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United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
Commission File Number 0-2382
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MTS SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
MINNESOTA 612-937-4000 41-0908057
(State or other jurisdiction of (Telephone number of registrant (I.R.S. Employer
incorporation or organization) including area code) Identification No.)
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14000 Technology Drive, Eden Prairie, Minnesota 55344
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter 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
--- ---
The number of shares outstanding of the Registrant's common stock as
of May 1, 1999 was 18,771,577 shares.
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MTS SYSTEMS CORPORATION AND SUBSIDIARIES
SECOND QUARTER REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1999
TABLE OF CONTENTS
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Balance Sheets
March 31, 1999 and September 30, 1998 2
Consolidated Statements of Income
Three months ended March 31, 1999 and 1998 3
Consolidated Statements of Income
Six months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows
Six months ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8-12
PART II -- OTHER INFORMATION
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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1
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MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(expressed in thousands, except per share data)
March 31 September 30
ASSETS 1999 1998
--------- ------------
Current assets:
Cash and cash equivalents $ 19,684 $ 10,512
Accounts receivable 76,783 89,278
Unbilled contracts and retainage receivable 29,764 35,891
Inventories-
Customer jobs-in-process 9,388 10,750
Components, assemblies and parts 47,566 42,925
Prepaid expenses 6,613 4,237
--------- ---------
Total current assets 189,798 193,593
--------- ---------
Property and Equipment:
Land 2,437 2,437
Buildings and improvements 40,031 40,432
Machinery and equipment 93,603 88,626
Accumulated depreciation (65,000) (63,758)
--------- ---------
Total property and equipment, net 71,071 67,737
--------- ---------
Other assets 33,787 37,118
--------- ---------
Total assets $ 294,656 $ 298,448
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Notes payable to banks $ 30,065 $ 28,243
Current maturities of long-term debt 945 1,180
Accounts payable 16,605 19,406
Accrued compensation and benefits 20,509 26,919
Advance billings to customers 21,575 17,360
Other accrued liabilities 9,791 12,106
--------- ---------
Total current liabilities 99,490 105,214
Deferred income taxes 4,765 4,939
Long-term debt, less current maturities 44,336 45,259
--------- ---------
Commitments and contingencies
Shareholders' Investment:
Common stock, $.25 par; 64,000,000 shares
authorized: 18,629,507 and 18,579,481
shares issued and outstanding 4,657 4,645
Additional paid-in capital 3,593 3,322
Retained earnings 136,659 133,203
Accumulated other comprehensive income 1,156 1,866
--------- ---------
Total shareholders' investment 146,065 143,036
--------- ---------
Total liabilites and shareholders' investement $ 294,656 $ 298,448
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements
2
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MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(expressed in thousands, except per share data)
FOR THE THREE MONTHS ENDED
MARCH 31
1999 1998
--------- ---------
NET REVENUE $ 86,950 $ 81,685
COST OF REVENUE 53,597 50,073
--------- ---------
Gross profit 33,353 31,612
OPERATING EXPENSES:
Selling 13,519 12,757
General and administrative 6,456 5,772
Research and development 6,092 5,447
Restructuring expense - -
--------- ---------
Total operating expenses 26,067 23,976
INCOME FROM OPERATIONS 7,286 7,636
Interest expense 1,145 449
Interest income (121) (69)
Other (income) and expense, net 1,862 (267)
--------- ---------
INCOME BEFORE INCOME TAXES 4,400 7,523
PROVISION FOR INCOME TAXES 1,538 2,657
--------- ---------
NET INCOME $ 2,862 $ 4,866
========= =========
BASIC EARNINGS PER SHARE $ 0.15 $ 0.27
DILUTED EARNINGS PER SHARE $ 0.15 $ 0.26
DIVIDENDS PER SHARE $ 0.06 $ 0.06
BACKLOG $ 164,991 $ 164,109
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
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MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(expressed in thousands, except per share data)
FOR THE SIX MONTHS ENDED
MARCH 31
1999 1998
--------- ---------
NET REVENUE $ 174,682 $ 155,623
COST OF REVENUE 107,955 93,771
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Gross profit 66,727 61,852
OPERATING EXPENSES:
Selling 27,950 25,103
General and administrative 11,476 10,973
Research and development 12,001 10,016
Restructuring expense 2,100 -
--------- ---------
Total operating expenses 53,527 46,092
INCOME FROM OPERATIONS 13,200 15,760
Interest expense 2,397 675
Interest income (172) (176)
Other (income) and expense, net 2,243 1,026
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INCOME BEFORE INCOME TAXES 8,732 14,235
PROVISION FOR INCOME TAXES 3,043 5,057
--------- ---------
NET INCOME $ 5,689 $ 9,178
========= =========
BASIC EARNINGS PER SHARE $ 0.31 $ 0.50
DILUTED EARNINGS PER SHARE $ 0.30 $ 0.48
DIVIDENDS PER SHARE $ 0.12 $ 0.12
