-----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, LE8qhgfjQwlyOdDf0gn3Bi9DDgsCDsU6ylmlY1OEBExgBhcVuWy/RvJE8mmvqh80 ny+EZMQcoBD/c9t3tNH0iA== 0000897101-01-500828.txt : 20020413 0000897101-01-500828.hdr.sgml : 20020413 ACCESSION NUMBER: 0000897101-01-500828 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011221 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: 1820378 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 mts015285_10k.txt MTS SYSTEMS CORPORATION FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________ ------------------- COMMISSION FILE NUMBER 0-2382 MTS SYSTEMS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA 952-937-4000 41-0908057 (STATE OR OTHER JURISDICTION OF (TELEPHONE NUMBER (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) OF REGISTRANT IDENTIFICATION NO.) INCLUDING AREA CODE) 14000 TECHNOLOGY DRIVE, EDEN PRAIRIE, MINNESOTA 55344-9763 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) ------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK (PAR VALUE OF 25(CENTS) PER SHARE) INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. __X__YES _____ NO INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. ( ) AS OF NOVEMBER 30, 2001, 21,029,946 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 $225,478,800. ------------------- DOCUMENTS INCORPORATED BY REFERENCE ANNUAL REPORT TO SHAREHOLDERS FOR FISCAL YEAR ENDED SEPTEMBER 30, 2001 - PARTS I, II AND IV. PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS, STATEMENT DATED PRIOR TO JANUARY 29, 2002 - PART III. ================================================================================ 1 MTS SYSTEMS CORPORATION ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 PART I ITEM 1. BUSINESS MTS Systems Corporation (hereafter called "MTS", or "the Company" or "the Registrant") is a technology-based, market-driven company providing hardware, software and engineering services to researchers, designers and manufacturers. MTS's business approach is based on a set of building-block technologies and business processes. Technologies include sensors for measuring machine and process parameters, control technologies for test and process automation, hydraulic and electric servodrives for precise actuation, and application software to tailor a test or automation system to a specific customer's needs and to analyze results. Business processes include project and product styles of operations on a worldwide basis. In combination, these technologies and business processes provide solutions to customers in a variety of markets. CUSTOMERS AND PRODUCTS BY BUSINESS SEGMENT The Company's operations are organized into two business sectors: the Mechanical Testing and Simulation ("MT&S") Sector and the Factory Automation ("FA") Sector. The operational alignment of these sectors allows the Company to maintain a strategic focus on markets having different applications for the Company's technologies. MT&S Sector: Customers of business units comprising this sector use the Company's systems, software and services for research, product development and quality control to determine the mechanical properties and performance of materials, products and structures. Many of the Company's products and services support its customers' mechanical design automation processes. Customers of this business sector are part of the following industries: AIRCRAFT AND AEROSPACE VEHICLE MANUFACTURERS AND THEIR SUPPLIERS: These customers use the Company's systems and software for full-scale structural tests on complete vehicles and principal subsystems such as landing gear. In the aircraft industry, the Company's customers include manufacturers of commercial, military and general aviation airplanes and their suppliers, including engine manufacturers. The space vehicle industry utilizes the Company's systems and software for such applications as solid fuel development and heat shield studies. Both aircraft and space vehicle manufacturers and their suppliers use the Company's systems and software to perform research on new materials and to control quality in the manufacturing of materials. CIVIL ENGINEERING: Customers in this market segment include construction and mineral/petroleum production companies, and test laboratories owned and/or operated by universities or governmental units. Systems sold to this market segment include seismic (earthquake) simulators, civil construction component (e.g., beam) testing systems, 2 pavement material testing systems, and specialized systems for rock and soil studies in construction and mineral/petroleum production. CONSUMER AND BIOMECHANICAL PRODUCTS/MATERIAL PRODUCERS: Customers in this market segment use the Company's electromechanical and servohydraulic material testing systems in research and product development where a high degree of quality control is required during production or other operations. In addition, customers use the Company's nanoindentation systems to test and measure mechanical properties of products where microscopic precision is required. Typical consumer products are made of textiles, paper products and plastic films of many types. Biomechanical products include implants, prostheses and other medical and dental devices and materials. Material producers include metal, ceramic, composite, paper and plastic manufacturers. GROUND VEHICLE INDUSTRY: This market consists of automobile, truck, motorcycle and off-road vehicle manufacturers and their suppliers. This represents the largest market segment within the MT&S Sector. Applications of the Company's systems and software include the design and production testing of engines and drivetrains, suspension and steering components, body and chassis, tires and wheels, and fuel storage and exhaust components. Vehicle manufacturers strive to improve performance, durability and safety while eliminating noise and vibration from their products. Customers also integrate the Company's modeling software and physical testing systems as a means of accelerating prototype design and decreasing product development and/or manufacturing costs of their products and components. ADVANCED SYSTEMS: The Company offers highly customized systems for simulation and testing through its Advanced Engineering Solutions business unit. These customized systems frequently contain highly technical, or "first of its kind" advances that are new to a specific application. Customers of Advanced Engineering Solutions business unit operate in all industries served by the other business units comprising the MT&S Sector - aerospace and advanced materials, civil engineering, and ground vehicles - as well as customers from other industries interested in developing new manufacturing technologies and systems such as friction stir welding and material processing. The MT&S Sector typically represents approximately 80% of the Company's total revenue and is the principal market for the Company's technology. FA Sector: Customers of business units comprising the FA Sector use the Company's measurement and control instrumentation to measure process variables and to automate appropriate production processes. These customers generally use MTS-produced products in discrete part manufacturing and chemical processing industries. Products of this Sector include: DISPLACEMENT POSITION AND LIQUID-LEVEL SENSORS BASED ON MAGNETOSTRICTIVE TECHNOLOGY: Displacement sensors accurately measure position up to 25 feet and are often used where accurate positioning and continuous control are critical, such as in discrete (piece part) manufacturing machinery, mobile equipment, process control elements and continuous measurement devices. Major applications include injection molding machines, servo-hydraulic cylinders, equipment presses of many types, sawmills, logging and other mobile machinery and valve or flow control. Displacement sensors are also used in high volume applications requiring low cost position feedback. MTS has the capabilities of manufacturing low cost products in various lengths and configurations, while maintaining an extremely high degree of accuracy. These lower cost solutions are marketed to such industries as automotive, appliance, medical, agricultural, marine, aeronautic and other non-manufacturing markets. 3 Liquid level sensors accurately measure the level of liquids up to 60 feet in tanks and other vessels. These sensors are marketed to control continuous processes in chemical, pharmaceutical, bio-technology and other related markets. The need for highly reliable accurate measurement of one or more fluid levels is common in most of these applications. These types of products are marketed to the ultimate end users, such as chemical producing companies, and to original equipment manufacturers and private label companies who, in turn, design level measurement or leak detection into their control systems or accessories for remote indication and where control devices are required. SERVO MOTORS, AMPLIFIERS AND CONTROLLERS: Customers use high-performance brushless servo motors and amplifiers for challenging factory automation applications in a wide range of industries, including machine tools, fabrication and packaging. Specialized plug-in amplifiers are used in light duty applications such as the semiconductor and textile industries. The Company's controllers are used for precise control of a wide variety of applications ranging from simple applications requiring only one axis of control to high-speed, complex operations requiring up to 28 axes of control. These combined product lines address many of the needs for high performance systems and are used primarily by original equipment manufacturers and large end users. TITANIUM AND OTHER PRODUCTS: The Company, through its wholly-owned subsidiary, AeroMet Corporation, has developed an innovative laser direct metal deposition process for manufacturing parts made out of titanium and other metals. This newly developed, computer-driven process uses a laser to fuse titanium powder, or powder of other metals, layer by layer, into solid structures. The process significantly reduces the time required to produce complex parts used in various industries, including the aircraft and aerospace industries. The FA sector typically represents approximately 20% of the Company's total revenue. COMMON TECHNOLOGIES The Company's systems and products are produced using the application engineering know-how of its employees, combined with common technology building block components that consist generally of measuring and actuation devices, electronic controls and application software. Many of these components are proprietary in nature and have been developed within the Company. The employees of the Company engineer or configure the components into products and systems to meet the specific application specifications of a 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. While such services are often included in the contract amount originally charged for completed systems, these types of services may be purchased separately either during and after the stated 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. Although the Company sells its products and most systems on fixed-price contracts, certain complex systems and applied research are undertaken on "cost-plus-fixed-fee" contract basis. 4 PRODUCT DEVELOPMENT HIGHLIGHTS FOR 2001 As discussed more fully in the Research and Development Section, the Company performs significant product, system and application development and from time to time, undertakes "first of its kind" high-technology contracts, certain of which may include significant technological pioneering. Selected highlights of product developments undertaken or completed during 2001 include the following: * The Company introduced an upgraded version of the SWIFT (R) Spinning Wheel Integrate Force Transducer. The new version, which is a larger configuration of the SWIFT wheel force transducer originally introduced in 1998, is designed for medium and heavy weight vehicle and truck applications. The SWIFT concept has replaced time consuming and expensive instrumentation for data acquisition and testing in many vehicle development programs and, with this upgraded version, is now available to medium and heavy truck development teams. * The Company introduced a nanoindentation system called Nano Indenter (R) XPW. This system is capable of performing nanoindentation tests on full size semiconductor wafers, up to 12 inches in diameter. Nanoindentation test systems characterize the surfaces of full size wafers for properties such as hardness and modulus of elasticity, at the nanometer level, or for as little as tens of atoms. * The Company introduced a friction stir welding system for advance manufacturing applications. The multi-axis system will be capable of conducting non-linear welds on complex structures while providing sufficient redundancy and documentation for weld validation and certification needed for aerospace structures. Since friction stir welding in a welding technique that occurs at a temperature below the melting point of the work piece metal, the process causes minimal component distortion and produces a highly desirable microstructure with high weld strength. * The Company introduced a new laser additive manufacturing system that incorporates fuzzy logic control of the process. This new system is an enhancement to the Company's previously existing multi-axis laser additive manufacturing systems. These systems use a computer-driven, high-power laser to fuse metallic powder into three-dimensional structures whose mechanical performance meets or exceeds that of comparable structures made by conventional methods, but with less waste. Benefits of the fuzzy logic controller include improved production efficiency with better "near net shape" forming. * The Company introduced the RPC (R) Pro Software, which is the latest evolution of MTS Remote Parameter Control ("RPC") products that support road simulation system control and general data analysis. New additions in this software release include process driven applications focused on streamlining data acquisition, data analysis and durability test operation, and new customer product evaluation capabilities. * The Company introduced the eTIM (TM) electronic test information management system. This product allows test laboratories to achieve major advances in productivity through superior information sharing, archiving and data management among CAE and CAT functions. * The Company introduced a new version of its EDM (TM) software for nonlinear, dynamic modeling. This new version expands the software's modeling abilities to automotive components that have traditionally been difficult to characterize, but are critical to developing exceptional vehicle designs, such as engine mounts and suspension bushings. 5 CHARACTERISTICS OF SALES The Company's systems and products are sold and delivered throughout the world to customers in a large number of different industries, government agencies, academic and other institutions. As such, the Company is generally not dependent on any single customer or industry for a significant portion of its business. MT&S systems range in price from less than $20,000 to over $20 million. Although important to the Company's image and technological advancements, large individual, fixed-price orders, generally considered as orders over $10 million, may produce volatility in both backlog and quarterly operating results. The majority of the customer orders received during any twelve month period is based on fixed-price quotations and, in some situations, require extensive technical communications with potential customers prior to receipt of the order. The production period for a typical system ranges from one to twelve months, depending on the complexity of the system and the availability of components in the Company's or its suppliers' inventories. The production periods for larger, more complex systems have been, in the past, up to three years and on certain large cost-plus-fixed-fee contracts, the production periods have been longer. FA products are sold in quantity at unit prices ranging from $500 to $10,000. Production periods generally vary from several days to several months. During the past two fiscal years, revenue derived from customers located outside of the United States has exceeded 50% of the Company's net revenue, a portion of which was sold in currencies other than the U.S. dollar. During this period, shipment of the Company's products have been shipped to Europe, Japan, Asia-Pacific, Latin America and Canada. As such, the Company's foreign operations and revenue derived from customers in foreign countries may be affected by local political conditions, export licensing issues and restrictions and/or foreign currency exchange rates and restrictions. Sales Channels: MTS markets its products using a number of sales channels. The Company sells its MT&S equipment through an employee sales network, independent sales representatives and, to a lesser extent, direct mail or catalog operation. Sales personnel are generally degreed engineers or highly skilled technicians and are specially trained to sell MT&S products and services. Employee salespersons are compensated through salary and sales incentives while independent sales representatives are paid a commission. A list of major domestic and international sales offices for the Company's MT&S Sector include the following: Domestic Sales Offices: Akron Dayton Pittsburgh Austin Denver Raleigh Baltimore Detroit Rockford Boston Los Angeles San Francisco Charlotte Minneapolis Seattle Chicago Milwaukee Washington, D.C Cincinnati Newark Dallas Philadelphia International Sales Offices: Beijing and other cities, Hong Kong, People's Republic of China Peoples Republic of China Berlin and other cities, Germany Paris, France Gloucester, United Kingdom Seoul, South Korea Gothenburg, Sweden Tokyo and other Cities, Japan Turin, Italy 6 MT&S also has sales and service representative organizations in nearly all industrialized countries of the world and in many of the developing countries of Latin America, Asia, Africa and the Middle East. The Company offers a mail-order catalog of material testing components, accessories and products. The catalog includes products of complementary vendors and has an overall objective of reaching a broader group of customers involved in some type of mechanical testing and simulation. The FA segment sells its products through sales channels separate from the MT&S Sector. To market products associated with this Sector, it employs a network of employees, direct sales, external domestic distributors, sales representatives and system houses. While revenue derived from customers located in foreign countries accounts for approximately 45% of this Sector's annual volume, continuing efforts are being made to continue expansion of its sales channels into other international markets. International Operations and Export Sales: For additional information regarding the Company's operations by geographic area, see the Geographic Analysis of New Orders, included as part of Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 3 to Consolidated Financial Statements, "Business Segment Information," on pages 18 and 19 of the Company's 2001 Annual Report to Shareholders, which sections are incorporated herein by reference. Export Licensing: During each of the three years ended September 30, 2001, the Company made various shipments to Asia, Europe and other regional areas throughout the world that required the Company to obtain export permission from the United States government. Although the Company does not undertake manufacturing on custom systems or projects until it is assured that the appropriate governmental units will grant export permission, initial design and development work may be performed on certain systems during the licensing period. Changes in political relations between the United States and foreign countries for which export licenses may be required, as well as various other factors, can adversely affect the Company's ability to complete a shipment should a previously issued license be unexpectantly withdrawn. Political activities in various regions of the world may result in dramatic changes in the export control regulations and restrictions within a relatively short period of time. In addition, the United States government maintains multilateral controls in its agreements with allies and unilateral controls based on U.S. initiatives and foreign policy that may, in certain situations, cause delays in certain of the Company's planned shipments or cause the Company to reject certain customer orders. BACKLOG The Company's revenue backlog, defined as firm orders from customers remaining unfilled, totaled $156.3 million, $163.0 million and $146.8 million as of September 30, 2001, 2000 and 1999, respectively. Based on anticipated production schedules and other factors, the Company believes that approximately $147.7 million of the backlog as of September 30, 2001 will become revenue during fiscal 2002. Production and other delays may occur as a result of, among other matters, technical difficulties, export licensing or other approvals, or the availability of the customers' installation site. Such delays may affect the period in which backlog is recognized as revenue. COMPETITION MT&S Sector - In most situations, products manufactured by this sector are available from several other companies throughout the world, some of whom may have greater financial, technical and marketing resources than the Company. Although the Company's products are available worldwide, the intensity of competition varies by product line and by geographic area. In the United States, the Company's major competitors include, among others, Instron Corp. and 7 Interlachen, while in foreign markets, competition is greatest throughout Europe and in Japan where major local manufacturers are located. When competing for specific projects or orders, the customer will consider such factors, among others, as engineering excellence and capabilities, the quality and technical features of the equipment, overall responsiveness to customer needs, quality of service, and price. Alternatively, in lieu of purchasing testing and other equipment from the Company or its competitors, companies may elect to contract with readily available testing laboratories, including those operated by certain universities and/or governmental units or they may choose to construct their own testing equipment from commercially available components. FA Sector - The Company competes directly with small to medium-sized specialty suppliers and also with divisions of the large companies specializing in control systems. MANUFACTURING AND ENGINEERING The Company conducts a significant portion of its manufacturing and engineering activities for the MT&S Sector out of its corporate headquarters and various other locations in and around the Minneapolis, MN metropolitan area. In addition, engineering, project management, final system assembly and quality testing may be performed in Berlin, Germany; Tokyo, Japan; Raleigh, North Carolina; and Ann Arbor, Michigan. Manufacturing and engineering activities for business units operating within the FA Sector occur in Raleigh, North Carolina; New Ulm, Minnesota; Horsham, Pennsylvania; and in Ludenscheid, Freiburg and Stralsund, Germany. PATENTS AND TRADEMARKS Although the Company's overall system business is not dependent on any single patent, license, trademark or copyright, it holds a number of patents, patent applications, licenses, trademarks and copyrights that the Company considers, in the aggregate, to constitute a valuable asset. In addition to these intellectual properties, the Company relies on its engineering and technological capabilities to maintain its overall position in the marketplace. RESEARCH AND DEVELOPMENT The Company does not do basic research, but does perform significant product, system and application developments. Costs associated with these development programs are expensed as incurred, and aggregated $22.5 million, $24.6 million and $27.0 million for the years ended September 30, 2001, 2000 and 1999, respectively. From time to time, the Company also undertakes "first of its kind" high-technology contracts, some of which is fully or partially customer-funded and that may include significant technological pioneering. In the aggregate, internally sponsored product development, and system or application innovations performed as part of certain customer contracts will generally approximate 10% of annual revenue. EMPLOYEES MTS had 2,224 employees as of September 30, 2001, including approximately 500 employees located outside the United States. None of the Company's employees in the United States is currently covered by collective bargaining agreements. In the past, the Company has not experienced any work stoppages at any of its U. S. locations. 8 SOURCES AND AVAILABILITY OF RAW MATERIALS AND COMPONENTS A major portion of products and systems delivered to customers may consist of equipment and component parts purchased from third-party vendors. The Company attempts to promote a partnership-type relationship with its vendors with an emphasis on continuous improvement in a number of critical areas including, but not limited to, quality, performance and technological advances. The Company is dependent, in certain situations, on computing hardware and software devices and raw materials that may be available in sufficient quantities from a limited number of vendors. However, during the recent past, the Company has not experienced significant problems or issues in procuring any essential materials, parts or components needed in its production process. Since the Company generally sells its products based on contracts that contain a fixed-price agreed upon at the time the order is accepted, fluctuations, either positively or negatively, in the cost of materials or components between the date of order through the delivery date, if not accurately forecast at an early date, may significantly impact the expected profitability of any project. Except for the effect of changes in foreign currency rates, the Company believes that such fluctuations in the cost of raw materials and components have not had a material effect on reported operating results. 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 Properties Located in the United States: The Company's corporate headquarters and major manufacturing, assembly and research facility for several of the MT&S business units, occupying 420,000 square feet, is located on 56 acres of land in the City of Eden Prairie, Minnesota, a suburb of Minneapolis, Minnesota. Since the original plant was placed into service in 1967, six additions of various sizes, with the most recent addition being completed in 1997, have occurred. At the current time, approximately one-half of this facility is used for manufacturing and assembly, while the balance is being used as general office space. During fiscal 2001, the Company's Automation business unit entered into an operating lease, expiring in 2011, for a newly constructed 75,000 square foot office, light manufacturing and warehousing facility in New Ulm, Minnesota, a city located approximately 65 miles southwest of Minneapolis, Minnesota. In addition, the Automation business unit entered into a 5-year lease agreement during 2001 for a 90,000 square foot office, light manufacturing and warehousing facility in Montgomeryville, Pennsylvania, a suburb of Philadelphia. The Company plans to sublease a portion of this facility to third party lessees. MTS's Sensors business unit is located in a Company-owned 65,000 square foot combination office and light manufacturing facility near the Research Triangle Park in Cary, North Carolina, a suburb of Raleigh, North Carolina. This facility was originally constructed in 1988 and expanded in 1992. The Company's electromechanical material testing division is located in a Company-owned facility adjacent to the MTS Sensors site in Cary, North Carolina. This 25,000 square foot office and light manufacturing facility was constructed in 1991. MTS Noise and Vibration Division currently has an aggregate of 29,000 square feet under lease in two facilities located in Madison Heights, Michigan and Milford, Ohio. The lease agreements for these facilities terminate in 2003 and 2004 respectively. 9 MTS Powertrain Division occupies a 57,200 square foot Company-owned facility in Ann Arbor, Michigan, and has an additional 13,000 square feet in Ann Arbor under lease through 2004. The Company also leases space in various other cities in the United States that serve primarily as sales and service offices. Neither the amount of leased space nor the rental obligations are significant individually or in the aggregate. The agreements pertaining to each of its leased facilities in the United States contain conventional operating lease terms. International Facilities: The Company has manufacturing, assembly, warehousing and/or office facilities in several European countries to support its international operations: Berlin, Germany - an 80,000 square foot Company-owned facility, of which a portion is leased to non-MTS entities. This facility is situated on land leased from the city government. The lease expires in 2052. Paris, France - a 22,000 square foot leased facility used for warehousing, servicing and office functions. The lease expires in 2009. Ludenschied, Germany - a 35,000 square foot leased facility located on six acres of land and used for light manufacturing and office functions. The lease expires in 2009. Freiburg, Germany - a 7,000 square foot office building under lease through 2006. Stralsund, Germany - a 7,000 square foot office and assembly facility under lease through 2006. The Company also leases office and general purpose space for its sales and service subsidiaries in Gloucester, United Kingdom; Gothenburg, Sweden; Turin, Italy; Seoul, South Korea; Tokyo and other cities in Japan; and Beijing and other cities in the Peoples Republic of China. No manufacturing is conducted at these locations. The Company considers its current facilities adequate to support its operations during fiscal 2002. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company is party to various claims, legal actions and complaints arising in the ordinary course of business. Management believes that the final resolution of these matters will not have a material adverse effect on the consolidated financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted for a vote of stockholders during the quarter ended September 30, 2001. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Shares of the Company's common stock are traded on The Nasdaq Stock Market's National Market ("Nasdaq") under the symbol "MTSC". The following table sets forth the high and low prices for the periods indicated: Quarter Ended Low * High * ------------- ----- ------ December 31, 1999 $ 7.50 $10.63 March 31, 2000 $ 5.38 $ 9.59 June 30, 2000 $ 6.19 $ 7.88 September 30, 2000 $ 6.00 $ 7.50 December 31, 2000 $ 5.50 $ 7.88 March 31, 2001 $ 6.75 $ 9.19 June 30, 2001 $ 7.88 $14.60 September 30, 2001 $10.00 $15.60 * Source: The Nasdaq Stock Market, Inc. Summary of Activity Report As of November 30, 2001, there were 2,086 holders of record of the Company's $.25 par value common stock. This number may be lower than the total number of stockholders of the Company since nominees or broker dealers hold many shares of the Company's common stock for the benefit of others. The Company has historically paid quarterly cash dividends and expects to continue such dividends in the future. During each of the past three years, the Company has paid cash dividends of $.24 per share to holders of its common stock. Under the terms of the Company's revolving credit agreement, certain covenants require tangible net worth, as defined, to exceed a defined minimum amount and limit repurchases of its common stock to a defined maximum amount. As of September 30, 2001, tangible net worth, as defined, exceeded the minimum requirement by $32.1 million, and $26.0 million was available to the Company for repurchases of its common stock. Under its current credit agreements, the Company has the flexibility to declare and pay cash dividends, in similar amounts, during future periods. ITEM 6. SELECTED FINANCIAL DATA A summary of selected financial information is presented in the "Six Year Financial Summary" on page 5 of the Company's 2001 Annual Report to Shareholders and is incorporated herein by reference. 11 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 6 through 10 of the Company's 2001 Annual Report to Shareholders is incorporated herein by reference. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks from changes in foreign exchange and interest rates. Additional information relative to these risks are included in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 8 and in Note 1 to Consolidated Financial Statements included in the Company's 2001 Annual Report to Shareholders, which is incorporated herein by reference. FOREIGN CURRENCY EXCHANGE RATES Market risks from changes in foreign currency exchange rates may cause fluctuations on the translation of orders, revenue and operating results. Currency gains and losses from the settlement of foreign currency denominated transactions are reported as part of "Other expense (income), net" in the Consolidated Statements of Income located in the 2001 Annual Report to Shareholders and incorporated herein by reference. The following table illustrates the impact of such market risks on the above financial items for the respective years: (expressed in thousands) - ------------------------------------------- ----------- ----------- ----------- 2001 2000 1999 - ------------------------------------------- ----------- ----------- ----------- Decrease from currency translation on - - ------------------------------------------- ----------- ----------- ----------- New orders $(11,640) $(2,324) $(10,838) - ------------------------------------------- ----------- ----------- ----------- Net revenue (13,247) (3,924) (6,704) - ------------------------------------------- ----------- ----------- ----------- Net income (930) (111) (236) - ------------------------------------------- ----------- ----------- ----------- - ------------------------------------------- ----------- ----------- ----------- Transaction gain (loss) included in - ------------------------------------------- ----------- ----------- ----------- "Other expense (income), net" $ 1,073 $ (538) $ (375) - ------------------------------------------- ----------- ----------- ----------- The Company regularly assesses these risks and employs certain practices to protect against possible adverse effects of these and other potential exposures. To manage the risk arising from exposure to changes in foreign currency exchange rates, the Company, when deemed appropriate, enters into forward contracts. The Company is principally exposed to movements in the rates of foreign currencies related to non-U.S. dollar denominated assets and uncertainty related to future revenue that is denominated in foreign currencies. The Company's foreign currency exposures include contracts currently in revenue backlog and unbilled receivables where the Company will ultimately be paid in, among other currencies, the Euro, Japanese Yen or British Pound. A hypothetical 10% appreciation in foreign currency exchange rates against the U.S. dollar, assuming all other variables are held constant, would result in a decrease in future revenues and asset balances of approximately $3.9 million. A hypothetical 10% depreciation in foreign currency exchange rates against the U.S. dollar, assuming all other variables are held constant, would result in an increase to future revenues and asset balances of approximately $3.4 million. INTEREST RATES The Company experiences interest rate risk on its fixed and variable rate indebtedness and manage such risk, part, by balancing the amount of variable and fixed rate debt outstanding. For fixed rate debt, interest rate changes affect the fair market value of such debt, but do not impact operating earnings. In contrast, interest rate risk on variable rate debt generally does 12 not affect the fair market value of such debt, but may impact future operating results and cash flows. At September 30, 2001, the Company had fixed rate debt of $53.9 million and variable rate debt of $5.0 million. Assuming all other factors (including, but not limited to, foreign exchange rates) remain constant, a hypothetical increase in interest rates of 100 basis points would result in the unrealized fair market value of the Company's fixed rate debt to decline by approximately $0.7 million while the impact on the Company's variable rate debt would reduce operating results before income taxes and increase cash requirements over the next twelve months by approximately $50,000. FORWARD LOOKING STATEMENTS Statements included or incorporated by reference in this Form 10-K (including the 2001 Annual Report to Shareholders) and in the Company's press releases and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. The following important factors, among others, could affect the Company's actual results in the future and could cause the Company's actual financial performance to differ materially from that expressed in any forward-looking statement: (i) With regard to the Company's new product developments, there may be uncertainties currently unknown to the Company concerning the expected results. In addition, the Company may not be aware of the introduction of new products or product enhancements by its competitors. (ii) Possible significant volatility in both backlog and quarterly operating results may result from large, individual, fixed price orders in connection with sales of MT&S systems. (iii) Order volumes and other operating considerations may be directly or indirectly impacted by economic conditions generally and/or in various geographic areas in which the Company operates. (iv) Export controls based on U.S. initiatives and foreign policy, as well as import controls imposed by foreign governments, may cause delays for certain shipments or the rejection of orders by the Company. Such delays could create material fluctuations in quarterly operating results and could have a material adverse effect on results of operations. Local political conditions and/or currency restrictions may also affect foreign revenue. (v) Delays in realization of backlog orders may occur due to technical difficulties, export licensing approval or the customer's preparation of the installation site, any of which can affect the quarterly or annual period when backlog is recognized as revenue and could materially affect the results of any such period. (vi) The Company experiences competition on a worldwide basis. Customers may choose to purchase equipment from the Company or from its competitors. For certain of the Company's products, customers may also contract with testing laboratories or construct their own testing equipment, purchasing commercially available components. Factors that may influence a customer's decision include price, service or required level of technology. (vii) The Company is exposed to market risk from changes in foreign currency exchange rates, which can affect its results from operations and financial condition. 13 (viii) The Company's short-term borrowings carry interest rate risk that is generally related to either LIBOR or the prime rate. The Company has minimal earnings and cash flow exposure due to market risks on its long-term debt obligations as a result of the primarily fixed-rate nature of the debt. The foregoing list is not exhaustive, and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, Report of Independent Public Accountants, Quarterly Financial Information (unaudited), and Six Year Financial Summary (unaudited) included in the Company's 2001 Annual Report to Shareholders on pages 11-26 are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The Executive Officers of the Registrant on the date of this report are: Name and Age Position Officer Since - ------------ -------- ------------- S. W. Emery, Jr. (55) Chairman, President and 1998 Chief Executive Officer S. E. Knight (46) Vice President and 2001 Chief Financial Officer S. M. Cohoon (47) Vice President 1996 K. D. Donaldson, Jr. (49) Vice President 2000 J. M. Egerdal (50) Vice President 1996 L. B. Hamilton (40) Vice President 2000 D. G. Krantz (46) Vice President 2000 K. M. Staby (55) Vice President 2000 M. G. Togneri (64) Vice President 1991 Executive Officers serve at the discretion of and are elected annually by the Company's Board of Directors. Business experience of the Executive Officers (consisting of positions with the Company, unless otherwise indicated) for the last five years, at a minimum, is as follows: Officer Business Experience ------- ------------------- S. W. Emery, Jr. Chairman since January 1999. President and Chief Executive Officer since March 17, 1998. Various management and executive positions with Honeywell International from 1985 to 1997 (Area Vice President, Western and Southern Europe from 1994 to 1997; Group Vice President, Military Avionics Systems from 1989 to 1994; Vice President and General Manager, Space Systems Division from 1988 to 1989; Vice President Operations, Process Controls Division from 1985 to 1988) S. E. Knight Vice President and Chief Financial Officer since October 2001. Prior thereto, various management and executive positions with Honeywell International from 1977 to 2001 (Chief Financial Officer of the Home and Building Control global business unit from 2000 to 2001; Chief Financial Officer of the North American Home and Building Control business unit from 1995 to 2000 and prior to 1995, held various other management positions including corporate director of Financial Planning and Analysis.) S. M. Cohoon Vice President of Integrated Vehicles Dynamics Division since 1996. Prior thereto, various engineering and management positions at General Motors Corporation. 15 Officer Business Experience ------- ------------------- K. H. Donaldson, Jr. Vice President, Noise and Vibration Business Unit since November 2001. Vice President of Strategic Planning and Product Development since 2000. Sales engineer in the Aerospace Division from 1995 to 2000. J. M. Egerdal Vice President, MTS Services and Support Division since 1997. Vice President, North American Sales from 1996 to 1997. Regional Sales and Service Management from 1988 to 1996. L. B. Hamilton Vice President, Material Testing and Aerospace Divisions since 2000. Director of Re-engineering from 1999 to 2000. Prior thereto, Vice President of Anatomic Pathology Business for Quest Diagnostics, (a division of Corning, Inc.) from 1997 to 1999. Executive Director Revenue Services, Quest Diagnostics from 1995 to 1997. D. G. Krantz Vice President of Advanced Engineering Solutions Division since 2000. Program manager, Advanced Systems from 1995 to 2000. K. M. Staby Vice President of Human Resources since 2000. Prior thereto, various management positions at Medtronic, Inc. from 1974 to 1999 (Vice President, Human Resources for Cardiac Rhythm Management from 1991 to 1999 and for Worldwide Distribution from 1989 to 1991). M.G. Togneri Vice President of Automation Division since November 2001. Vice President of Sensors Division since 1998. Vice President of Factory Automation Sector from 1991 to 1997. Prior thereto, Vice President at Square D Corporation and General Manager of Crisp Automation. (c) Information with respect to the directors of the Registrant, including business experience, can be found in the Registrant's Proxy Statement, a definitive copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this report and certain information included therein is incorporated herein by reference. (c) There are no family relationships between and among directors or officers. (c) Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference from the Registrant's Proxy Statement for the 2001 Annual Meeting of Shareholders scheduled to be held on January 29, 2002. 16 ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the Registrant's Proxy Statement for the 2001 Annual Meeting of Shareholders scheduled to be held on January 29, 2002. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the Registrant's Proxy Statement for the 2001 Annual Meeting of Shareholders scheduled to be held on January 29, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as part of this report: (a) Financial Statements: See accompanying Index to Financial Statements on Page F-1. (b) Reports on Form 8-K: None. (c) Exhibits: 3.a Restated and Amended Articles of Incorporation, adopted January 30, 1996, incorporated by reference from Exhibit 3.a. of Form 10-K for the year ended September 30, 1996. 3.b Restated Bylaws, reflecting amendments through May 26, 1998, incorporated by reference from Exhibit 3.b. of Form 10-K for the year ended September 30, 1998. 10.a Management Variable Compensation Plan, dated October 2001. 10.c 1987 Stock Option Plan, as amended, incorporated herein by reference to Exhibit 10.c. of the Registrant's Form 10-K filed for the year ended September 30, 1996. 10.d 1990 Stock Option Plan, as amended, incorporated herein by reference to Exhibit 10.d. of the Registrant's Form 10-K filed for the year ended September 30, 1996. 10.e 1994 Stock Option Plan, as amended, incorporated herein by reference to Exhibit 10.e. of the Registrant's Form 10-K filed for the year ended September 30, 1996. 10.f 1997 Stock Option Plan, as amended, incorporated herein by reference to Exhibit 10.p. of the Registrant's Form 10-K filed for the year ended September 30, 1999. 10.h Severance Agreement, dated May 1, 1990, between the Registrant and Werner Ongyert, incorporated herein by reference to Exhibit 10.m. of the Registrant's Form 10-K filed for the year ended September 30, 1990. 10.i Severance Agreement, dated March 27, 1998, between the Registrant and Keith D. Zell, as amended, incorporated herein by reference to Exhibit 10.m. of the Registrant's Form 10-K filed for the year ended September 30, 1998. 10.j Severance Agreement, dated March 24, 1998, between the Registrant and Mauro G. Togneri, as amended, incorporated herein by reference to Exhibit 10.n. of the Registrant's Form 10-K for the year ended September 30, 1998. 18 (c) Exhibits (continued): 10.k 1992 Employee Stock Purchase Plan, incorporated herein by reference to Exhibit 4(a) of the Registrant's Form S-8, File No. 33-45386. 10.l Severance Agreement, dated March 18, 1998, between the Registrant and Steven M. Cohoon, as amended, incorporated herein by reference to Exhibit 10.q. of the Registrant's Form 10-K filed for the year ended September 30, 1998. 10.m Severance Agreement, dated March 16, 1998, between the Registrant and Sidney W. Emery, Jr., incorporated herein by reference to Exhibit 10.r. of the Registrant's Form 10-K filed for the year ended September 30, 1998. 10.n Change in Control Agreement, dated March 16, 1998, between the Registrant and Sidney W. Emery, Jr., incorporated herein by reference to Exhibit 10.s. of the Registrant's Form 10-K filed for the year ended September 30, 1998. 10.o Change in Control Agreement, dated March 27, 1998, between the Registrant and Keith D. Zell incorporated herein by reference to Exhibit 10.t. of the Registrant's Form 10-K filed for the year ended September 30, 1998. 10.p Change in Control Agreement, dated March 24, 1998, between the Registrant and Mauro G. Togneri incorporated herein by reference to Exhibit 10.v. of the Registrant's Form 10-K filed for the year ended September 30, 1998. 10.q Change in Control Agreement, dated March 18, 1999, between the Registrant and Steven M. Cohoon incorporated herein by reference to Exhibit 10.z. of the Registrant's Form 10-K for the fiscal year ended September 30, 1999. 10.r Severance Agreement, dated March 13, 1998, between the Registrant and William G. Anderson incorporated herein by reference to Exhibit 10.aa. of the Registrant's Form 10-K filed for the year ended September 30, 1998. 10.s Severance Agreement, dated March 14, 1998, between the Registrant and James M. Egerdal incorporated herein by reference to Exhibit 10.ab. of the Registrant's Form 10-K filed for the year ended September 30, 1998. 10.t Change in Control Agreement, dated March 14, 1998, between the Registrant and James M. Egerdal incorporated herein by reference to Exhibit 10.ad. of the Registrant's Form 10-K filed for the year ended September 30, 1998. 10.u Severance Agreement dated January 3, 2000, between the Registrant and Kathleen M. Staby incorporated herein by reference to Exhibit 10.x. of the Registrant's Form 10-K filed for the year ended September 30, 2000. 19 (c) Exhibits (continued): 10.v Change in Control Agreement, dated January 3, 2000, between the Registrant and Kathleen M. Staby incorporated herein by reference to Exhibit 10.y. of the Registrant's Form 10-K filed for the year ended September 30, 2000. 10.w Change in Control Agreement, dated June 1, 2001, between the Registrant and Donald G. Krantz. 10.x Change in Control Agreement, dated June 18, 2001, between the Registrant and Laura B. Hamilton. 10.y Change in Control Agreement, dated June 25, 2001, between the Registrant and Kelly H. Donaldson. 10.z Change in Control Agreement, dated October 22, 2001, between the Registrant and Susan E. Knight. 13. Annual Report to Stockholders for the year ended September 30, 2001. 21. Subsidiaries of the Registrant. 23. Consent of Independent Public Accountants. (d) Financial Statement Schedules: See accompanying Index to Financial Statements on page F-1. 20 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MTS SYSTEMS CORPORATION By: /s/ Sidney W. Emery, Jr. --------------------------------------- Sidney W. Emery Jr. Chairman, President and Chief Executive Officer Date: December 20, 2001 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 indicated: Signatures Title Date ---------- ----- ---- /s/ Sidney W. Emery, Jr. Chairman, December 20, 2001 - ----------------------------- President and Sidney W. Emery Jr. Chief Executive Officer /s/ Susan E. Knight Vice President and December 20, 2001 - ----------------------------- Chief Financial Officer Susan E. Knight /s/ Charles A. Brickman Director December 20, 2001 - ----------------------------- Charles A. Brickman /s/ Jean Lou Chameau Director December 20, 2001 - ----------------------------- Jean Lou Chameau /s/ Bobby I. Griffin Director December 20, 2001 - ----------------------------- Bobby I. Griffin /s/ Brendan Hegarty Director December 20, 2001 - ----------------------------- Brendan Hegarty /s/ Bruce Hertzke Director December 20, 2001 - ----------------------------- Bruce Hertzke /s/ Barb J. Samardzich Director December 20, 2001 - ----------------------------- Barb J. Samardzich /s/ Linda Hall Whitman Director December 20, 2001 - ----------------------------- Linda Hall Whitman 21 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 2001 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) 11 --- Consolidated Balance Sheets - September 30, 2001 and 2000 12 --- Consolidated Statements of Income and Shareholders' Investment for the Years Ended September 30, 2001, 2000 and1999 13 --- Consolidated Statements of Cash Flows for the Years Ended September 30, 2001, 2000 and 1999 14 --- Notes to Consolidated Financial Statements 15 --- Report of Independent Public Accountants 26 --- F-1 B. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS --- F-3 C. FINANCIAL STATEMENT SCHEDULES Schedule Description -------- ----------- II Summary of Consolidated Allowances For Doubtful Accounts, Inventory and Restructuring Reserves --- F-4 All schedules except the one listed above have been omitted as not required, not applicable, or the information required therein is contained in the financial statements or the footnotes thereto. F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To MTS Systems Corporation: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in MTS Systems Corporation's annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated November 15, 2001. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule (page F-4) listed as a part of Item 14 in this Form 10-K is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Minneapolis, Minnesota, November 15, 2001 F-3 MTS SYSTEMS CORPORATION AND SUBSIDIARIES SCHEDULE II - SUMMARY OF CONSOLIDATED ALLOWANCES FOR DOUBTFUL ACCOUNTS, INVENTORY AND RESTRUCTURING RESERVES FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999 (In Thousands) Balance Amounts Balance Beginning Written-Off/ End of of Year Provisions Payments Year ----------- ---------- --------- ------- Allowance for Doubtful Accounts: - -------------------------------- 2001 $2,255 $992 $(538) $2,709 2000 2,232 645 (622) 2,255 1999 2,285 544 (597) 2,232 Inventory Reserves: - ------------------- 2001 $3,726 $4,132 $(2,591) $5,267 2000 3,067 1,500 (841) 3,726 1999 2,020 1,370 (323) 3,067 Restructuring Reserves: - ----------------------- 2001 $1,120 $ - $(1,120) $ -- 2000 3,231 1,210 (3,321) 1,120 1999 -- 5,711 (2,480) 3,231 F-4 EX-10.A 3 mts015285_ex-10a.txt MANAGEMENT VARIABLE COMPENSATION (MVC) PLAN EXHIBIT 10.a [LOGO] MTS(R) MTS Systems Corporation Management Variable Compensation (MVC) Plan (Revised October 2001) TABLE OF CONTENTS SECTION PAGE - ------- ---- 1. General Purpose of the Plan 3 2. Definitions 3 3. Eligibility and Participation 3 4. Plan Objectives 4 5. Payout Opportunity 4 6. Determining the Payout 5 7. Relationship to Other Compensation Plans 5 2 SECTION 1. GENERAL PURPOSE OF THE PLAN The name of this plan is the MTS Systems Management Variable Compensation Plan (the "Plan"). The purpose of the Plan is to focus efforts on achievement of near term financial objectives which are critical to the success of MTS Systems Corporation; to reward accomplishment at a level above competition when performance is above that of comparable companies; and to more closely couple total compensation (salary plus variable) to the financial results of the company. The Plan does not apply to the employees of the Aeromet Corporation. No employment contract is implied by participation in the Plan. SECTION 2. DEFINITIONS Definitions as used in the Plan are: a. "CEO" means the Chief Executive Officer duly elected by the Board. b. "Company" means MTS Systems Corporation, a corporation organized under the laws of the State of Minnesota (or any successor corporation). c. "Employee" means an employee of the Company, whether or not an officer or member of the Board, but excluding any temporary employee and any person serving the Company only in the capacity of a member of the Board. d. "Participant" means an Employee who is eligible to participate in the Plan. e. "Plan" means the MTS Systems Corporation Management Variable Compensation Plan. f. "Plan Year" means the applicable fiscal year of the Company. SECTION 3. ELIGIBILITY AND PARTICIPATION Employees eligible to participate in the Plan will include * Corporate officers, * Business 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. The Employee must be in a qualifying position by October 1st in order to be eligible for the fiscal year plan. Participants are eligible for payout in proportion to the percentage of the fiscal year the participant is responsible for the qualifying position. Employees eligible for other variable compensation (i.e. commissions) are not eligible to participate in the Plan. Participants must also work at least 1,000 hours in the Plan Year and be employed at the end of the Plan Year to be eligible for a payout. Employees resigning or terminating before the end of the Plan Year, regardless of cause, are not eligible for a payout. Participants who work less 3 than full time during the Plan Year (e.g., due to a personal leave, but not due to illness) would earn a proportionately reduced payout. The CEO must approve any waivers to the eligibility and participation rules listed above. SECTION 4. PLAN OBJECTIVES The major emphasis of the Plan objectives is achieving financial results. For the Executive Management Team, all objectives are financial. For all other participants, plan objectives are both financial and operating (individual) objectives. The financial objectives for the Plan Year can include: * Earnings Per Share (EPS) * Earnings Before Interest and Taxes (EBIT) * Working Capital Rate to Revenue (WCRR) * Return on average net assets (ROANA) * Revenue or Revenue Growth Other operating (individual) objectives reflect individual accountability. These objectives are nonrecurring, specific to the individual, or related to a project that contributes to the success of MTS. The objectives are established on individual Business Units or the combined Minneapolis Based Business Units. Approved Unit levels for the Plan Year are: AESD EMT (MTD Raleigh) Nano Aero IVDD NVH Automation MT&S Powertrain Technologies Corporate MTD - S/H Sensors SSD The objectives for participants below the direct reports to the CEO require one over one approval levels to: * Integrate objectives into the Company operating plan * Guard against conflicting objectives * Help to assure consistency in degree of difficulty The CEO has the final approval for plan objectives over all participants other than himself. SECTION 5. PAYOUT OPPORTUNITY The MVC target payment is expressed as a percentage of salary grade midpoint. The percentage is determined at the beginning of the Plan Year and is based on salary level, scope of responsibility, and profit impact of the position. Incentive payments vary above and below the target percent based on the financial results in comparison to the established objectives. 4 The MVC target is expressed as a percentage of the midpoint of the salary structure and is shown below: Position Salary Level MVC Target % -------- ------------ ------------ CEO E5 70% Exec VP, MT&S E4 50% Vice President E3 25-50, depending on revenue level or profit potential Vice President E2 20-50, depending on revenue level or profit potential Vice President (Unit) E1 15-45, depending on revenue level or profit potential Mkt Div P&L Mgrs SAM 17-21 15-35, depending on revenue level or profit potential All Other Mgmt SAM 18-21 10-25, depending on profit impact SAM 15-17 6-20, depending on profit impact T/E 5/5S - 9/9S 6-15, depending on profit impact For Minneapolis Based Business Units (MBBU) which includes Aero, AESD, MTD-S/H, SSD, and VDD, the combined objectives reflect our initiatives to work together toward the success of these operations. For key management positions that have a large impact on these combined business units, MVC payments will be greater than 100% once the financial performance meets or exceeds the established MBBU EBIT goal. Overranging is when an additional payout occurs when results are above established goals. An overranging multiplier is assigned to each financial and revenue objective. There is no overranging potential for operating (individual) objectives. SECTION 6. DETERMINING THE PAYOUT Payouts are based on four factors: 1) the degree to which objectives are met; 2) the MVC target percentage; 3) the midpoint of the salary range as assigned at the beginning of the Plan Year; and 4) the percentage of time worked during the Plan Year. Each objective is assigned a minimum/maximum payout range. The minimum level or hurdle represents that level of performance below, which no award is to be paid. The maximum level of a payout range represents performance above target objectives and overranging may apply at this level. The sum of the relative weightings of the objectives must equal 100%. Payouts will be made in cash within 90 days of the end of the Plan Year, expected to be on or before December 31. SECTION 7. RELATIONSHIP TO OTHER COMPENSATION PLANS 7.a "NON MANAGEMENT" VARIABLE COMPENSATION (VC) Employees may be eligible for a variable compensation bonus at the end of the Plan Year if they are not eligible to participate in another variable compensation program (i.e. Management 5 Variable Compensation, sales commissions); work at least a 1,000 hours during the Plan Year; and are employed by the Company at the end of the Plan Year. The following is an outline summary to which these VC plans must adhere. They are included in the MVC Plan for reference only. * VC Competitive payout potential is 3% of the midpoint of the salary range in which the employee is placed at the beginning of the fiscal year. * VC payout will normally be based on the combination of the results of the Roll-up business unit goal and the employee's unit vice president's objective(s) for the year. * The entire 3% VC payout potential is eligible for overranging for participating employees. * Eligibility and participation rules for VC will be the same as those for MVC, where appropriate. 7.b RETIREMENT PLAN The calculations for the Management Variable Compensation Plan and Variable Compensation Plan are made after deductions for retirement plans. Payout to a U.S. based participant in the Management Variable Compensation Plan and Variable Compensation Plan is included in the calculation of the Company's contribution to that employee's retirement plan. 6 EX-10.W 4 mts015285_ex-10w.txt CHANGE IN CONTROL AGREEMENT-DONALD KRANTZ EXHIBIT 10.w [LOGO] MTS(R) MTS SYSTEMS CORPORATION 14000 Technology Drive Eden Prairie, MN 55344-2290 Telephone 612-937-4000 Fax 612-937-4515 CHANGE IN CONTROL AGREEMENT - -------------------------------------------------------------------------------- AGREEMENT made as of this 1st day of June, 2001 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and DONALD G. KRANTZ (the "Executive"). WHEREAS, MTS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of MTS and its shareholders; and WHEREAS, the Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of MTS, its policies, methods, personnel and problems, a significant contribution to the profitability, growth and financial strength of MTS; and WHEREAS, MTS, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of the Executive in the performance of the Executive's duties to the detriment of MTS and its shareholders; and WHEREAS, Executive is becoming employed by MTS upon the understanding that MTS will provide income security if the Executive's employment is terminated under certain terms and conditions; and WHEREAS, it is in the best interests of MTS and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including Executive, to their assigned duties without distraction and to ensure the continued availability to MTS of the Executive in the event of a Change in Control; THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until the earlier of (A) the date that any and all benefits due to Executive under this Agreement upon the happening of the events set forth herein have been paid and satisfied and all obligations of MTS to the Executive have been performed or (B) the date the Executive and MTS agree in writing to terminate this Agreement. Notwithstanding the preceding sentence, if a Change in Control occurs, this Agreement shall remain in effect for a period of 36 months from the date of the occurrence of a Change in Control. 