplifiers, and controllers help manufacturing industries automate their production machinery. Our products are applicable to machine tools, packaging machines, and other production equipment where control of motion is critical to production speed and quality. Using advanced magnetic technology in a unique scalable design, we provide custom servo motor solutions that meet demanding speed, torque, and size requirements. Machine designers use our products to replace complex assemblies of gears, pulleys, cranks, and transmissions to improve production efficiency and reliability. MARKET NICHE UPDATE Our strategic investments in new product development, worldwide customer support, and leveragable acquisitions over the past several years began to pay off in the form of improved profitability in 1996. Here is a news update from each of our market niches. [PHOTO] MECHANICAL TESTING AND SIMULATION Adding value by providing critical information on the mechanical behavior of materials, products, and structures BIOMECHANICS AND BIOMATERIALS New material and component test systems continue to expand our biomechanics and biomaterials business. We expect the market for these products to continue to grow well into the twenty-first century as aging populations in developed countries drive demand for prostheses of all types. The market also is being driven by government safety certification requirements for implantable medical devices and prostheses. To meet the demands of this market niche, we provide engineers with the ability to program and run complex tests that simulate precisely the forces applied to joints, bones, and muscles during normal and strenuous activity. The information generated by such tests is invaluable to researchers working to perfect artificial knees, hips, teeth, and other implantable and external prostheses. With the Bionix(R) testing product line, WE OFFER UNIQUE MULTIAXIAL TESTING CAPABILITIES UNMATCHED IN THE INDUSTRY. In 1996 we introduced the Bionix 100/200/400 systems, a line of electromechanical systems designed to perform low-force static tests. Such tests are used to evaluate catheters, sutures, medical stents, and other devices. We also introduced a number of new specialized fixtures that allow our Mini Bionix product line to simulate exact hip, knee, and spinal motions. In addition, our new twelve-station hip simulator provides quality-assurance and research engineers with added capacity at a price comparable to our previous eight-station hip simulator. By reproducing the motions and loads that affect the hip joint during walking and running, our new twelve-station hip simulator helps researchers evaluate the dura bility of materials and prosthetic designs. [PHOTO] [PHOTO] Demographic trends drive the growth in demand for prosthetics. GROUND VEHICLES Our ground vehicle market continues to benefit from solid consumer demand for safer and more pleasing cars and trucks. Tire engineers have responded to this demand by researching areas such as tread wear and rolling resistance to develop longer lasting, safer tires that also improve gas mileage. This type of research has created a record backlog of orders for our new Flat-Trac(R) III tire test system. At the same time, suspension engineers are using more of our kinematics and compliance test systems to improve vehicle ride and handling. Our safety testing systems enable manufacturers to respond not only to consumer demands for safety but also to the growing body of government safety regulations in North America, Europe, and Asia Pacific. Our testing and simulation systems and software ENABLE MANUFACTURERS TO CONDUCT TESTS THAT MEET SPECIFIC REGULATORY REQUIREMENTS for crush, intrusion, and impact. [PHOTO] Component testing is a growing market for our ground vehicles business. By introducing the new FlexTest(TM) II test controllers based on the Windows NT operating system, MTS is laying the groundwork for a totally integrated flow of test methodology and data within manufacturing organizations and with their suppliers. This will make it easier for our customers and their suppliers to share test data, a capability we are leveraging as we market systems to component manufacturers. [PHOTO] Our seat and headrest testing systems are used worldwide by automakers to ensure com pliance with safety standards. The year's noteworthy orders included a $4.7 million order from the Michelin Tire Company and orders totaling $8.8 million from two Korean automakers. In addition, we ended the year with a significant uptick in activity for our MTS-PowerTek subsidiary, acquired in 1994, which produces dynamometer controls and systems. [PHOTO] We ended the year with a record backlog of orders for our new Flat-Trac III system, an advanced tire performance testing system. We expect this niche to continue to grow because we believe the auto industry will continue its growth worldwide, particularly in Asia Pacific. We have responded with additional customer support to take advantage of accelerating production of vehicles and components in that region. The off-road and agricultural equipment industries also appear very healthy, and we anticipate renewed growth in orders from these customers in North America, Europe, and Asia Pacific. [PHOTO] ADDING VALUE THROUGH APPLICATION SOFTWARE Software continues to be a key differentiator in delivering value to testing and simulation markets, and we expect our software to fuel growth as customers increasingly look for flexibility and ease of use in their testing solutions. Our internal software development efforts focus on applications which include standard packages for specific tests as well as "middleware" with which customers can create their own test programs. Our application products include tests used in materials engineering, such as fatigue and fracture tests; civil engineering, such as static deflection and fracture toughness tests; and automotive engineering, such as suspension deflection and occupant impact tests; along with applications in many other niches. Many of our application software packages include predefined templates for common industry test standards. Our easy-to-use, feature-rich software is designed to increase the productivity of our customers' researchers and laboratory operators, enhancing the value they add to their organizations. To help integrate our application software into customers' computer networks while reducing our cost of software development and support, we are continuing to move our applications to the Microsoft Windows environment. Customers benefit from the performance, ease of use, and data sharing capabilities that Windows provides. Moving toward a widely accepted environment allows us to better focus our software development resources. At the end of 1996, all of our digital systems ran in either the Windows NT or Windows 95 environments. We also continue to support other operating systems where desired by our customer base. CIVIL ENGINEERING When large forces are required to test geological and building materials and components, our civil engineering test systems PROVIDE THE NEEDED POWER AND CONTROL. We see opportunities to grow our civil engineering business as many parts of the world urbanize at an increasing rate. These growing economies demand new infrastructure in the form of roads, bridges, tunnels, and power generation plants. Many developing countries also are committed to establishing their own state-of-the-art civil engineering research centers. Benefiting from this trend, our civil engineering business in FY 1996 included delivery of two multi million-dollar orders to outfit advanced civil engineering laboratories in Asia. Late in the year we introduced a new low-cost, multipurpose geomaterials test system, the Model 816. This system provides an economical solution for tests that do not require extremely high compressive forces, and it allows customers to expand their testing capabilities incrementally as their needs change. We expect this new system to gain wide acceptance for advanced construction materials evaluation. [PHOTO] Civil engineers use our high-accuracy strain transducers to determine the deformation characteristics of concrete and other building materials. AEROSPACE [PHOTO] The Aero-90 LT controller extends our aerospace controller product line to serve a broader range of customers. Our aerospace business has been affected by a sharp downturn in defense spending worldwide and a cyclic downturn in large commercial aircraft development in Europe and North America. In response, we've focused on two initiatives. First, better project management and manufacturing cost reduction have enabled us to improve gross manufacturing profit in the face of decreasing revenue. Second, scaling our Aero-90(TM) test control and data acquisition system down to A SMALLER SIZE, WITHOUT REDUCING ITS CAPABILITY, allows us to compete for general aviation and commuter airplane projects at a new price point. In mid 1996 we completed software developments that allow our new Aero-90 LT system to run in the Windows NT environment, and by year end had booked several orders for the system. Both of these initiatives will continue in 1997. Beyond that, we see promising signs that our traditional aerospace business is poised for an upswing. Major development projects are coming on-line in the defense and commercial aircraft and aerospace sectors in North America, Europe, and Asia. These projects include new commercial transport and civilian passenger planes, military fighters, launch vehicles, and the international space station being coordinated by the U.S. National Aeronautics and Space Administration. [PHOTO] Our aerospace customers include manufacturers of all types of aircraft, including airplanes, helicopters, and launch vehicles. ADDING VALUE THROUGH CUSTOMER SUPPORT [PHOTO] Beyond providing testing and simulation software and systems, we provide a range of engineering services to help our customers meet their objectives. Our consulting services help customers develop test methodologies for their unique needs. We also will supplement their staff when their capacity is overloaded, such as during the start-up of new labs and during peak workload periods prior to new product releases. In some cases we design and equip entire laboratories for our customers. The worldwide trend toward focusing on core competencies and outsourcing non-core functions means that many companies are looking to outside firms for tech nical expertise. Being able to provide these services provides us with growth oppor tunities across a number of industries. Once a customer's MTS equipment is up and running, we continue to provide