BACKLOG $ 164,991 $ 164,109
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
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MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(expressed in thousands)
FOR THE SIX MONTHS ENDED
MARCH 31
1999 1998
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OPERATING ACTIVITIES
Net income $ 5,689 $ 9,178
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,213 4,459
Deferred income taxes 35 6
Changes in operating assets and liabilities:
Receivables, including accounts, unbilled
contracts and retainages 17,600 (10,009)
Inventories (4,053) (10,241)
Prepaid expenses (2,426) (530)
Advance billings to customers 4,383 3,389
Accounts payable and accrued liabilities (10,477) (5,133)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 16,964 (8,881)
-------- --------
INVESTING ACTIVITIES
Property and equipment, net (7,676) (10,468)
Other assets (116) 71
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (7,792) (10,397)
-------- --------
FINANCING ACTIVITIES
Net borrowings (payments) on notes payable 1,826 28,430
Payments on long-term borrowings (421) (165)
Cash dividends (2,233) (2,202)
Proceeds from exercise of stock options 368 1,417
Payments to purchase and retire common stock (85) (1,149)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (545) 26,331
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 545 123
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,172 7,176
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,512 10,285
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,684 $ 17,461
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements
5
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MTS SYSTEMS CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Consolidation
The consolidated financial statements include the accounts of MTS SYSTEMS
CORPORATION and its wholly owned subsidiaries (the Company). All significant
intercompany balances and transactions have been eliminated.
The interim consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments necessary for the fair presentation of such consolidated financial
statements have been reflected in the interim periods presented. The significant
accounting policies and certain financial information which are normally
included in financial statements prepared in accordance with generally accepted
accounting principles, but which are not required for interim reporting
purposes, have been condensed or omitted. The accompanying consolidated
financial statements of the Company should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K.
2. EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted earnings
per share include the dilutive effect of potential common shares. Weighted
average common shares and per share computations have been restated for the
two-for-one stock split effective February 2, 1998.
Three Months Ended Six Months Ended
MARCH 31 March 31 MARCH 31 March 31
1999 1998 1999 1998
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(expressed in thousands, except per share data)
Weighted average
common shares
outstanding 18,624 18,384 18,609 18,337
Dilutive potential
common shares 447 550 474 760
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Total dilutive
common shares 19,071 18,934 19,083 19,097
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Basic net income
per share $0.15 $0.27 $0.31 $0.50
Diluted net income
per share $0.15 $0.26 $0.30 $0.48
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3. RESTRUCTURING CHARGE
The Company has taken a series of actions to better align its organizational
structure with market elements, improve operational performance, and reduce
costs. These actions resulted in a one-time charge during the first quarter of
fiscal year 1999 of approximately $2.1 million ($1.5 million after tax, or $.08
per share). This charge relates principally to a workforce reduction and $0.3
million for other. Annualized pretax cost savings from reducing the number of
employees and contractors are estimated to be $5.0 million. Of the charges
mentioned above, $890,000 was paid during the first six months of fiscal 1999
for severance related costs.
6
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4. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement established standards for reporting and
display of comprehensive income and its components. Comprehensive income
reflects the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. For the
Company, comprehensive income represents net income adjusted for foreign
currency translation adjustments. Comprehensive income was a loss of
approximately $2.0 million and $0.5 million for the three months ended March 31,
1999 and 1998, respectively and a loss of approximately $0.7 million and $1.4
million for each of the six month periods ended March 31, 1999 and 1998.
7
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MTS SYSTEMS CORPORATION AND SUBSUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NEW ORDERS AND BACKLOG
THREE MONTHS ENDED 3/31/99 COMPARED TO THREE MONTHS ENDED 3/31/98
New orders for the second quarter of fiscal 1999 increased to $76.8 million
compared to $74.6 million for the same period one year ago. International orders
were up 45.6% for the quarter while domestic orders decreased by 17.5% when
compared to the same period one year ago.