2. Change in Control. If a Change in Control shall have occurred during the term of this Agreement, the provisions of this Agreement shall become operative and MTS agrees to employ the Executive and to provide the benefits stated in this Agreement. Change in Control Agreement Page 2 (a) Change in Control, shall, for purposes of this Agreement, means a change in control of MTS which would be required to be reported in response to Item 1 of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not MTS is then subject to such reporting requirement, including, without limitation, if: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, including any affiliate or associate as defined in Rule 12(b)-2 under the Exchange Act of such person, other than MTS, any trustee or other fiduciary holding securities under an employee benefit plan of MTS, or any corporation owned, directly or indirectly, by the stockholders of MTS in substantially the same proportions as their ownership of stock of MTS) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of MTS representing 35% or more of the combined voting power of MTS' then outstanding securities; or (ii) the Board of Directors is comprised of fewer than 65% of the individuals described in subsection (b) below; or (iii) the stockholders of MTS approve a definitive agreement to merge or consolidate MTS with or into another corporation or other enterprise in which the holders of outstanding stock of MTS entitled to vote in elections of directors immediately before such merger or consolidation hold less than 80% of the voting power of the survivor of such merger or consolidation or its parent, or approve a plan of liquidation; or (iv) at least 60% of MTS' assets are sold or transferred (other than as security for a loan) to any person (as defined above) in one or a series of related transactions; or (v) the Board of Directors of MTS determines, by a vote of a majority of its entire membership, that a tender offer statement by any person (as defined above) indicates an intention on the part of such person to acquire control of MTS. (b) Board of Directors shall, for purposes of subsection (a), mean: (i) individuals who on the date hereof constituted the Board of MTS, and (ii) any new director who subsequently was elected or nominated for election by a majority of the directors who held such office immediately prior to a Change in Control. (c) Friendly Change in Control shall mean a Change in Control which arises from a transaction or series of transactions authorized, recommended or approved at the time by formal action of the Board of Directors. Change in Control Agreement Page 3 (d) Unfriendly Change in Control shall mean a Change in Control that is not a "Friendly Change in Control" as defined above. An Unfriendly Change in Control shall not thereafter become a Friendly Change in Control. 3. Termination by Reason of Death or Disability. If Executive's employment shall be terminated by MTS by reason of death or disability, MTS shall immediately commence payment to the Executive (or Executive's designated beneficiaries or estate, if no beneficiary is designated) of any and all benefits to which the Executive is entitled under MTS retirement and insurance programs them in effect. Except for such benefits, MTS shall have no further obligations to Executive under this Agreement. 4. Termination for Cause. (a) If Executive's employment with MTS shall be terminated by MTS for Cause as defined below, MTS shall pay to Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and MTS shall have no further obligation to Executive under this Agreement. (b) Termination by MTS of Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (ii) willful gross misconduct or gross negligence in the performance of his duties by the Executive; or (iii) material violation by the Executive of any employment agreement applicable to the Executive. 5. Termination Following Friendly Change in Control. (a) If, after a Friendly Change in Control, Executive's employment with MTS shall be terminated (1) by MTS other than for cause, death or disability or (2) by Executive for Good Reason, then Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay the Executive as a severance payment (the "Severance Payment") an amount equal to the product of 18 multiplied by the Executive's Monthly Gross Income as defined below. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. Change in Control Agreement Page 4 For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts: (A) 1/12 of the highest average base salary for any 12-consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination (without taking into account any reduction in such base salary that would constitute Good Reason); plus (B) the monthly average of the total Management Variable Compensation (MVC) earned during the lesser of the 3 most recent or the actual number of fiscal years participating in the MVC plan ending immediately prior to the Date of Termination; plus (C) the product of the average percentage of MTS profit sharing contributions to the MTS Systems Corporation Profit Sharing Retirement Plan and Trust (as a percent of Compensation as defined in the Plan up to the federal limit) for the lesser of the 3 most recent or the actual number of participating Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (A) and (B) above. (ii) Benefits. For an 18-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the respective percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive during this period, and any such benefits actually received by Executive shall be reported to MTS. At the expiration of said 18-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Reconciliation Act ("COBRA") or applicable state law. (b) Good Reason. Executive shall be entitled to terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without Executive's express written consent, any of the following: (i) the assignment to Executive of any duties inconsistent with Executive's status or position with MTS, or a substantial alteration in the nature or status of Executive's responsibilities; or Change in Control Agreement Page 5 (ii) a reduction by MTS in Executive's annual base salary other than a reduction comparable to other senior Executives of MTS in connection with a company-wide cost reduction program; or (iii) the relocation of MTS' principal executive offices to a location more than fifty miles from Eden Prairie, Minnesota or MTS requiring Executive to be based anywhere other than MTS' principal executive offices except for required travel on MTS' business to an extent substantially consistent with Executive's prior business travel obligations; or (iv) the failure by MTS to continue to provide Executive with benefits at least as favorable to those enjoyed by Executive under any of MTS' pension, life insurance, medical, health and accident, disability, deferred compensation, incentive awards, incentive stock options, or savings plans in which Executive was participating at the time of the Change in Control, the taking of any action by MTS which would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed by him at the time of the Change in Control, or the failure by MTS to provide Executive with the number of paid vacation days to which Executive is entitled at the time of the Change in Control, provided, however, that MTS may amend any such plan or programs as long as such amendments do not reduce any benefits to which Executive would be entitled upon termination; or (v) the failure of MTS to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 12; or (vi) MTS requests Executive's resignation from employment; or (vii) any purported termination of Executive's employment which is not made pursuant to a Notice of Termination satisfying the requirements of this Agreement; for purposes of this Agreement, no such purported termination shall be effective; or (viii) any material violation by MTS of this Agreement. (c) Voluntary Termination Deemed Good Reason. Notwithstanding anything herein to the contrary, during the period commencing on the 30th day following a Change in Control (whether Friendly or Unfriendly) and ending on the 180th day following a Change in Control, Executive may voluntarily terminate his employment for any reason, and such termination shall be deemed "Good Reason" for all purposes of this Agreement. Change in Control Agreement Page 6 6. Termination - Unfriendly Change in Control. (a) If, after an Unfriendly Change in Control, Executive's employment with MTS is terminated (1) by MTS other than for Cause, death or disability, or (2) by Executive for Good Reason, the Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay the Executive as a severance payment (the "Severance Payment") an amount equal to the product of 36 multiplied by the Executive's Monthly Gross Income as defined in Section 5(a)(i) above. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. (ii) Benefits. For a 36-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the responsive percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive shall be reported to MTS. At the expiration of said 36-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law. (b) If the Executive voluntarily terminates his employment other than for Good Reason but more than 180 days after an Unfriendly Change in Control, Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay to Executive as a severance payment (the "Severance Payment") an amount equal to the product of 18 multiplied by the Executive's monthly Gross Income as defined in Section 5(a)(i) above. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. (ii) Benefits. For 18-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the respective percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive during such period, and any such benefits actually received by Executive shall be reported to Change in Control Agreement Page 7 MTS. At the expiration of said 18-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law. 7. Additional Benefits. In addition to all other amounts payable and benefits receivable to Executive upon termination of employment covered under this Agreement, Executive shall be entitled to the following benefits: (a) Legal Fees. In the event of any termination of employment under this Agreement, other than termination for Cause, MTS shall pay to Executive all legal fees and expenses reasonably incurred by Executive in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement. (b) Retirement Plan. Executive shall, upon termination of employment, be entitled to receive all benefits payable to the Executive under the MTS Systems Corporation Profit Sharing Retirement Plan and any other plan or agreement relating to retirement benefits. (c) Employee Stock Option Certificate. The Executive's rights under any existing Employee Stock Option Agreement and any future such agreements, including particularly his right to exercise his option rights following his termination of employment, shall continue to be fully effective hereunder. 8. No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits after the Date of Termination, or except as otherwise provided in this Agreement. 9. Potential Excise Tax; Indemnification (a) Excise Tax. Should any payments hereunder or contemplated hereby be subject to excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as may be amended, or any successor or similar provision thereto, or comparable state or local tax laws, MTS shall pay to the Executive such additional compensation as is necessary (after taking into account all federal, state and local income taxes payable by the Executive as a result of the receipt of such compensation) to place the Executive in the same after-tax position he would have been in had no such excise tax (or any interest or penalties thereon) been paid or incurred. MTS shall pay such additional compensation upon the earlier of: (i) the time at which MTS withholds such excise tax from any payments to the Executive; or Change in Control Agreement Page 8 (ii) 30 days after the Executive notifies MTS that the Executive has paid such excise tax pursuant to a tax return filed by the Executive which takes the position that such excise tax is due and payable in reliance on a written opinion of the Executive's tax counsel that it is more likely than not that such excise tax is due and payable, or, if later, the date the IRS notifies Executive that such amount is due and payable. Without limiting the obligation of MTS hereunder, the Executive agrees, in the event the Executive makes any payment pursuant to the preceding sentence, to negotiate with MTS in good faith with respect to procedures reasonably requested by MTS which would afford MTS the ability to contest the imposition of such excise tax; provided, however, that the Executive will not be required to afford MTS any right to contest the applicability of any such excise tax to the extent that the Executive reasonably determines that such contest is inconsistent with the overall tax interests of the Executive. MTS agrees to hold in confidence and not to disclose, without the Executive's prior written consent, any information with regard to the Executive's tax position which MTS obtains pursuant to this subsection. (b) Indemnification. MTS will indemnify the Executive (and his legal representative or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of the proceeding) by the laws of the State of Minnesota, as in effect at the time of the subject act or omission, or the Articles of Incorporation and By-Laws of MTS as in effect at such time or on the date of this Agreement, whichever affords or afforded greater protection to the Executive; and the Executive shall be entitled to the protection of any insurance policies MTS may elect to maintain generally for the benefit of its directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by him or his legal representatives in connection with any action, suit or proceeding to which he (or his legal representative or other successors) may be made a party by reason of his being or having been a director, officer or employee of MTS or any of its subsidiaries or his serving or having served any other enterprise as a director, officer or employee at the request of MTS, provided that MTS shall cause to be maintained in effect for not less than six years from the date of a Change in Control (to the extent available) policies of directors' and officers' liability insurance of at least the same coverage as those maintained by MTS on the date of this Agreement and containing terms and conditions which are no less advantageous than such policies. 10. Non-Competition and Confidentiality. (a) Noncompetition. Except as provided in subsection (c) below, Executive agrees that, as a condition of receiving benefits under this Agreement, he will not render services directly or indirectly to any competing organization, wherever located, for a period of one year following the Date of Termination, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, Change in Control Agreement Page 9 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) Confidentiality. 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 or knowledge pertaining to the business of MTS, or any of its subsidiaries, obtained during his employment by MTS or any of its subsidiaries. (c) Waiver - Unfriendly Change in Control. Notwithstanding anything herein to the contrary: the restriction on competition under subsection (a) shall not apply if the Executive's employment terminates following an Unfriendly Change in Control. Furthermore, in such event, MTS waives any other restriction on Executive's employment and consents unconditionally to any employment Executive may subsequently obtain. 11. Funding of Payments. In order to assure the performance of MTS or its successor of its obligations under this Agreement, MTS may deposit in a so-called "rabbi" trust an amount equal to the maximum payment that will be due the Executive under the terms hereof; provided, however, that MTS shall deposit in trust the amount equal to the maximum payment due Executive immediately upon an Unfriendly Change in Control. Under such written trust instrument, the Trustee shall be instructed to pay to the Executive (or the Executive's legal representative, as the case may be) the amount to which the Executive shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to MTS. If MTS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. The written instrument governing the trust shall be irrevocable from and after such Change in Control and shall contain such provisions protective of the Executive as are contained in similar trust agreements approved by the Internal Revenue Service in published private letter rulings (provided that the assets of the trust shall be reachable by creditors of MTS as required by such rulings). The trustee shall be a national bank selected by MTS with the consent of the Executive, with trust powers and whose principal officers are located in the Minneapolis/St. Paul metropolitan area. The trustee shall invest the assets of the trust in any readily marketable securities of U.S. corporations (other than MTS, its successor, or any affiliate of MTS or its successor). If and to the extent there are not amounts in trust sufficient to pay Executive under this Agreement, MTS shall remain liable for any and all payments due to Executive. 12. Successors; Binding Agreement. Change in Control Agreement Page 10 (a) Successors. MTS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of MTS to expressly assume and agree to perform this Agreement in the same manner and to the same extent that MTS would be required to perform it if no such succession had taken place. Failure of MTS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from MTS in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, successors, heirs, and designated beneficiaries. If Executive should die while any amount would still be payable to Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designated beneficiaries or, if there is no such designated beneficiary, to the Executive's estate. 13. Notice. (a) Form and Delivery. All notices and other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the last known residence address of the Executive or in the case of MTS, to its principal office to the attention of each of the then directors of MTS with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (b) Notice of Termination. Any purported termination of Executive's employment by MTS or by Executive shall be communicated by written Notice of Termination to the other party hereto, which shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circumstances claimed to provide a basis for termination of Executive's employment. (c) Date of Termination. For purposes of this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination which shall not be less than 10 nor more than 30 days, respectively, from the date such Notice of Termination is given. (d) Dispute of Termination. If, within 10 days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final Change in Control Agreement Page 11 judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence in accordance with Section 14 below. Notwithstanding the pendency of any such dispute, MTS shall continue to pay Executive full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this subsection or at the end of a period of 180 days, whichever first occurs. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement. 14. Arbitration. Any dispute arising under or in connection with this Agreement (including without limitation, the making of this Agreement or the Executive's termination of employment) shall be resolved by final and binding arbitration to be held in Minneapolis, Minnesota in accordance with the rules and procedures of the American Arbitration Association. The parties shall select a mutually acceptable single arbitrator to resolve the dispute or if they fail or are unable to do so, each side shall within the following ten business days select a single arbitrator and the two so selected shall select a third arbitrator within the following ten business days. The arbitrator shall have no power to award any punitive or exemplary damages. The arbitrator may construe or interpret, but shall not ignore or vary the terms of this Agreement, and shall be bound by controlling law. The arbitration award or other resolution may be entered as a judgment at the request of the prevailing party by any court of competent jurisdiction in Minnesota or elsewhere. 15. Miscellaneous. (a) Modification and Waiver. Except as otherwise specifically provided in this Agreement, no provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party hereto at any time of any breach by the other party to this Agreement of, or compliance with, any other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. (b) Entire Agreement. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. (c) Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. Change in Control Agreement Page 12 (d) Severability. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have executed this Agreement as of the day and date first above written. EXECUTIVE: MTS SYSTEMS CORPORATION /s/ Donald G. Krantz By /s/ Sidney W. Emery Jr. - --------------------------------- --------------------------------- Its Chairman and CEO ---------------- EX-10.X 5 mts015285_ex-10x.txt CHANGE IN CONTROL AGREEMENT-LAURA HAMILTON EXHIBIT 10.x [LOGO] MTS(R) MTS SYSTEMS CORPORATION 14000 Technology Drive Eden Prairie, MN 55344-2290 Telephone 612-937-4000 Fax 612-937-4515 CHANGE IN CONTROL AGREEMENT - -------------------------------------------------------------------------------- AGREEMENT made as of this 18th day of June, 2001 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and LAURA B. HAMILTON (the "Executive"). WHEREAS, MTS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of MTS and its shareholders; and WHEREAS, the Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of MTS, its policies, methods, personnel and problems, a significant contribution to the profitability, growth and financial strength of MTS; and WHEREAS, MTS, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of the Executive in the performance of the Executive's duties to the detriment of MTS and its shareholders; and WHEREAS, Executive is becoming employed by MTS upon the understanding that MTS will provide income security if the Executive's employment is terminated under certain terms and conditions; and WHEREAS, it is in the best interests of MTS and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including Executive, to their assigned duties without distraction and to ensure the continued availability to MTS of the Executive in the event of a Change in Control; THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until the earlier of (A) the date that any and all benefits due to Executive under this Agreement upon the happening of the events set forth herein have been paid and satisfied and all obligations of MTS to the Executive have been performed or (B) the date the Executive and MTS agree in writing to terminate this Agreement. Notwithstanding the preceding sentence, if a Change in Control occurs, this Agreement shall remain in effect for a period of 36 months from the date of the occurrence of a Change in Control. 2. Change in Control. If a Change in Control shall have occurred during the term of this Agreement, the provisions of this Agreement shall become operative and MTS agrees to employ the Executive and to provide the benefits stated in this Agreement. Change in Control Agreement Page 2 (a) Change in Control, shall, for purposes of this Agreement, means a change in control of MTS which would be required to be reported in response to Item 1 of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not MTS is then subject to such reporting requirement, including, without limitation, if: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, including any affiliate or associate as defined in Rule 12(b)-2 under the Exchange Act of such person, other than MTS, any trustee or other fiduciary holding securities under an employee benefit plan of MTS, or any corporation owned, directly or indirectly, by the stockholders of MTS in substantially the same proportions as their ownership of stock of MTS) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of MTS representing 35% or more of the combined voting power of MTS' then outstanding securities; or (ii) the Board of Directors is comprised of fewer than 65% of the individuals described in subsection (b) below; or (iii) the stockholders of MTS approve a definitive agreement to merge or consolidate MTS with or into another corporation or other enterprise in which the holders of outstanding stock of MTS entitled to vote in elections of directors immediately before such merger or consolidation hold less than 80% of the voting power of the survivor of such merger or consolidation or its parent, or approve a plan of liquidation; or (iv) at least 60% of MTS' assets are sold or transferred (other than as security for a loan) to any person (as defined above) in one or a series of related transactions; or (v) the Board of Directors of MTS determines, by a vote of a majority of its entire membership, that a tender offer statement by any person (as defined above) indicates an intention on the part of such person to acquire control of MTS. (b) Board of Directors shall, for purposes of subsection (a), mean: (i) individuals who on the date hereof constituted the Board of MTS, and (ii) any new director who subsequently was elected or nominated for election by a majority of the directors who held such office immediately prior to a Change in Control. (c) Friendly Change in Control shall mean a Change in Control which arises from a transaction or series of transactions authorized, recommended or approved at the time by formal action of the Board of Directors. Change in Control Agreement Page 3 (d) Unfriendly Change in Control shall mean a Change in Control that is not a "Friendly Change in Control" as defined above. An Unfriendly Change in Control shall not thereafter become a Friendly Change in Control. 3. Termination by Reason of Death or Disability. If Executive's employment shall be terminated by MTS by reason of death or disability, MTS shall immediately commence payment to the Executive (or Executive's designated beneficiaries or estate, if no beneficiary is designated) of any and all benefits to which the Executive is entitled under MTS retirement and insurance programs them in effect. Except for such benefits, MTS shall have no further obligations to Executive under this Agreement. 4. Termination for Cause. (a) If Executive's employment with MTS shall be terminated by MTS for Cause as defined below, MTS shall pay to Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and MTS shall have no further obligation to Executive under this Agreement. (b) Termination by MTS of Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (ii) willful gross misconduct or gross negligence in the performance of his duties by the Executive; or (iii) material violation by the Executive of any employment agreement applicable to the Executive. 5. Termination Following Friendly Change in Control. (a) If, after a Friendly Change in Control, Executive's employment with MTS shall be terminated (1) by MTS other than for cause, death or disability or (2) by Executive for Good Reason, then Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay the Executive as a severance payment (the "Severance Payment") an amount equal to the product of 18 multiplied by the Executive's Monthly Gross Income as defined below. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. Change in Control Agreement Page 4 For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts: (A) 1/12 of the highest average base salary for any 12-consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination (without taking into account any reduction in such base salary that would constitute Good Reason); plus (B) the monthly average of the total Management Variable Compensation (MVC) earned during the lesser of the 3 most recent or the actual number of fiscal years participating in the MVC plan ending immediately prior to the Date of Termination; plus (C) the product of the average percentage of MTS profit sharing contributions to the MTS Systems Corporation Profit Sharing Retirement Plan and Trust (as a percent of Compensation as defined in the Plan up to the federal limit) for the lesser of the 3 most recent or the actual number of participating Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (A) and (B) above. (ii) Benefits. For an 18-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the respective percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive during this period, and any such benefits actually received by Executive shall be reported to MTS. At the expiration of said 18-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Reconciliation Act ("COBRA") or applicable state law. (b) Good Reason. Executive shall be entitled to terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without Executive's express written consent, any of the following: (i) the assignment to Executive of any duties inconsistent with Executive's status or position with MTS, or a substantial alteration in the nature or status of Executive's responsibilities; or Change in Control Agreement Page 5 (ii) a reduction by MTS in Executive's annual base salary other than a reduction comparable to other senior Executives of MTS in connection with a company-wide cost reduction program; or (iii) the relocation of MTS' principal executive offices to a location more than fifty miles from Eden Prairie, Minnesota or MTS requiring Executive to be based anywhere other than MTS' principal executive offices except for required travel on MTS' business to an extent substantially consistent with Executive's prior business travel obligations; or (iv) the failure by MTS to continue to provide Executive with benefits at least as favorable to those enjoyed by Executive under any of MTS' pension, life insurance, medical, health and accident, disability, deferred compensation, incentive awards, incentive stock options, or savings plans in which Executive was participating at the time of the Change in Control, the taking of any action by MTS which would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed by him at the time of the Change in Control, or the failure by MTS to provide Executive with the number of paid vacation days to which Executive is entitled at the time of the Change in Control, provided, however, that MTS may amend any such plan or programs as long as such amendments do not reduce any benefits to which Executive would be entitled upon termination; or (v) the failure of MTS to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 12; or (vi) MTS requests Executive's resignation from employment; or (vii) any purported termination of Executive's employment which is not made pursuant to a Notice of Termination satisfying the requirements of this Agreement; for purposes of this Agreement, no such purported termination shall be effective; or (viii) any material violation by MTS of this Agreement. (c) Voluntary Termination Deemed Good Reason. Notwithstanding anything herein to the contrary, during the period commencing on the 30th day following a Change in Control (whether Friendly or Unfriendly) and ending on the 180th day following a Change in Control, Executive may voluntarily terminate his employment for any reason, and such termination shall be deemed "Good Reason" for all purposes of this Agreement. Change in Control Agreement Page 6 6. Termination - Unfriendly Change in Control. (a) If, after an Unfriendly Change in Control, Executive's employment with MTS is terminated (1) by MTS other than for Cause, death or disability, or (2) by Executive for Good Reason, the Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay the Executive as a severance payment (the "Severance Payment") an amount equal to the product of 36 multiplied by the Executive's Monthly Gross Income as defined in Section 5(a)(i) above. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. (ii) Benefits. For a 36-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the responsive percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive shall be reported to MTS. At the expiration of said 36-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law. (b) If the Executive voluntarily terminates his employment other than for Good Reason but more than 180 days after an Unfriendly Change in Control, Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay to Executive as a severance payment (the "Severance Payment") an amount equal to the product of 18 multiplied by the Executive's monthly Gross Income as defined in Section 5(a)(i) above. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. (ii) Benefits. For 18-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the respective percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive during such period, and any such benefits actually received by Executive shall be reported to Change in Control Agreement Page 7 MTS. At the expiration of said 18-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law. 7. Additional Benefits. In addition to all other amounts payable and benefits receivable to Executive upon termination of employment covered under this Agreement, Executive shall be entitled to the following benefits: (a) Legal Fees. In the event of any termination of employment under this Agreement, other than termination for Cause, MTS shall pay to Executive all legal fees and expenses reasonably incurred by Executive in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement. (b) Retirement Plan. Executive shall, upon termination of employment, be entitled to receive all benefits payable to the Executive under the MTS Systems Corporation Profit Sharing Retirement Plan and any other plan or agreement relating to retirement benefits. (c) Employee Stock Option Certificate. The Executive's rights under any existing Employee Stock Option Agreement and any future such agreements, including particularly his right to exercise his option rights following his termination of employment, shall continue to be fully effective hereunder. 8. No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits after the Date of Termination, or except as otherwise provided in this Agreement. 9. Potential Excise Tax; Indemnification (a) Excise Tax. Should any payments hereunder or contemplated hereby be subject to excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as may be amended, or any successor or similar provision thereto, or comparable state or local tax laws, MTS shall pay to the Executive such additional compensation as is necessary (after taking into account all federal, state and local income taxes payable by the Executive as a result of the receipt of such compensation) to place the Executive in the same after-tax position he would have been in had no such excise tax (or any interest or penalties thereon) been paid or incurred. MTS shall pay such additional compensation upon the earlier of: (i) the time at which MTS withholds such excise tax from any payments to the Executive; or Change in Control Agreement Page 8 (ii) 30 days after the Executive notifies MTS that the Executive has paid such excise tax pursuant to a tax return filed by the Executive which takes the position that such excise tax is due and payable in reliance on a written opinion of the Executive's tax counsel that it is more likely than not that such excise tax is due and payable, or, if later, the date the IRS notifies Executive that such amount is due and payable. Without limiting the obligation of MTS hereunder, the Executive agrees, in the event the Executive makes any payment pursuant to the preceding sentence, to negotiate with MTS in good faith with respect to procedures reasonably requested by MTS which would afford MTS the ability to contest the imposition of such excise tax; provided, however, that the Executive will not be required to afford MTS any right to contest the applicability of any such excise tax to the extent that the Executive reasonably determines that such contest is inconsistent with the overall tax interests of the Executive. MTS agrees to hold in confidence and not to disclose, without the Executive's prior written consent, any information with regard to the Executive's tax position which MTS obtains pursuant to this subsection. (b) Indemnification. MTS will indemnify the Executive (and his legal representative or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of the proceeding) by the laws of the State of Minnesota, as in effect at the time of the subject act or omission, or the Articles of Incorporation and By-Laws of MTS as in effect at such time or on the date of this Agreement, whichever affords or afforded greater protection to the Executive; and the Executive shall be entitled to the protection of any insurance policies MTS may elect to maintain generally for the benefit of its directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by him or his legal representatives in connection with any action, suit or proceeding to which he (or his legal representative or other successors) may be made a party by reason of his being or having been a director, officer or employee of MTS or any of its subsidiaries or his serving or having served any other enterprise as a director, officer or employee at the request of MTS, provided that MTS shall cause to be maintained in effect for not less than six years from the date of a Change in Control (to the extent available) policies of directors' and officers' liability insurance of at least the same coverage as those maintained by MTS on the date of this Agreement and containing terms and conditions which are no less advantageous than such policies. 10. Non-Competition and Confidentiality. (a) Noncompetition. Except as provided in subsection (c) below, Executive agrees that, as a condition of receiving benefits under this Agreement, he will not render services directly or indirectly to any competing organization, wherever located, for a period of one year following the Date of Termination, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, Change in Control Agreement Page 9 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) Confidentiality. 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 or knowledge pertaining to the business of MTS, or any of its subsidiaries, obtained during his employment by MTS or any of its subsidiaries. (c) Waiver - Unfriendly Change in Control. Notwithstanding anything herein to the contrary: the restriction on competition under subsection (a) shall not apply if the Executive's employment terminates following an Unfriendly Change in Control. Furthermore, in such event, MTS waives any other restriction on Executive's employment and consents unconditionally to any employment Executive may subsequently obtain. 11. Funding of Payments. In order to assure the performance of MTS or its successor of its obligations under this Agreement, MTS may deposit in a so-called "rabbi" trust an amount equal to the maximum payment that will be due the Executive under the terms hereof; provided, however, that MTS shall deposit in trust the amount equal to the maximum payment due Executive immediately upon an Unfriendly Change in Control. Under such written trust instrument, the Trustee shall be instructed to pay to the Executive (or the Executive's legal representative, as the case may be) the amount to which the Executive shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to MTS. If MTS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. The written instrument governing the trust shall be irrevocable from and after such Change in Control and shall contain such provisions protective of the Executive as are contained in similar trust agreements approved by the Internal Revenue Service in published private letter rulings (provided that the assets of the trust shall be reachable by creditors of MTS as required by such rulings). The trustee shall be a national bank selected by MTS with the consent of the Executive, with trust powers and whose principal officers are located in the Minneapolis/St. Paul metropolitan area. The trustee shall invest the assets of the trust in any readily marketable securities of U.S. corporations (other than MTS, its successor, or any affiliate of MTS or its successor). If and to the extent there are not amounts in trust sufficient to pay Executive under this Agreement, MTS shall remain liable for any and all payments due to Executive. 12. Successors; Binding Agreement. Change in Control Agreement Page 10 (a) Successors. MTS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of MTS to expressly assume and agree to perform this Agreement in the same manner and to the same extent that MTS would be required to perform it if no such succession had taken place. Failure of MTS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from MTS in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, successors, heirs, and designated beneficiaries. If Executive should die while any amount would still be payable to Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designated beneficiaries or, if there is no such designated beneficiary, to the Executive's estate. 13. Notice. (a) Form and Delivery. All notices and other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the last known residence address of the Executive or in the case of MTS, to its principal office to the attention of each of the then directors of MTS with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (b) Notice of Termination. Any purported termination of Executive's employment by MTS or by Executive shall be communicated by written Notice of Termination to the other party hereto, which shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circumstances claimed to provide a basis for termination of Executive's employment. (c) Date of Termination. For purposes of this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination which shall not be less than 10 nor more than 30 days, respectively, from the date such Notice of Termination is given. (d) Dispute of Termination. If, within 10 days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final Change in Control Agreement Page 11 judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence in accordance with Section 14 below. Notwithstanding the pendency of any such dispute, MTS shall continue to pay Executive full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this subsection or at the end of a period of 180 days, whichever first occurs. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement. 14. Arbitration. Any dispute arising under or in connection with this Agreement (including without limitation, the making of this Agreement or the Executive's termination of employment) shall be resolved by final and binding arbitration to be held in Minneapolis, Minnesota in accordance with the rules and procedures of the American Arbitration Association. The parties shall select a mutually acceptable single arbitrator to resolve the dispute or if they fail or are unable to do so, each side shall within the following ten business days select a single arbitrator and the two so selected shall select a third arbitrator within the following ten business days. The arbitrator shall have no power to award any punitive or exemplary damages. The arbitrator may construe or interpret, but shall not ignore or vary the terms of this Agreement, and shall be bound by controlling law. The arbitration award or other resolution may be entered as a judgment at the request of the prevailing party by any court of competent jurisdiction in Minnesota or elsewhere. 15. Miscellaneous. (a) Modification and Waiver. Except as otherwise specifically provided in this Agreement, no provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party hereto at any time of any breach by the other party to this Agreement of, or compliance with, any other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. (b) Entire Agreement. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. (c) Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. Change in Control Agreement Page 12 (d) Severability. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have executed this Agreement as of the day and date first above written. EXECUTIVE: MTS SYSTEMS CORPORATION /s/ Laura B. Hamilton By /s/ Sidney W. Emery Jr. - --------------------------------- --------------------------------- Its Chairman and CEO ---------------- EX-10.Y 6 mts015285_ex-10y.txt CHANGE IN CONTROL AGREEMENT-KELLY DONALDSON EXHIBIT 10.y [LOGO] MTS(R) MTS SYSTEMS CORPORATION 14000 Technology Drive Eden Prairie, MN 55344-2290 Telephone 612-937-4000 Fax 612-937-4515 CHANGE IN CONTROL AGREEMENT - -------------------------------------------------------------------------------- AGREEMENT made as of this 25th day of June, 2001 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and KELLY H. DONALDSON (the "Executive"). WHEREAS, MTS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of MTS and its shareholders; and WHEREAS, the Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of MTS, its policies, methods, personnel and problems, a significant contribution to the profitability, growth and financial strength of MTS; and WHEREAS, MTS, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of the Executive in the performance of the Executive's duties to the detriment of MTS and its shareholders; and WHEREAS, Executive is becoming employed by MTS upon the understanding that MTS will provide income security if the Executive's employment is terminated under certain terms and conditions; and WHEREAS, it is in the best interests of MTS and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including Executive, to their assigned duties without distraction and to ensure the continued availability to MTS of the Executive in the event of a Change in Control; THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until the earlier of (A) the date that any and all benefits due to Executive under this Agreement upon the happening of the events set forth herein have been paid and satisfied and all obligations of MTS to the Executive have been performed or (B) the date the Executive and MTS agree in writing to terminate this Agreement. Notwithstanding the preceding sentence, if a Change in Control occurs, this Agreement shall remain in effect for a period of 36 months from the date of the occurrence of a Change in Control. 2. Change in Control. If a Change in Control shall have occurred during the term of this Agreement, the provisions of this Agreement shall become operative and MTS agrees to employ the Executive and to provide the benefits stated in this Agreement. Change in Control Agreement Page 2 (a) Change in Control, shall, for purposes of this Agreement, means a change in control of MTS which would be required to be reported in response to Item 1 of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not MTS is then subject to such reporting requirement, including, without limitation, if: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, including any affiliate or associate as defined in Rule 12(b)-2 under the Exchange Act of such person, other than MTS, any trustee or other fiduciary holding securities under an employee benefit plan of MTS, or any corporation owned, directly or indirectly, by the stockholders of MTS in substantially the same proportions as their ownership of stock of MTS) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of MTS representing 35% or more of the combined voting power of MTS' then outstanding securities; or (ii) the Board of Directors is comprised of fewer than 65% of the individuals described in subsection (b) below; or (iii) the stockholders of MTS approve a definitive agreement to merge or consolidate MTS with or into another corporation or other enterprise in which the holders of outstanding stock of MTS entitled to vote in elections of directors immediately before such merger or consolidation hold less than 80% of the voting power of the survivor of such merger or consolidation or its parent, or approve a plan of liquidation; or (iv) at least 60% of MTS' assets are sold or transferred (other than as security for a loan) to any person (as defined above) in one or a series of related transactions; or (v) the Board of Directors of MTS determines, by a vote of a majority of its entire membership, that a tender offer statement by any person (as defined above) indicates an intention on the part of such person to acquire control of MTS. (b) Board of Directors shall, for purposes of subsection (a), mean: (i) individuals who on the date hereof constituted the Board of MTS, and (ii) any new director who subsequently was elected or nominated for election by a majority of the directors who held such office immediately prior to a Change in Control. (c) Friendly Change in Control shall mean a Change in Control which arises from a transaction or series of transactions authorized, recommended or approved at the time by formal action of the Board of Directors. Change in Control Agreement Page 3 (d) Unfriendly Change in Control shall mean a Change in Control that is not a "Friendly Change in Control" as defined above. An Unfriendly Change in Control shall not thereafter become a Friendly Change in Control. 3. Termination by Reason of Death or Disability. If Executive's employment shall be terminated by MTS by reason of death or disability, MTS shall immediately commence payment to the Executive (or Executive's designated beneficiaries or estate, if no beneficiary is designated) of any and all benefits to which the Executive is entitled under MTS retirement and insurance programs them in effect. Except for such benefits, MTS shall have no further obligations to Executive under this Agreement. 4. Termination for Cause. (a) If Executive's employment with MTS shall be terminated by MTS for Cause as defined below, MTS shall pay to Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and MTS shall have no further obligation to Executive under this Agreement. (b) Termination by MTS of Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (ii) willful gross misconduct or gross negligence in the performance of his duties by the Executive; or (iii) material violation by the Executive of any employment agreement applicable to the Executive. 5. Termination Following Friendly Change in Control. (a) If, after a Friendly Change in Control, Executive's employment with MTS shall be terminated (1) by MTS other than for cause, death or disability or (2) by Executive for Good Reason, then Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay the Executive as a severance payment (the "Severance Payment") an amount equal to the product of 18 multiplied by the Executive's Monthly Gross Income as defined below. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. Change in Control Agreement Page 4 For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts: (A) 1/12 of the highest average base salary for any 12-consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination (without taking into account any reduction in such base salary that would constitute Good Reason); plus (B) the monthly average of the total Management Variable Compensation (MVC) earned during the lesser of the 3 most recent or the actual number of fiscal years participating in the MVC plan ending immediately prior to the Date of Termination; plus (C) the product of the average percentage of MTS profit sharing contributions to the MTS Systems Corporation Profit Sharing Retirement Plan and Trust (as a percent of Compensation as defined in the Plan up to the federal limit) for the lesser of the 3 most recent or the actual number of participating Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (A) and (B) above. (ii) Benefits. For an 18-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the respective percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive during this period, and any such benefits actually received by Executive shall be reported to MTS. At the expiration of said 18-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Reconciliation Act ("COBRA") or applicable state law. (b) Good Reason. Executive shall be entitled to terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without Executive's express written consent, any of the following: (i) the assignment to Executive of any duties inconsistent with Executive's status or position with MTS, or a substantial alteration in the nature or status of Executive's responsibilities; or Change in Control Agreement Page 5 (ii) a reduction by MTS in Executive's annual base salary other than a reduction comparable to other senior Executives of MTS in connection with a company-wide cost reduction program; or (iii) the relocation of MTS' principal executive offices to a location more than fifty miles from Eden Prairie, Minnesota or MTS requiring Executive to be based anywhere other than MTS' principal executive offices except for required travel on MTS' business to an extent substantially consistent with Executive's prior business travel obligations; or (iv) the failure by MTS to continue to provide Executive with benefits at least as favorable to those enjoyed by Executive under any of MTS' pension, life insurance, medical, health and accident, disability, deferred compensation, incentive awards, incentive stock options, or savings plans in which Executive was participating at the time of the Change in Control, the taking of any action by MTS which would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed by him at the time of the Change in Control, or the failure by MTS to provide Executive with the number of paid vacation days to which Executive is entitled at the time of the Change in Control, provided, however, that MTS may amend any such plan or programs as long as such amendments do not reduce any benefits to which Executive would be entitled upon termination; or (v) the failure of MTS to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 12; or (vi) MTS requests Executive's resignation from employment; or (vii) any purported termination of Executive's employment which is not made pursuant to a Notice of Termination satisfying the requirements of this Agreement; for purposes of this Agreement, no such purported termination shall be effective; or (viii) any material violation by MTS of this Agreement. (c) Voluntary Termination Deemed Good Reason. Notwithstanding anything herein to the contrary, during the period commencing on the 30th day following a Change in Control (whether Friendly or Unfriendly) and ending on the 180th day following a Change in Control, Executive may voluntarily terminate his employment for any reason, and such termination shall be deemed "Good Reason" for all purposes of this Agreement. Change in Control Agreement Page 6 6. Termination - Unfriendly Change in Control. (a) If, after an Unfriendly Change in Control, Executive's employment with MTS is terminated (1) by MTS other than for Cause, death or disability, or (2) by Executive for Good Reason, the Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay the Executive as a severance payment (the "Severance Payment") an amount equal to the product of 36 multiplied by the Executive's Monthly Gross Income as defined in Section 5(a)(i) above. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. (ii) Benefits. For a 36-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the responsive percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive shall be reported to MTS. At the expiration of said 36-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law. (b) If the Executive voluntarily terminates his employment other than for Good Reason but more than 180 days after an Unfriendly Change in Control, Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay to Executive as a severance payment (the "Severance Payment") an amount equal to the product of 18 multiplied by the Executive's monthly Gross Income as defined in Section 5(a)(i) above. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. (ii) Benefits. For 18-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the respective percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive during such period, and any such benefits actually received by Executive shall be reported to Change in Control Agreement Page 7 MTS. At the expiration of said 18-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law. 7. Additional Benefits. In addition to all other amounts payable and benefits receivable to Executive upon termination of employment covered under this Agreement, Executive shall be entitled to the following benefits: (a) Legal Fees. In the event of any termination of employment under this Agreement, other than termination for Cause, MTS shall pay to Executive all legal fees and expenses reasonably incurred by Executive in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement. (b) Retirement Plan. Executive shall, upon termination of employment, be entitled to receive all benefits payable to the Executive under the MTS Systems Corporation Profit Sharing Retirement Plan and any other plan or agreement relating to retirement benefits. (c) Employee Stock Option Certificate. The Executive's rights under any existing Employee Stock Option Agreement and any future such agreements, including particularly his right to exercise his option rights following his termination of employment, shall continue to be fully effective hereunder. 8. No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits after the Date of Termination, or except as otherwise provided in this Agreement. 9. Potential Excise Tax; Indemnification (a) Excise Tax. Should any payments hereunder or contemplated hereby be subject to excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as may be amended, or any successor or similar provision thereto, or comparable state or local tax laws, MTS shall pay to the Executive such additional compensation as is necessary (after taking into account all federal, state and local income taxes payable by the Executive as a result of the receipt of such compensation) to place the Executive in the same after-tax position he would have been in had no such excise tax (or any interest or penalties thereon) been paid or incurred. MTS shall pay such additional compensation upon the earlier of: (i) the time at which MTS withholds such excise tax from any payments to the Executive; or Change in Control Agreement Page 8 (ii) 30 days after the Executive notifies MTS that the Executive has paid such excise tax pursuant to a tax return filed by the Executive which takes the position that such excise tax is due and payable in reliance on a written opinion of the Executive's tax counsel that it is more likely than not that such excise tax is due and payable, or, if later, the date the IRS notifies Executive that such amount is due and payable. Without limiting the obligation of MTS hereunder, the Executive agrees, in the event the Executive makes any payment pursuant to the preceding sentence, to negotiate with MTS in good faith with respect to procedures reasonably requested by MTS which would afford MTS the ability to contest the imposition of such excise tax; provided, however, that the Executive will not be required to afford MTS any right to contest the applicability of any such excise tax to the extent that the Executive reasonably determines that such contest is inconsistent with the overall tax interests of the Executive. MTS agrees to hold in confidence and not to disclose, without the Executive's prior written consent, any information with regard to the Executive's tax position which MTS obtains pursuant to this subsection. (b) Indemnification. MTS will indemnify the Executive (and his legal representative or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of the proceeding) by the laws of the State of Minnesota, as in effect at the time of the subject act or omission, or the Articles of Incorporation and By-Laws of MTS as in effect at such time or on the date of this Agreement, whichever affords or afforded greater protection to the Executive; and the Executive shall be entitled to the protection of any insurance policies MTS may elect to maintain generally for the benefit of its directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by him or his legal representatives in connection with any action, suit or proceeding to which he (or his legal representative or other successors) may be made a party by reason of his being or having been a director, officer or employee of MTS or any of its subsidiaries or his serving or having served any other enterprise as a director, officer or employee at the request of MTS, provided that MTS shall cause to be maintained in effect for not less than six years from the date of a Change in Control (to the extent available) policies of directors' and officers' liability insurance of at least the same coverage as those maintained by MTS on the date of this Agreement and containing terms and conditions which are no less advantageous than such policies. 10. Non-Competition and Confidentiality. (a) Noncompetition. Except as provided in subsection (c) below, Executive agrees that, as a condition of receiving benefits under this Agreement, he will not render services directly or indirectly to any competing organization, wherever located, for a period of one year following the Date of Termination, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, Change in Control Agreement Page 9 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) Confidentiality. 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 or knowledge pertaining to the business of MTS, or any of its subsidiaries, obtained during his employment by MTS or any of its subsidiaries. (c) Waiver - Unfriendly Change in Control. Notwithstanding anything herein to the contrary: the restriction on competition under subsection (a) shall not apply if the Executive's employment terminates following an Unfriendly Change in Control. Furthermore, in such event, MTS waives any other restriction on Executive's employment and consents unconditionally to any employment Executive may subsequently obtain. 