support through our aftermarket operations, which handles product upgrades, accessories, and additional services, such as maintenance, calibration, and training. Software upgrades provide us with an opportunity to realize return on our R&D investment while enabling our customers to quickly increase the value of their installed systems. We consider our competitors' installed base as part of our served market because our aftermarket products and services can provide great value to these users. Serving them through our aftermarket business helps open doors that can lead to new MTS testing and simulation system sales in the future. We continue to invest heavily in engineering service and aftermarket support capabilities worldwide. This business now represents more than 15 percent of our mechanical testing and simulation sector and is making an increasing contribution to the bottom line. ADVANCED SYSTEMS [PHOTO] Our first underwater seismic simulation table is installed at Kyoto University in Japan. Recent advanced-system projects include a multimillion-dollar order for a complete ride system to be installed at a major amusement park, a $5 million order from the U.S. Army's Tank Automotive Command for upgrades to a tank motion simulation system, a $10 million incrementally funded subcontract to provide the motion system for the U.S. Department of Transportation's National Advanced Driving Simulator, and an intelligent material processing system for the forming of titanium near-net shapes. Although projects of this type are engineering intensive and contain considerable cost risk, our staff has CONSISTENTLY BROUGHT PROJECTS TO COMPLETION AT OR UNDER BUDGET WHILE SATISFYING STRINGENT CUSTOMER REQUIREMENTS. This is a profitable and growing niche where we have few competitors once given the opportunity to present our capabilities. Our challenge is to find or create more of those opportunities. MATERIAL AND PRODUCT TESTING This niche comprises a broad range of customers with diverse testing requirements. Our advanced testing products provide solutions to fulfill these requirements at universities and government laboratories and for material, component, and finished goods suppliers. We currently are among the top three or four suppliers to this niche, but we are not the market share leader. Our strategy is to develop or acquire best-of-class products and services and market them selectively where we can gain market share. We have been successful in implementing this strategy. In 1996 orders grew over 10 percent in this niche which we believe grew in total less than 5 percent. [PHOTO] Many consumer materials and products are tested with MTS equipment to ensure their quality and manufacturability. We believe that the electronics industry presents us with growth opportunities within this niche. To meet some of the mechanical testing needs of this industry, we introduced the Tytron(TM) microforce test system, our first system designed specifi cally for very low-force testing and which can accommodate extremely small specimens. In the electronics industry it can be used to address reliability issues arising from the thermal stresses placed on electronic components and assemblies. Although industry standards are not yet in place for the mechanical testing of electronic components, we are working with industry organizations to help formulate such standards. [PHOTO] The growth of the electronics industry provides us with opportunities to grow our business with products such as the Tytron micro-force testing system. We also continued the integration of recent acquisitions and have begun to realize improved margins from synergies between our electromechanical operations. In 1994 we acquired Adamel-Lhomargy, the premier French manufacturer of electromechanical (static) testing equipment. The acquisition expanded our presence in Europe and provided us with an established line of accessories for use with our existing product line worldwide. TestWorks(R) for Windows, our industry-leading software for static applications, has been adapted for the Adamel product line, enhancing the productivity, flexibility, and ease of use of these systems. This two-way synergy is reducing the overall costs of product development and will provide opportunities to expand the market for this important product line. We still have many opportunities to grow our market share in this niche. [PHOTO] Our Synergie(TM) testing systems provide a full range of low-force material testing capabilities in a convenient, portable unit. INDUSTRIAL MEASUREMENT AND AUTOMATION Adding value by providing precise monitoring and control of industrial machines and processes MEASUREMENT [PHOTO] The Level Plus long gauge is easy to install and provides the unique ability to cost-effectively measure three variables--two levels and temperature--with a single gauge. With manufacturing plants in Cary, North Carolina and Ludenscheid, Germany, and a new joint venture in Yokohama, Japan, our sensors operations serve a worldwide market. In late 1996 we completely redesigned the basic elements of our Temposonics(R) linear displacement sensors, the market-share leaders. The new patented design features modular construction for unprecedented precision and improved configurability and ruggedness. The new design is CE certified for worldwide markets. New markets targeted by this innovation include metalforming, auto motive, and mobile hydraulics. The full benefit of our new sensors will begin to appear on our top and bottom lines by mid-1997. [PHOTO] Patented and CE-certified Temposonics linear displacement sensors have a modular design that improves their performance and reduces manufacturing costs. We currently command a small share of the liquid-level sensor market, but we bring to the market a higher degree of perfor mance and reliability, and we continue to acquire market share from older technologies. In late FY 1996, we were selected as the primary supplier for the U.S. Navy's fuel depot modernization project. Our sensors, chosen for their accurate measurement and ease of installation, were installed on several tanks to provide inventory and custody-transfer data. If successful in this initial project, we will be in a position to supply Level Plus(R) gauges for the entire fuel modernization project at Navy depots throughout the world. AUTOMATION Our Custom Servo Motors subsidiary provides high-performance, permanent magnet brushless servo motors, amplifiers, and motion controllers to original equipment manufacturers and end users to improve quality and reduce production costs. Major markets for these products include the packaging, machine tool, and factory automation industries. We expanded our product line in 1996 with several product introductions. [PHOTO] Our servo motors, amplifiers, and controllers bring efficient new technologies to the auto mation of industrial processes. Our new MaxPlus(TM) 12-inch servo motor delivers up to 90 horsepower of continuous torque. Operating at full torque at low speeds, the new 12-inch motor performs extremely well on very large machines which were usually driven by less efficient hydraulics. This larger motor opens new markets to us through new applications. JM Systems Corporation, for example, uses two 12-inch motors as the prime motors in the largest spring coiling machine ever to use electric motors. Our new line of 2- and 3-inch ServoFlex(TM) motors and amplifiers provides a powerful, economical alternative to stepper motors and brush servo motors in light duty applications. The ServoFlex motors yield higher performance than stepper motors and require less maintenance than brush servo motors. In 1996 we also announced a powerful new multi-axis controller, the XDC 720, which can control up to 28 independent axis, making it ideal for complex packaging operations. This controller has received CE certification, which allows us to sell the product worldwide. Just as this report was going to press, we completed the acquisition of a majority interest in Bregenhorn-Butow, & Co., a German supplier of lower-power motors and amplifiers. The acquired product lines complement our high-performance motors manufactured in New Ulm, Minnesota. Through the combined product line we will be able to rapidly launch our high-performance servo motor products in Europe and distribute the lower-power motor products throughout our established channels in North America. [PHOTO] By using 12-inch servo motors from our Custom Servo Motors subsidiary, JM Systems Corporation eliminated less efficient hydraulic pumps and actuators. SIX YEAR FINANCIAL SUMMARY (SEPTEMBER 30)
1996 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------------------------- (dollars expressed in thousands, except per share data and number of employees) OPERATIONS - ---------------------------------------------------------------------------------------------------------------------------------- Net revenue $ 261,029 $ 234,131 $200,550 $ 189,499 $161,013 $ 157,865 United States revenue 128,593 125,659 101,747 92,153 68,931 72,538 International revenue 132,436 108,472 98,803 97,346 92,082 85,327 Gross profit 106,104 91,638 79,840 78,882 61,919 69,902 Income before income taxes 20,006 14,031 12,629 14,937 6,452 14,350 Net income 14,109 10,461 8,659 10,382 4,915 10,080 Net income per share, fully diluted basis 1.48 1.15 .92 1.14 .54 1.12 Research and development costs 17,696 13,733 12,645 13,697 9,999 9,271 Net interest expense 1,123 2,424 1,860 1,207 704 1,061 Depreciation and amortization 7,820 7,217 6,214 5,648 5,789 5,755 FINANCIAL POSITION - ---------------------------------------------------------------------------------------------------------------------------------- Current assets $ 130,382 $ 131,589 $123,206 $ 123,445 $100,929 $ 91,240 Current liabilities 60,834 67,014 66,361 66,961 50,717 44,183 Current ratio 2.1:1 2.0:1 1.9:1 1.8:1 2.0:1 2.1:1 Net working capital 69,548 64,575 56,845 56,484 50,212 47,057 Property and equipment, net 48,090 48,490 47,368 37,254 38,079 35,995 Total assets 187,396 189,500 175,708 165,716 144,650 135,627 Interest bearing debt 11,836 22,965 23,851 33,299 19,335 20,565 Shareholders' investment 112,814 106,677 100,046 93,011 84,992 80,739 Shareholders' investment per share 12.30 11.60 10.95 10.24 9.52 9.08 OTHER STATISTICS AND RATIOS - ---------------------------------------------------------------------------------------------------------------------------------- Fully diluted shares outstanding(1) 9,553 9,090 9,336 9,144 9,190 8,954 Number of shareholders 1,523(2) 1,395 1,394 1,400 1,413 1,838 Number of employees 1,725 1,612 1,557 1,447 1,404 1,372 New orders $ 282,753 $ 