-----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, IkXLaujOd1UFBJgNuvfC6XI1o1mRG3uPWnNBskVf+8cllfBLq4qs6UcDyMaT3T8x cgm9QZbpCV38HdZXXZBqLQ== 0000897101-98-001244.txt : 19981228 0000897101-98-001244.hdr.sgml : 19981228 ACCESSION NUMBER: 0000897101-98-001244 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MTS SYSTEMS CORP CENTRAL INDEX KEY: 0000068709 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 410908057 STATE OF INCORPORATION: MN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-02382 FILM NUMBER: 98773813 BUSINESS ADDRESS: STREET 1: 14000 TECHNOLOGY DR CITY: EDEN PRAIRIE STATE: MN ZIP: 55344-2290 BUSINESS PHONE: 6129374000 MAIL ADDRESS: STREET 1: 14000 TECHNOLOGY DR CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 FORMER COMPANY: FORMER CONFORMED NAME: RESEARCH INC DATE OF NAME CHANGE: 19670216 10-K 1 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 -------------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For The Fiscal Year Ended September 30, 1998 Commission File Number 0-2382 -------------------- MTS SYSTEMS CORPORATION (Exact name of registrant as specified in its charter) MINNESOTA 612-937-4000 41-0908057 (State or other jurisdiction (Telephone number of registrant (I.R.S. Employer of incorporation or including area code) Identification No.) organization) 14000 TECHNOLOGY DRIVE, EDEN PRAIRIE, MINNESOTA 55344-9763 (Address of principle executive offices) (Zip Code) -------------------- Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK (PAR VALUE OF $.25 PER SHARE) Indicate by check mark whether 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, 1998, 18,598,890 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 $215,938,000. -------------------- DOCUMENTS INCORPORATED BY REFERENCE Annual Report to Shareholders for Fiscal Year ended September 30, 1998 - Parts I, II and IV. Proxy Statement for Annual Meeting of Shareholders, statement dated prior to January 26, 1999 - Part III. =============================================================================== MTS SYSTEMS CORPORATION ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 PART I ITEM 1. BUSINESS MTS Systems Corporation (hereafter called "MTS" or "the Company" or "the Registrant") is a technology-based company providing engineering services, equipment, and software for applications in research, product development, quality control and production. MTS bases its business on a set of building-block technologies and business processes. Technologies include sensors for measuring machine and process parameters, control technologies for test and process automation, hydraulic and electric servodrives for precise actuation, and application software to tailor the test or automation system to the customer's needs and to analyze results. Business processes include project and product styles of operations on a worldwide basis. In combination, they offer solutions to customers in a variety of markets. In the Mechanical Testing and Simulation sector, customers use the Company's products and services in research, product development and quality control to determine the mechanical properties and performance of materials, products and structures. Many of the Company's products and services support the customers' mechanical design automation processes. In the Factory Automation sector, customers use the Company's measurement and control instrumentation to measure process variables and to automate production processes. CUSTOMERS AND PRODUCTS BY BUSINESS SECTOR The Company's operations are organized into two business sectors: 1) Mechanical Testing and Simulation (MT&S), and 2) Factory Automation (FA). The operational alignment of the sectors allows the Company to maintain a strategic focus on markets with different applications of the Company's technologies and with different competitors. Mechanical Testing and Simulation Sector: Customers in this sector use MTS's systems and software for research, product development and quality control in the design and manufacture of materials, products and structures. Customer industries in this sector include: 1 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 planes and their suppliers, such as engine manufacturers. The space vehicle industry utilizes the Company's systems and software for such applications as solid fuel development and heat shield studies. Both aircraft and space vehicle manufacturers and their suppliers use the Company's systems and software to perform research on new materials and to control quality in the manufacturing of materials. CIVIL ENGINEERING: This market is comprised of university and government laboratories, and construction and mineral/petroleum production companies. Systems sold in this market include seismic (earthquake) simulators, civil construction component (e.g., beam) testing systems, pavement material testing systems, and specialized systems for rock and soil studies in construction and mineral/petroleum production. CONSUMER AND BIOMECHANICAL PRODUCTS/MATERIAL PRODUCERS: Customers use the Company's electromechanical and servohydraulic material testing systems in research, product development and extensively for quality control during production. In addition, customers use the Company's nanoindentation systems to test and measure mechanical properties of products where microscopic precision is required. Typical consumer products are made of textiles, paper products and plastic films of many types. Biomechanical products include implants, prostheses and other medical and dental devices and materials. Material producers include metal, ceramic, composite, paper and plastic manufacturers. GROUND VEHICLE INDUSTRY: This market consists of automobile, truck, motorcycle and off-road vehicle manufacturers and their suppliers. This market is the largest within the MT&S sector. Applications of the Company's systems and software include the design and production testing of engines and drivetrains, suspension and steering components, body and chassis, tires and wheels, and fuel storage and exhaust components. Vehicle manufacturers strive to improve performance, durability and safety, accelerate design development work and decrease the cost to manufacture their products and components. 2 ADVANCED SYSTEMS: The Company also offers highly customized systems for simulation and testing through its Advanced Engineering Solutions Division (AESD). These systems frequently embody technology which is new to the application. Customers of AESD come from all industries served by the MT&S sector - aerospace and advanced materials, civil engineering, and ground vehicles - as well as customers from other industries interested in the development of new manufacturing technologies and systems such as welding and material processing. TITANIUM PRODUCTS: The Company, through its wholly owned subsidiary, AeroMet Corporation, has developed an innovative laser direct metal deposition process for manufacturing titanium parts. The process uses a laser to fuse titanium powder, layer upon layer, into solid structures. This computer driven process significantly reduces the time required to produce large complex parts. MT&S sector accounted for 78% of revenue in 1998, 79% of revenue in 1997 and 82% of revenue in 1996. It represents the oldest and is the principal market for the Company's technology. Factory Automation Sector: FA customers use MTS products in discrete part manufacturing and chemical process industries. Products in this sector include: DISPLACEMENT POSITION AND LIQUID-LEVEL SENSORS BASED ON MAGNETOSTRICTIVE TECHNOLOGY. Displacement sensors accurately measure position up to 25 feet. They are used where accurate positioning and continuous control are critical, such as in discrete (piece part) manufacturing machinery, mobile equipment, process control elements and continuous measurement devices. Major applications include injection molding machines, servo-hydraulic cylinders, presses of all types, sawmills, logging and other mobile machinery and valve or flow control. Displacement sensors are also used in high volume applications requiring low cost position feedback. MTS builds a version of its technology in various lengths and configurations, but at very high rates affording on-board low cost solutions to industries such as automotive, appliance, medical, agricultural, marine, aeronautic and other non-manufacturing markets. Liquid level sensors accurately measure the level of liquids in tanks and other vessels up to 60 