11. Funding of Payments. In order to assure the performance of MTS or its successor of its obligations under this Agreement, MTS may deposit in a so-called "rabbi" trust an amount equal to the maximum payment that will be due the Executive under the terms hereof; provided, however, that MTS shall deposit in trust the amount equal to the maximum payment due Executive immediately upon an Unfriendly Change in Control. Under such written trust instrument, the Trustee shall be instructed to pay to the Executive (or the Executive's legal representative, as the case may be) the amount to which the Executive shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to MTS. If MTS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. The written instrument governing the trust shall be irrevocable from and after such Change in Control and shall contain such provisions protective of the Executive as are contained in similar trust agreements approved by the Internal Revenue Service in published private letter rulings (provided that the assets of the trust shall be reachable by creditors of MTS as required by such rulings). The trustee shall be a national bank selected by MTS with the consent of the Executive, with trust powers and whose principal officers are located in the Minneapolis/St. Paul metropolitan area. The trustee shall invest the assets of the trust in any readily marketable securities of U.S. corporations (other than MTS, its successor, or any affiliate of MTS or its successor). If and to the extent there are not amounts in trust sufficient to pay Executive under this Agreement, MTS shall remain liable for any and all payments due to Executive. 12. Successors; Binding Agreement. Change in Control Agreement Page 10 (a) Successors. MTS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of MTS to expressly assume and agree to perform this Agreement in the same manner and to the same extent that MTS would be required to perform it if no such succession had taken place. Failure of MTS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from MTS in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, successors, heirs, and designated beneficiaries. If Executive should die while any amount would still be payable to Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designated beneficiaries or, if there is no such designated beneficiary, to the Executive's estate. 13. Notice. (a) Form and Delivery. All notices and other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the last known residence address of the Executive or in the case of MTS, to its principal office to the attention of each of the then directors of MTS with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (b) Notice of Termination. Any purported termination of Executive's employment by MTS or by Executive shall be communicated by written Notice of Termination to the other party hereto, which shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circumstances claimed to provide a basis for termination of Executive's employment. (c) Date of Termination. For purposes of this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination which shall not be less than 10 nor more than 30 days, respectively, from the date such Notice of Termination is given. (d) Dispute of Termination. If, within 10 days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final Change in Control Agreement Page 11 judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence in accordance with Section 14 below. Notwithstanding the pendency of any such dispute, MTS shall continue to pay Executive full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this subsection or at the end of a period of 180 days, whichever first occurs. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement. 14. Arbitration. Any dispute arising under or in connection with this Agreement (including without limitation, the making of this Agreement or the Executive's termination of employment) shall be resolved by final and binding arbitration to be held in Minneapolis, Minnesota in accordance with the rules and procedures of the American Arbitration Association. The parties shall select a mutually acceptable single arbitrator to resolve the dispute or if they fail or are unable to do so, each side shall within the following ten business days select a single arbitrator and the two so selected shall select a third arbitrator within the following ten business days. The arbitrator shall have no power to award any punitive or exemplary damages. The arbitrator may construe or interpret, but shall not ignore or vary the terms of this Agreement, and shall be bound by controlling law. The arbitration award or other resolution may be entered as a judgment at the request of the prevailing party by any court of competent jurisdiction in Minnesota or elsewhere. 15. Miscellaneous. (a) Modification and Waiver. Except as otherwise specifically provided in this Agreement, no provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party hereto at any time of any breach by the other party to this Agreement of, or compliance with, any other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. (b) Entire Agreement. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. (c) Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. Change in Control Agreement Page 12 (d) Severability. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have executed this Agreement as of the day and date first above written. EXECUTIVE: MTS SYSTEMS CORPORATION /s/ Kelly H. Donaldson By /s/ Sidney W. Emery Jr. - --------------------------------- --------------------------------- Its Chairman and CEO ---------------- EX-10.Z 7 mts015285_ex-10z.txt CHANGE IN CONTROL AGREEMENT-SUSAN KNIGHT EXHIBIT 10.z [LOGO] MTS(R) MTS SYSTEMS CORPORATION 14000 Technology Drive Eden Prairie, MN 55344-2290 Telephone 612-937-4000 Fax 612-937-4515 CHANGE IN CONTROL AGREEMENT - -------------------------------------------------------------------------------- AGREEMENT made as of this 22nd day of October, 2001 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and SUSAN E. KNIGHT (the "Executive"). WHEREAS, MTS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of MTS and its shareholders; and WHEREAS, the Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of MTS, its policies, methods, personnel and problems, a significant contribution to the profitability, growth and financial strength of MTS; and WHEREAS, MTS, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of the Executive in the performance of the Executive's duties to the detriment of MTS and its shareholders; and WHEREAS, Executive is becoming employed by MTS upon the understanding that MTS will provide income security if the Executive's employment is terminated under certain terms and conditions; and WHEREAS, it is in the best interests of MTS and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including Executive, to their assigned duties without distraction and to ensure the continued availability to MTS of the Executive in the event of a Change in Control; THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until the earlier of (A) the date that any and all benefits due to Executive under this Agreement upon the happening of the events set forth herein have been paid and satisfied and all obligations of MTS to the Executive have been performed or (B) the date the Executive and MTS agree in writing to terminate this Agreement. Notwithstanding the preceding sentence, if a Change in Control occurs, this Agreement shall remain in effect for a period of 36 months from the date of the occurrence of a Change in Control. 2. Change in Control. If a Change in Control shall have occurred during the term of this Agreement, the provisions of this Agreement shall become operative and MTS agrees to employ the Executive and to provide the benefits stated in this Agreement. Change in Control Agreement Page 2 (a) Change in Control, shall, for purposes of this Agreement, means a change in control of MTS which would be required to be reported in response to Item 1 of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not MTS is then subject to such reporting requirement, including, without limitation, if: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, including any affiliate or associate as defined in Rule 12(b)-2 under the Exchange Act of such person, other than MTS, any trustee or other fiduciary holding securities under an employee benefit plan of MTS, or any corporation owned, directly or indirectly, by the stockholders of MTS in substantially the same proportions as their ownership of stock of MTS) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of MTS representing 35% or more of the combined voting power of MTS' then outstanding securities; or (ii) the Board of Directors is comprised of fewer than 65% of the individuals described in subsection (b) below; or (iii) the stockholders of MTS approve a definitive agreement to merge or consolidate MTS with or into another corporation or other enterprise in which the holders of outstanding stock of MTS entitled to vote in elections of directors immediately before such merger or consolidation hold less than 80% of the voting power of the survivor of such merger or consolidation or its parent, or approve a plan of liquidation; or (iv) at least 60% of MTS' assets are sold or transferred (other than as security for a loan) to any person (as defined above) in one or a series of related transactions; or (v) the Board of Directors of MTS determines, by a vote of a majority of its entire membership, that a tender offer statement by any person (as defined above) indicates an intention on the part of such person to acquire control of MTS. (b) Board of Directors shall, for purposes of subsection (a), mean: (i) individuals who on the date hereof constituted the Board of MTS, and (ii) any new director who subsequently was elected or nominated for election by a majority of the directors who held such office immediately prior to a Change in Control. (c) Friendly Change in Control shall mean a Change in Control which arises from a transaction or series of transactions authorized, recommended or approved at the time by formal action of the Board of Directors. Change in Control Agreement Page 3 (d) Unfriendly Change in Control shall mean a Change in Control that is not a "Friendly Change in Control" as defined above. An Unfriendly Change in Control shall not thereafter become a Friendly Change in Control. 3. Termination by Reason of Death or Disability. If Executive's employment shall be terminated by MTS by reason of death or disability, MTS shall immediately commence payment to the Executive (or Executive's designated beneficiaries or estate, if no beneficiary is designated) of any and all benefits to which the Executive is entitled under MTS retirement and insurance programs them in effect. Except for such benefits, MTS shall have no further obligations to Executive under this Agreement. 4. Termination for Cause. (a) If Executive's employment with MTS shall be terminated by MTS for Cause as defined below, MTS shall pay to Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and MTS shall have no further obligation to Executive under this Agreement. (b) Termination by MTS of Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (ii) willful gross misconduct or gross negligence in the performance of his duties by the Executive; or (iii) material violation by the Executive of any employment agreement applicable to the Executive. 5. Termination Following Friendly Change in Control. (a) If, after a Friendly Change in Control, Executive's employment with MTS shall be terminated (1) by MTS other than for cause, death or disability or (2) by Executive for Good Reason, then Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay the Executive as a severance payment (the "Severance Payment") an amount equal to the product of 18 multiplied by the Executive's Monthly Gross Income as defined below. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. Change in Control Agreement Page 4 For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts: (A) 1/12 of the highest average base salary for any 12-consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination (without taking into account any reduction in such base salary that would constitute Good Reason); plus (B) the monthly average of the total Management Variable Compensation (MVC) earned during the lesser of the 3 most recent or the actual number of fiscal years participating in the MVC plan ending immediately prior to the Date of Termination; plus (C) the product of the average percentage of MTS profit sharing contributions to the MTS Systems Corporation Profit Sharing Retirement Plan and Trust (as a percent of Compensation as defined in the Plan up to the federal limit) for the lesser of the 3 most recent or the actual number of participating Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (A) and (B) above. (ii) Benefits. For an 18-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the respective percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive during this period, and any such benefits actually received by Executive shall be reported to MTS. At the expiration of said 18-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Reconciliation Act ("COBRA") or applicable state law. (b) Good Reason. Executive shall be entitled to terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without Executive's express written consent, any of the following: (i) the assignment to Executive of any duties inconsistent with Executive's status or position with MTS, or a substantial alteration in the nature or status of Executive's responsibilities; or Change in Control Agreement Page 5 (ii) a reduction by MTS in Executive's annual base salary other than a reduction comparable to other senior Executives of MTS in connection with a company-wide cost reduction program; or (iii) the relocation of MTS' principal executive offices to a location more than fifty miles from Eden Prairie, Minnesota or MTS requiring Executive to be based anywhere other than MTS' principal executive offices except for required travel on MTS' business to an extent substantially consistent with Executive's prior business travel obligations; or (iv) the failure by MTS to continue to provide Executive with benefits at least as favorable to those enjoyed by Executive under any of MTS' pension, life insurance, medical, health and accident, disability, deferred compensation, incentive awards, incentive stock options, or savings plans in which Executive was participating at the time of the Change in Control, the taking of any action by MTS which would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed by him at the time of the Change in Control, or the failure by MTS to provide Executive with the number of paid vacation days to which Executive is entitled at the time of the Change in Control, provided, however, that MTS may amend any such plan or programs as long as such amendments do not reduce any benefits to which Executive would be entitled upon termination; or (v) the failure of MTS to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 12; or (vi) MTS requests Executive's resignation from employment; or (vii) any purported termination of Executive's employment which is not made pursuant to a Notice of Termination satisfying the requirements of this Agreement; for purposes of this Agreement, no such purported termination shall be effective; or (viii) any material violation by MTS of this Agreement. (c) Voluntary Termination Deemed Good Reason. Notwithstanding anything herein to the contrary, during the period commencing on the 30th day following a Change in Control (whether Friendly or Unfriendly) and ending on the 180th day following a Change in Control, Executive may voluntarily terminate his employment for any reason, and such termination shall be deemed "Good Reason" for all purposes of this Agreement. Change in Control Agreement Page 6 6. Termination - Unfriendly Change in Control. (a) If, after an Unfriendly Change in Control, Executive's employment with MTS is terminated (1) by MTS other than for Cause, death or disability, or (2) by Executive for Good Reason, the Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay the Executive as a severance payment (the "Severance Payment") an amount equal to the product of 36 multiplied by the Executive's Monthly Gross Income as defined in Section 5(a)(i) above. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. (ii) Benefits. For a 36-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the responsive percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive shall be reported to MTS. At the expiration of said 36-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law. (b) If the Executive voluntarily terminates his employment other than for Good Reason but more than 180 days after an Unfriendly Change in Control, Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay to Executive as a severance payment (the "Severance Payment") an amount equal to the product of 18 multiplied by the Executive's monthly Gross Income as defined in Section 5(a)(i) above. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. (ii) Benefits. For 18-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the respective percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive during such period, and any such benefits actually received by Executive shall be reported to Change in Control Agreement Page 7 MTS. At the expiration of said 18-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law. 7. Additional Benefits. In addition to all other amounts payable and benefits receivable to Executive upon termination of employment covered under this Agreement, Executive shall be entitled to the following benefits: (a) Legal Fees. In the event of any termination of employment under this Agreement, other than termination for Cause, MTS shall pay to Executive all legal fees and expenses reasonably incurred by Executive in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement. (b) Retirement Plan. Executive shall, upon termination of employment, be entitled to receive all benefits payable to the Executive under the MTS Systems Corporation Profit Sharing Retirement Plan and any other plan or agreement relating to retirement benefits. (c) Employee Stock Option Certificate. The Executive's rights under any existing Employee Stock Option Agreement and any future such agreements, including particularly his right to exercise his option rights following his termination of employment, shall continue to be fully effective hereunder. 8. No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits after the Date of Termination, or except as otherwise provided in this Agreement. 9. Potential Excise Tax; Indemnification (a) Excise Tax. Should any payments hereunder or contemplated hereby be subject to excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as may be amended, or any successor or similar provision thereto, or comparable state or local tax laws, MTS shall pay to the Executive such additional compensation as is necessary (after taking into account all federal, state and local income taxes payable by the Executive as a result of the receipt of such compensation) to place the Executive in the same after-tax position he would have been in had no such excise tax (or any interest or penalties thereon) been paid or incurred. MTS shall pay such additional compensation upon the earlier of: (i) the time at which MTS withholds such excise tax from any payments to the Executive; or Change in Control Agreement Page 8 (ii) 30 days after the Executive notifies MTS that the Executive has paid such excise tax pursuant to a tax return filed by the Executive which takes the position that such excise tax is due and payable in reliance on a written opinion of the Executive's tax counsel that it is more likely than not that such excise tax is due and payable, or, if later, the date the IRS notifies Executive that such amount is due and payable. Without limiting the obligation of MTS hereunder, the Executive agrees, in the event the Executive makes any payment pursuant to the preceding sentence, to negotiate with MTS in good faith with respect to procedures reasonably requested by MTS which would afford MTS the ability to contest the imposition of such excise tax; provided, however, that the Executive will not be required to afford MTS any right to contest the applicability of any such excise tax to the extent that the Executive reasonably determines that such contest is inconsistent with the overall tax interests of the Executive. MTS agrees to hold in confidence and not to disclose, without the Executive's prior written consent, any information with regard to the Executive's tax position which MTS obtains pursuant to this subsection. (b) Indemnification. MTS will indemnify the Executive (and his legal representative or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of the proceeding) by the laws of the State of Minnesota, as in effect at the time of the subject act or omission, or the Articles of Incorporation and By-Laws of MTS as in effect at such time or on the date of this Agreement, whichever affords or afforded greater protection to the Executive; and the Executive shall be entitled to the protection of any insurance policies MTS may elect to maintain generally for the benefit of its directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by him or his legal representatives in connection with any action, suit or proceeding to which he (or his legal representative or other successors) may be made a party by reason of his being or having been a director, officer or employee of MTS or any of its subsidiaries or his serving or having served any other enterprise as a director, officer or employee at the request of MTS, provided that MTS shall cause to be maintained in effect for not less than six years from the date of a Change in Control (to the extent available) policies of directors' and officers' liability insurance of at least the same coverage as those maintained by MTS on the date of this Agreement and containing terms and conditions which are no less advantageous than such policies. 10. Non-Competition and Confidentiality. (a) Noncompetition. Except as provided in subsection (c) below, Executive agrees that, as a condition of receiving benefits under this Agreement, he will not render services directly or indirectly to any competing organization, wherever located, for a period of one year following the Date of Termination, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, Change in Control Agreement Page 9 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) Confidentiality. 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 or knowledge pertaining to the business of MTS, or any of its subsidiaries, obtained during his employment by MTS or any of its subsidiaries. (c) Waiver - Unfriendly Change in Control. Notwithstanding anything herein to the contrary: the restriction on competition under subsection (a) shall not apply if the Executive's employment terminates following an Unfriendly Change in Control. Furthermore, in such event, MTS waives any other restriction on Executive's employment and consents unconditionally to any employment Executive may subsequently obtain. 11. Funding of Payments. In order to assure the performance of MTS or its successor of its obligations under this Agreement, MTS may deposit in a so-called "rabbi" trust an amount equal to the maximum payment that will be due the Executive under the terms hereof; provided, however, that MTS shall deposit in trust the amount equal to the maximum payment due Executive immediately upon an Unfriendly Change in Control. Under such written trust instrument, the Trustee shall be instructed to pay to the Executive (or the Executive's legal representative, as the case may be) the amount to which the Executive shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to MTS. If MTS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. The written instrument governing the trust shall be irrevocable from and after such Change in Control and shall contain such provisions protective of the Executive as are contained in similar trust agreements approved by the Internal Revenue Service in published private letter rulings (provided that the assets of the trust shall be reachable by creditors of MTS as required by such rulings). The trustee shall be a national bank selected by MTS with the consent of the Executive, with trust powers and whose principal officers are located in the Minneapolis/St. Paul metropolitan area. The trustee shall invest the assets of the trust in any readily marketable securities of U.S. corporations (other than MTS, its successor, or any affiliate of MTS or its successor). If and to the extent there are not amounts in trust sufficient to pay Executive under this Agreement, MTS shall remain liable for any and all payments due to Executive. 12. Successors; Binding Agreement. Change in Control Agreement Page 10 (a) Successors. MTS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of MTS to expressly assume and agree to perform this Agreement in the same manner and to the same extent that MTS would be required to perform it if no such succession had taken place. Failure of MTS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from MTS in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, successors, heirs, and designated beneficiaries. If Executive should die while any amount would still be payable to Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designated beneficiaries or, if there is no such designated beneficiary, to the Executive's estate. 13. Notice. (a) Form and Delivery. All notices and other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the last known residence address of the Executive or in the case of MTS, to its principal office to the attention of each of the then directors of MTS with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (b) Notice of Termination. Any purported termination of Executive's employment by MTS or by Executive shall be communicated by written Notice of Termination to the other party hereto, which shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circumstances claimed to provide a basis for termination of Executive's employment. (c) Date of Termination. For purposes of this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination which shall not be less than 10 nor more than 30 days, respectively, from the date such Notice of Termination is given. (d) Dispute of Termination. If, within 10 days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final Change in Control Agreement Page 11 judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence in accordance with Section 14 below. Notwithstanding the pendency of any such dispute, MTS shall continue to pay Executive full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this subsection or at the end of a period of 180 days, whichever first occurs. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement. 14. Arbitration. Any dispute arising under or in connection with this Agreement (including without limitation, the making of this Agreement or the Executive's termination of employment) shall be resolved by final and binding arbitration to be held in Minneapolis, Minnesota in accordance with the rules and procedures of the American Arbitration Association. The parties shall select a mutually acceptable single arbitrator to resolve the dispute or if they fail or are unable to do so, each side shall within the following ten business days select a single arbitrator and the two so selected shall select a third arbitrator within the following ten business days. The arbitrator shall have no power to award any punitive or exemplary damages. The arbitrator may construe or interpret, but shall not ignore or vary the terms of this Agreement, and shall be bound by controlling law. The arbitration award or other resolution may be entered as a judgment at the request of the prevailing party by any court of competent jurisdiction in Minnesota or elsewhere. 15. Miscellaneous. (a) Modification and Waiver. Except as otherwise specifically provided in this Agreement, no provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party hereto at any time of any breach by the other party to this Agreement of, or compliance with, any other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. (b) Entire Agreement. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. (c) Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. Change in Control Agreement Page 12 (d) Severability. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have executed this Agreement as of the day and date first above written. EXECUTIVE: MTS SYSTEMS CORPORATION /s/ Susan Knight By /s/ Sidney W. Emery Jr. - --------------------------------- --------------------------------- Its Chairman and CEO ---------------- EX-13 8 mts015285_ex-13.txt 2001 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 Six Year Financial Summary (September 30)
2001 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBERS OF SHAREHOLDERS AND EMPLOYEES) OPERATIONS(1) - ------------------------------------------------------------------------------------------------------------------------------- Net revenue $396,641 $391,853 $390,542 $362,163 $323,424 $278,170 North America revenue 192,990 194,056 200,556 200,490 156,877 140,249 International revenue 203,651 197,797 189,986 161,673 166,547 137,921 Gross profit 141,408 132,940 151,171 142,227 132,073 116,047 Gross profit as a % of net revenue 35.7% 33.9% 38.7% 39.3% 40.8% 41.7% Research and development costs 22,485 24,619 26,966 24,348 19,798 19,776 Research and development costs as a % of net revenue 5.7% 6.3% 6.9% 6.7% 6.1% 7.1% Income before income taxes 24,578(2) 6,095 18,770 33,448 29,986(3) 21,813 Effective income tax rate 38% 41% 34% 36% 36% 31% Net income 15,176(2) 3,624 12,445 21,539 19,237(3) 15,170 Net income as a % of net revenue 3.8%(2) .9% 3.2% 5.9% 5.9%(3) 5.5% Net income per diluted share of common stock .72(2) .17 .59 1.01 .92(3) .72 Weighted average diluted shares outstanding during the year(4) 21,074 20,935 21,184 21,330 20,945 21,184 Net interest expense 4,837 4,892 4,597 1,948 1,125 1,123 Depreciation and amortization 14,477 15,294 14,424 10,880 9,608 8,673 FINANCIAL POSITION - ------------------------------------------------------------------------------------------------------------------------------- Current assets $230,249 $225,273 $223,651 $204,311 $162,814 $137,584 Current liabilities 105,073 108,648 104,713 110,223 83,413 63,465 Current ratio 2.2:1 2.1:1 2.1:1 1.9:1 2.0:1 2.2:1 Net working capital 125,176 116,625 118,938 94,088 79,401 74,119 Property and equipment, net 68,893 72,081 73,633 69,942 51,790 49,476 Total assets 331,759 330,234 333,347 313,022 229,075 197,679 Interest bearing debt 59,305 75,712 71,637 74,682 12,865 11,836 Total shareholders' investment 167,122 157,854 162,859 152,689 133,524 120,578 Shareholders' investment per share 7.95 7.61 7.80 7.39 6.56 5.90 Interest bearing debt as a % of shareholders' investment 35.5% 48.0% 44.0% 48.9% 9.6% 9.8% Return on beginning shareholders' investment 9.6% 2.2% 8.0% 15.4% 15.6%(3) 13.0% Return on average net assets(5) 13.4% 4.9% 10.7% 20.9% 22.7% 17.6% OTHER STATISTICS - ------------------------------------------------------------------------------------------------------------------------------- Number of common shareholders of record at year end(6) 2,086 2,229 2,055 1,760 1,575 1,523 Number of employees at year end 2,224 2,350 2,436 2,424 2,125 1,866 New orders received $384,900 $415,900 $350,200 $352,300 $380,900 $302,800 Backlog of orders at year end $156,300 $163,000 $146,800 $187,200 $190,800 $130,600 Cash dividends paid per share $ .24 $ .24 $ .24 $ .24 $ .20 $ .16 - -------------------------------------------------------------------------------------------------------------------------------