245,919 $195,260 $ 178,786 $178,178 $ 169,237 Backlog of orders $ 120,481 $ 98,757 $ 84,591 $ 88,731 $ 99,221 $ 82,404 Gross profit percent 40.6% 39.1% 39.8 41.6% 38.5% 44.3% Research and development costs as a percent of net revenue 6.8% 5.9% 6.3% 7.2% 6.2% 5.9% Net income as a percent of net revenue 5.4% 4.5% 4.3% 5.5% 3.1% 6.4% Effective tax rate 29% 25% 31% 30% 24% 30% Interest bearing debt to equity ratio 10% 22% 24% 36% 23% 25% Return on average net assets(3) 17.2% 12.9% 11.6% 16.3% 7.6% 17.4% Return on beginning shareholders' investment per share 12.8% 10.5% 9.0% 11.9% 5.9% 13.7% Cash dividends paid per share $ .32 $ .28 $ .28 $ .24 $ .24 $ .20 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Presented on a weighted average basis of common shares assuming conversion of common stock equivalents during each year after retroactive adjustments for issued shares, for stock splits and reduction of shares from treasury stock purchases (in thousands of shares). (2) On November 29, 1996, there were 1,523 common shareholders of record, with another estimated 1,900 shareholders whose stock is held by nominees or broker dealers. (3) (Income before income taxes plus net interest expense) divided by (average quarterly assets minus non-interest bearing liabilities). MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKLOG/NEW ORDERS 1996 1995 1994 - -------------------------------------------------------------- (expressed in thousands) New Orders: North America* $ 139,725 $ 137,775 $ 101,498 International 143,028 108,144 93,762 - -------------------------------------------------------------- Total $ 282,753 $ 245,919 $ 195,260 - -------------------------------------------------------------- Backlog $ 120,481 $ 98,757 $ 84,591 - -------------------------------------------------------------- *Includes U.S. and Canada Record 1996 new orders of $282.8 million were up 15% from the prior year and represented a 45% increase over 1994. New orders in 1996 included 56 orders with unit values exceeding $500,000 compared to 67 orders in 1995 and 30 orders in 1994 in this category. These orders represented 39%, 31% and 26% of the new order total for these three years. In 1996, the Mechanical Test and Simulation sector (MT&S) new orders of $234.6 million increased 17% from 1995 and represented a 48% increase over 1994. The Industrial Measurement and Automation sector (M&A) new orders in 1996 of $48.2 million increased 5% over the prior year and represented a 30% increase over 1994. North American new orders increased 1% in 1996, 36% in 1995 and 4% in 1994. The M&A sector was strong in 1995 and 1994 but experienced a soft domestic market for most of 1996. The ground vehicle niche of the MT&S sector strengthened considerably in both 1996 and 1995 compared to order levels achieved in 1994. The small but emerging biomechanics systems niche also experienced strong growth in 1996. International orders increased 32% in 1996, 15% in 1995 and 16% in 1994. The 1996 new order increase occurred in all three international areas (see table below), whereas in 1995 the increase came principally from Europe. 1996 Asia Pacific orders content included a $23.3 million earthquake simulator in Japan which represented the largest single order received by the Company. Most of the 1994 increase occurred in Asia Pacific. See Geographic Analysis of New Orders for the percentage breakdown by geographic area. The backlog of undelivered orders at September 30, 1996, increased 22% from 1995, the result of record new orders received in 1996. REVENUES 1996 1995 1994 - -------------------------------------------------------------- (expressed in thousands) United States $ 128,593 $ 125,659 $ 101,747 International 132,436 108,472 98,803 - -------------------------------------------------------------- Total $ 261,029 $ 234,131 $ 200,550 - -------------------------------------------------------------- Record 1996 revenues of $261.0 million were up 11% from the prior year and represented a 30% increase over 1994. For 1996, the Mechanical Test and Simulation sector (MT&S) revenues of $212.8 million increased 12% from 1995 and represented a 30% increase compared to 1994. The Industrial Measurement and Automation sector (M&A) revenues in 1996 of $48.3 million increased 11% over the prior year and represented a 31% increase compared to 1994. For geographic and sector revenues and income information, see Note 2 of "Notes to Consoli dated Financial Statements." Revenues in the United States increased over the prior years: 2% in 1996, 24% in 1995 and 10% in 1994, reflecting strengthening markets for most of the Company's business segments during 1995 and 1994 and a softer market in 1996. The M&A sector revenue growth reflected rising demand from our European original equipment manufacturers and a faster delivery response on new orders. The MT&S sector revenue increase in 1996 reflected a continued strong automotive market, strong aftermarket sales for accessories and services, and revenue recognized on a portion of the large Japanese earthquake simulator in the fourth quarter. International revenues increased 22% in 1996, 10% in 1995, and 2% in 1994. The 1995 and 1994 growth rates were lower than those in the U.S. which reflected the recessionary economies of Europe and Japan during these periods. International revenues grew at a faster rate in 1996 reflecting a turnaround in these economics in late 1995 which continued in 1996. A significant portion of the Company's inter national revenues are contracted for in foreign currencies. In both 1995 and 1994, the value of the dollar weakened, particularly against European currencies, increasing dollar values on foreign currency revenue in those years by $3.9 million and $3.7 million. The value of the dollar began strengthening in 1996, reducing dollar values on translated foreign currency revenues by $5.5 million. Selective price increases and decreases 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
1996 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------- North America 49% 57% 52% 55% 49% 46% - ---------------------------------------------------------------------------------------------------------------- Europe/Africa/Middle East 22 25 21 20 25 35 - ---------------------------------------------------------------------------------------------------------------- Asia Pacific 26 17 26 23 25 18 - ---------------------------------------------------------------------------------------------------------------- Latin America/Rest of the World 3 1 1 2 1 1 - ----------------------------------------------------------------------------------------------------------------
GROSS PROFIT 1996 1995 1994 - ------------------------------------------------------------- (expressed in thousands) Gross Profit $ 106,104 $ 91,638 $ 79,840 - ------------------------------------------------------------- % of Revenues 40.6% 39.1% 39.8% - ------------------------------------------------------------- The gross profit percentage for 1996 increased to 40.6% from 39.1% in 1995, a continuation of the improved gross profit margin which began in fourth quarter of 1995. The lower gross profit percentage in 1995 was caused primarily by the effect of a weak dollar on foreign currency denominated revenues of low-margin projects in our Mechanical Testing and Simulation sector. The majority of these low margin projects were shipped during the first half of 1995 after which point our gross profit margin began to show improvement from revenues with higher margin, operating efficiencies, and a more favorable business mix. The 1994 gross profit percentage declined 1.8 percentage points from 1993, principally caused by a higher-than-normal content of development costs in some large custom projects resulting in much lower than expected gross profit margins. Some of these projects also contributed to the 1995 decrease in the gross profit percentage. RESEARCH AND DEVELOPMENT 1996 1995 1994 - -------------------------------------------------------------- (expressed in thousands) R & D Expense $ 17,696 $ 13,733 $ 12,645 - -------------------------------------------------------------- % of Revenues 6.8% 5.9% 6.3% - -------------------------------------------------------------- The Company does not do basic research, but does fund product, system and application developments (R&D) in both the Mechanical Testing and Simulation (MT&S) and Industrial Measurement and Automation (M&A) sectors. The majority of the development expenditures in all three years was for systems, software, control products, new measurement products, servo motors and amplifiers, electromechanical load frames and accessories. The product development spending percentages reflected above are representative of the ratio range the Company normally commits to in its annual planning process with the 1996 percentage at the higher end of the range. Accelerated development programs in both the MT&S and M&A sectors and a shift from customer funded development caused the higher 1996 percentage. The Company also undertakes "first of their kind" system level development effort as part of custom projects sold to customers. The cost of these efforts is reported as cost of sales. The combination of internally funded R&D and these customer funded system innovations typically approximates 10% of revenues. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 1996 1995 1994 - -------------------------------------------------------------- (expressed in thousands) Selling/Marketing $ 48,260 $ 45,088 $ 40,351 General & Administrative 17,260 16,053 12,682 - -------------------------------------------------------------- Total $ 65,520 $ 61,141 $ 53,033 - -------------------------------------------------------------- % of Revenues 25.1% 26.1% 26.4% - -------------------------------------------------------------- Selling/Marketing and General & Administrative (SG&A) expenses for 1996 as a percentage of revenues were reduced 1.0 percentage point from 1995 and 1.3 percentage points from 1994. Full year spending for 1996 totaled $65.5 million which represented a $4.4 million (7%) increase over 1995 and a $12.5 million (24%) increase over 1994. All three years were similar in that cost reduction was at the forefront of the planning process as well as aligning existing resources or making new investments in markets with the greatest potential. Operating expenses of newly acquired companies represented $2.2 million of the expense increase in 1995 with the majority of the remaining increase being attributable to investments by our Industrial Measurement and Automation sector to support its strong growth rate, higher translated European expenses caused by the weak dollar, and inflation. The $4.4 million (7%) increase in SG&A expense in 1996 reflects the results of cost reduction initiatives over the last two years which have resulted in a lower SG&A cost as a percentage of revenues. The $5.2 million (11%) increase in SG&A expense in 1994 from 1993 was principally related to the acquisition of Adamel Lhomargy (France). INCOME 1996 1995 1994 - -------------------------------------------------------------- (expressed in thousands except per share data) Income Before Income Taxes $ 20,006 $ 14,031 $ 12,629 - -------------------------------------------------------------- % of Revenues 7.7% 6.0% 6.3% - -------------------------------------------------------------- Net Income $ 14,109 $ 10,461 $ 8,659 - -------------------------------------------------------------- % of Revenues 5.4% 4.5% 4.3% - -------------------------------------------------------------- Effective Tax Rate 29.5% 25.4% 31.4% - -------------------------------------------------------------- Return On Beginning Equity Per Share 12.8% 10.5% 9.0% - -------------------------------------------------------------- Net Income Per Share $ 1.48 $ 1.15 $ .92 - -------------------------------------------------------------- Income before income taxes (pretax income) in 1996 increased $6.0 million (43%) from 1995 and reflected an improved return on revenue resulting from a 11% increase in revenues, a 1.5% improvement in the gross profit percentage, and a 1.0% decrease in the Selling/Marketing and General & Administrative (SG&A) percentage. For 1996, the Mechanical Testing and Simulation sector (MT&S) pretax income of $15.3 million increased 59% compared to 1995 and was up 78% compared to 1994. The Industrial Measurement and Automation sector (M&A) pretax income in 1996 of $4.7 million increased 5% over the prior year and was up 18% from 1994. Pretax income in 1995 increased $1.4 million (11%) from 1994 principally from higher revenues and improved gross profit margins in the fourth quarter. Pretax income in 1994 decreased $2.3 million (16%) from 1993 as a result of significant development costs incurred on specific leading-edge technology projects affecting gross profit margins, and a $2.1 million charge to operations for a work-force reduction offset by a non-operating gain of $3.9 million realized from the sale of our Berlin, Germany facility. Net income in all three years benefited from an effective tax rate that was lower than the federal statutory tax rate, primarily the result of the tax benefit of the Company's Foreign Sales Corporation and the Research and Development (R&D) tax credits. The 1996 effective tax rate increased over 1995 as a result of having the reinstated R&D tax credit available only for the fourth quarter of 1996. See Note 4 of "Notes to Consolidated Financial Statements" for the reconcilia tion between the federal statutory and effective income tax rates and other related tax information. FOREIGN CURRENCIES EFFECTS In 1996 the U.S. dollar strengthened in relation to the European and Japan currencies which decreased translated foreign currency denominated revenues by $5.5 million. A weaker dollar generally has a positive effect on overseas results because foreign exchange denominated revenues and earnings translate into more U.S. dollars; a stronger dollar has a negative translation effect. However, the cost of overseas operations and products sourced for domestic use, which were not significant, are affected in the opposite direction. In 1995, the U.S. dollar was generally weaker in relation to European economies, specifically in relationship to the German Deutschemark, which increased translated European foreign currency denominated revenues by $3.9 million. Over the year as a whole, there was little change in translated yen denominated revenues. Throughout 1994, the dollar weakened against all major foreign currencies, which increased translated foreign currency denominated revenues by $3.7 million. The Company recorded foreign currency transaction gains of $104 thousand, $1.4 million and $1.1 million, for the years 1996, 1995, and 1994, respectively. The Company's foreign currency risk-management program focuses on foreign currencies of countries where the Company operates (German Deutschemark, French Franc, English Pound, Swedish Kroner, Italian Lire and Japanese Yen). This involves entering into forward foreign currency hedge contracts, options, and foreign currency denominated loans. On September 30, 1996, there were open currency hedge contracts, primarily denominated in Yen and Deutschemark, with various settlement dates, totaling $28.4 million. Unrealized gains under these contracts were $1.7 million as of September 30, 1996. These contracts are targeted to limit transaction exposures where equipment and services costs are incurred in U.S. dollars and the customer contracts are in a foreign currency. LIQUIDITY AND CAPITAL RESOURCES 1996 1995 1994 - --------------------------------------------------------------- (expressed in thousands except per share data) Total Interest Bearing Debt $ 11,836 $ 22,965 $ 23,851 % of Total Capital 9.5% 17.7% 19.3% - --------------------------------------------------------------- Shareholders' Investment $ 112,814 $ 106,677 $ 100,046 - --------------------------------------------------------------- Per Share $ 12.30 $ 11.60 $ 10.95 - --------------------------------------------------------------- FINANCIAL CONDITION At September 30, 1996, the Company's capital structure was comprised of $3.1 million of current debt, $8.7 million long-term debt and $112.8 million shareholders' equity. The ratio of total debt to total capital was 9.5%, compared with 17.7% at September 30, 1995. Total debt decreased $11.1 million during 1996 to $11.8 million. This resulted from a $10.4 million reduction in notes payable to banks and a $2.7 million reduction in long-term debt offset by a $2.0 million increase in current maturities of long-term debt. Shareholders' equity increased $6.1 million in 1996 to $112.8 million. Shareholders' investment per share in 1996 increased to $12.30 from $11.60 in 1995. The increase was primarily due to an increase in retained earnings of $14.1 million from current year net earnings and $3.7 million from employee stock option and purchase plans. These increases were offset by dividends of $3.0 million, $7.9 million of treasury stock repurchases, and a $800 thousand reduction in the cumulative translation adjustment. CASH FLOWS Operating activities generated cash of $36.1 million in 1996, $23.1 million in 1995 and $20.9 million in 1994. The cash generated in 1996 was largely from earnings, depreciation and amortization, and a reduction in accounts receivable. These funds supported $7.4 million of capital expenditures, $3.0 million of dividend payments, $7.9 million of stock repurchases, and a repayment of $10.4 of notes payable to banks. Cash and cash equivalents increased $10.5 million during 1996. Capital expenditures for property, plant and equipment totaled $7.4 million in 1996, compared to $6.3 million in 1995, and $18.2 million in 1994. Capital spending in 1994 included $11.3 million for a new facility for the Company's Berlin, Germany operations. This amount was net of the sale of the existing facility. Capital spending in 1997 is planned to be about $8 million. The Company anticipates that 1997 capital expenditures will be financed primarily with cash balance and 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 33% of the average earnings per share of the last two years. In November, 1996, the Company's Board of Directors increased the quarterly dividend to 10 cents per share from 8 cents per share. Annualized, this dividend pay out equates to 31% of the 1996 and 1995 average earnings per share. SHARE REPURCHASE PLAN In 1996, the Company repurchased 415,307 shares of common stock on the open market for $7.9 million, at an average cost of $19.00 per share. The Company repurchased 317,680 shares in 1995 for $3.6 million, and 80,078 shares in 1994 for $900 thousand. The Company's practice for share repurchases is to offset the dilutive impact of shares of common stock issued from the Company's stock option and stock purchase plans, and for other corporate stock based programs. During this three year period, the Company issued 773,904 shares of its common stock from these stock option and stock purchase plans. In January, 1995, the Company's Board of Directors authorized the repurchase of 500,000 shares of common stock in the open market within the Securities and Exchange Commission guidelines. At the end of 1996, 153,955 shares remained available to be repurchased under this authorization. In November, 1996, the Company's Board of Directors authorized the repurchase of an additional 500,000 shares of common stock in the open market within the Securities and Exchange Commission guidelines. The above share amounts have been adjusted for the Company's two-for-one stock split in the form of a 100% stock dividend effective April 1, 1996. The Company believes that its 1997 anticipated cash flows from operations, a forecast decrease in unbilled contract and retainage receivables, and its lines of credit will adequately finance ongoing operations, allow for further common-stock repurchase programs and strategic acquisitions. 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: 1996 1995 - ----------------------------------------------------------------- Shares Shares High Low Traded High Low Traded - ----------------------------------------------------------------- 1st Quarter 17 3/4 13 7/8 2796 12 3/8 10 1/8 1117 2nd Quarter 19 3/8 14 2635 12 7/8 11 1309 3rd Quarter 22 1/2 17 1/2 1471 13 7/8 11 3/4 806 4th Quarter 21 1/2 18 1/2 1937 14 5/8 13 3/8 769 - ----------------------------------------------------------------- (1) Source: The Nasdaq Stock Market The above prices and share volumes have been adjusted for the Company's two-for-one stock split in the form of a 100% stock dividend, effective April 1, 1996 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 than expected gross profit margins. This "system level" product development is as equally essential to the Company's long term growth as is Company funded research and development. Manage ment believes these orders have significant long-term benefits for the Company despite their potential impact on earnings. Quarterly earnings will 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 the reconciliation between the statutory and effective income tax rates. Selected quarterly financial information, for the three fiscal years ended September 30, 1996, is presented below.