feet. These sensors are marketed to control continuous processes in chemical, pharmaceutical, bio-technology and other related markets. The need for highly reliable accurate measurement of one or more fluid levels is common in most of these applications. MTS markets liquid level sensors to both end users, such as chemical producing companies, and to original equipment manufacturers and private label companies who build level measurement or leak detection into their control systems or as accessories for remote indication and control devices. SERVO MOTORS, AMPLIFIERS AND CONTROLLERS: Customers use high-performance brushless servo motors and amplifiers for challenging factory automation applications in a wide range of industries, including machine tools, fabrication 3 and packaging. Specialized plug-in amplifiers are used in light duty applications such as the semiconductor and textile industries. The Company's controllers are used for precise control of a wide variety of applications ranging from simple applications requiring only one axis of control to high-speed, complex operations requiring up to 28 axes of control. These combined product lines address the need for high performance systems and are used primarily by original equipment manufacturers and large end users. The FA sector accounted for 22% of revenue in 1998, 21% of revenue in 1997, and 18% of revenue in 1996. COMMON TECHNOLOGIES MTS' systems and products in both sectors are constructed using employees' application engineering know-how with common technology building block components generally composed of measuring and actuation devices, electronic controls and application software. Many of these components are proprietary and are developed and manufactured within the Company. MTS employees engineer or configure the components into products and systems to match the application called for in the customer's order. Frequently, special-purpose software is developed to meet a customer's unique requirements. Such software often represents a significant part of the value added by the Company. Services offered to system customers include on-site installation, training of customer personnel, technical manuals and continuing maintenance. Such services are often included in the contract amount charged for completed systems, but these services may be purchased separately, during and after the system warranty period. Certain proprietary products, such as sensors, process controls, motors, actuators and process software and firmware are sold as products to end users and to other companies for incorporation into their systems, machines or processes. All products and most systems are sold on fixed-price contracts. Complex systems and applied research in the MT&S sector are in some cases undertaken on "cost-plus-fixed-fee" contract basis. 1998 PRODUCT DEVELOPMENT HIGHLIGHTS The Company funds new application and product development within its market sectors. Highlights of product development undertaken or completed in 1998 include: Mechanical Testing and Simulation Sector * The Company introduced the SilentFlo(TM) hydraulic power unit, a clean quiet pump that eliminates the need for a separate pump room, allowing each power unit to be placed near the equipment it powers, minimizing the need for excessive piping. 4 * The Company introduced the MTS Crash Simulator. Automotive engineers will use this simulator to reproduce increasingly complex crash pulse waveforms. The incorporation of digital controls and sophisticated simulation and modeling software will significantly reduce the overall development cycle. * The Company completed the Component RPC III(TM) software product, which runs on Microsoft NT(TM) and is used with standard MTS controller products. This software is designed for automotive engineers that need an easy and accurate way to perform simulation testing. * The Company introduced the TestWorks 4 universal testing software package. This can be used to test materials, components, subassemblies and finished goods to support research, product and process development and quality control. Targeted industries include plastics, biomaterials, electronics, textiles and consumer goods. Factory Automation Sector * The Company developed new variations of its magnetostrictive products, based upon its modular technology, and the development occurred much more rapidly than in the past. Past methods required engineering of entirely new products to address new applications. Examples include custom pulse and analog outputs, intelligent analog communications and environmental enclosures. * The Company released the first four models of a new line of digital drives. These servo drives will provide high performance, auto tuning and multiple communications bus options. * The Company introduced two new lines of smaller MaxPlus servo motors that provide high performance servo capability to low power or space limited applications. General factory automation and semi conductor industries are the primary markets for these products. * The Company introduced new board level DSP based motion controllers. The products are expandable up to 16 axis and can be installed on individual personal computers. They provide for high speed motion control, while at the same time being user friendly. CHARACTERISTICS OF SALES The Company's systems and products are sold and delivered throughout the world and its customer orders cover a broad spectrum of industries, government agencies, institutions, applications and geographic locations. As such, MTS is not dependent upon any single customer for its business. MT&S systems range in price from less than $20,000 to over $20 million. Large, individual, fixed-price orders, generally considered to be over $10 million, 5 although important to the Company's image and technical advancement, can produce volatility in both backlog and quarterly operating results. The majority of the orders received in any one year are based on fixed-price quotations and some require extensive technical communication with potential customers prior to receipt of an order. The current typical delivery time for a system ranges from one to twelve months, depending upon the complexity of the system and the availability of components in the Company's or suppliers' inventories. Larger system contracts can run as long as three years and cost-plus-fixed-fee contracts have run longer. FA products are sold in quantity at unit prices ranging from $500 to $10,000. Delivery varies from several days to several months. Approximately 54% of revenue in fiscal 1998, 47% of revenue in fiscal 1997, and 49% of revenue in fiscal 1996 was from domestic customers. The balance of the revenue, some of which was sold in currencies other than the U.S. dollar, was to customers located outside the United States--mainly in Europe, Asia-Pacific, Latin America and Canada. The Company's foreign operations and foreign revenues may be affected by local political conditions, export licensing problems and/or currency restrictions. Sales Channels: MTS markets its products using a number of sales channels. The Company sells its MT&S equipment through an employee sales network, independent sales representatives and a direct mail (catalog) operation. Sales personnel are generally graduate engineers or highly skilled technicians and are specially trained to sell MTS products and services. Employee salespersons are compensated with salary and sales incentives, and independent representatives are paid a commission. A list of major domestic and international offices for the Company's MT&S sector follows: Domestic offices: Akron Dayton Philadelphia Austin Denver Raleigh Baltimore Detroit Pittsburgh Boston Huntsville San Diego Chicago Los Angeles San Jose Cincinnati Minneapolis Seattle Dallas Washington, D.C. International offices: Beijing and other cities, Paris, France Peoples Republic of China Berlin and other cities, Seoul, South Korea Germany Torino, Italy Gothenburg, Sweden Stroud, United Kingdom Hong Kong Nagoya and Tokyo, Japan Singapore 6 In addition, MTS works with sales and service representative organizations in nearly all industrialized countries of the world and in the developing countries of Latin America, Asia, Africa and the Middle East. The Company offers a mail-order catalog of material testing components, accessories and products. The catalog includes products of complementary vendors and aims to reach a broad range of customers involved in mechanical testing and