(1)ALL AMOUNTS HAVE BEEN RESTATED TO REFLECT THE ACQUISITION OF DSP TECHNOLOGY, INC.IN 1999 THAT WAS RECORDED UNDER THE POOLING-OF-INTEREST METHOD. (2)EXCLUDES THE CUMULATIVE EFFECT FROM THE ADOPTION OF STAFF ACCOUNTING BULLETIN NO. 101 "REVENUE RECOGNITION IN FINANCIAL STATEMENTS" AS OF OCTOBER 1, 2000. THE CUMULATIVE EFFECT RESULTED IN A REDUCTION IN NET INCOME OF $2,263 ($0.11 PER DILUTED SHARE) IN FISCAL 2001. (3)EXCLUDES AN AFTER-TAX GAIN OF $2,654 ($0.13 PER SHARE) FROM THE SALE OF LAND DURING 1997. (4)ASSUMES THE CONVERSION OF POTENTIAL COMMON SHARES USING THE TREASURY STOCK METHOD. (5)INCOME BEFORE INCOME TAXES AND NET INTEREST EXPENSE DIVIDED BY AVERAGE NET ASSETS EMPLOYED (EXCLUSIVE OF NON-INTEREST BEARING LIABILITIES). (6)DOES NOT INCLUDE BENEFICIAL SHAREHOLDERS WHOSE STOCK IS HELD BY NOMINEES OR BROKER DEALERS. 5 Management's Discussion and Analysis of Financial Condition and Results of Operations CUSTOMER ORDERS AND BACKLOG 2001 2000 1999 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Customer Orders: North America* $208,400 $233,700 $196,400 International 176,500 182,200 153,800 - -------------------------------------------------------------------------------- Total $384,900 $415,900 $350,200 - -------------------------------------------------------------------------------- Backlog of Undelivered Orders $156,300 $163,000 $146,800 - -------------------------------------------------------------------------------- *INCLUDES U.S. AND CANADA New orders from customers during 2001 totaled $384.9 million, a decrease of $31.0 million or 7.4% compared to customer orders of $415.9 million booked in 2000. In 1999, customer orders totaled $350.2 million. In 2001, the Company received an order from a customer for $10.8 million and in 2000 a contract totaling $18.6 million was received from another customer, each of which were customers of the Mechanical Testing and Simulation ("MT&S") Sector. No individual customer order over $10 million was booked during 1999. Orders for the MT&S Sector totaled $308.2 million in 2001, a decrease of $6.7 million or 2.1%, compared to customer orders of $314.9 million for 2000. The MT&S Sector booked 80.1% of total Company orders in 2001, compared to 75.7% for 2000. During 2001, the Company continued to experience strong order demand worldwide for its aircraft structural testing equipment and in the custom project business of its Advanced Systems business unit, offset somewhat by the continuing slowdown in North American business levels especially as a result of cut backs in capital spending in the North American automotive market. Despite the overall slowdown in the North American automotive market place, the Company, along with its strategic alliance partners, continued to see growing demand for software and analysis products targeted principally at the automotive design validation marketplace. Orders from the ground vehicle industry in North America and for aerospace applications were particularly strong during 2000. Generally, orders from customers outside the United States (including Europe, Japan, Korea and Southeast Asia) during 2001 were strong for each of the business units comprising the MT&S Sector. Orders received during 2000 from the Asia/ Pacific Region, especially Japan, were much stronger for vehicle testing systems and aerospace applications compared to 1999. Orders from Europe in 2000 were consistent with the order levels in 1999. New orders for the Factory Automation ("FA") Sector totaled $76.7 million for 2001, a decrease of $24.3 million, or 24.1%, compared to new orders written during 2000 of $101.0 million. Customer orders in this sector were particularly weak during fiscal 2001, especially as the result of aggressive cut backs in capital spending in the North American automotive market and a precipitous drop in North American and European demand for the Company's automation components in the semiconductor, electronic assembly and industrial markets. The FA Sector accounted for 19.9% of total Company orders during fiscal 2001, compared to 24.3% in 2000. During fiscal 2000, the FA Sector experienced solid growth in Europe and Japan while orders for industrial automation applications (servo motors, amplifiers and motion controllers) and industrial sensors in the North American marketplace were much stronger, compared to the prior year. On a geographical basis, orders from customers located in North America totaled $208.4 million during 2001, down $25.3 million or 10.8% compared to orders received of $233.7 million in 2000. North American orders received during fiscal 1999 totaled $196.4 million. Interna tional orders received during 2001 of $176.5 million decreased by $5.7 million, or 3.1%, compared to orders received during 2000 of $182.2 million. International orders in fiscal 1999 totaled $153.8 million. The following table reflects the geographical analysis of new orders received during the years ended September 30: GEOGRAPHIC ANALYSIS OF NEW ORDERS 2001 2000 1999 - -------------------------------------------------------------------------------- North America 54% 56% 56% - ------------------------------------------------------------------------------- Europe, Africa, and Middle East 23 26 30 - ------------------------------------------------------------------------------- Asia Pacific, including Japan 23 18 13 - ------------------------------------------------------------------------------- Other -- -- 1 - ------------------------------------------------------------------------------- The backlog of undelivered orders at September 30, 2001 totaled $156.3 million, a decrease of approximately $6.7 million, or 4.1%, compared to backlog of $163.0 million at September 30, 2000. Backlog at the end of fiscal 1999 totaled $146.8 million. NET REVENUE 2001 2000 1999 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) North America $187,998 $205,781 $210,924 International 208,643 186,072 179,618 - -------------------------------------------------------------------------------- Total $396,641 $391,853 $390,542 - -------------------------------------------------------------------------------- Net revenue of $396.6 million for fiscal 2001 increased $4.7 million or 1.2%, compared to $391.9 million for fiscal 2000. Net revenue for fiscal 1999 totaled $390.5 million. On a sector basis, revenue of the MT&S Sector totaled $315.4 million, comparing favorably to revenue of $302.4 million in fiscal 2000 and $313.7 million in fiscal 1999. The increase in revenue for fiscal 2001 was principally the result of strong demand worldwide for its aircraft structural testing equipment and the custom project business of its Advanced Systems business unit. Despite the slow down in capital spending in the North American automotive market during fiscal 2001, revenue backlog and new orders from customers in the automotive product development market remained at an adequate level during fiscal 2001 to allow the vehicle testing systems business unit to slightly exceed its revenue of fiscal 2000. Net revenue of the FA Sector totaled $81.2 million in fiscal 2001, compared to $89.5 million in fiscal 2000 and $76.9 million in fiscal 1999. Net rev- 6 enue of the FA Sector during 2001 was negatively impacted by the aggressive cut backs in capital spending in the North American automotive market and a precipitous drop in North American and European demand for its automation components in the semiconductor, electronic assembly and industrial markets. The increase in revenue of the FA Sector during fiscal 2000, as compared to fiscal 1999, was the result of strong European demand for sensors and an expansion of the Company's product line offerings for amplifiers, servo-electric motors and motion control products. See Note 3 to Consolidated Financial Statements for additional information on industry sector and geographic information. Net revenue in North America of $188.0 million decreased slightly, compared to $205.8 million in 2000. Net revenue for 1999 totaled $210.9 million. International revenue totaled $208.6 million, an increase of 12.1%, compared to revenue of $186.1 million for 2000. Net revenue from international sources totaled $179.6 million in 1999. Similar to the past several years, revenue from international sources grew at a faster rate than domestic revenue and is generally reflective of improved economic conditions in the international markets in which the Company participates, a broader product offering and stronger order activity in the vehicle dynamics and aerospace industries. Although selective price changes were implemented during each of the three years, the overall impact of pricing changes did not have a material effect on reported revenue. During fiscal 2001, the Company implemented Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements," which had the effect of increasing reported revenue in fiscal 2001 by $4.9 million. See Notes 1 and 2 to Consolidated Financial Statements for additional information. GROSS PROFIT 2001 2000 1999 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Gross Profit $141,408 $132,940 $151,171 - -------------------------------------------------------------------------------- % of Net Revenue 35.7% 33.9% 38.7% - -------------------------------------------------------------------------------- Gross profit, as a percentage of net revenue, increased to 35.7% in 2001, compared to 33.9% in 2000. Gross margin for the MT&S Sector was 35.0% in fiscal 2001, up substantially from 31.8% in 2000, while the gross margin of the FA Sector declined to 38.1%, compared to 41.1% in 2000, primarily as the result of the significantly lower manufacturing and shipping volumes during fiscal 2001. Gross margin in the MT&S Sector increased during 2001 despite continued competitive pricing pressures and was the result of a number of factors, including a favorable mix of aerospace and custom projects shipped during the year, more aggressive negotiation strategies, better overall project planning, staffing and management and the positive impact of the Company's re-engineering and front-end project assessment activities initiated in previous periods. The lower gross profit percentage realized by the MT&S Sector during 2000 was the result of higher than expected costs that were required to complete certain custom entertainment and large complex custom projects of the Advanced Systems business unit. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 2001 2000 1999 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Selling $ 57,669 $ 58,747 $ 58,695 General & Administrative 31,714 36,531 35,071 - -------------------------------------------------------------------------------- Total $ 89,383 $ 95,278 $ 93,766 - -------------------------------------------------------------------------------- % of Net Revenue 22.5% 24.3% 24.0% - -------------------------------------------------------------------------------- Selling, general and administrative ("SG&A") expenses, as a percentage of net revenue, were 22.5%, 24.3% and 24.0% in 2001, 2000 and 1999, respectively. Over the past three years, the Company has focused several initiatives on overall cost control and the alignment of resources with current and anticipated economic conditions and with markets having the greatest potential. Overall spending levels in each of the MT&S and FA Sectors were reduced during 2001 as a result of these management initiatives. During 2000, SG&A expenses of the FA Sector increased in anticipation of accelerated revenue growth of the Sensors and Automation business units. Administrative expenses of the MT&S Sector included a provision of $0.7 million in 2000 related to the closure of the Company's laboratory instrument business as discussed further in Note 9 to the Consolidated Financial Statements. RESEARCH AND DEVELOPMENT COSTS 2001 2000 1999 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Research & Development $ 22,485 $ 24,619 $ 26,966 - -------------------------------------------------------------------------------- % of Net Revenue 5.7% 6.3% 6.9% - -------------------------------------------------------------------------------- The Company provides funds for product, systems and application developments ("R&D") in the MT&S and FA Sectors. During 2001, approximately 70% of R&D spending was in the MT&S Sector, compared to 73% in fiscal 2000. R&D spending in each of the years presented is focused on the development of new systems and system components such as software, controls and mechanical products, new measurement products and accessories. The overall decrease in R&D spending, as a percentage of net revenue, is primarily due to management initiatives to focus its spending in areas and on products having the greatest market potential and the highest return opportunity. As a result of these initiatives and management's planned cutback in spending in underperforming product lines and/or business units, R&D spending, as a percentage of net revenue, decreased to 5.7% in fiscal 2001, compared to 6.3% in 2000 and 6.9% in 1999. 7 Management's Discussion and Analysis of Financial Condition and Results of Operations INTEREST (INCOME) EXPENSE 2001 2000 1999 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Interest Expense $ 5,209 $ 6,371 $ 5,067 Interest Income (372) (1,479) (470) - -------------------------------------------------------------------------------- Interest expense of $5.2 million in 2001, a decrease of $1.2 million compared to fiscal 2000, primarily resulted from lower average borrowings during 2001 and a generally lower interest rate on its borrowings under its bank line of credit. Interest income in 2000 included interest earned of $0.7 million related to the overpayment of income taxes during a prior period. OPERATING RESULTS 2001 2000 1999 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) Income Before Income Taxes* $ 24,578 $ 6,095 $ 18,770 % of Net Revenue 6.2% 1.6% 4.8% - -------------------------------------------------------------------------------- Income Before Cumulative Effect of Accounting Change, Net of Taxes $ 15,176 $ 3,624 $ 12,445 % of Net Revenue 3.8% .9% 3.2% ================================================================================ Effective Income Tax Rate 38.3% 40.5% 33.7% Return On Beginning Shareholders' Investment* 9.6% 2.2% 8.0% - -------------------------------------------------------------------------------- Earnings Per Share - Diluted* $ .72 $ .17 $ .59 ================================================================================ *EXCLUDES THE CUMULATIVE EFFECT OF THE ACCOUNTING CHANGE FOR SAB 101 IN 2001 Income before income taxes totaled $24.6 million in 2001, compared with $6.1 million in 2000, primarily as the result of overall improved product margins and the continuing effect from the Company's cost control and more focused spending programs. Income before income taxes for 2000 included a provision of $3.0 million (of which, $1.2 million is reflected as restructuring, $1.1 million as an increase to cost of revenue and $0.7 million as an increase to administrative expenses) related to the closure of its laboratory instrument business acquired as part of its acquisition of DSP Technology, Inc. ("DSP"). During 1999, the Company recorded a restructuring charge of $5.7 million as a result of the closure of its manufacturing operations in France and the transfer of this product line to its electromechanical division in North Carolina and incurred costs of approximately $1.4 million directly related to its acquisition of DSP. For further information, see Notes 8 and 9 to Consolidated Financial Statements. Income from operations of the MT&S Sector increased to $26.8 million in 2001, compared to $3.2 million in 2000. This increase in income from operations was primarily the result of increased net revenue of $13.0 million, improved gross margin of 3.2 percentage points and management's initiative of continued cost control and more focused spending. Income from operations of the MT&S Sector totaled $16.9 million in 1999. Income from operations of the FA Sector declined to $2.7 million in 2001, compared to $8.6 million in 2000 primarily as the result of the aggressive cut backs in capital spending in the North American automotive market, a precipitous drop in North American and European demand for its automation components in the semiconductor, electronic assembly and industrial markets and lower overall gross margins due to the significantly lower manufacturing and shipping volumes during fiscal 2001. Income from operations of the FA Sector totaled $6.4 million in 1999. The effective tax rate for each of the years presented is impacted by the amount of tax credits available from the Company's Foreign Sales Corporation, Extraterritorial Income Exclusion and qualified R&D costs; and on the amount of foreign sourced income that is generally taxed at higher rates than domestic sourced income. A greater percentage of the Company's income was derived from foreign sources in fiscal 2000, compared to 2001 and 1999. In 2001, income before cumulative effect of accounting change for SAB 101 increased to $15.2 million ($0.72 per diluted share), compared to $3.6 million ($0.17 per diluted share) in 2000 and $12.4 million ($0.59 per diluted share) in 1999. During 2001, the Company implemented SAB 101 that had the cumulative effect of reducing net income, net of taxes, by $2.3 million ($0.11 per diluted share) in fiscal 2001. CHANGES IN FOREIGN CURRENCY EXCHANGE RATES The Company is exposed to market risk from changes in foreign currency exchange rates that can affect its operating results and financial condition. To minimize that risk, the Company manages exposure to changes in foreign currency rates through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments, principally forward exchange contracts. Foreign exchange contracts are used to hedge the Company's overall exposure to exchange rate fluctuations, since the gains and losses on these contracts offset gains and losses on the assets, liabilities and transactions being hedged. Historically, approximately 50% of the Company's revenue occurs from shipments to customers outside of the United States and about 65% of this revenue (approximately 30% of the Company's total net revenue) is denominated in currencies other than the U.S. dollar. As a result, a strengthening of the U.S. dollar decreases translated foreign currency denominated revenue and earnings. Conversely, weakening of the U.S. dollar has the reverse impact on revenue and earnings. During the past three years, the U.S. dollar was generally stronger against other major currencies. Gains and losses attributed to translating the financial statements for all non-U.S. subsidiaries are included in the currency translation adjustments. The gains and losses on forward exchange contracts used to hedge these exposures are included as part of "Other expense (income), net" in the accompanying consolidated statements of income. 8 LIQUIDITY AND CAPITAL RESOURCES 2001 2000 1999 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) Total Interest Bearing Debt $ 59,305 $ 75,712 $ 71,637 % of Total Capitalization 26.2% 32.4% 30.5% - -------------------------------------------------------------------------------- Total Shareholders' Investment $167,122 $157,854 $162,859 - -------------------------------------------------------------------------------- Shareholders Investment Per Share $ 7.95 $ 7.61 $ 7.80 - -------------------------------------------------------------------------------- The Company's capital structure as of September 30, 2001 included long-term debt (including current maturities) of $58.9 million, notes payable to banks of $0.4 million and total shareholders' investment of $167.1 million. The ratio of total interest-bearing debt to total capitalization was 26.2% at September 30, 2001, as compared to 32.4% and 30.5% at September 30, 2000 and 1999, respectively. Total interest-bearing debt decreased by $16.4 million during 2001. This decrease resulted from the repayment of advances totaling $11.5 million under its domestic bank revolving credit agreement and scheduled payments of $4.9 million of long-term debt. At September 30, 2001, the Company had no borrowings outstanding under its $50.0 million domestic bank revolving credit agreement. Shareholders' investment increased by $9.3 million during fiscal 2001 to $167.1 million. The change in shareholders' investment during 2001 was primarily the result of profitable operating results, funds received of $3.5 million from the exercise of employee stock options and employee purchases of the Company's stock under its stock purchase plan, offset in part, by the payment of cash dividends of $5.0 million and repurchases of the Company's stock totaling $1.6 million. CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES provided cash of $39.1 million during 2001, compared to $3.0 million generated in 2000 and $26.7 million generated in 1999. The increase in cash during 2001 resulted primarily from improved operating results and the increase in advanced payments from customers of $8.3 million. Accounts receivables and inventory balances, in the aggregate, remained relatively unchanged at September 30, 2001 and 2000. CASH FLOWS FROM INVESTING ACTIVITIES required cash usage of $10.5 million during 2001, compared to $13.2 million in 2000 and $17.2 million in 1999. Cash was used primarily for additions to property and equipment in each of the years. Capital expenditures for fiscal 2002, including investments in facilities and equipment to support the on-going operations, are planned to approximate $8.0 million. CASH FLOWS FROM FINANCING ACTIVITIES required the use of cash of $19.6 million during 2001 primarily as a result of the repayment of interest-bearing debt of $16.6 million, the payment of cash dividends of $5.0 million and repurchases of its common stock of $1.6 million, partially offset by funds received in connection with employees' exercise of stock options and purchases under the Company's stock purchase plan. During 2000, the Company used cash of $1.0 million in its financing activities primarily as the result of paying cash dividends of $5.0 million and repurchasing $2.2 million of its common stock, partially offset by additional new borrowings of $6.1 million and the funds received in connection with employees' exercise of stock options and stock purchases. During 2001, cash and cash equivalents increased by $9.3 million. The Company believes that the current capital resources, internally generated funds and unused financing sources will be adequate to finance on-going operations and anticipated capital expenditures, allow for investment in opportunities to internally grow its business and to make selected strategic acquisitions. OTHER MATTERS EURO CONVERSION On January 1, 1999, certain member countries of the European Economic and Monetary Union adopted the "Euro" as a form of common currency. For a three-year transition period, both the Euro and the member countries' currencies remained in use. The Company has upgraded its information and reporting systems, where necessary, in order to appropriately effect conversion to the Euro. Although the Company began processing Euro transactions with its customers beginning in 1999, its European operations began reporting in this currency on various dates beginning in 2000. The cost of upgrading its systems to handle the Euro conversion did not have a material impact on the Company's financial condition or operating results for any period presented. RESTRUCTURING AND OTHER CHARGES During 2000, the Company announced a restructuring charge related to the discontinuation of a line of data acquisition products acquired as part of its acquisition of DSP in 1999. The restructuring charge of $1.2 million included a provision for severance costs of $0.7 million, the write-off of leasehold improvements and production and other equipment no longer needed of $0.3 million and other costs of $0.2 million associated with the closedown of the facility and the wind-down of the related product line. During the year ended September 30, 2001, the restructuring reserve was reduced by severance costs of $0.8 million, the write off of leasehold improvements, equipment and other assets aggregating $0.2 million and costs associated with the closing of the facility and the wind-down of the product line of $0.2 million. In addition to the restructuring charge, the Company recorded an additional provision of $1.8 million in fiscal 2000 to cover excess and obsolete inventory, uncollectible receivables and the write off of the remaining book value of fixed assets no longer needed. Of this amount, $1.1 million was charged to cost of revenue and $0.7 million was charged to general and administrative expenses. 9 Management's Discussion and Analysis of Financial Condition and Results of Operations During 1999, the Company recorded a restructuring charge of $5.7 million as a result of the closure of its manufacturing operations in France and the transfer of this product line to its electromechanical division in North Carolina. In connection therewith, cash outlays of $2.6 million were made during 1999 and $3.1 million were made during 2000. Such costs were financed primarily with funds from continuing operations and borrowings under its bank line of credit. QUARTERLY FINANCIAL INFORMATION Revenue and operating results, as reflected on a quarterly basis, do not necessarily reflect changes in the demand for the Company's products or its operating efficiency. Revenue and operating results in any quarter can be significantly affected by shipment and/or installation delays or the acceleration of the completion of one or more high-value systems where revenue is not recognized on the percentage-of-completion accounting method. The Company's use of the percentage-of-completion revenue recognition method for large longer-term projects, generally helps to alleviate significant fluctuations between quarters. See Notes 1 and 2 to Consolidated Financial Statements for additional information on the Company's revenue recognition policy. High-value, state-of-the-art custom projects often contain leading-edge applications of the Company's technology that caused the Company to experience lower than expected gross margins during 1999 and 2000. Product development for these types of state-of-the-art custom projects, along with its funded research and development programs, are essential to the Company's long term growth. Quarterly earnings also vary as the result of the use of estimations including, but not limited to the rates used in providing federal, state and foreign income taxes. See Notes 1 and 5 to Consolidated Financial Statements for additional information on the Company's use of estimates and income tax related matters. DIVIDENDS AND OTHER STOCK MATTERS The Company's dividend policy is to maintain a payout ratio that 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 approximately 25% of earnings per share over the long term. The Company paid a quarterly dividend of 6 cents per share during 1999, 2000 and 2001. During 2001, the Company repurchased 0.2 million shares of its common stock at an average cost of $8.19 per share. Pursuant to the plan adopted by its Board of Directors, the Company has authorization as of September 30, 2001 to repurchase an additional 0.5 million shares of its common stock. The Company also repurchased 0.3 million shares of its common stock ($7.28 per share) in 2000. The Company's primary long term objective relative to its share repurchase program is to offset the dilutive effect of shares of common stock issued in connection with its employee stock option and stock purchase programs. During the three years ended September 30, 2001, the Company has issued approximately 872,000 shares of its common stock under the stock option and stock purchase programs. QUARTERLY STOCK ACTIVITY(1) The Company's shares of its common stock trade on The Nasdaq Stock Market's National Market under the symbol "MTSC". The following table sets forth the high and low prices and volume of shares traded (expressed in thousands) for the periods indicated: 2001 2000 - -------------------------------------------------------------------------------- PRICE SHARES PRICE SHARES HIGH LOW TRADED HIGH LOW TRADED - -------------------------------------------------------------------------------- 1st Quarter $ 7.88 $ 5.50 1,698 $10.63 $ 7.50 3,526 2nd Quarter $ 9.19 $ 6.75 1,711 $ 9.59 $ 5.3 4,318 3rd Quarter $14.60 $ 7.88 5,233 $ 7.88 $ 6.1 4,648 4th Quarter $15.60 $10.00 5,365 $ 7.50 $ 6.0 3,385 ================================================================================ (1) SOURCE: THE NASDAQ STOCK MARKET 10 Selected quarterly financial information for the three fiscal years ended September 30 is presented below:
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) - ----------------------------------------------------------------------------------------------------------------- 2001 Net revenue $ 91,563 $ 98,272 $ 99,031 $107,775 $396,641 Gross profit 31,951 35,600 37,210 36,647 141,408 Income before income taxes 2,772 6,408 6,933 8,465 24,578 Income before cumulative effect of accounting change, net of taxes 1,698 3,853 4,233 5,392 15,176 Cumulative effect of accounting change, net of taxes (2,263) -- -- -- (2,263) - ----------------------------------------------------------------------------------------------------------------- Net income (loss) $ (565) $ 3,853 $ 4,233 $ 5,392 $ 12,913 - ----------------------------------------------------------------------------------------------------------------- Earnings per share Basic Before cumulative effect of accounting change $ .08 .19 .20 $ .26 $ .73 Cumulative effect of accounting change, net (.11) -- -- -- (.11) - ----------------------------------------------------------------------------------------------------------------- Net income (loss) $ (.03) $ .19 $ .20 $ .26 $ .62 - ----------------------------------------------------------------------------------------------------------------- Diluted Before cumulative effect of accounting change $ .08 .18 .20 $ .25 $ .72 Cumulative effect of accounting change, net (.11) -- -- -- (.11) - ----------------------------------------------------------------------------------------------------------------- Net income (loss) $ (.03) $ .18 $ .20 $ .25 $ .61 - ----------------------------------------------------------------------------------------------------------------- 2000 Net revenue $ 87,214 $ 95,291 $ 94,988 $114,360 $391,853 Gross profit 22,786 34,470 34,797 40,887 132,940 Income (loss) before income taxes (9,221) 2,213 5,831 7,272 6,095 - ----------------------------------------------------------------------------------------------------------------- Net income (loss) $ (6,040) $ 1,371 $ 3,697 $ 4,596 $ 3,624 - ----------------------------------------------------------------------------------------------------------------- Earnings per share Basic $ (.29) $ .07 $ .18 $ .22 $ .17 Diluted (.29) .07 .18 .22 .17 - ----------------------------------------------------------------------------------------------------------------- 1999 Net revenue $ 96,142 $ 93,262 $ 95,363 $105,775 $390,542 Gross profit 38,064 36,775 37,818 38,514 151,171 Income before income taxes 5,722 4,666 8,269 113 18,770 - ----------------------------------------------------------------------------------------------------------------- Net income $ 3,726 $ 3,146 $ 5,293 $ 280 $ 12,445 - ----------------------------------------------------------------------------------------------------------------- Earnings per share Basic $ .18 $ .15 $ .25 $ .01 $ .60 Diluted .18 .15 .25 .01 .59 - -----------------------------------------------------------------------------------------------------------------