Orders for the Mechanical Testing and Simulation (MT&S) sector increased 3.8% to
$60.6 million from $58.3 million for the prior year. The MT&S sector accounted
for 78.8% of total orders compared to 78.3% one year ago. Orders for the
Measurement and Automation Group (MAG) remained flat at $16.3 million. The MAG
sector accounted for 21.2% of total orders compared to 21.7% one year ago.
SIX MONTHS ENDED 3/31/99 COMPARED TO SIX MONTHS ENDED 3/31/98
New orders for the first half of fiscal 1999 increased to $164.3 million
compared to $143.9 million for the same period one year ago. International
orders were 47.7% and 35.1% for the first halves of fiscal 1999 and 1998
respectively. International orders have increased 55.1% to $78.3 million when
compared to the same period one year ago. The increase in international orders
have been fueled by a strong European market and the beginning of a recovery in
the Asian and Japanese economies.
Orders for the Mechanical Testing and Simulation (MT&S) sector increased 11.4%
to $130.6 million from $111.6 million for the prior year. The MT&S sector
accounted for 79.5% of total orders compared to 77.5% one year ago. Orders for
the Measurement and Automation Group (MAG) increased 4.2% to $33.7 million from
$32.3 million for the prior year. The MAG sector accounted for 20.5% of total
orders compared to 22.5% one year ago.
Backlog of undelivered orders at March 31, 1999 was $165.0 million, a slight
increase over the backlog at March 31, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED 3/31/99 COMPARED TO THREE MONTHS ENDED 3/31/98
On January 4, 1999 The Company implemented its new system wide financial
accounting software (SAP). The startup impact of implementing the new software
was approximately $1.4 million ($.09 million after tax or $.05 cents per share).
The impact is due mainly to $900,000 from lost productivity and $500,000 for SAP
consultants. All appropriate expenses prior to the implementation date were
capitalized to the balance sheet. Productivity levels returned to near normal
during March. The company expects productivity will return to normal during the
third quarter of its fiscal year.
Because the company operates in many different countries around the world it is
exposed to currency fluctuations. These fluctuations can cause either a gain or
a loss due to the translation of the foreign currencies to U.S. dollars. For the
three months ended March 31, 1999 the net impact on income of translating these
foreign currencies to U.S. dollars was a loss of approximately $800,000. This
amount was offset by a gain of approximately $800,000 during the first quarter
of fiscal 1999.
8
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REVENUE for the second quarter of fiscal 1999 was $87.0 million, an increase of
$5.3 million or 6.5% over the same three months of fiscal 1998. International
content of revenue was 51.9% of total revenues compared to 50.0% for the second
quarter ended March 31, 1999 and 1998 respectively.
GROSS PROFIT for the second quarter of fiscal 1999 increased 5.5% to $33.4
million compared to $31.6 million for the same period one year ago. Gross profit
as a percentage of revenue decreased slightly to 38.4% from 38.6% for the
three-month periods ending March 31, 1999 and 1998 respectively, even though the
current quarter was negatively impacted by the SAP implementation.
SELLING EXPENSES increased by 6.0% to $13.5 million compared to $12.8 million
for the three months ending March 31, 1999 and 1998 respectively. Selling
expense as a percentage of revenue decreased slightly to 15.5% compared to 15.6%
for the same period one year ago.
GENERAL AND ADMINISTRATIVE EXPENSES increased by 11.9% to $6.5 million compared
to $5.8 million for the three months ending March 31, 1999 and 1998
respectively. General and administrative expense as a percentage of revenue
increased to 7.4% compared to 7.1% for the same period one year ago.
RESEARCH AND DEVELOPMENT increased by 11.8% to $6.1 million compared to $5.4
million for the three months ending March 31, 1999 and 1998 respectively.
Research and development expense as a percentage of revenue increased slightly
to 7.0% compared to 6.7% for the same period one year ago.
INTEREST (INCOME) AND EXPENSE increased to $1.0 million compared to $0.4 million
for the three months ending March 31, 1999 and 1998 respectively. Interest
expense increased mainly due to the timing of borrowings for 1998 acquisitions,
which occurred in the second half of 1998. Net interest expense as a percentage
of revenue increased to 1.2% from 0.5% for the same period one year ago.