simulation. The FA sector sells its products through sales channels separate from the MT&S sector. A network of employees, direct sales, external domestic distributors, representatives and system houses market the products of these divisions. International revenue currently accounts for 38% of this sector's volume. Efforts continue to expand sales channels in international markets. International Operations and Export Sales: The sections entitled Geographic Analysis of New Orders and Geographic Segment Information on pages 17 and 29 of the Company's 1998 Annual Report to Shareholders, which sections are incorporated by reference herein, contain information regarding the Company's operations by geographic area. Export Licensing: The Company's foreign shipments in fiscal 1998, 1997, and 1996 included sales to Asia-Pacific, Europe and other regions that may require the Company to obtain export permission from the U.S. government. The Company does not undertake manufacturing on custom systems or projects until it is assured that permission will be granted. However, due to the extended time to process and receive a license, design work is performed on some systems during the licensing period. Changes in political relations between the U.S. and countries requiring import licenses, as well as other factors, can adversely affect the Company's ability to complete a sale should a previously issued license be withdrawn. While political reform occurring internationally may relax export controls, the U.S. government still maintains multilateral controls in agreement with allies and unilateral controls based on U.S. initiatives and foreign policy that may cause delays for certain shipments or the rejection of orders by the Company. BACKLOG The Company's backlog, which it defines as firm orders remaining unfilled, totaled $175.4 million at September 30, 1998, $175.8 million at September 30, 1997, and $120.5 million at September 30, 1996. The Company believes that approximately $160 million of the backlog at September 30, 1998 will become revenue during fiscal 1999. Delays may occur due to technical difficulties, export licensing approval or the customer's preparation of the installation site. Any such delay can affect the period when backlog is recognized as revenue. 7 COMPETITION In the MT&S sector, customers may choose to buy equipment from the Company or from competitors, principally: Instron (U.S.-based), Interlachen (U.S.), AVL (Austria), Zwick (Germany), Saganomiya and Shimadzu (Japan). There are also smaller local competitors in most major countries. In lieu of buying equipment from the Company or its competitors, customers may contract with testing laboratories such as EG&G, Peabody, Wyle, or with universities. Government laboratories also market testing services to the public. Finally, customers may choose to construct their own testing equipment from commercially available components. Customers in the aerospace and automotive industries and universities sometimes choose this approach, purchasing equipment from companies such as Parker Hannifin, Moog and Mannesman (Germany). In the FA sector, the Company competes directly with small to medium-sized specialty suppliers and also with divisions of the large control system companies such as Rockwell, Emerson Electric, Mannesman (Germany) and Fanuc (Japan). MANUFACTURING AND ENGINEERING The Company conducted a significant portion of its fiscal 1998 MT&S manufacturing and engineering activities in Minneapolis. Certain engineering, project management, final system assembly and quality testing may be done in Berlin, Germany, and Tokyo, Japan. Electromechanical material testing systems are assembled in the Raleigh, NC, facility and in the Paris, France facility. The Company's MTS-PowerTek subsidiary engineers and assembles dynamometer control systems and provides related services from Detroit. Manufacturing and engineering activities for the FA sector occur in Raleigh, NC, New Ulm, MN, Ludenscheid, Freiburg, and Stralsund, Germany, and at the Company's majority-owned subsidiary in Nagoya, Japan. PATENTS AND TRADEMARKS The Company holds a number of patents, patent applications, licenses, trademarks and copyrights which it considers, in the aggregate, to constitute a valuable asset. The Company's system business is not dependent upon any single patent, license, trademark or copyright. RESEARCH AND DEVELOPMENT The Company does not do basic research, but does fund significant product, system and application developments. Costs of these development programs are expensed as incurred, and amounted to $21.9, $17.5, and $17.7 million for fiscal years 1998, 1997, and 1996 respectively. Additionally, the Company also undertakes "first of their kind" high-technology, customer-funded contracts which contain considerable technical pioneering. The combination of internally sponsored product development and system or application innovation on customer contracts approximates 10% of annual sales volume. 8 EMPLOYEES MTS employed 2,272 persons as of September 30, 1998, including 397 employees in Europe, 48 in Japan, 13 in China, 4 in Canada, 12 in Korea, 4 in Hong Kong, and 2 in Singapore. None of the Company's U.S. employees are covered by a collective bargaining agreement, and MTS has experienced no work stoppages at any location. SOURCES AND AVAILABILITY OF RAW MATERIALS AND COMPONENTS A major portion of products and systems delivered to a customer may consist of equipment and component parts purchased from vendors. The relationship which the Company promotes with its vendors is partnership based with an emphasis on continuous improvement. The Company is dependent upon certain computing hardware and software devices and certain raw materials which have limited sources. However, the Company has not experienced significant problems in procurement or delivery of any essential materials, parts or components in the last several years. Due to the manner in which the Company sells the majority of its products, on a fixed-price contract agreed upon at the time the order is obtained, wide fluctuations up or down in cost of materials and components from order date to delivery date, if not accurately forecast by the Company at an early date, can change the expected profitability of any sale. The Company believes that such fluctuations have not had a material effect on reported earnings, except as affected by changes in foreign currency rates, which have been reported. ENVIRONMENTAL MATTERS Management believes the Company's operations are in compliance with federal, state and local provisions relating to the protection of the environment. BUSINESS SYSTEMS DEVELOPMENT The Company undertook the development and deployment of an enterprise-wide financial and business operations software system in 1997. The company expects to complete its first phase of implementation in early 1999, with subsequent phases to follow. This system is expected to improve business processing and to provide software processing capability beyond the end of the century. 9 ITEM 2. PROPERTIES Domestic Facilities: The Company's corporate headquarters and main MT&S plant, occupying 410,000 square feet, is located on 56 acres of land in Eden Prairie, Minnesota, a suburb of Minneapolis. The original plant was completed in 1967. Six additions, the most recent completed in 1997, have expanded the plant to its present size. Approximately 50% of the Eden Prairie facility is used for manufacturing and assembly while the balance of the facility is used for office space. In 1998, 17,000 square feet of manufacturing space was leased in Chanhassen, Minnesota under a five year operating lease expiring in 2003. Electronic design and component assembly is conducted in a 57,000 square foot facility in Chaska, Minnesota, approximately 10 miles west of the headquarters in Eden Prairie. The building was completed in 1996. MTS has a five year operating lease with provisions to extend, purchase or terminate at the end of the lease period. The terms of the lease agreement do not require capitalization of the asset and the related obligation. Custom Servo Motors, Inc. occupies a 30,000 square foot plant in New Ulm, Minnesota (65 miles southwest of Minneapolis). The plant provides assembly operations and office space. The facility was constructed in 1993 by the New Ulm Economic Development Corporation and expanded in 1995. MTS has a five year operating lease for the facility with provisions to extend the lease, purchase the property, or terminate the lease. The terms of the lease agreement do not require capitalization of the asset and the related obligation. MTS Sensors Division is located near the Research Triangle Park in Cary, North Carolina, a suburb of Raleigh. A 40,000 square foot plant constructed in 1988 provides manufacturing and office space. In 1992, 25,000 square feet was added to the plant. MTD Raleigh is located adjacent to the MTS Sensors Division site in Cary, North Carolina. A 25,000 square foot plant, constructed in 1991, provides manufacturing and office space. MTS-PowerTek, Inc. occupies 20,000 square feet in Farmington Hills, Michigan, a suburb of Detroit. Plant and office space in two buildings is leased under conventional operating lease terms. The Company leases space in other U.S. cities for sales and service offices. Neither the space nor the rental obligations is significant. 