11 Consolidated Balance Sheets (September 30)
ASSETS 2001 2000 - --------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) CURRENT ASSETS: Cash and cash equivalents $ 17,515 $ 8,211 Accounts receivable, net of allowance for doubtful accounts of $2,709 and $2,255 97,661 117,866 Unbilled contracts and retainage receivable 45,287 26,765 Inventories 63,381 62,520 Prepaid expenses 6,405 9,911 - --------------------------------------------------------------------------------------------------------- Total current assets 230,249 225,273 - --------------------------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT: Land 3,247 3,247 Buildings and improvements 45,785 44,733 Machinery and equipment 110,419 107,325 Accumulated depreciation (90,558) (83,224) - --------------------------------------------------------------------------------------------------------- Total property and equipment, net 68,893 72,081 - --------------------------------------------------------------------------------------------------------- OTHER ASSETS 32,617 32,880 - --------------------------------------------------------------------------------------------------------- Total Assets $331,759 $330,234 - --------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' INVESTMENT - --------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Notes payable to banks $ 428 $ 11,945 Current maturities of long-term debt 5,260 5,663 Accounts payable 16,672 22,755 Accrued payroll-related costs 33,661 29,285 Advance payments from customers 26,572 18,673 Accrued warranty costs 4,559 6,487 Other accrued liabilities 16,395 13,680 Accrued income taxes 1,526 160 - --------------------------------------------------------------------------------------------------------- Total current liabilities 105,073 108,648 - --------------------------------------------------------------------------------------------------------- Deferred income taxes 5,947 5,628 Long-term debt, less current maturities 53,617 58,104 - --------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 10) SHAREHOLDERS' INVESTMENT: Common stock, 25(cent) par value; 64,000 shares authorized: 21,031 and 20,748 shares issued and outstanding 5,258 5,187 Additional paid-in capital 8,946 7,072 Retained earnings 154,159 146,234 Accumulated other comprehensive loss (1,241) (639) ========================================================================================================= Total shareholders' investment 167,122 157,854 ========================================================================================================= Total Liabilities and Shareholders' Investment $331,759 $330,234 =========================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE SHEETS. 12 Consolidated Statements of Income and Shareholders' Investment (For the Years Ended September 30)
INCOME 2001 2000 1999 - --------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) NET REVENUE $396,641 $391,853 $390,542 COST OF REVENUE 255,233 258,913 239,371 - --------------------------------------------------------------------------------------------------- GROSS PROFIT 141,408 132,940 151,171 - --------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Selling 57,669 58,747 58,695 General and administrative 31,714 36,531 35,071 Research and development 22,485 24,619 26,966 Restructuring -- 1,210 5,711 Acquisition -- -- 1,391 - --------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 29,540 11,833 23,337 - --------------------------------------------------------------------------------------------------- Interest expense 5,209 6,371 5,067 Interest income (372) (1,479) (470) Other expense (income), net 125 846 (30) - --------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 24,578 6,095 18,770 PROVISION FOR INCOME TAXES 9,402 2,471 6,325 - --------------------------------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 15,176 3,624 12,445 CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES (NOTE 2) (2,263) -- -- - --------------------------------------------------------------------------------------------------- NET INCOME $ 12,913 $ 3,624 $ 12,445 =================================================================================================== NET INCOME PER SHARE Basic Before Cumulative Effect of Accounting Change $ .73 $ .17 $ .60 Cumulative Effect of Accounting Change (.11) -- -- - --------------------------------------------------------------------------------------------------- NET INCOME PER SHARE $ .62 $ .17 $ .60 =================================================================================================== Diluted Before Cumulative Effect of Accounting Change $ .72 $ .17 $ .59 Cumulative Effect of Accounting Change (.11) -- -- - --------------------------------------------------------------------------------------------------- NET INCOME PER SHARE $ .61 $ .17 $ .59 ===================================================================================================
SHAREHOLDERS' INVESTMENT
Common Stock ------------------- Additional Accumulated Other Total Shares Paid-In Retained Comprehensive Shareholders' Issued Amount Capital Earnings Income (Loss) Investment - ------------------------------------------------------------------------------------------------------------------------------ (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) BALANCE, SEPTEMBER 30, 1998 20,657 $ 5,164 $ 5,818 $139,782 $ 1,925 $152,689 - ------------------------------------------------------------------------------------------------------------------------------ Net income -- -- -- 12,445 -- 12,445 Foreign currency translation -- -- -- -- 36 36 Unrealized loss on investment, net of tax -- -- -- -- (60) (60) - ------------------------------------------------------------------------------------------------------------------------------ Total comprehensive income -- -- -- 12,445 (24) 12,421 Exercise of stock options 235 59 2,396 -- -- 2,455 Common stock repurchased and retired (8) (2) (92) -- -- (94) Cash dividends, 24(cent)per share -- -- -- (4,612) -- (4,612) - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, SEPTEMBER 30, 1999 20,884 5,221 8,122 147,615 1,901 162,859 - ------------------------------------------------------------------------------------------------------------------------------ Net income -- -- -- 3,624 -- 3,624 Foreign currency translation -- -- -- -- (2,594) (2,594) Unrealized gain on investment, net of tax -- -- -- -- 54 54 - ------------------------------------------------------------------------------------------------------------------------------ Total comprehensive income -- -- -- 3,624 (2,540) 1,084 Exercise of stock options 163 41 1,048 -- -- 1,089 Common stock repurchased and retired (299) (75) (2,098) -- -- (2,173) Cash dividends, 24(cent)per share -- -- -- (5,005) -- (5,005) - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, SEPTEMBER 30, 2000 20,748 5,187 7,072 146,234 (639) 157,854 - ------------------------------------------------------------------------------------------------------------------------------ Net income -- -- -- 12,913 -- 12,913 Foreign currency translation -- -- -- -- (391) (391) Derivative instruments -- -- -- -- (72) (72) Unrealized loss on investment, net of tax -- -- -- -- (139) (139) - ------------------------------------------------------------------------------------------------------------------------------ Total comprehensive income -- -- -- 12,913 (602) 12,311 Exercise of stock options 474 119 3,390 -- -- 3,509 Common stock repurchased and retired (191) (48) (1,516) -- -- (1,564) Cash dividends, 24(cent)per share -- -- -- (4,988) -- (4,988) - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, SEPTEMBER 30, 2001 21,031 $ 5,258 $ 8,946 $154,159 $ (1,241) $167,122 ==============================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 13 Consolidated Statements of Cash Flows (For the Years Ended September 30)
2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) OPERATING ACTIVITIES: Net income $ 12,913 $ 3,624 $ 12,445 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 14,477 15,294 14,424 Deferred income taxes 232 455 889 Restructuring provision -- (1,210) (5,711) Provision for doubtful accounts (992) (645) (544) Provision for inventory obsolesence (4,132) (1,500) (1,370) Changes in operating assets and liabilities: Accounts, unbilled contracts, and retainage receivables 2,716 (8,914) (10,741) Inventories 1,982 (5,259) 1,743 Prepaid expenses 3,570 (2,395) (3,493) Accounts payable (6,032) 2,025 884 Accrued payroll and related costs 4,809 4,232 (1,006) Advance payments from customers 8,317 (5,919) 8,711 Accrued warranty costs (2,061) 1,633 360 Other current liabilities 3,317 1,606 10,149 - -------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 39,116 3,027 26,740 - -------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Additions to property and equipment (7,583) (12,399) (15,990) Acquisitions, net of cash acquired (2,720) -- (1,036) Increase in other assets (211) (841) (132) - -------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (10,514) (13,240) (17,158) - -------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net borrowings (repayments) under notes payable to banks (11,451) 1,853 (18,168) Proceeds from issuance of long-term debt -- 4,271 16,837 Repayments of long-term debt (5,122) (998) (924) Dividends paid (4,988) (5,005) (4,612) Proceeds from issuance of stock under employee stock option and stock purchase plans 3,509 1,089 2,455 Repurchases of common stock (1,564) (2,173) (94) ========================================================================================================================== NET CASH USED IN FINANCING ACTIVITIES (19,616) (963) (4,506) ========================================================================================================================== EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 318 1,304 418 ========================================================================================================================== CASH AND CASH EQUIVALENTS Increase (decrease) during the year 9,304 (9,872) 5,494 Balance, beginning of year 8,211 18,083 12,589 Balance, end of year $ 17,515 $ 8,211 $ 18,083 ========================================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: Cash paid during the year for: Interest $ 5,724 $ 6,298 $ 4,291 Income taxes 6,516 5,105 6,731 ==========================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 14 Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of MTS Systems Corporation and its wholly and majority-owned subsidiaries (the "Company"). Significant intercompany balances and transactions have been eliminated. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's foreign subsidiaries are translated to U.S. dollars at exchange rates prevailing at the end of the fiscal year. Income statement items are translated using average exchange rates for the year. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within shareholders' investment. Gains and losses resulting from translation of foreign currency transactions and from foreign exchange hedge contracts are included in "Other expense (income), net" in the Consolidated Statements of Income and amounted to gains aggregating $1.1 million in 2001 and losses aggregating $0.5 million and $0.4 million in 2000 and 1999, respectively. REVENUE RECOGNITION The Company implemented Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial State ments," in the fourth quarter of fiscal 2001 and has applied it retroactively to the beginning of fiscal 2001. SAB 101 provides guidelines on the timing of revenue recognition based on factors such as passage of title, installation, payment terms and customer acceptance. Prior to the adoption of SAB 101, the Company recognized revenue on short-duration projects at the time the systems were shipped and title passed to the customer. Revenue on projects requiring longer delivery periods (longer-term contracts) and other customized orders that allow for progress billings to the customer was recognized using the percentage-of-completion method based on the cost incurred to date as compared to the total estimated cost of the contract (cost-to-cost method). The effect of any revision to the total estimated cost, on an individual contract basis, and its impact on revenue is recorded in the period in which the revision becomes known. When a loss is anticipated on a contract, the anticipated loss is provided in the period the loss is identified. Under the guidelines of SAB 101, the Company changed its revenue recognition method to delay the recognition of revenue on short-duration projects from the date of shipment to the time the Company obtains customer acceptance. Revenue on longer-term contracts continues to be recognized on the percentage-of-completion method. Customer acceptance generally is received within a period of less than three months following shipment to the customer. See Note 2 to the Consolidated Financial Statements for additional information regarding the impact of SAB 101 on the Company's revenue and operating results. Revenue for services rendered is recognized at the time the services are performed and ratably over the defined contractual period for service maintenance contracts. ACCOUNTS RECEIVABLE AND LONG-TERM CONTRACTS The Company grants credit to its customers, but generally does not require collateral or other security from domestic customers. Receivables from customers residing outside of the United States, where deemed appropriate, are supported by letters of credit from financial institutions. The Company enters into longer-term contracts for customized equipment sold to its customers. Under terms of such contracts, revenue recognized using the percentage of completion method may be invoiced upon completion of contractual milestones, upon shipment to the customer or upon installation and acceptance by the customer. Unbilled or retained amounts relating to these contracts are reflected as Unbilled Contracts and Retainage Receivables in the accompanying Consolidated Balance Sheets. Amounts unbilled or retained as of September 30, 2001 are expected to be invoiced during fiscal 2002. WARRANTY OBLIGATIONS The Company warrants its products against defects in materials and workmanship under normal use and service, generally for one year after installation. The Company maintains reserves for estimated future warranty costs based on its past experience. RESEARCH AND DEVELOPMENT Research and product development costs associated with new products are charged to operations as incurred. CASH EQUIVALENTS Cash equivalents represent short-term highly liquid investments having a maturity of three months or less at the time of purchase and are recorded at cost which approximates fair value. INVENTORIES Inventories consist of material, labor and overhead costs and are stated at the lower of cost or market, determined under the first-in, first-out accounting method. Inventory components as of September 30, were as follows: 2001 2000 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Customer projects in various stages of completion $ 4,709 $ 2,704 Components, assemblies and parts 58,672 59,816 - -------------------------------------------------------------------------------- Total $ 63,381 $ 62,520 ================================================================================ 15 Notes to Consolidated Financial Statements (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Additions, replacements and improvements are capitalized at cost, while maintenance and repairs are charged to operations as incurred. Depreciation is provided over the following estimated useful lives of the property: Buildings and improvements: 10 to 40 years. Machinery and equipment: 3 to 15 years. Building and equipment additions are generally depreciated on a straight-line basis for financial reporting purposes and on an accelerated basis for income tax reporting purposes. DERIVATIVE FINANCIAL INSTRUMENTS Effective October 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No.138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities--an amendment of SFAS Statement No. 133"("SFAS No. 133"), which requires the Company to recognize all derivative financial instruments on the balance sheet at fair value. Derivatives that are not classified as a hedge are required under SFAS 133 to be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the hedged assets, liabilities or firm commitments are recognized through earnings or in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has determined that the impact of the adoption of SFAS 133 was not material to the earnings and financial position of the Company. The Company periodically enters into forward exchange contracts principally to hedge the estimated cash flow of foreign currency denominated transactions (primarily the EURO, British Pound, Swedish Krona and Japanese Yen). Gains and losses resulting from forward exchange contracts that hedge undelivered orders denominated in foreign currency and net exposed assets are included in "Other expense (income), net" in the accompanying Consolidated Statements of Income. The Company's accounting policy for these contracts is based on its designation of foreign currency contracts as hedging transactions. The criteria used by the Company in designating a specific contract as a hedge include, among other items, the contract's effectiveness in reducing risk and the specific matching of a contract to the underlying transactions. The Company's documentation policies were revised as considered necessary to comply with the requirements of SFAS 133. However, the Company made no substantive changes to its risk manage- ment strategy as a result of adopting SFAS 133. Open hedge contracts totaled $39.4 million, $40.5 million and $7.3 million as of September 30, 2001, 2000 and 1999, respectively. The Company does not use derivative financial instruments for speculative or trading purposes. OTHER ASSETS Other assets principally consist of patents, other intellectual property and goodwill. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and has been amortized over periods up to 40 years. The carrying value of goodwill, net of accumulated amortization, was $21.5 million and $24.2 million at September 30, 2001 and 2000, respectively. Amortization expense was $3.0 million in 2001, $3.2 million in 2000 and $3.3 million in 1999. Effective October 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142 which requires that goodwill and intangible assets with indefinite lives are not to be amortized, but tested for impairment annually, except in certain circumstances, and when ever there is an impairment indicator. The Company periodically evaluates whether events and circumstances have occurred which may affect the estimated useful life or the recoverability of the remaining balance of its goodwill and other long-lived assets. If such events or circumstances were to indicate that the carrying amount of these assets would not be recoverable, the Company would estimate the future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) were less than the carrying amount of goodwill and other long-lived assets, the Company would recognize an impairment loss. With the adoption of SFAS No. 142 on October 1, 2001, goodwill and intangible assets with an indefinite life will be assessed for impairment on an annual basis, except in certain circumstances, and whenever there is an impairment indicator. The assessment is a two step process. The first step is to compare the estimated fair value of a reporting unit to its carrying value. If the carrying value exceeds the fair value then the second step is to perform a valuation of all tangible and intangible assets to determine the amount, if any, by which goodwill and/or an intangible asset is impaired. The Company will assess the impact of SFAS No. 142 by performing the initial impairment study during the first half of fiscal 2002 and will complete any required goodwill impairment calculations by the end of fiscal 2002 as required by SFAS No. 142. INCOME TAXES Deferred tax assets and liabilities are recognized for the expected future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. 16 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): EARNINGS PER SHARE Basic earnings per common share is based on the weighted average number of common shares outstanding in each year. Diluted earnings per common share is computed using the treasury stock method and includes the dilutive effect of potential common shares, such as stock options, that would have been outstanding if these shares had been issued. The computation of basic and diluted earnings per common share is as follows: 2001 2000 1999 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) Income before cumulative effect of accounting change $ 15,176 $ 3,624 $ 12,445 Cumulative effect of accounting change, net of taxes (2,263) -- -- - -------------------------------------------------------------------------------- Net income $ 12,913 $ 3,624 $ 12,445 - -------------------------------------------------------------------------------- Weighted average common shares outstanding 20,755 20,842 20,763 Dilutive potential common shares 319 93 421 - -------------------------------------------------------------------------------- Total dilutive common shares 21,074 20,935 21,184 - -------------------------------------------------------------------------------- Earnings per share: Basic Before cumulative effect of accounting change $ .73 $ .17 $ .60 Cumulative effect of accounting change, net of taxes (.11) -- -- - -------------------------------------------------------------------------------- Net income per share $ .62 $ .17 $ .60 - -------------------------------------------------------------------------------- Dilutive Before cumulative effect of accounting change $ .72 $ .17 $ .59 Cumulative effect of accounting change, net of taxes (.11) -- -- - -------------------------------------------------------------------------------- Net income per share $ .61 $ .17 $ .59 ================================================================================ COMPREHENSIVE INCOME The Company follows the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income, unrealized gains or loss on investment, derivative instruments gains or losses and foreign currency translation adjustments and is presented as a component of Shareholders' Investment. RECLASSIFICATIONS Certain amounts included in the consolidated financial statements have been reclassified in prior years to conform to the current year presentation. These reclassifications had no effect on previously reported shareholders' investment or net income. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from those estimates. The Company undertakes significant technological innovation on certain of its long-term contracts. These contracts involve performance risk that may result in delayed delivery of product and/or recognition of revenue and gross profit variation resulting from difficulties in estimating the ultimate cost of such contracts. 2. CHANGE IN ACCOUNTING FOR REVENUE RECOGNITION: The Company implemented SAB 101 in the fourth quarter of fiscal 2001 and has applied it retroactively to the beginning of fiscal 2001. See Note 1 to the Consolidated Financial Statements for additional information regarding the Company's revenue recognition policy. In accordance with SAB 101, the new method of accounting for revenue recognition has been applied retroactively to the beginning of fiscal 2001. The cumulative effect adjustment of the change in accounting for all periods through September 30, 2000 was a reduction in net income of $2.3 million (net of income taxes of $1.4 million), or $0.11 per diluted share, which has been accounted for as a charge to the financial results for the first quarter of fiscal 2001. The effect of the change as compared to the revenue recognition policy previously followed in accounting for revenue recognition on the quarter ended September 30, 2001, was to decrease net revenue by $2.5 million and reduce income before cumulative effect of the accounting change, net of taxes, by $0.6 million, or $0.03 per diluted share. The effect of the change for the total fiscal year of 2001 was to increase revenue by $4.9 million and to increase income before cumulative effect of the accounting change, net of taxes, by $0.9 million, or $0.04 per diluted share. Pro forma accounts showing the retroactive application of SAB 101 for periods prior to 2001 could not be reasonably determined and have not been provided. 17 Notes to Consolidated Financial Statements (Continued) 2. CHANGE IN ACCOUNTING FOR REVENUE RECOGNITION (CONTINUED): The effect of the accounting change for revenue recognition for each of the first three quarters of fiscal 2001 is as follows: QUARTER ENDED -------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 2000 2001 2001 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) Net revenue, as previously reported $ 84,989 $ 97,935 $ 98,586 Effect of change in revenue recognition 6,574 337 445 - -------------------------------------------------------------------------------- Revenue, as restated $ 91,563 $ 98,272 $ 99,031 - -------------------------------------------------------------------------------- Gross profit, as previously reported $ 29,619 $ 35,059 $ 37,563 Effect of change in revenue recognition 2,332 541 (353) - -------------------------------------------------------------------------------- Gross profit, as restated $ 31,951 $ 35,600 $ 37,210 - -------------------------------------------------------------------------------- Net income, as previously reported $ 264 $ 3,520 $ 4,446 Effect of change in revenue recognition, net of taxes 1,434 333 (213) - -------------------------------------------------------------------------------- Income before cumulative effect of change in revenue recognition, net of taxes 1,698 3,853 4,233 Cumulative effect on prior years of the change in accounting, net of taxes (2,263) -- -- - -------------------------------------------------------------------------------- Net income (loss), as restated $ (565) $ 3,853 $ 4,233 - -------------------------------------------------------------------------------- Earnings per share: Basic- Net income, as previously reported $ .01 $ .17 $ .21 Effect of change in revenue recognition, net of taxes .07 .02 (.01) - -------------------------------------------------------------------------------- Income before cumulative effect of change in revenue recognition, net of taxes .08 .19 .20 Cumulative effect on prior years of the accounting change (.11) -- -- - -------------------------------------------------------------------------------- Net income (loss), as restated $ (.03) $ .19 $ .20 - -------------------------------------------------------------------------------- Diluted- Net income, as previously reported $ .01 $ .17 $ .21 Effect of change in revenue recognition, net of taxes .07 .01 (.01) - -------------------------------------------------------------------------------- Income before cumulative effect of change in revenue recognition, net of taxes .08 .18 .20 Cumulative effect on prior years of the accounting change (.11) -- -- - -------------------------------------------------------------------------------- Net income (loss), as restated $ (.03) $ .18 $ .20 ================================================================================ 3. BUSINESS SEGMENT INFORMATION: The Company follows the provisions of Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about Segments on an Enterprise and Related Information." As such, the Company has determined that it has five operating business units: Vehicle Testing Systems, Material Testing Systems, Advanced Systems, Automation and Sensors. Vehicle Testing Systems manufactures and markets systems for vehicle and component manufacturers to aid in the acceleration of design development work and to decrease the cost of product manufacturing. Material Testing Systems manufactures and markets systems to aid customers in product development and quality control toward an effort of design improvement. Advanced Systems offers highly customized systems primarily for simulation and manufacturing purposes. The Automation business manufactures and markets products for high performance industrial machine applications in a wide range of industries. The Sensors business unit manufactures and markets displacement and liquid level sensors used in various applications to monitor and automate industrial processes. The economic characteristics, nature of products and services, production processes, type or class of customer, method of distribution and regulatory environments are similar for the Vehicle Testing Systems, Material Testing Systems and Advanced Systems business units. As a result of these similarities, these units have been aggregated for financial statement purposes into one reportable segment called Mechanical Testing and Simulation ("MT&S"). The economic characteristics, nature of products and services, production processes, type or class of customer, method of distribution and regulatory environments are similar for the Automation and Sensors business units. As a result, these business units have been aggregated into a reportable segment called Factory Automation ("FA"). The Company's Chief Executive Officer reviews operating results of its MT&S and FA segments on a periodic basis. The accounting policies of the reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements. In evaluating the performance of each segment, management focuses primarily on income from operations and return on assets employed. This measurement excludes special charges (such as restructuring charges and acquisition-related expenses), interest income and expense, income taxes and other non-operating income or expense. Corporate administrative expenses, including expenses related to various support functions such as human resources, information technology and finance, are allocated to the reportable segments primarily on the basis of revenue. 18