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year - ----------------------------------------------------------------------------------------------------- (expressed in thousands except per share data) 1996 Revenues $ 56,135 $ 67,082 $ 60,630 $ 77,182 $ 261,029 Gross margin 23,867 28,066 24,374 29,797 106,104 Pretax income 3,570 5,363 4,286 6,787 20,006 - ----------------------------------------------------------------------------------------------------- Net income $ 2,430 $ 3,632 $ 2,914 $ 5,133 $ 14,109 - ----------------------------------------------------------------------------------------------------- Income per share $ .26 $ .38 $ .30 $ .54 $ 1.48 - ----------------------------------------------------------------------------------------------------- 1995 Revenues $ 49,468 $ 58,949 $ 55,709 $ 70,005 $ 234,131 Gross margin 18,195 21,061 21,327 31,055 91,638 Pretax income 1,652 2,022 1,961 8,396 14,031 - ----------------------------------------------------------------------------------------------------- Net income $ 1,239 $ 1,511 $ 1,488 $ 6,223 $ 10,461 - ----------------------------------------------------------------------------------------------------- Income per share $ .14 $ .17 $ .17 $ .67 $ 1.15 - ----------------------------------------------------------------------------------------------------- 1994 Revenues $ 47,241 $ 46,357 $ 48,468 $ 58,484 $ 200,550 Gross margin 19,443 17,380 18,902 24,115 79,840 Pretax income 3,526 5,015 1,442 2,646 12,629 - ----------------------------------------------------------------------------------------------------- Net income $ 2,361 $ 3,181 $ 1,002 $ 2,115 $ 8,659 - ----------------------------------------------------------------------------------------------------- Income per share $ .26 $ .34 $ .10 $ .22 $ .92 - -----------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (SEPTEMBER 30) ASSETS 1996 1995 - -------------------------------------------------------------------------------------------------------------------- (expressed in thousands) Current Assets: Cash and cash equivalents $ 19,231 $ 8,736 Accounts receivable, net of allowance for doubtful accounts of $1,742 and $1,824 53,717 65,106 Unbilled contracts and retainage receivable 16,418 19,668 Inventories 36,276 35,669 Prepaid expenses 4,740 2,410 - --------------------------------------------------------------------------------------------------------------------- Total current assets 130,382 131,589 - --------------------------------------------------------------------------------------------------------------------- Property and Equipment: Land 3,459 3,461 Buildings and improvements 38,644 38,574 Machinery and equipment 59,060 55,826 Accumulated depreciation (53,073) (49,371) - --------------------------------------------------------------------------------------------------------------------- Total property and equipment, net 48,090 48,490 - --------------------------------------------------------------------------------------------------------------------- Other Assets 8,924 9,421 - --------------------------------------------------------------------------------------------------------------------- $ 187,396 $ 189,500 - --------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' INVESTMENT - --------------------------------------------------------------------------------------------------------------------- Current Liabilities: Notes payable to banks $ 56 $ 10,475 Current maturities of long-term debt 3,030 1,043 Accounts payable 11,604 11,768 Accrued compensation and benefits 23,664 20,194 Advance billings to customers 13,807 14,784 Other accrued liabilities 8,673 8,750 - --------------------------------------------------------------------------------------------------------------------- Total current liabilities 60,834 67,014 - --------------------------------------------------------------------------------------------------------------------- Deferred Income Taxes 4,998 4,362 Long-term Debt 8,750 11,447 - --------------------------------------------------------------------------------------------------------------------- Shareholders' Investment: Common stock, 25 (cents) par; 32,000,000 shares authorized: 9,173,518 and 4,598,311 shares issued and outstanding 2,293 1,150 Additional paid-in capital -- 255 Retained earnings 106,485 100,443 Cumulative translation adjustment 4,036 4,829 - --------------------------------------------------------------------------------------------------------------------- Total shareholders' investment 112,814 106,677 - --------------------------------------------------------------------------------------------------------------------- $ 187,396 $ 189,500 - --------------------------------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
CONSOLIDATED STATEMENTS OF INCOME AND SHAREHOLDERS' INVESTMENT (FOR THE YEARS ENDED SEPTEMBER 30) INCOME 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- (expressed in thousands except for share data) Net Revenue $ 261,029 $ 234,131 $ 200,550 Cost of Revenue 154,925 142,493 120,710 - -------------------------------------------------------------------------------------------------------------- Gross Profit 106,104 91,638 79,840 - -------------------------------------------------------------------------------------------------------------- Operating Expenses: Selling 48,260 45,088 40,351 General and administrative 17,260 16,053 12,682 Research and development 17,696 13,733 12,645 Interest expense 1,524 2,670 2,150 Interest income (401) (246) (290) Other expense (income), net 1,759 309 (327) - -------------------------------------------------------------------------------------------------------------- Total Operating Expenses 86,098 77,607 67,211 - -------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 20,006 14,031 12,629 Provision for Income Taxes 5,897 3,570 3,970 - -------------------------------------------------------------------------------------------------------------- Net Income $ 14,109 $ 10,461 $ 8,659 - -------------------------------------------------------------------------------------------------------------- Net Income Per Share $ 1.48 $ 1.15 $ .92 - -------------------------------------------------------------------------------------------------------------- Weighted Average Common Shares Outstanding 9,553 9,090 9,336 - --------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT - -------------------------------------------------------------------------------------------------------------------------------- Common Stock ------------------------- Additional Cumulative Shares Paid-In Retained Translation Issued Amount Capital Earnings Adjustment - -------------------------------------------------------------------------------------------------------------------------------- (dollars expressed in thousands) Balance, September 30, 1993 4,543,603 $1,136 $ 2,677 $ 85,661 $3,537 - ------------------------------------------------------------------------------------------------------------------------------- Exercise of stock options 64,810 16 1,187 -- -- Translation adjustment -- -- -- -- 677 Common stock purchased and retired (40,039) (10) (936) -- -- Net income -- -- -- 8,659 -- Cash dividends, 28 (cents) per share -- -- -- (2,558) -- - ------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1994 4,568,374 1,142 2,928 91,762 4,214 - ------------------------------------------------------------------------------------------------------------------------------- Exercise of stock options 44,277 11 899 -- -- Translation adjustment -- -- -- -- 615 Common stock purchased and retired (158,840) (39) (3,572) -- -- Acquisitions through pooling of interests 144,500 36 -- 743 -- Net income -- -- -- 10,461 -- Cash dividends, 28 (cents) per share -- -- -- (2,523) -- - ------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1995 4,598,311 1,150 255 100,443 4,829 - ------------------------------------------------------------------------------------------------------------------------------- Exercise of stock options 264,604 66 3,642 -- -- Translation adjustment -- -- -- -- (793) Common stock purchased and retired (381,055) (95) (3,897) (3,904) -- Stock split, 2 for 1 4,691,658 1,172 -- (1,172) -- Net income -- -- -- 14,109 -- Cash dividends, 32 (cents) per share -- -- -- (2,991) -- - ------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1996 9,173,518 $2,293 $ -- $106,485 $4,036 - ------------------------------------------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (FOR THE YEARS ENDED SEPTEMBER 30) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ (expressed in thousands) Operating Activities: Net income $ 14,109 $ 10,461 $ 8,659 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 7,820 7,217 6,214 Deferred income taxes 740 278 731 Gain from sale of land and building -- (418) (3,930) Changes in operating assets and liabilities: Accounts receivable, unbilled contracts, and retainage receivable 13,362 (2,625) 8,789 Inventories (1,071) 1,065 (10,143) Prepaid expenses (2,380) 718 (1,085) Advance billings to customers (455) 4,629 2,336 Other liabilities, net 3,969 1,749 9,339 - ----------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 36,094 23,074 20,910 - ----------------------------------------------------------------------------------------------------------------- Investing Activities: Property and equipment additions, net (7,437) (6,310) (6,901) Plant purchases and new construction, net -- -- (11,277) Proceeds from sale of land and building -- 671 6,131 Purchase of PowerTek, Inc. -- (4,687) -- Other assets (649) (405) (469) - ----------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (8,086) (10,731) (12,516) - ----------------------------------------------------------------------------------------------------------------- Financing Activities: Net borrowings under notes payable to banks (10,386) (8,134) (11,595) Proceeds from issuance of long-term debt 2,202 8,257 4,341 Repayments of long-term debt (2,169) (3,185) (2,194) Cash dividends (2,991) (2,523) (2,558) Proceeds from employee stock option and stock purchase plans 3,708 910 1,203 Payments to purchase and retire common stock (7,896) (3,611) (946) - ----------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (17,532) (8,286) (11,749) - ----------------------------------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash 19 (240) 677 - ----------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 10,495 3,817 (2,678) Cash and Cash Equivalents at Beginning of Year 8,736 4,919 7,597 - ----------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 19,231 $ 8,736 $ 4,919 - ----------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flows Information: Cash paid during the year for: Interest $ 1,458 $ 2,615 $ 2,069 Income taxes 6,677 3,317 3,715 - ------------------------------------------------------------------------------------------------------------------ The accompanying Notes to Consolidated Financial Statements are an integral part of these 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 owned subsidiaries. All significant intercompany balances and transactions have been eliminated. All balance sheet accounts of foreign subsidiaries are translated at the current exchange rate as of the end of the 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 resulting from foreign currency transactions are included in "Other expense (income), net" in the Consolidated Statements of Income. These transac tions resulted in net exchange gains of $104,000 in 1996, $1,401,000 in 1995 and $1,058,000 in 1994. The Company has a foreign currency risk management program which principally involves entering into forward foreign currency hedge contracts, options, and foreign currency denominated loans to address specific exposures related to future foreign currency transactions. On September 30, 1996, there were open hedge and options contracts, with various future settlement dates, totaling $28,362,000. The net unrealized gain on such contracts was $1,707,000 at September 30, 1996. Upon settlement, resultant gains or losses on such contracts offset the impact of foreign currency rates on cash collected from accounts receivable. REVENUE RECOGNITION Revenue is recognized upon shipment of equipment when the customer's order can be manufactured, delivered and installed 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 antici pated 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 Consoli dated Balance Sheets as Unbilled Contracts and Retainage Receivable. Amounts unbilled or retained at September 30, 1996 are expected to be invoiced during fiscal 1997. Long-term contracts consider the duration of the manufacturing and collection cycles at the time the contract is bid. Accordingly, Accounts Receivable in the accompanying Consolidated Balance Sheets approximate fair value. 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 war ranty claims. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make assumptions and estimates that affect the reported amounts in the Consolidated Balance Sheets and Statements of Income and the disclosures in the accompanying Notes to Consolidated Financial Statements. Ultimate results could differ from reported amounts based upon those assumptions and 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. CASH EQUIVALENTS Cash equivalents represent short-term investments which have an original maturity of 90 days 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 first-in, first-out cost or market. Inventory components as of September 30, were as follows: 1996 1995 - -------------------------------------------------------------- (expressed in thousands) Customer projects in various stages of completion $ 12,832 $ 13,304 Components, assemblies and parts 23,444 22,365 - -------------------------------------------------------------- Total $ 36,276 $ 35,669 - -------------------------------------------------------------- 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 10 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. OTHER ASSETS Other assets consist principally of patents and excess cost over net assets acquired, net of accumulated amortization. The carrying value of such assets less accumulated amortization was $6,872,000 and $7,275,000 in 1996 and 1995, respectively. These assets are being amortized over various periods from 8 to 40 years. ADOPTION OF STATEMENT NO. 121 Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (the Statement), is effective for the Company's fiscal year ending September 30, 1997. The Company chose to adopt this Statement in 1996. Adoption of the Statement had no impact on the Company's Consolidated Statements of Income or Balance Sheets. RESEARCH AND DEVELOPMENT Research and product development costs associated with new products are charged to operations as incurred. NET INCOME PER SHARE Net income per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during each period. Fully diluted and primary net income per share amounts are approximately equivalent for the years presented. Weighted average common shares and per share computations have been restated retroactively for the 2 for 1 stock split effective April 1, 1996. 2. INDUSTRY SECTOR AND GEOGRAPHIC INFORMATION: The Company provides customers with hardware and software products and services they can use to improve product quality, stimulate innovation, and increase machine and worker productivity. MTS markets these products and services in two business sectors--Mechanical Testing and Simulation (MT&S) and Industrial Measurement and Automation (M&A). MT&S customers use the Company's products and services to determine how their products (materials, vehicles, components or structures) will perform under actual service conditions. M&A customers use the Company's instrumentation products to monitor and automate indus trial processes and equipment. Financial information by sector follows:
1996 1995 1994 - ---------------------------------------------------------------------------------------------------- (expressed in thousands) Net Revenue Mechanical Testing & Simulation $ 212,763 $ 190,464 $ 163,502 Measurement & Automation 48,266 43,946 37,276 Transfers within and between sectors -- (279) (228) - --------------------------------------------------------------------------------------------------- Total $ 261,029 $ 234,131 $ 200,550 - --------------------------------------------------------------------------------------------------- Income Before Income Taxes Mechanical Testing & Simulation $ 15,299 $ 9,550 $ 8,606 Measurement & Automation 4,707 4,481 4,023 - --------------------------------------------------------------------------------------------------- Total $ 20,006 $ 14,031 $ 12,629 - --------------------------------------------------------------------------------------------------- Identifiable Assets Mechanical Testing & Simulation $ 165,110 $ 161,678 $ 152,763 Measurement & Automation 38,670 36,048 29,558 Eliminations between sectors (16,384) (8,226) (6,613) - --------------------------------------------------------------------------------------------------- Total $ 187,396 $ 189,500 $ 175,708 - --------------------------------------------------------------------------------------------------- Other Sector Data Mechanical Testing & Simulation: Capital expenditures $ 6,198 $ 6,319 $ 16,464 Depreciation 5,706 5,456 4,917 Amortization 380 417 108 - --------------------------------------------------------------------------------------------------- Measurement & Automation: Capital expenditures $ 1,803 $ 1,243 $ 1,396 Depreciation 1,216 1,086 945 Amortization 518 258 244 - ---------------------------------------------------------------------------------------------------
A geographic summary of the Company's operations and related year-end asset information for each of the three years in the period ended September 30, 1996 follows:
International ----------------------------------------------------- United Elimi- Consoli- States Far East Europe Other nations dated - ------------------------------------------------------------------------------------------------------------------------------- (expressed in thousands) Operations for the Year Ended September 30, 1996 Net revenue $128,593 $ 54,392 $63,023 $15,021 $ -- $ 261,029 Transfers between geographic areas 2,513 18,411 21,499 3 (42,426) -- - ------------------------------------------------------------------------------------------------------------------------------- Total $131,106 $ 72,803 $84,522 $15,024 $ (42,426) $ 261,029 - ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 10,690 $ 2,208 $ 3,876 $ 3,232 $ -- $ 20,006 - ------------------------------------------------------------------------------------------------------------------------------- Operations for the Year Ended September 30, 1995 Net revenue $125,659 $ 42,032 $54,634 $11,806 $ -- $ 234,131 Transfers between geographic areas 1,256 16,620 9,998 585 (28,459) -- - ------------------------------------------------------------------------------------------------------------------------------- Total $126,915 $ 58,652 $64,632 $12,391 $ (28,459) $ 234,131 - ------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes $ 15,046 $ (192) $(1,955) $ 1,132 $ -- $ 14,031 - ------------------------------------------------------------------------------------------------------------------------------- Operations for the Year Ended September 30, 1994 Net revenue $101,747 $ 45,541 $45,099 $ 8,163 $ -- $ 200,550 Transfers between geographic areas -- 19,343 15,439 871 (35,653) -- - ------------------------------------------------------------------------------------------------------------------------------- Total $101,747 $ 64,884 $60,538 $ 9,034 $ (35,653) $ 200,550 - ------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes $ 7,736 $ 4,010 $ 1,242 $ (359) $ -- $ 12,629 - ------------------------------------------------------------------------------------------------------------------------------- Identifiable Assets at September 30 1996 $174,507 $ 12,060 $42,098 $ 175 $ (41,444) $ 187,396 1995 164,341 12,895 51,708 311 (39,755) 189,500 1994 154,954 19,454 40,825 791 (40,316) 175,708 - ------------------------------------------------------------------------------------------------------------------------------- Transfers between geographic areas are made at prices which allow appropriate markup to the manufacturing or selling unit. Individual countries, other than the United States, do not exceed 10% of consolidated revenues on a recurrent annual basis.