10 International Facilities: MTS Systems GmbH is located in an 80,000 square foot facility in Berlin, Germany. As of September 30, 1998 3,000 square feet has been leased to other companies. The building is situated on land leased by MTS from the city government. The lease expires in 2069. MTS Systems (France) operates in a leased facility in Paris, France, of approximately 38,000 square feet. Approximately 40% of this space is used for manufacturing with the remainder used as offices. The current lease expires at the end of fiscal 2000. MTS Sensors Technologie operates in a leased facility in Ludenscheid, Germany on approximately six acres of land. The manufacturing and office facilities occupy 18,000 square feet at this location. Custom Servo Motors Antriebstechnik Verwaltungs GmbH operates in three leased facilities in Germany, two in Freiburg, and a new facility in Stralsund. The Freiburg facilities total about 12,000 square feet and the Stralsund location is about 16,000 square feet. Approximately 50% of the Freiburg facilities and 70% of the Stralsund facility are used for assembly with the remainder used as offices. The Company also leases office and general purpose space for its sales and service subsidiaries in Stroud, United Kingdom; Torino, Italy; Seoul, South Korea; Tokyo and Nagoya, Japan; Toronto, Canada; Sao Paulo, Brazil; Gothenburg, Sweden; Beijing and Shanghai, Peoples Republic of China; Singapore; and Hong Kong. No manufacturing is conducted at these locations. Expansion Opportunities: Room remains at its Eden Prairie location for limited facility expansion. Also, the sites in Cary, North Carolina could be expanded. Other suitable commercial real property is available for purchase or lease in metropolitan areas where the Company is presently located. The Company considers its current facilities adequate to support its operations in 1999. 11 ITEM 3. LEGAL PROCEEDINGS No material legal proceedings were pending or threatened against the Company or its subsidiaries as of September 30, 1998. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the year ended September 30, 1998, for a vote by the shareholders. 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's stock is traded on The Nasdaq Stock Market's National Market (Nasdaq) under the symbol MTSC. The following table shows the Company's low and high closing sale transactions as reported by Nasdaq. Share prices for fiscal year 1997 have been restated retroactively for the two-for-one stock split in the form of a 100% stock dividend effective February 2, 1998. Quarter Ended Low * High * ------------- ----- ------ December 31, 1996 $ 9.625 $10.75 March 31, 1997 $ 9.75 $11.312 June 30, 1997 $10.25 $15.25 September 30, 1997 $14.375 $19.625 December 31, 1997 $17.375 $20.00 March 31, 1998 $13.50 $19.00 June 30, 1998 $15.50 $19.25 September 30, 1998 $11.562 $17.75 * Source: The Nasdaq Stock Market, Inc. Summary of Activity Report At December 1, 1998 there were 1,760 holders of record of the Company's $.25 par value common stock. The Company estimates that there are an additional 2,000 beneficial shareholders whose stock is held by nominees or broker dealers. The Company has a history of paying quarterly dividends and expects to continue such payments in the future. During 1998, 1997 and 1996, the Company paid dividends totaling $.24, $.20 and $.16 per share, per year, respectively, to holders of its common stock. Under the terms of the Company's credit agreements, certain covenants require that tangible net worth, as defined, must exceed a defined minimum amount and limit repurchases of its common stock to a defined maximum amount. As of September 30, 1998, tangible net worth exceeded the minimum by $24.8 million 13 and the Company had $16.3 million available for repurchases of its common stock. The Company has flexibility to declare and pay dividends in the future similar to recent dividends. ITEM 6. SELECTED FINANCIAL DATA A comprehensive summary of selected financial information is presented in the "Six Year Financial Summary" on page 16 of the Company's 1998 Annual Report to Shareholders. Data included in the summary is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 17 through 22 of the Company's 1998 Annual Report to Shareholders is incorporated herein by reference. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The required disclosures are included in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 19 and in Note 1 to the Consolidated Financial Statements included in the Company's 1998 Annual Report to Shareholders. This information is incorporated herein by reference. FORWARD LOOKING STATEMENTS Statements included or incorporated by reference in this Form 10-K which are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. The following important facts, among others, could affect the Company's actual results in the future and could cause the Company's actual financial performance to differ materially from that expressed in any forward-looking statement: (i) With regard to the Company's 1998 product developments, there are no uncertainties known to the Company concerning the expected results. (ii) Possible significant volatility in both backlog and quarterly operating results may result from large, individual, fixed price orders, generally over $10 million, in connection with sales of MT&S systems. 14 (iii) Export controls based on U.S. initiatives and foreign policy, as well as import controls imposed by foreign governments, may cause delays for certain shipments or the rejection of orders by the Company. Such delays could create material fluctuations in quarterly results and could have a material adverse effect on results of operations. Foreign revenues may also be affected by local political conditions and/or currency restrictions. (iv) Delays in realization of $175.4 million in backlog orders as of September 30, 1998 (approximately $160 million of which are anticipated to be recognized during fiscal 1999) may occur due to technical difficulties, export licensing approval or the customer's preparation of the installation site, any of which can affect the quarterly or annual period when backlog is recognized as revenue and could materially affect the results of any such period. (v) Company experiences competition on a worldwide basis. Customers may choose to purchase equipment from the Company or from its competitors. For the MT&S sector, customers may also contract with testing laboratories or construct their own testing equipment, purchasing commercially available components. Factors which influence the customer's decision include price, service and required level of technology. (vi) The Company is exposed to market risk from changes in foreign currency exchange rates, which can affect its results from operations and financial condition. Further disclosures are included in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 19 and in Note 1 to the Consolidated Financial Statements included in the Company's 1998 Annual Report to Shareholders. This information is incorporated herein by reference. (vii) Risks in connection with the Year 2000 issue, including risks of anticipated Year 2000 compliance, greater-that-anticipated costs, or risks of business interruptions due to inability of the Company's vendors to comply. The foregoing list is not exhaustive, and the Company disclaims any obligation subsequently to or 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. 