OTHER (INCOME) AND EXPENSE, which includes gains and losses from foreign
currency translations, increased to $1.9 million from $(0.3) million for the
three months ending March 31, 1999 and 1998 respectively.
NET INCOME decreased 41.2% to $2.9 million compared to $4.9 million for the
three months ending March 31, 1999 and 1998 respectively. Net income as a
percentage of revenue decreased to 3.3% from 6.0% for the same period one year
ago. The effective tax rate for the second quarter of fiscal 1999 remained
unchanged at 35% when compared to the same period one year ago. Excluding the
$1.4 million ($0.9 million after tax or $.05 cents a share) related to the
implementation of new software discussed above, net income would have been $3.8
million compared to $4.9 million for the three months ended March 31, 1999 and
1998 respectively.
SIX MONTHS ENDED 3/31/99 COMPARED TO SIX MONTHS ENDED 3/31/98
During the first half of fiscal 1999, revenues increased 12.3% to $174.7
million. The 1998 acquisitions of Performance Controls, Inc., Nano Indentation
Systems and SDRC's Noise and Vibration Division, which occurred in the second
half of 1998, account for $14.2 million of the increase in revenues for the
current fiscal year. Excluding this amount, revenue for the six months ended
March 31, 1999 increased 3.1% to $160.5 over the same period last year.
For the six month period ended March 31, 1999 the net impact on income of
translating foreign currencies to U.S. dollars was approximately zero.
Operating expenses for the first half of fiscal 1999 increased 16.1% to $53.5
million. Included in this total is a $2.1 million restructuring charge related
to a previously announced workforce reduction which occurred during the first
quarter of fiscal 1999 and $5.0 million in incremental operating costs due to
the timing of 1998 acquisitions which occurred after the first half of the year.
Excluding these amounts, operating costs for the six months ended March 31, 1999
increased slightly over the same period last year.
REVENUE for the first six months of fiscal 1999 was $174.7 million, an increase
of $19.1 million or 12.3% over the first six months of fiscal 1998. The timing
issues related to the acquisitions noted above account for $14.2 million of
9
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the change from the previous fiscal year. Excluding the $14.2 million, revenue
would have been $160.5 million compared to $155.6 million for the same period a
year ago. International content of revenue was 49.4% of total revenues compared
to 48.0% for the six month periods ended March 31, 1999 and 1998 respectively.
GROSS PROFIT for the first half of 1999 increased 7.9% to $66.7 million compared
to $61.9 million for the same period one year ago. Gross profit as a percentage
of revenue was 38.2% compared to 39.7% for the six-month periods ending March
31, 1999 and 1998 respectively. The decrease in gross profit was due to lost
productivity resulting from the SAP implementation as discussed above.
SELLING EXPENSES increased by 11.3% to $28.0 million compared to $25.1 million
for the six months ending March 31, 1999 and 1998 respectively. Selling expense
as a percentage of revenue decreased slightly to 16.0% compared to 16.1% for the
same period one year ago. Excluding $1.7 million in incremental operating costs
for fiscal 1998 acquisitions discussed above, selling expenses would have been
$26.3 million, a 4.8% increase over the $25.1 million reported for the first
half of fiscal 1998.
GENERAL AND ADMINISTRATIVE EXPENSES increased by 4.6% to $11.5 million compared
to $11.0 million for the six months ending March 31, 1999 and 1998 respectively.
General and administrative expense as a percentage of revenue decreased to 6.6%
compared to 7.1% for the same period one year ago. Excluding $1.6 million in
incremental operating costs for fiscal 1998 acquisitions discussed above,
general and administrative expenses would have been $9.9 million, a 9.7%
decrease from the $11.0 million reported for the first half of fiscal 1998.
RESEARCH AND DEVELOPMENT increased by 19.8% to $12.0 million compared to $10.0
million for the six months ending March 31, 1999 and 1998 respectively. Research
and development expense as a percentage of revenue increased slightly to 6.9%
compared to 6.4% for the same period one year ago. Excluding $1.7 million in
incremental operating costs for fiscal 1998 acquisitions discussed above,
research and development expenses would have been $10.3 million, a 2.4% increase
over the $10.0 million reported for the first half of fiscal 1998.