2001 2000 1999 - -------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) NET REVENUE BY SEGMENT Mechanical Testing & Simulation $315,392 $302,353 $313,685 Factory Automation 81,249 89,500 76,857 - -------------------------------------------------------------------------------------- Total $396,641 $391,853 $390,542 - -------------------------------------------------------------------------------------- INCOME FROM OPERATIONS BY SEGMENT Mechanical Testing & Simulation Income before restructuring and acquisition costs $ 26,835 $ 4,460 $ 23,809 Restructuring charge -- (1,210) (5,510) Acquisition costs -- -- (1,391) - -------------------------------------------------------------------------------------- Total 26,835 3,250 16,908 - -------------------------------------------------------------------------------------- Factory Automation Income before restructuring and acquisition costs 2,705 8,583 6,630 Restructuring charge -- -- (201) - -------------------------------------------------------------------------------------- Total 2,705 8,583 6,429 - -------------------------------------------------------------------------------------- Total Income from Operations $ 29,540 $ 11,833 $ 23,337 - -------------------------------------------------------------------------------------- IDENTIFIABLE ASSETS BY SEGMENT Mechanical Testing & Simulation $270,703 $267,666 $272,491 Factory Automation 61,056 62,568 60,856 - -------------------------------------------------------------------------------------- Total Assets $331,759 $330,234 $333,347 ====================================================================================== OTHER SEGMENT DATA Mechanical Testing & Simulation: Capital expenditures $ 3,509 $ 10,057 $ 13,822 Depreciation and amortization 10,600 11,782 11,028 - -------------------------------------------------------------------------------------- Factory Automation: Capital expenditures $ 4,074 $ 2,342 $ 2,168 Depreciation and amortization 3,877 3,512 3,396 - -------------------------------------------------------------------------------------- Geographic segment information was as follows: 2001 2000 1999 - -------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) TOTAL NET REVENUE United States $170,704 $194,056 $200,556 Germany 41,847 49,771 47,172 Other European Countries 54,313 60,494 69,185 Far East 98,711 69,444 56,897 Other 31,066 18,088 16,732 - -------------------------------------------------------------------------------------- Total $396,641 $391,853 $390,542 - -------------------------------------------------------------------------------------- TOTAL PROPERTY AND EQUIPMENT, NET United States $ 58,008 $ 60,496 $ 59,926 Germany 10,106 10,604 12,821 Other European Countries 413 429 658 Far East 288 454 114 Other 78 98 114 - -------------------------------------------------------------------------------------- Total $ 68,893 $ 72,081 $ 73,633 - --------------------------------------------------------------------------------------
Revenue by geographic location is based on revenue generated from each country's operations. No country, other than the United States and Germany, exceeded 10% of consolidated net revenue on a recurrent annual basis. No single customer accounted for 10% or more of consolidated net revenue during any of the periods presented. 19 Notes to Consolidated Financial Statements (Continued) 4. FINANCING: Long-term debt as of September 30 was as follows:
2001 2000 - --------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) 6.6% Notes, unsecured, due in annual installments of $4,375 beginning in July 2001 $ 30,625 $ 35,000 7.5% Note, unsecured, due in semi-annual installments of $1,153 beginning in July 2003 15,000 15,000 Variable Rate Note, due in varying installments through April 2007, collateralized by building 5,005 5,519 5.4% Mortgage, due in quarterly installments of $39 through October 2015, collateralized by building 4,843 4,829 6.0% Note, unsecured, due in annual installments of $194 through July 2008 1,943 1,943 Other 1,461 1,476 - --------------------------------------------------------------------------------------------------------------------------- TOTAL INDEBTEDNESS $ 58,877 $ 63,767 LESS CURRENT MATURITIES (5,260) (5,663) - --------------------------------------------------------------------------------------------------------------------------- TOTAL LONG-TERM DEBT $ 53,617 $ 58,104 ===========================================================================================================================
Aggregate annual maturities of long-term debt for the next five fiscal years are as follows: 2002--$5.3 million; 2003--$7.0 million; 2004--$6.4 million; 2005--$7.6 million; 2006--$7.1 million and $25.5 million thereafter. The carrying value of the Company's long-term debt at September 30, 2001 is approximately $0.4 million higher than the estimated fair value as determined using current interest rates available to the Company for debt having similar characteristics and remaining maturities. At September 30, 2001, the Company has a $50 million revolving credit agreement with a domestic bank group that allows the Company to borrow funds at various interest rates. The revolving credit agreement expires in January 2003. Under the provisions of its revolving credit agreement, the Company is required, among other matters, to maintain certain financial ratios and to meet certain indebtedness and restricted payments tests. At September 30, 2001, the Company had $26.0 million available for restricted payments, as defined. No borrowings were outstanding under this credit agreement at September 30, 2001. In addition, the Company has standby letter-of-credit lines totaling $30 million. At September 30, 2001, standby letters of credit outstanding totaled $9.7 million. The Company was in com pliance with respect to all such covenants and conditions of its revolving credit and other debt agreements as of September 30, 2001. Information on short-term borrowings for the years ended September 30 were as follows:
2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Balance outstanding at year end $ 428 $ 11,945 $ 10,071 Average balance outstanding during the year 8,553 22,617 24,903 Maximum balance outstanding during the year 24,000 37,500 34,700 Interest rate at year end 6.8% 8.1% 6.0% Weighted-average interest rate during the year 7.4% 7.0% 5.7% ==========================================================================================================================
20 5. INCOME TAXES: The components of income before income taxes for the fiscal years ended September 30 are as follows: 2001 2000 1999 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Income before income taxes: Domestic $ 7,412 $ (9,441) $ 8,775 Foreign 17,166 15,536 9,995 - -------------------------------------------------------------------------------- Total $ 24,578 $ 6,095 $ 18,770 - -------------------------------------------------------------------------------- The provision for income taxes for the years ended September 30 consists of the following: 2001 2000 1999 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Current provision (benefit): Federal $ 3,716 $ (3,469) $ 2,239 State 694 (413) 432 Foreign 4,725 5,974 2,773 Deferred 267 379 881 - -------------------------------------------------------------------------------- Total provision $ 9,402 $ 2,471 $ 6,325 - -------------------------------------------------------------------------------- A reconciliation from the Federal statutory income tax rate to the Company's effective rate for the years ended September 30 is as follows: 2001 2000 1999 - -------------------------------------------------------------------------------- Statutory income tax rate 35% 35% 35% Tax benefit of Foreign Sales Corporation/Extraterritorial Income Exclusion (2) (9) (3) Foreign provision in excess of U.S. tax rate 2 32 4 State income taxes, net of federal benefit 2 (4) 2 Research and development tax credits (1) (9) (5) Other, net 2 (4) 1 - -------------------------------------------------------------------------------- Effective income tax rate 38% 41% 34% - -------------------------------------------------------------------------------- Following is a summary of the deferred tax assets and liabilities as of September 30: 2001 2000 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) DEFERRED TAX ASSET: Accrued compensation and benefits $ 1,147 $ 1,073 Inventory reserves 3,764 3,649 Allowance for doubtful accounts 347 242 Other assets (859) (1,229) - -------------------------------------------------------------------------------- TOTAL DEFERRED TAX ASSET 4,399 3,735 ================================================================================ DEFERRED TAX LIABILITY: ================================================================================ Property and equipment 5,947 5,628 - -------------------------------------------------------------------------------- NET DEFERRED TAX LIABILITY $ 1,548 $ 1,893 ================================================================================ 21 Notes to Consolidated Financial Statements (Continued) 6. STOCK OPTIONS: The Company has made certain stock-based awards to its officers, non-employee directors and key employees under various stock plans. Awards permitted under these plans include incentive (qualified) stock options, non-qualified stock options, stock appreciation rights, restricted stock, deferred stock, and other stock-based and non stock-based awards. During the year ended September 30, 2001, the Company awarded incentive stock options and non-qualified stock options. These awards have been granted at exercise prices that are 100% of market value at the day of grant. Beginning one year after grant, the options generally can be exercised proportionately each year for periods of three, four or six years, as defined in the respective plans. Options currently expire no later than seven years from the grant date, as defined. Option holders may exercise options by delivering Company stock already owned, cash or a combination of stock and cash. During 2001 and 2000, option holders delivered 85,075 shares and 7,145 shares, respectively, of the Company's stock in full or partial payment of options exercised. A status of the Company's stock option plans is summarized below (in thousands of shares):
2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- SHARES WAEP* SHARES WAEP* SHARES WAEP* - ---------------------------------------------------------------------------------------------------------------- Options outstanding at beginning of year 3,625 $ 9.98 2,816 $11.21 2,143 $10.30 - ---------------------------------------------------------------------------------------------------------------- Granted 728 $12.30 1,115 $ 7.17 880 $12.95 - ---------------------------------------------------------------------------------------------------------------- Exercised (410) $ 8.00 (19) $ 6.44 (138) $ 7.25 - ---------------------------------------------------------------------------------------------------------------- Forfeited (863) $ 8.81 (287) $11.30 (69) $13.38 - ---------------------------------------------------------------------------------------------------------------- Options outstanding at end of year 3,080 $11.12 3,625 $ 9.98 2,816 $11.21 - ---------------------------------------------------------------------------------------------------------------- Options exercisable at year-end 1,415 $11.58 1,891 $10.23 1,566 $ 9.46 ================================================================================================================
*WEIGHTED-AVERAGE EXERCISE PRICE The following summarizes information concerning stock options outstanding as of September 30, 2001 (in thousands of shares):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ---------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ---------------------------------------------------------------------------------------------------------------- $5.78-$7.25 450 2.66 years $ 6.53 221 $ 6.30 - ---------------------------------------------------------------------------------------------------------------- $7.3125-$9.875 612 3.82 years $ 7.43 188 $ 7.45 - ---------------------------------------------------------------------------------------------------------------- $10.00-$13.00 975 3.27 years $ 12.15 354 $ 10.82 - ---------------------------------------------------------------------------------------------------------------- $13.125-$14.625 712 3.07 years $ 13.41 321 $ 13.69 - ---------------------------------------------------------------------------------------------------------------- $15.375-$19.375 331 1.33 years $ 16.23 331 $ 16.23 - ---------------------------------------------------------------------------------------------------------------- TOTAL 3,080 3.03 YEARS $ 11.12 1,415 $ 11.58 ================================================================================================================
The number of stock options scheduled to expire, if not exercised by specified dates in the following fiscal years are as follows: 2002: 513,000; 2003: 424,000; 2004: 300,000; 2005: 859,000; 2006: 984,000. Prices for options exercised during the three-year period ended September 30, 2001 ranged from $6.25 to $14.55. Total options available for future grant as of September 30, 2001 were 2,077,828. In 1992, the Company's shareholders authorized an Employee Stock Purchase Plan (the "Purchase Plan"), whereby 1.0 million shares of the Company's common stock were reserved for sale to employees. Participants of the Purchase Plan were issued 149,748 shares in 2001 and 157,818 shares in 2000. During 2001, participants subscribed to purchase 111,266 shares at 85% of market price for issuance in 2002. 22 6. STOCK OPTIONS (CONTINUED): PRO FORMA INFORMATION: The Company has elected to follow Accounting Principles Board Opinion No. 25, ("APB No. 25") "Accounting for Stock Issued to Employees," in accounting for its employee stock options. Under APB No. 25, no compensation cost for stock options is recognized for stock options granted at or above fair value. However, Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensa tion," requires the use of option valuation models to estimate compensation cost from the granting of employee stock options and to present the pro forma effect of such cost on reported net income and earnings per share. SFAS No. 123 requires this information be determined as if the Company had accounted for employee stock options granted in fiscal years beginning subsequent to December 31, 1994 under the fair value method of that Statement. The fair value of options granted, as reported below, has been estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions: 2001 2000 1999 - -------------------------------------------------------------------------------- Expected life (in years) 1.5 1.8 2.7 Risk-free interest rate 2.9% 6.0% 5.8% Expected volatility .54 .49 .49 Dividend yield 2.1% 3.4% 2.3% ================================================================================ The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models required the input of highly subjective assumptions, including the expected stock price volatility. The weighted average estimated fair value of employee stock options granted during 2001, 2000, and 1999 was $4.20, $2.14 and $4.47, respectively. For purpose of the pro forma disclosure, the estimated fair value of the options is amortized to expense over the vesting period of the options. The Company's net income, as reported, and pro forma earnings per share are as follows (in thousands, except per share amounts): STOCK OPTION PRO FORMA DISCLOSURE YEARS ENDED SEPTEMBER 30 2001 2000 1999 - -------------------------------------------------------------------------------- Income Before Cumulative Effect of Accounting Change, Net of Taxes As Reported $ 15,176 $ 3,624 $ 12,445 Pro forma 13,700 2,216 10,553 - -------------------------------------------------------------------------------- Basic Earnings Per Share* As Reported $ .73 $ .17 $ .60 Pro forma .66 .11 .51 - -------------------------------------------------------------------------------- Diluted Earnings Per Share* As Reported $ .72 $ .17 $ .59 Pro forma .65 .11 .50 ================================================================================ *EXCLUDES THE CUMULATIVE EFFECT OF THE ACCOUNTING CHANGE FOR SAB 101 IN 2001 7. EMPLOYEE BENEFIT PLANS: The Company offers a 401(k) Pay Conversion Plan for eligible employees in the United States. Employees are able to supplement their retirement income by participating in this voluntary pretax savings plan by designating a percentage of their gross income, subject to limitations imposed by federal law. Employees are fully vested in their voluntary contributions. The Company matches a portion of the employees' voluntary contributions. This matching contribution totaled $647,000 in 2001, $843,000 in 2000 and $730,000 in 1999. The Company also has a profit sharing plan that serves 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 Company's Board of Directors approves the contribution annually. The plan provides for a minimum con tribution of 4% of participant compensation, as defined, up to the social security taxable wage base, and 8% of participant compensation in excess of the social security taxable wage base up to the maximum profit sharing contribution allowed by federal law, so long as the entire contribution does not exceed pretax income. The Company's contributions totaled $4.2 million in 2001, $4.4 million in 2000, and $3.9 million in 1999. Prior to 1998, two of the Company's international subsidiaries had noncontributory, unfunded retirement plans for eligible employees. These plans provide benefits based on the employee's years of service and compensation during the years immediately preceding retirement, early retirement, termination, disability or death, as defined in the respective plans. In 1998, one of the plans was modified to provide for contributions based solely on annual compensation levels. 23 Notes to Consolidated Financial Statements (Continued) 7. EMPLOYEE BENEFITS PLANS (CONTINUED): The cost for these plans include the following components: 2001 2000 1999 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Service cost-benefit earned during the period $ 190 $ 188 $ 209 Interest cost on projected benefit obligation 237 235 249 Net amortization and deferral 14 50 17 - -------------------------------------------------------------------------------- NET PERIODIC PENSION COST $ 441 $ 473 $ 475 ================================================================================ The following summarizes the change in benefit obligation and the plan assets: 2001 2000 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Change in benefit obligation: Projected benefit obligation, beginning of year $ 6,120 $ 5,877 Service cost 190 177 Interest cost 237 211 Translation change (245) (156) Actuarial loss 42 49 Benefits paid (44) (38) - -------------------------------------------------------------------------------- PROJECTED BENEFIT OBLIGATION, END OF YEAR $ 6,300 $ 6,120 ================================================================================ Change in plan assets: Fair value of plan assets, beginning of year $ -- $ -- Actual return on plan assets -- -- Employer contributions 44 38 Benefits paid (44) (38) - -------------------------------------------------------------------------------- FAIR VALUE OF PLAN ASSETS, END OF YEAR $ -- $ -- ================================================================================ The funded status of the Company's pension retirement plans at September 30 is as follows: 2001 2000 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Funded status $ (6,300) $ (6,120) Unrecognized net gain (26) (31) Unrecognized net liability being amortized 584 528 Required adjustment to recognize minimum liability (23) (34) - -------------------------------------------------------------------------------- ACCRUED PENSION LIABILITY $ (5,765) $ (5,657) - -------------------------------------------------------------------------------- Major assumptions used in the above calculation include: Discount rate 3.5 to 6.0% 3.5 to 6.0% Expected rate of increase in future compensation levels 3.0% 3.0% ================================================================================ 8. ACQUISITIONS: During 1999, the Company completed a merger with DSP Technology, Inc. ("DSP"), an enterprise active in the automotive engine development market segment. Under the terms of the merger agreement, the Company issued approximately 2.1 million shares of its common stock in exchange for all of DSP's outstanding shares of common stock. In connection with the acquisition, the Company and DSP incurred acquisition related costs, in the aggregate, of approximately $1.4 million that have been charged to operations during 1999. The acquisition qualified as a tax-free exchange and was recorded under the pooling-of-interests accounting method. 24 9. RESTRUCTURING AND OTHER CHARGES: During 2000, the Company announced a restructuring charge related to the discontinuation of a line of data acquisition products acquired as part of its acquisition of DSP in 1999. The restructuring charge of $1.2 million included a provision for severance costs of $0.7 million, the write-off of leasehold improvements and production and other equipment no longer needed of $0.3 million and other costs of $0.2 million associated with the closedown of the facility and the wind-down of the related product line. During the year ended September 30, 2001, the restructuring reserve was reduced by severance costs of $0.8 million, the write off of leasehold improvements, equip ment and other assets aggregating $0.2 million and costs associated with the closing of the facility and the wind-down of the product line of $0.2 million. In addition to the restructuring charge, the Company recorded an additional provision of $1.8 million to cover excess and obsolete inventory, uncollectible receivables and the write off of the remaining book value of fixed assets no longer needed. Of this amount, $1.1 million was charged to cost of sales and $0.7 million was charged to general and administrative expenses in fiscal 2000. As the activity for which the restructuring charge and the additional provision were created is essentially complete as of September 30, 2001, the Company does not expect any significant additional charges to be incurred in future periods. During 1999, the Company recorded a restructuring charge of $5.7 million as a result of the closure of its manufacturing operations in France and the transfer of this product line to its electromechanical division in North Carolina. In connection therewith, cash outlays of $2.6 million were made during 1999 and $3.1 million were made during 2000. Such costs were financed primarily with funds from continuing operations and borrowings under its bank line of credit. While certain of the effects from such restructuring were expected to be realized during fiscal 2000, other costs associated with the integration of the product line into the North Carolina facility offset much of the benefit expected from such restructuring. As a result, the Company has yet to realize substantial improvement in operating results from this restructuring. 10. COMMITMENTS AND CONTINGENCIES: LITIGATION: The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, final resolution of these matters will not have a material adverse effect on the consolidated financial position or results of operations of the Company. LEASES: The Company has noncancelable operating lease commitments for equipment and facilities that expire on various dates through 2011. Minimum annual rental commitments at September 30, 2001 for the fiscal years 2002 through 2006 and thereafter are $6.0 million, $5.2 million, $4.1 million, $3.2 million and $3.8 million, respectively. Total lease expense was $4.3 million in 2001, $3.9 million in 2000 and $4.2 million in 1999. 25 Reports on Consolidated Financial Statements REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO MTS SYSTEMS CORPORATION: We have audited the accompanying consolidated balance sheets of MTS Systems Corporation (a Minnesota corporation) and subsidiaries as of September 30, 2001 and 2000, and the related consolidated statements of income, shareholders' investment and cash flows for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MTS Systems Corporation and subsidiaries as of September 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001 in conformity with accounting principles generally accepted in the United States. As discussed in Note 2 to the consolidated financial statements, effective October 1, 2000, the Company changed its method of revenue recognition upon adoption of Staff Accounting Bulletin No. 101. Arthur Andersen LLP Minneapolis, Minnesota, November 15, 2001 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 consolidated financial statements have been prepared in accordance with account ing principles generally accepted in the United States and include certain amounts based on management's best estimates and judgment. Management is also responsible for establishing and maintaining the Company's accounting systems and related internal controls, which are designed to provide reasonable assurance that assets are safeguarded, transactions are properly recorded, and the policies and procedures are implemented by qualified personnel. The Audit Committee of the Board of Directors, which is comprised solely of outside directors, meets regularly with management and its independent auditors to review audit activities, internal controls, and other accounting, reporting and financial matters. This Committee also recommends independent auditors for appointment by the full Board, subject to shareholder ratification. Arthur Andersen LLP, independent public accountants, has audited the financial statements included in this annual report. We have been advised that their audits were conducted in accordance with auditing standards generally accepted in the United States and included such reviews of internal controls and tests of transactions as they considered necessary in setting the scope of their audits. Sidney W. Emery, Jr Chairman and Chief Executive Officer Susan E. Knight Vice President and Chief Financial Officer 26 Corporate Information BOARD OF DIRECTORS Sidney W. Emery, Jr. Chairman and Chief Executive Officer MTS Systems Corporation Charles A. Brickman President Pinnacle Capital Corporation Jean-Lou Chameau Provost, Vice President Georgia Institute of Technology Bobby I. Griffin Consultant; formerly Executive Vice President Medtronic, Inc. Brendan C. Hegarty Chief Executive Officer NanoMagnetics Bruce D. Hertzke Chairman, Chief Executive Officer, President Winnebago Inustries, Inc. Barbara J. Samardzich Chief Engineer, Automatic Transmission Engineering Operations Ford Motor Company Linda Hall Whitman, Ph.D Consultant; formerly President Ceridian Performance Partners EXECUTIVE MANAGEMENT Sidney W. Emery, Jr. Chairman and Chief Executive Officer Steven M. Cohoon Vice President Integrated Vehicle Dynamics Development Division Kelly H. Donaldson, Jr. Vice President Noise and Vibration Business and Corporate Product Management James M. Egerdal Vice President Service & Support Division Laura B. Hamilton Vice President Material Testing and Aerospace Division Susan E. Knight Vice President Chief Financial Officer Donald G. Krantz Vice President, Advanced Engineering Solutions Division Larry Moulton Vice President Powertrain Technology Division Werner Ongyert Vice President Europe Kathleen M. Staby Vice President Human Resources Mauro Togneri Vice President Sensors and Automation Divisions M. Perry Walraven Vice President Electromechanical Material Testing Division Ryoji Yamaguchi Vice President Asia/Pacific SUBSIDIARY OFFICER Frank G. Arcella President, AeroMet Corporation CORPORATE OFFICERS Barbara J. Carpenter Assistant Corporate Secretary John R. Houston Secretary Partner, Robins, Kaplan, Miller & Ciresi LLP Thomas J. Minneman Treasurer REFERENCES Bank Reference US Bank Minneapolis, MN Transfer Agent Wells Fargo Bank Minnesota, N.A. South St. Paul, MN Shareholder Assistance: 800-468-9716 General Counsel Robins, Kaplan, Miller & Ciresi LLP Minneapolis, MN Patent Counsel Westman, Champlin & Kelly Minneapolis, MN Independent Public Accountants Arthur Andersen LLP Minneapolis, MN NOTICE OF ANNUAL MEETING The annual meeting of shareholders will be held at 5:00 p.m. (Central Standard Time) on Tuesday, January 29, 2002 at the Company's Headquarters in Eden Prairie, Minnesota. SHAREHOLDERS 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 AND OTHER FINANCIAL INFORMATION Copies of the Annual Report on Form 10-K, filed with the Securities and Exchange Commission are available on request without charge. MTS Systems Corporation 14000 Technology Drive Eden Prairie, Minnesota 55344-2290. Telephone: 952-937-4213 COMMON STOCK MTS Systems Corporation's common stock publicly trades on The Nasdaq Stock Market's National Market under the symbol "MTSC". FOR NEWS RELEASES AND OTHER INFORMATION Our latest news releases are available on the World Wide Web at http://www.mts.com. INVESTOR RELATIONS Securities analysts, portfolio managers, and representatives of financial institutions seeking information about the Company should direct their inquiries to: Thomas J. Minneman Treasurer and Manager of Investor Relations MTS Systems Corporation 14000 Technology Drive Eden Prairie, Minnesota 55344-2290. Telephone: 952-937-4647 Email: tom.minneman@mts.com DIVIDEND REINVESTMENT PLAN Under the plan, shareholders can invest MTS Systems dividends in additional shares of MTS stock and make periodic voluntary cash investments for the purchase of MTS stock. Both alternatives bear a nominal transaction charge which is netted against the funds used to purchase shares of MTS stock. Shareholders may obtain a brochure giving further details by calling Wells Fargo Shareholder Services at 800-468-9716. TRADEMARKS MTS, Flat-Trac, Nano Indenter, SWIFT, and Temposonics are registered trademarks; AeroPro, Empirical Dynamics Models, EDM, SensorlessServo, Sound Quality, Virtual Test Lab, and VTL are trademarks; and AeroMet and SmartSim Community are servicemarks of MTS Systems Corporation. 27 CORPORATE HEADQUARTERS MTS Systems Corporation 14000 Technology Drive Eden Prairie, Minnesota 55344-2290 Telephone: 952-937-4000 info@mts.com www.mts.com NORTH AMERICAN SUBSIDIARIES AeroMet Corporation INTERNATIONAL SUBSIDIARIES MTS Automation Antriebstechnik Verwaltungs GmbH MTS Automation Antriebstechnik GmbH MTS Automotive Sensors GmbH MTS Holdings France, SARL MTS International Ltd. MTS(Japan) Ltd. MTS Korea, Inc. MTS Powertrain Technology Ltd MTS Sensor Technologie Verwaltungs GmbH MTS Sensor Technologie GmbH and Co. KG MTS Sensors Technology K.K. MTS Systems (China) Inc. MTS Systems do Brazil, Ltda. MTS Systems SA MTS Systems GmbH MTS Systems Holdings for Europe GmbH MTS Systems (Hong Kong) Inc. MTS Systems Limited MTS Systems Norden AB MTS Systems (Singapore) Pte Ltd. MTS Systems SRL MTS Testing Systems (Canada) Ltd. 28 EX-21 9 mts015285_ex-21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 MTS SYSTEMS CORPORATION AND SUBSIDIARIES OF THE COMPANY Incorporation Name Jurisdiction ---- ------------ MTS Systems Norden AB Sweden MTS Systems GmbH Germany MTS Systems SRL (Italy) Italy MTS Systems Limited (UK) United Kingdom MTS Holdings France, SARL France MTS Systems, SA France MTS Sensor Technologie Verwaltungs GmbH Germany MTS Automotive Sensors GmbH Germany MTS Sensor Technologie GmbH & Co. KG Germany MTS Systems (Canada) Ltd. Canada MTS Systems (Hong Kong) Inc. Minnesota, U.S.A. MTS Systems (China) Inc. Minnesota, U.S.A. MTS Systems do Brazil, Ltda. Brazil MTS (Japan) Ltd. Japan MTS Sensors Technology K.K. Japan MTS International, Ltd. West Indies MTS Korea, Inc. Republic of Korea MTS Systems Holdings for Europe GmbH Germany MTS Automation Antriebstechnik Verwaltungs GmbH Germany MTS Automation Antriebstechnik GmbH Germany MTS Systems (Singapore) Pte Ltd Singapore AeroMet Corporation Minnesota, U.S.A. MTS Powertrain United Kingdom EX-23 10 mts015285_ex-23.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (Registration Nos. 333-28661, 33-21699,33-35288, 333-39388 and 33-45386). Arthur Andersen LLP Minneapolis, Minnesota, December 19, 2001 -----END PRIVACY-ENHANCED MESSAGE-----