15 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 1998 Annual Report to Shareholders are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The Corporate Executive Officers of the Registrant on September 30, 1998 were: Name and Age Position Officer Since - ------------ -------- ------------- D. M. Sullivan (63) Chairman 1976 S. W. Emery, Jr. (52) President and 1998 Chief Executive Officer K. D. Zell (56) Executive Vice President 1979 W. G. Beduhn (57) Vice President 1983 M. L. Carpenter (61) Vice President 1973 and Chief Financial Officer M. G. Togneri (61) Vice President 1991 Officers serve at the discretion of and are elected annually by the board of directors, and serve until their successors are elected. Business experience of the Executive Officers for at least the last 5 years (consisting of positions with the Company unless otherwise indicated) is as follows: Officer Business Experience ------- ------------------- D. M. Sullivan Chairman since 1994. Chief Executive Officer from 1987 to March 17, 1998. President and Chief Operating Officer from 1982 to March 17, 1998. Vice President from 1976 to 1982. Has extensive prior experience in the management of technology intensive businesses. S. W. Emery, Jr. President and Chief Executive Officer since March 17, 1998. Management and executive positions with Honeywell, Inc. from 1985 to 1997. (Area Vice President Western and Southern Europe from 1994 to 1997; Group Vice President, Military Avionics Systems from 1989 to 1994; Vice President and General Manager, Space Systems Division from 1988 to 1989; Vice President Operations, Process Controls Division from 1985 to 1988. 17 K. D. Zell Executive Vice President of Mechanical Testing and Simulation sector since 1993. Vice President of Materials Testing Division from 1988 to 1993. Vice President, Sales and Service from 1984 to 1988. Vice President, Product Group from 1979 to 1984. Division manager, Hydro-Mechanical Products from 1978 to 1979. W. G. Beduhn Vice President of Advanced Engineering Solutions Division since 1991. Vice President of Technology Development from 1983 to 1991. Division manager of various marketing and operating divisions from 1977 to 1983. M. L. Carpenter Vice President and Chief Financial Officer since 1991. Vice President and Treasurer since 1973. M.G. Togneri Vice President of Sensors Division since 1998. Vice President of Factory Automation sector from 1991 to 1997. Prior to his employment at MTS was Vice President at Square D Corporation and General Manager of Crisp Automation. Has extensive experience in the industrial instrumentation and control business in the U.S. and internationally. (a) Information concerning the Company's Directors, including business experience, can be found in the Company's Proxy Statement, a definitive copy of which will be filed with the Securities and Exchange Commission prior to January 26, 1999, and is incorporated herein by reference. (b) The Company has no other significant employees requiring disclosure in this Form 10-K. (c) There are no family relationships between and among directors or officers. (d) Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference from the Company's Proxy Statement, a definitive copy of which will be filed with 18 the Securities and Exchange Commission prior to January 26, 1999, pursuant to Regulation 14A under the Securities Exchange Act of 1934. ITEM 11. EXECUTIVE COMPENSATION See Item 12. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Items 11 and 12 is incorporated herein by reference from the Company's Proxy Statement, a definitive copy of which will be filed with the Securities and Exchange Commission prior to January 26, 1999, pursuant to Regulation 14A under the Securities Exchange Act of 1934. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as part of this report: (a) Financial Statements: See accompanying Index to Financial Statements on Page F-1. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of fiscal 1998. (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 fiscal year ended September 30, 1996. 3.b Restated Bylaws, reflecting amendments through May 26, 1998. 10.a Management Variable Compensation Plan, Fiscal 1998, dated December 3, 1998. 10.b 1985 Employee Stock Option Incentive Plan, incorporated by reference to exhibit 4(a) from Form S-8, File No. 2-99389. 10.c 1987 Stock Option Plan, as amended, incorporated by reference from exhibit 10.c of Form 10-K for the fiscal year ended September 30, 1996. 10.d 1990 Stock Option Plan, as amended, incorporated by reference from exhibit 10.d of Form 10-K for the fiscal year ended September 30, 1996. 10.e 1994 Stock Plan, as amended, incorporated by reference from exhibit 10.e of Form 10-K for the fiscal year ended September 30, 1996. 10.f Severance Agreement, dated March 5, 1998 between the Registrant and William G. Beduhn as amended. 20 10.g Severance Agreement, dated May 13, 1998 between the Registrant and Marshall L. Carpenter as amended. 10.h Severance Agreement, dated December 3, 1990 between the Registrant and Kenneth E. Floren, incorporated by reference to exhibit 10.k of Form 10-K for the fiscal year ended September 30, 1990. 10.i Severance Agreement, dated May 1, 1990 between the Registrant and Werner Ongyert, incorporated by reference to exhibit 10.m of Form 10-K for the fiscal year ended September 30, 1990. 10.j Severance Agreement, dated May 1, 1990 between the Registrant and J. Howell Owens, incorporated by reference to exhibit 10.n of Form 10-K for the fiscal year ended September 30, 1990. 10.k Severance Agreement, dated May 20, 1997 between the Registrant and Donald M. Sullivan, incorporated by reference to exhibit 10.k of Form 10-K for the fiscal year ended September 30, 1997. 10.l Severance Agreement, dated May 1, 1990 between the Registrant and Richard S. White, incorporated by reference to exhibit 10.q of Form 10-K for the fiscal year ended September 30, 1990. 10.m Severance Agreement, dated March 27, 1998 between the Registrant and Keith D. Zell, as amended. 10.n Severance Agreement, dated March 24, 1998 between the Registrant and Mauro G. Togneri, as amended. 10.o 1992 Employee Stock Purchase Plan, incorporated by reference to exhibit 4(a) from Form S-8, File No. 33-45386. 10.p 1997 Stock Option Plan, incorporated by reference to exhibit 10.p of Form 10-K for the fiscal year ended September 30, 1996 10.q Severance Agreement, dated September 30, 1996 between the Registrant and Steven M. Cohoon, incorporated by reference from exhibit 10.q of Form 10-K for the fiscal year ended September 30, 1996. 10.r Severance Agreement, dated March 16, 1998 between the Registrant and Sidney W. Emery. 21 10.s Change in Control Agreement, dated March 16, 1998 between the Registrant and Sidney W. Emery. 10.t Change in Control Agreement, dated March 27, 1998 between the Registrant and Keith D. Zell. 10.u Change in Control Agreement, dated May 13, 1998 between the Registrant and Marshall L. Carpenter. 10.v Change in Control Agreement, dated March 24, 1998 between the Registrant and Mauro G. Togneri. 10.w Change in Control Agreement, dated March 13, 1998 between the Registrant and William G. Beduhn. 13. Annual Report to Shareholders for the fiscal year ended September 30, 1998. 21. Subsidiaries of the Company. 23. Consent of Independent Public Accountants. 27. Financial Data Schedule. (d) Financial Statement Schedules: See accompanying Index to Financial Statements on page F-1. 22 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MTS SYSTEMS CORPORATION By: /s/ Donald M. Sullivan ----------------------------- Donald M. Sullivan Chairman By: /s/ Sidney W. Emery, Jr. ----------------------------- Sidney W. Emery Jr. President and Chief Executive Officer By: /s/ Marshall L. Carpenter ----------------------------- Marshall L. Carpenter Vice President and Chief Financial Officer Date: December 18, 1998 23 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: By: /s/ Charles A. Brickman ----------------------------- Charles A. Brickman, December 18, 1998 Director By: /s/ Jean Lou Chameau ----------------------------- Jean Lou Chameau, December 18, 1998 Director By: /s/ Bobby I. Griffin ----------------------------- Bobby I. Griffin, December 18, 1998 Director By: /s/ Russell A. Gullotti ----------------------------- Russell A. Gullotti, December 18, 1998 Director By: /s/ Brendan E. Hegarty ----------------------------- Brendan E. Hegarty, December 18, 1998 Director By: /s/ Thomas E. Holloran ----------------------------- Thomas E. Holloran, December 18, 1998 Director By: /s/ Linda Hall Whitman ----------------------------- Linda Hall Whitman, December 18, 1998 Director By: /s/ Thomas E. Stelson ----------------------------- Thomas E. Stelson, December 18, 1998 Director 24 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 1998 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) 22 --- Consolidated Balance Sheets - September 30, 1998 23 --- and 1997 Consolidated Statements of Income and Shareholders' Investment for the Years Ended September 30, 1998, 1997 and 1996 24 --- Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 1997 and 1996 25 --- Notes to Consolidated Financial Statements 26 --- Report of Independent Public Accountants 35 --- F-1 Annual Report 10-K Page Page ---- ---- B. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE --- F-3 C. CONSOLIDATED SCHEDULE Schedule Description - -------- ----------- II Summary of Consolidated Allowances for Doubtful Accounts --- 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 ON SCHEDULE To MTS Systems Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in MTS Systems Corporation's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated November 20, 1998. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule (page F-4) listed as a part of Item 14 in this Form 10-K is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, November 20, 1998 F-3 MTS SYSTEMS CORPORATION AND SUBSIDIARIES SCHEDULE II - SUMMARY OF CONSOLIDATED ALLOWANCES FOR DOUBTFUL ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 Balance Provision Amounts Balance Beginning Charged to Written End of of Year Operations Off Year ------- ---------- ------- ------- (expressed in thousands) 1998 $2,010 $344 $(219) $2,135 1997 1,742 449 (181) 2,010 1996 1,824 330 (412) 1,742 F-4 EXHIBIT INDEX Exhibit No. Description --- ----------- 3.b Restated Bylaws 10.a Management Variable Compensation Plan Fiscal 1998 10.f Severance Agreement, dated March 5, 1998, as amended 10.g Severance Agreement, dated May 13, 1998, as amended 10.m Severance Agreement, dated March 27, 1998, as amended 10.n Severance Agreement, dated March 24, 1998, as amended 10.r Severance Agreement, dated March 16, 1998 10.s Change in Control Agreement, dated March 16, 1998 10.t Change in Control Agreement, dated March 27, 1998 10.u Change in Control Agreement, dated May 13, 1998 10.v Change in Control Agreement, dated March 24, 1998 10.w Change in Control Agreement, dated March 13, 1998 13. Annual Report to Shareholders for the fiscal year ended September 30, 1998 21. Subsidiaries of the Company 23. Consent of Independent Public Accountants 27. Financial Data Schedule EX-3.B 2 BYLAWS EXHIBIT 3.b BYLAWS OF MTS SYSTEMS CORPORATION (Reflecting Amendments through May 26, 1998) ----------------------------------------------------- ARTICLE I Shareholders Section 1. The annual meeting of the shareholders of this corporation shall be held on such date in January of each year and at such place as may be designated by the Board of Directors. A notice setting out the time and place of the annual meeting shall be mailed, postage prepaid, to each shareholder of record at his address as it appears on the records of the corporation, or if no such address appears, at his last known address, at least ten days prior to the annual meeting, but any shareholder may waive such notice either before, at, or after such meeting by a signed waiver in writing. Section 2. At the annual meeting, the shareholders shall elect directors of the corporation and shall transact such other business as may properly come before them. To be properly brought before the meeting, business must be of a nature that is appropriate for consideration at an annual meeting and must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, each such notice must be given, either by personal delivery or by United States mail, postage prepaid, to the secretary of the corporation, not less than 45 days nor more than 75 days prior to a meeting date corresponding to the previous year's annual meeting. Each such notice to the secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address of record of the shareholder proposing such business, (c) the class or series (if any) and number of shares of the corporation which are owned by the shareholder, and (d) any material interest of the shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be transacted at the annual meeting except in accordance with the procedures set forth in this Article; provided, however, that nothing in this Article shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting, in accordance with these Bylaws. Section 3. A special meeting of the shareholders may be called at any time by the Chairman of the Board of Directors of the corporation and shall be called by the Secretary upon the request in writing by two or more members of the Board of Directors, upon the vote of the Directors, or upon the request in writing of shareholders holding not less than one-tenth of the outstanding shares of voting stock. Such meeting shall be called by mailing a notice thereof as above provided. Such notice shall state the time, place, and object of the meeting. 1 Section 4. At any shareholders' meeting, each shareholder shall be entitled to one vote for each share of stock standing in his name on the books of the corporation as of the date of the meeting. Any shareholder may vote either in person or by proxy. The presence in person or by proxy of the holders of a majority of the shares of stock entitled to vote at any shareholders' meeting shall constitute a quorum for the transaction of business. If no quorum be present at any meeting, the shareholders present in person or by proxy may adjourn the meeting to such future time as they shall agree upon without further notice other than by announcement at the meeting at which such adjournment is taken. ARTICLE II Directors Section 1. The Board of Directors shall have the general management and control of all business and affairs of the corporation and shall exercise all the powers that may be exercised or performed by the corporation under the statutes, its Articles of Incorporation, and its Bylaws. Section 2. The Board of Directors of this corporation shall consist of up to ten Directors, and majority of the Directors then holding office shall constitute a quorum. Section 3. Each director shall be elected for a term of one year, and shall hold office for that term and until his successor is elected and qualified. If a vacancy in the Board occurs by reason of death, resignation, or otherwise, the vacancy may be filled for the unexpired portion of the term in which it occurs by a majority vote of the remaining Directors. Section 4. The Board of Directors may meet regularly at such time and place as it shall fix by resolution, and no notice of regular meetings shall be required. Special meetings of the Board of Directors may be called by the President or any two Directors by giving at least three days' notice to each of the other Directors by mail, telephone, telegraph, or in person, provided that such notice may be waived either before, at, or after a meeting by any Director by a signed waiver in writing. Section 5. Any action which might have been taken at a meeting of the Board of Directors may be taken without a meeting if done in writing, signed by all of the Directors, and any such action shall be as valid and effective in all respects as if taken by the Board at a regular meeting. Section 6. The Board of Directors shall fix and change as it may from time to time determine by a majority vote, the compensation to be paid the officers of the corporation, and, if deemed appropriate, the members of the Board of Directors. Section 7. Subject to the provisions of applicable laws and its Articles of Incorporation, the Board of Directors shall have full power to determine whether any, and if any, what part of any, funds legally available for the payment of the dividends shall be declared in dividends and 2 paid to the shareholders; the division of the whole or any part of such funds of this corporation shall rest wholly within the discretion of the Board of Directors, and it shall not be required at any time, against such discretion, to divide or pay any part of such funds among or to the stockholders as dividends or otherwise. Section 8. Except as otherwise provided in Article III of these Bylaws, the Board of Directors may, in its discretion, by the affirmative vote of a majority of the Directors, appoint committees which shall have and may exercise such powers as shall be conferred or