INTEREST (INCOME) AND EXPENSE increased to $2.2 million compared to $0.5 million
for the six months ending March 31, 1999 and 1998 respectively. Net interest
expense as a percentage of revenue increased to 1.3% from 0.3% for the same
period one year ago. Interest expense increased due to the timing of borrowings
for 1998 acquisitions, which occurred in the second half of 1998.
OTHER (INCOME) AND EXPENSE increased 118.6% to $2.2 million from $1.0 million
for the six months ending March 31, 1999 and 1998 respectively.
NET INCOME decreased 38.0% to $5.7 million compared to $9.2 million for the six
months ending March 31, 1999 and 1998 respectively. Net income as a percentage
of revenue decreased to 3.3% from 5.9% for the same period one year ago.
Excluding the previously mentioned $2.1 million ($1.5 million after tax or $0.08
per share) restructuring charge and the $1.4 million ($0.9 million after tax or
$.05 cents a share) in software implementation related charges and costs, net
income would have been $8.1 million a 11.8% decrease from $9.2 million reported
one year ago. The effective tax rate for the first half of fiscal 1999 was 34.8%
compared to 35.5% for first half of fiscal 1998.
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOWS FROM OPERATING ACTIVITIES provided $17.0 million in the first six
months of 1999 and required $8.9 million for the same period in 1998. The $17.0
million increase in cash was a direct result of $5.7 million of net income
coupled with $5.0 million provided by working capital items, such as accounts
payable, accounts receivable and unearned revenue. In addition, there was $6.3
million of cash flows provided during the first six months of 1999 from
depreciation and amortization expense and other non-cash items.
CASH FLOWS FROM INVESTING ACTIVITIES required cash totaling $7.8 million in the
first six months of 1999 compared to $10.4 million in 1998. The majority of the
cash outflows during the first six months of 1999 and 1998 related to net
additions to property, plant and equipment. The Company expects that future
expenditures for property, plant and equipment will be met with internally
generated funds.
10
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CASH FLOWS FROM FINANCING ACTIVITIES required $0.5 million in the first six
months of 1999 compared to cash provided of $26.3 million in 1998. The $28.4
million in short-term borrowings in the first half of fiscal 1998 was used
primarily to fund working capital needs. Cash flows from financing activities
primarily related to cash disbursements for dividends of $2.2 million and cash
provided from short-term borrowings of $1.8 million. The Company had no new
long-term borrowings for the first half of 1999 and payments on its long-term
debt of $421,000.
YEAR 2000
The following is a Year 2000 Readiness Disclosure pursuant to the Year 2000
Information and Readiness Disclosure Act. This disclosure should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in the Company's Annual Report on Form 10-K.
The Company continues to evaluate the potential impact of what is commonly
referred to as the Year 2000 issue, concerning the inability of certain
computer-based products and systems to operate correctly into and during the
year 2000. If not corrected, these products and systems could fail or create
erroneous results. Following preliminary work done in fiscal 1997, in early 1998
the Company established a full-time Year 2000 central project office led by a
senior technical manager reporting directly to an executive.
The central project office has been working with each of the Company's twelve
producing sites to evaluate the following areas:
1. Site Infrastructure, Equipment and Vendors
Business Information Systems
End User Computing Systems
Telecommunications Infrastructure
Service Providers
Material Suppliers
Manufacturing and Metrology Equipment and Facilities
2. Products Manufactured at Site
Site Infrastructure, Equipment and Vendors
The Company's major Business Information, End User Computing and Telecom Systems
have been identified at each site, and the vast majority of these systems that
have been tested are compliant. Each site has developed a plan for completion of
testing and remediation of critical systems.
The Company believes its greatest Year 2000 exposure lies with a limited number
of critical/sole source service providers and material suppliers. A failure of
these vendors to be able to operate up to and through the year 2000 could have a
material adverse effect on the Company's business, financial condition and
operating results. The Company has sent surveys to such vendors and has received
responses from most of them about their Year 2000 readiness. Where the Company
does not have sufficient comfort that a critical vendor will be ready, site
management is obtaining more detailed information and during the first quarter
of fiscal 1999 has begun to develop contingency plans, where feasible, in those
cases where such interruption remains reasonably possible.
The Company's manufacturing and metrology equipment and facilities contain
embedded processors and code which have been inventoried and evaluated for Year
2000 readiness. A few instances require remediation.
The Company is on plan for the completion of testing and where necessary
remediation of the above items by June 30, 1999.