3. FINANCING: Long-term debt as of September 30 follows:
1996 1995 - ------------------------------------------------------------------------------------------------------------- (expressed in thousands) 7.75% Mortgage, due in October 2015, collateralized by building $ 7,413 $ 8,085 6.69% Note, unsecured, due in April 1997 2,296 2,408 5.5% Note, unsecured, due in September 2000 2,064 -- 9.5% Note, unsecured, due in August 1996 -- 1,611 8.3% Note, unsecured, due in September 1996 -- 313 Other 7 73 - ------------------------------------------------------------------------------------------------------------- Total 11,780 12,490 Less Current Maturities (3,030) (1,043) - ------------------------------------------------------------------------------------------------------------- Total Long-Term Debt $ 8,750 $ 11,447 - -------------------------------------------------------------------------------------------------------------
Aggregate annual maturities of long-term debt for the next five fiscal years are as follows: 1997--$3,030,000; 1998--$741,000; 1999--$756,000; 2000--$635,000; 2001--$240,000 and $6,378,000 thereafter. The carrying value of the Company's long-term debt at September 30, 1996, approximates the fair value at current interest rates offered to the Company for debt of the same remaining maturities. The Company has credit agreements with two domestic banks totaling $20,000,000. One credit agreement, for $5,000,000, permits the Company to issue domestic and Euro-currency notes. The other credit agreement, for $15,000,000, permits the Company to issue domestic notes, Euro-currency notes, and banker's acceptances. As part of the same credit agreement, the bank has agreed to issue term loans up to a maximum of $15,000,000 until September 30, 1997. This agreement provides for repayment of these term loans through September 1999. The Company compensates both banks with loan commitment fees on the unused portion of the credit lines. The Company also has four uncommitted lines of credit with banks that total $40,000,000. In addition, the Company has standby letter-of-credit lines totaling $15,000,000. At September 30, 1996, standby letters of credit outstanding totaled $12,267,000. Under the terms of its credit agreements, 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) its tangible net worth will exceed a defined minimum amount; and (d) repurchases of its common stock will not exceed a maximum amount. At September 30, 1996, tangible net worth exceeded the defined minimum amount by $17,352,000 and the Company had $3,439,000 available for repurchases of its common stock. The Company was in compliance with the terms of its credit agreements and its lines of credit at September 30, 1996. Information on short-term borrowings for the years ended September 30 follows: 1996 1995 1994
1996 1995 1994 - -------------------------------------------------------------------------------------------- (expressed in thousands) Balance outstanding at September 30 $ 56 $ 10,475 $ 17,007 Average balance outstanding 3,282 22,286 23,702 Maximum balance outstanding 11,223 26,642 30,302 Year-end interest rate 7.0% 7.0% 5.8% Weighted-average interest rate 6.9% 6.5% 4.4% - -------------------------------------------------------------------------------------------- 4. INCOME TAXES: The provision for income taxes for the years ended September 30 consisted of: 1996 1995 1994 - -------------------------------------------------------------------------------------------- (expressed in thousands) Currently payable (receivable): Federal $ 3,717 $ 3,211 $ 2,249 State 499 662 411 Foreign 1,830 (295) 1,203 Deferred (149) (8) 107 - -------------------------------------------------------------------------------------------- Total provision $ 5,897 $ 3,570 $3,970 - --------------------------------------------------------------------------------------------
A reconciliation from the Federal statutory income tax rate to the Company's effective rate for the years ended September 30 follows:
1996 1995 1994 - ------------------------------------------------------------------------------------------- Statutory rate 35% 35% 35% Tax benefit of Foreign Sales Corporation (5) (7) (4) Foreign provision in excess of U.S. tax rate 2 -- 5 State income taxes, net of Federal benefit 2 3 2 Research and development tax credits (3) (7) (4) Other, net (2) 1 (3) - ------------------------------------------------------------------------------------------- Effective rate 29% 25% 31% - -------------------------------------------------------------------------------------------
Deferred tax assets and liabilities are recorded for the differences between the amounts reported for financial reporting and income tax purposes. Components of the net deferred tax liabilities as of September 30 were as follows: Deferred Tax Assets:
1996 1995 - --------------------------------------------------------------------------------------------- (expressed in thousands) Accrued compensation and benefits $ 1,446 $1,444 Inventory reserves 1,586 860 Allowance for doubtful accounts 248 216 Other assets (20) 21 - --------------------------------------------------------------------------------------------- Total deferred tax assets $ 3,260 $2,541 - --------------------------------------------------------------------------------------------- Deferred Tax Liability: 1996 1995 - --------------------------------------------------------------------------------------------- Property and equipment $ 4,998 $4,362 - --------------------------------------------------------------------------------------------- Net deferred tax liability $ 1,738 $1,821 - ---------------------------------------------------------------------------------------------
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, 1996, the Company had awarded only incentive stock options and non-qualified stock options. These were granted at exercise prices that are 100% of the fair-market value at the date of grant. Beginning one year after grant, the options generally can be exercised proportion ately each year for periods of three, four, and six years, as defined in the respective plans. 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 1996 and 1995, option holders exchanged 52,189 and 30,546 shares, respectively, of the Company's stock in payment of options exercised. (All share and share price data herein have been restated retroactively for the 2 for 1 stock split effective April 1, 1996.) Under the Plans, options for 983,068 shares are outstanding at $11.56 to $19.50 per share, of which options for 463,465 shares were exercisable at September 30, 1996. Another 345,601 options remain available for granting beyond September 30, 1996. During 1996 and 1995, options for 394,335 and 88,314 shares were exercised at prices of $6.50 to $15.88 and $6.50 to $13.38 per share, respectively. In January 1992 the Company's shareholders authorized an Employee Stock Purchase Plan (the Purchase Plan), whereby 500,000 shares of the Company's common stock were reserved for sale to employees until April 2002. Participants in the 1996 and 1995 phases, all at dates specified in the Purchase Plan, were issued 49,539 shares in 1996, and 30,786 shares in 1995. During fiscal 1996, participants subscribed to purchase 45,000 shares at 85% of market price for issuance in fiscal 1997. Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting for Stock-Based Compensation" (the Statement) is effective for the Company's fiscal year ending September 30, 1997. The Statement encourages, but does not require, a fair value based method of accounting for employee stock options or other similar equity instruments. The Company believes the effect of the adoption of the new standard will have no impact on the Company's consolidated results of operations or financial position as the Company intends to continue to measure compensation costs under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and present pro forma disclosures of net income and net income per share as if the fair value based method of accounting had been applied. 6. EMPLOYEE BENEFIT PLANS: 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 for 1996, 1995, and 1994 were 4.3%, 4.3%, and 4.3% of participant compensation, respectively. The provisions for profit sharing were $2,338,000 in 1996, $2,132,000 in 1995, and $2,281,000 in 1994, and are distributed among the various operating expenses shown in the accompanying Consolidated Statements of Income. Two of the Company's international subsidiaries have 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. The expenses for these plans consist of the following components:
1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- (expressed in thousands) Service cost-benefit earned during the period $ 360 $ 395 $ 214 Interest cost on projected benefit obligation 261 278 195 Net amortization and deferral 5 40 (16) - -------------------------------------------------------------------------------------------------------------- Net Periodic Pension Cost $ 626 $ 713 $ 393 - -------------------------------------------------------------------------------------------------------------- The status of the Company`s plans and the amounts recognized in the consolidated financial statements are: 1996 1995 - -------------------------------------------------------------------------------------------------------------- (expressed in thousands) Actuarial Present Value: Accumulated benefit obligation: Vested $3,135 $3,201 Nonvested 552 778 - -------------------------------------------------------------------------------------------------------------- Total 3,687 3,979 - -------------------------------------------------------------------------------------------------------------- Projected benefit obligation 4,532 4,968 Unrecognized net gain 822 409 Unrecognized net liability being amortized (631) (738) Adjustment required to recognize minimum liability 86 118 - -------------------------------------------------------------------------------------------------------------- Accrued Pension Liability $4,809 $4,757 - -------------------------------------------------------------------------------------------------------------- Major assumptions at year-end are: - -------------------------------------------------------------------------------------------------------------- Discount rate 3.5 to 7% 3.5 to 7% Rate of increase in future compensation levels 3% 3% - --------------------------------------------------------------------------------------------------------------
7. ACQUISITIONS: In fiscal 1994 the Company purchased 100% of the stock of Adamel Lhomargy for cash and assumption of debt. The transaction was accounted for by the purchase method of accounting. In fiscal 1995 the Company acquired three entities. The Company acquired the stock of PowerTek, Inc. for an initial cash payment and a contingent future payment. The transaction was accounted for by the purchase method of accounting. PowerTek became a wholly owned subsidiary and conducts business as MTS-PowerTek, Inc. The Company also completed transactions to exchange shares of its common stock for all the outstanding shares of Gull Engineering, Inc. and Incon Corporation. Both transactions were accounted for as poolings of interests. These companies were absorbed into existing operating units of the Company. Financial data for prior periods were not restated for the acquisitions by pooling of interests as neither assets nor operations were material, individually or in total, to the Company's 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, 1996 and 1995, and the related consolidated statements of income, shareholders' investment, and cash flows for each of the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Company's manage ment. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material respects, the financial position of MTS Systems Corporation and Subsidiaries as of September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, November 22, 1996 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 accor d ance with generally accepted accounting principles and include certain amounts based on man age ment'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 inde pendent 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. Donald M. Sullivan Chairman and Chief Executive Officer /s/ Donald M. Sullivan Marshall L. Carpenter Vice President and Chief Financial Officer /s/ Marshall L. Carpenter CORPORATE INFORMATION BOARD OF DIRECTORS E. Thomas Binger General Partner, Pittsburgh Pacific Co. Charles A. Brickman President, Pinnacle Capital Corporation Bobby I. Griffin President, Medtronic Pacing Business; Executive Vice President, Medtronic, Inc. Russell A. Gullotti Chairman, President, Chief Executive Officer, National Computer Systems Thomas E. Holloran Professor, University of St. Thomas Thomas E. Stelson, Ph.D Independent Engineering Consultant Donald M. Sullivan Chairman, Chief Executive Officer, President MTS Systems Corporation Linda Hall Whitman, Ph.D President, Chief Executive Officer, Ceridian People Partners CHAIRMAN EMERITUS George N. Butzow Founder EXECUTIVE OFFICERS Donald M. Sullivan Chairman, Chief Executive Officer, President William G. Beduhn Vice President Marshall L. Carpenter Vice President and Chief Financial Officer Mauro Togneri Vice President Keith D. Zell Executive Vice President CORPORATE OFFICERS Barbara J. Carpenter Assistant Corporate Secretary Patrick Delaney Secretary, Partner, Lindquist & Vennum Thomas J. Minneman Treasurer Werner Ongyert Vice President/Europe J. Howell Owens Vice President Richard S. White Vice President/Asia Pacific DIVISIONAL OFFICERS William G. Anderson Vice President Steven M. Cohoon Vice President James M. Egerdal Vice President Kenneth E. Floren Vice President Joachim Hellwig Vice President Daniel T. Sparks Vice President REFERENCES Bank Reference First Bank National Association Minneapolis, MN Transfer Agent Norwest Bank Minnesota, N.A. South St. Paul, MN Shareholder Assistance: 800-468-9716 General Counsel Lindquist & Vennum PLLP Minneapolis, MN Patent Counsel Westman, Champlin & Kelly Minneapolis, MN Auditors Arthur Andersen LLP Minneapolis, MN NOTICE OF ANNUAL MEETING The annual meeting of stockholders will be held at 4:00 p.m. (Central Standard Time) on Tuesday, January 28, 1997 at the Company's Headquarters in Eden Prairie, Minnesota STOCKHOLDERS WHO CANNOT ATTEND THE MEETING ARE URGED TO EXERCISE THEIR RIGHT TO VOTE BY PROXY. A PROXY CARD, A PROXY STATEMENT, AND A RETURN ENVELOPE ARE ENCLOSED FOR THIS PURPOSE. 10-K REPORT Copies of the Annual Report on Form 10-K, filed with the Securities and Exchange Commission, are available on request without charge from Investor Relations, MTSSystems Corporation, 14000 Technology Drive, Eden Prairie, Minnesota 55344-2290. COMMON STOCK MTS Systems Corporation's common stock publicly trades on The Nasdaq Stock Market's National Market under the symbol "MTSC". STOCK HELD IN STREET NAME The Company maintains a direct mailing list to insure that stockholders whose stock is not held in their own names, and other interested persons, receive annual reports and other information on a timely basis. If you would like your name added to this list, please send your request to Barbara Carpenter, Assistant Corporate Secretary, MTS Systems Corporation, 14000 Technology Drive, Eden Prairie, Minnesota 55344-2290. INVESTOR INQUIRIES Security analysts, investment managers and others seeking information about MTSSystems Corporation should contact Thomas J. Minneman, Treasurer, by mail at the Company's headquarters or by telephone at 612-937-4647. TRADEMARKS MTS, Bionix, Level Plus, Temposonics, Flat-Trac, and TestWorks are registered trademarks, and Aero-90, FlexTest, MaxPlus, ServoFlex, Synergie, and Tytron are trademarks of MTS Systems Corporation. Microsoft and Windows are trademarks of Microsoft Corporation. [LOGO] CORPORATE HEADQUARTERS MTS Systems Corporation 14000 Technology Drive Eden Prairie, Minnesota 55344-2290 Telephone: 612-937-4000 E-mail: info@mts.com Internet Address: www.mts.com ISO 9001 Certified DOMESTIC SUBSIDIARIES Custom Servo Motors, Inc. MTS-PowerTek, Inc. INTERNATIONAL SUBSIDIARIES MTS International Ltd. (Barbados, West Indies) MTS (Japan) Ltd. MTS Systems (China) Inc. MTS Systems France MTS Systems GmbH (Berlin) MTS Systems (Hong Kong) Inc. MTS Systems Limited (London) MTS Systems Norden AB (Sweden) MTS Systems SRL (Italy) MTS Sensors Technologie GmbH and Co. KG (Germany) MTS Sensors Technology K.K. (Japan) MTS Testing Systems (Canada) Ltd. MTS Korea, Inc. MTS Adamel Lhomargy S.A. MTS Holdings France, SARL EX-21 10 MTS SYSTEMS CORPORATION 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 (Berlin) Germany MTS Sensors Technologie GmbH and Co. KG Germany MTS Systems France France MTS Adamel Lhomargy S.A. France MTS Holdings France, SARL France MTS (Japan) Ltd. Japan MTS Sensors Technology K.K. Japan MTS Systems Limited (London) 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. Peoples Republic of China Custom Servo Motors, Inc. Minnesota, U.S.A. MTS Korea, Inc. Republic of Korea MTS-PowerTek, Inc. Michigan, U.S.A. EX-23 11 CONSENT OF PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included and incorporated by reference in this Form 10-K and into the Company's previously filed Registration Statements on Form S-8 (Registration Nos. 2-99389, 33-21699, 33-35288, 33-45386 and 33-45386) and Form S-3 (Registration No. 33-60485). ARTHUR ANDERSEN LLP Minneapolis, Minnesota, December 19, 1996 EX-27 12 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS SEP-30-1996 OCT-01-1995 SEP-30-1996 19,231 0 70,135 1,742 36,276 130,382 101,163 53,073 187,396 60,834 11,780 0 0 2,293 110,521 187,396 261,029 261,029 154,925 241,023 0 330 1,524 20,006 5,897 20,006 0 0 0 14,109 1.48 1.48
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