authorized by the resolutions appointing them. A majority of any such committee, if the committee be composed of more than two members, may determine its action and fix the time and place of its meetings, unless the Board of Directors shall otherwise provide. The Board of Directors shall have power at any time to fill vacancies in, to change the membership of, or to discharge any such committee. ARTICLE III Executive Committee The Board of Directors may by unanimous affirmative action of the entire Board designate two or more of their number to constitute an Executive Committee which, to the extent determined by unanimous affirmative action of the Board, shall have and exercise the authority of the Board in the management of the business of the corporation. Such Executive Committee shall act only in the interval between meetings of the Board and shall be subject at all times to the control and direction of the Board. ARTICLE IV Officers Section 1. The officers of this corporation shall be a Chairman of the Board of Directors, a President (one of which may be designated Chief Executive Officer in the discretion of the Directors), one or more Vice Presidents (any one of which may be designated as Executive Vice President in the discretion of the Directors), a Treasurer, a Secretary, and such other and further officers, including any number of Assistant Secretaries and Assistant Treasurers as may be deemed necessary from time to time by the Board of Directors, each of whom shall be elected by the Board of Directors. One person may hold any two offices other than those of President and Vice President. No more than two offices shall be held by any one person. Each officer shall serve at the pleasure of the Board of Directors until the next annual meeting of Directors and until his successor is duly elected and qualifies. Notwithstanding the foregoing, the Board of Directors shall have the power and authority to cause the corporation to enter into Employment Agreements or Contracts with any of the officers of the corporation for periods exceeding one year. 3 Section 2. The Chairman of the Board of Directors shall preside at meetings of shareholders and Directors. Section 3. The Chief Executive Officer shall have general and active management of the business under the supervision and direction of the Board of Directors and he shall be responsible for carrying into effect all orders and resolutions of the Board of Directors. He shall also have such other powers and perform such other duties as the Board of Directors may from time to time prescribe. The position of Chief Executive Officer shall be filled, at the Board of Directors' discretion, either by the Chairman or the President. Section 4. The Board of Directors may also appoint a Chief Operating Officer with duties to be determined by the Chief Executive Officer. Unless he is also serving as the Chief Executive Officer, the President would be appointed as Chief Operating Officer. If the President is also serving as Chief Executive Officer, the President shall nominate an Executive Vice President to be appointed by the Board as Chief Operating Officer. Section 5. The Vice Presidents of the corporation shall each have such powers and duties as generally pertain to their respective offices as well as such powers and duties as from time to time may be conferred by the Board of Directors. Section 6. The Secretary shall keep a record of the meetings and proceedings of the Directors and shareholders, have custody of the corporate seal and of other corporate records specifically entrusted to him by these Bylaws or by direction of the Board of Directors, and shall give notice of such meetings as are required by these Bylaws or by the Directors. Section 7. The Treasurer shall keep accounts of all monies and assets of the corporation received or disbursed, shall deposit all funds in the name of and to the credit of the corporation in such banks or depositories or with such custodians as may be authorized to receive the same by these Bylaws or the Board of Directors, and shall render such accounts thereof as may be required by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President, or the shareholders. ARTICLE V Fiscal Year The fiscal year of the corporation shall be from the first day of October to the 30th day of September in the succeeding year. ARTICLE VI Office The principal office of this corporation shall be at such place as the Board of Directors shall fix from time to time. The corporation may also have an office or offices at such other places and in such other states or countries as the Board of Directors may from time to time authorize and establish. 4 ARTICLE VII Seal The corporation shall have a corporate seal which shall bear the name of the corporation and the name of the state of incorporation and the words "corporate seal". It shall be in such form and bear such other inscription as the Board of Directors may determine or approve. ARTICLE VIII General Provisions Section 1. Shares of stock in this corporation not exceeding the authorized number thereof as specified in the Articles of Incorporation may be issued, and certificates therefore shall be authenticated by the Chairman of the Board of Directors, or the President or any Vice President and the Secretary or Treasurer upon authorization by the Board of Directors and receipt by the corporation of such consideration for such shares as shall be specified by the Board of Directors. In the event that a bank, trust company of other similarly qualified corporation is designated and agrees to act as the registrar and/or transfer agent for the corporation, then the signatures of the officers specified above and the seal of the corporation may be imprinted upon the stock certificates by facsimile and said certificates may be authenticated by signature of an authorized agent of the said registrar and/or transfer agent. The officers of the corporation may delegate to such transfer agent and/or registrar such of the duties relating to the recording and maintenance of records relating to shares of stock and shareholders of the corporation as may be deemed expedient and convenient and as are assumed by said registrar and/or transfer agent. Section 2. The Board of Directors may establish reasonable regulations for recording of transfers of shares of stock in this corporation, and may establish a date, not earlier than 60 days prior to any shareholders' meeting, as of which the shareholders entitled to vote and participate in any shareholders' meeting shall be determined. Section 3. From time to time as it may deem appropriate and advantageous to the best interests of this corporation, the Board of Directors may establish such bonus, pension, profit sharing, stock bonus, stock purchase, stock option, or other employee incentive plans, as and for the benefit of such of the corporation's employees as it in its sole discretion shall determine. Section 4. No certificate for shares of stock in the corporation, or any other security issued by this corporation, shall be issued in place of any certificate alleged to have been lost, destroyed or stolen, except on production of such evidence of such loss, destruction or theft and on delivery to the corporation, if the Board of Directors shall so require, of a bond of indemnity in such amount (not exceeding twice the value of the shares represented by such certificate), upon such terms and secured by such surety as the Board of Directors may in its discretion require. Section 5. Any person who at any time shall serve or shall have served as a director, officer or employee of the corporation, or of any other enterprise at the request of the 5 corporation, and the heirs, executors and administrators of such person, shall be indemnified by the corporation in accordance with, and to the fullest extent permitted by, the provisions of the Minnesota Business Corporation Act, as it may be amended from time to time. ARTICLE IX Adoption and Amendment Section 1. These Bylaws shall become and remain effective until amended or superseded as hereinafter provided when they shall have been adopted by the Board of Directors named in the Articles of Incorporation or in the absence of such adoption, by the shareholders. Section 2. The Board of Directors may alter or may amend these Bylaws and may make or adopt additional Bylaws, subject to the power of the shareholders to change or repeal the Bylaws; provided the Board of Directors shall not make or alter any Bylaw fixing their qualifications, classifications, term of office, or number, except the Board of Directors may make or alter any Bylaw to increase their number. Section 3. The shareholder may alter or amend these Bylaws and may make or adopt additional Bylaws by a majority vote at any annual meeting of the shareholders or at any special meeting called for that purpose. 