11
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Products Manufactured at Site
The Company's Factory Automation sector products contain few date sensitive
computer and embedded processors. The Company has completed an evaluation of the
vast majority of these products and is currently working to complete the
balance. All of the products evaluated to date have been found to be year 2000
ready, in some cases with stipulations, and the Company believes that will be
the case with the products yet to be evaluated.
The Company's MT&S sector products are by their nature computer intensive. The
Company has assessed the vast majority of these products and advised its
customers as to their Year 2000 readiness via its web site and written
communication. The balance of products will be assessed by May 31, 1999. In
those cases where MT&S's products were found to be non-compliant, less than 2%,
or in the case of discontinued products that were not evaluated, the Company is
working with its customers to provide upgrades that are year 2000 ready.
Summary
The Company estimates that the costs directly related to its Year 2000 project
were $300,000 in fiscal 1998 and will be $800,000 in fiscal 1999. Approximately
$200,000 was incurred durring the first two quarters of fiscal 1999. Such costs
are expensed as incurred.
This Readiness Disclosure is a Forward Looking statement as defined by the
Securities and Exchange Commission and the Company recognizes that, although not
expected, there are risks of project delays, costs incurred, vendor compliance,
and loss of business which are outside the direct control of the Company and/or
could prove to be material.
12
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PART II-------OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
(a) The Company's Annual Meeting of Shareholders was held January
26, 1999.
(b) The following persons were nominated and elected to continue as
directors of the Company until the next Annual Meeting of
Shareholders.
Votes For Votes Against
Jean-Lou Chameau 16,197,241 205,796
Charles A. Brickman 16,167,722 235,315
Bobby I. Griffin 16,197,872 205,165
Russell A. Gullotti 16,201,276 201,761
Thomas E. Holloran 16,195,305 207,732
Brendan C. Hegarty 16,199,676 203,361
Sidney W. Emery 16,205,595 197,442
Linda Hall Whitman 16,193,046 209,991
No voters abstained or were broker/bank non-votes for any of the
directors.
(c) Shareholders did not approve the proposal to amend the Company's
Articles of Incorporation to authorize the creation of
25,000,000 shares of Preferred Stock and to authorize multiple
classes of Common Stock with 6,597,962 votes for; 7,707,555
votes against; 257,153 abstained; and 2,041,528 non-votes by
broker/banks.
(d) Arthur Andersen LLP was ratified to serve as the Company's
independent auditor for fiscal year 1999 with 16,495,274 votes
for; 36,009 votes against; and 68,915 votes abstained.
ITEM 5. Other Information.
Subsequent Event
On March 23, 1999 the company announced that it had entered into a definitive
merger agreement with DSP Technology Inc. [Nasdaq: DSPT]. The combined company,
operating as MTS Systems Corporation and headquartered in Eden Prairie, Minn.,
would have annual revenues of more than $375 million based on revenues for the
prior 12 months.
The transaction will be accounted for as a pooling of interests and provides for
the tax-free exchange of 2,077,000 shares of MTS Common Stock for all DSPT
outstanding Common Stock and net share equivalents of outstanding DSPT stock
options.
The exchange ratio will be determined at closing by dividing the 2,077,000 MTS
Common Shares by the sum of the total number of DSPT Common Shares outstanding
plus the common share equivalent of outstanding DSPT stock options.
The transaction is expected to close in the second calender quarter of this
year, subject to approval of the merger agreement by stockholders of DSPT and
customary closing conditions, including regulatory approvals.
13
<PAGE>
Forward Looking Statements
In this report the Company makes 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 upon many factors, some
beyond our control, including factors related to Company competitive
performance, industry conditions and international economic trends.
Item 6. Exhibits and Reports on Form 8-K.
The following are submitted as part of this report.
(a) Exhibit 27
Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed
during the quarter ended March 31, 1999.
(c) 1998 Annual Report to Shareholders, incorporated by
reference from exhibit 13 of Form 10-K for fiscal year
ended September 30, 1998.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MTS SYSTEMS CORPORATION
/s/ Sidney W. Emery, Jr.
------------------------------------
Sidney W. Emery, Jr.
President
Chief Executive Officer
/s/ Marshall L. Carpenter
------------------------------------
Marshall L. Carpenter
Vice President
Chief Financial Officer
Dated: May 14, 1999
15
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