6 EX-10.A 3 MANAGEMENT VARIABLE COMPENSATION (MVC) PLAN EXHIBIT 10.a (Approved by the Board HR Committee December 3, 1997) MANAGEMENT VARIABLE COMPENSATION (MVC) PLAN FISCAL '98 EFFECTIVE FOR ALL UNITS EXCEPT CUSTOM SERVO MOTORS AND AEROMET 1. PURPOSE OF PLAN To focus efforts on achievement of objectives which are critical to the success of the Company; to reward accomplishment at a level above competition when performance is above that of comparable companies; to more closely couple total compensation costs (salary plus variable) to the financial results of the enterprise. The Plan's payout is primarily related to achievement of Corporate/Sector/Division/Niche profit and growth objectives. Other measurable objectives may be included at the discretion of the cognizant officer with approval by the CEO. 2. RELATIONSHIP TO OTHER COMPENSATION PLANS 2.a SALARY PLAN The midpoint of a given salary range will be suppressed by 1/4th of the average competitive payout potential of participants in that range to conform to the Company's fixed vs. variable compensation strategy (i.e., if the participants in a range have an average competitive payout potential of 20%, the midpoint of that range will be suppressed 5%). 2.b "NON MANAGEMENT" VARIABLE COMPENSATION PLAN (NMVC) Certain units may have a variable compensation plan for employees who are not eligible for the MVC, sales commissions, or other variable compensation plans. Payout in these NMVC Plans is linked directly to payout on the unit's MVC profit objectives. These non-management plans are subject to the approval of the unit vice president, corporate Human Resources manager and CEO. The following is an outline summary to which these NMVC plans must adhere. They are included in this MVC Plan for reference only. 2.b(1) NMVC Competitive payout potential is 3% of the midpoint of the salary range in which the employee is placed at the beginning of the fiscal year. 2.b(2) NMVC payout will normally be based on the results of the employee's unit vice president's (in some cases the unit manager's) profit objective(s) for the year. If the unit's vice president (manager)has more than one such objective, the payout will be based on the weighted average of the officer's objectives. '98 MVC Plan Page 2 2.b(3) The entire 3% NMVC payout potential is eligible for overranging for participating employees. The overranging will be at the same ratio as the unit officer (manager's) profit objective(s) overranging, if any. 2.b(4) Eligibility and participation rules for NMVC will be the same as those for MVC, where appropriate. 2.c RETIREMENT PLAN The calculations for the Management Variable Compensation Plan (and "NMVC") are made after deductions for retirement plans. Payout to a U.S. based participant in the Management Variable Compensation Plan (and "NMVC") is included in the calculation of the Company's contribution to that employee's retirement plan. 3. ELIGIBILITY AND PARTICIPATION * Corporate officers * Unit vice presidents * Market and functional unit managers * Managers, technical supervisors and key marketing or technical employees who meet certain minimum responsibilities for profitability, financial/human resource acquisition and allocation, balance sheet control, and/or market/technical direction - defined as beginning at SAM 15 and TE 5, or equivalent. An employee must be in such a position by the November Board of Directors meeting in order to be eligible for the fiscal year plan beginning the preceding 1 October, unless otherwise authorized by the CEO. Certain subsidiaries may have other management variable compensation plans approved by the cognizant corporate vice president, corporate HR manager and CEO. An officer may recommend that an employee, who is otherwise eligible, not participate but such a recommendation must be agreed to by the CEO. Participants are eligible for payout in proportion to the % of the fiscal year the participant is responsible for the qualifying position, unless otherwise authorized by the CEO. Employees who work less than full time during a year (e.g., due to a personal leave, but not due to illness) would earn a proportionately reduced payout. Unless authorized by the CEO, no payout will be made to employees who work less than 1,000 hours in the fiscal year. '98 MVC Plan Page 3 The participant must be on MTS' payroll at the end of the fiscal year to qualify for a payout. Employees resigning or terminated before the end, regardless of cause, are not eligible unless otherwise authorized by the CEO. (An example of an exception could be early retirement or voluntary separation under a workforce reduction plan.) No employment contract is implied by participation in this Plan. 4. ESTABLISHMENT OF OBJECTIVES a. The Board of Directors sets the CEO's Corporate profit objectives (Return on Beginning Equity [ROBE]/share and Return on Average Net Assets [ROANA]), the revenue growth objective, and the CEO's individual "other" objective, at their November meeting. b. Profit objectives for other participants (typically ROANA, but may be contribution or pretax for other than officers) and their revenue growth objective will also be finalized by the December '97 Board of Directors' meeting. They are not renegotiable. All other objectives must be finalized by 15 December. The cognizant officers and CEO approve the profit and revenue growth objectives for other participants. The purpose of these approvals is to: * Integrate objectives into Company operating plan * Guard against conflicting objectives * Help to assure consistency in degree of difficulty The cognizant vice president and one other manager approve all "other" objectives c. Each participant whose competitive payout potential exceeds 10% will have a mix of objectives per paragraph 7. 5. CRITERIA FOR OBJECTIVES 5.a CORPORATE The Corporate Profit and Growth, Objectives are set by the Board based on the current 3 Year Business Plan. Currently they are: ROBE/Share: 15% return on beginning equity/share (span -1/3 to + 2/3) Or A EPS: 15% increase (span -1/3 to + 2/3) ROANA: 21% (span -1/3 to + 2/3), calculated with net assets including cash above short term borrowings. '98 MVC Plan Page 4 (Both ROBE and ROANA may be increased in '98 based on an analysis of comparable company performance and MTS's cost of capital.) Revenue Growth 12% /year; span +/-1/3 All objectives include all transactions, acquisitions, write-offs, sale of assets, etc. unless specifically excluded by the Board in writing. 5.b UNIT Sector/Division/Niche profit and growth objectives are set as appropriate for the 3 Year Business Plan for the unit. For example, (MT&S + MTS PowerTek + ASD) ROANA objectives are 19.25% cashless for '97; and 22.5% cashless for '98. Sector/Niches whose ROANA budget in a given year exceeds the equivalent of the Corporate ROANA goal without cash (22.5%) could have their budget number as their MVC goal, but it would not more than 120% of the equivalent Corporate goal (1.2 x 22.5 = 27%) Revenue growth objectives are set on a year-to-year basis using the current three year business plan as a reference. "Other" objectives must be stated in measurable terms and must not be activities (i.e. number of sales calls or technical society presentations). 6. COMPETITIVE PAYOUT POTENTIAL The competitive payout potential, when added to the mid-point of the salary range is intended to yield total cash compensation somewhat above that of comparable companies to compensate for the salary suppression (ref. 2a). The competitive payout potential, expressed as a % of the midpoint of the salary structure, or actual salary in the case of subsidiary management, is shown below:
POSITION COMPETITIVE PAYOUT POTENTIAL % CEO E5 70 Executive Vice President, MT&S E-4 50 Vice President E-3 25-50, depending on revenue level (profit potential) Vice President E-2 25-50, depending on revenue level (profit potential) Vice President (Unit) E-1 15-45, depending on revenue level (profit potential) Market Division P&L Mgrs. SAM 17-21 15-35, depending on revenue level (profit potential) All Other Management/ Leadership SAM 18-21 10-25, depending on profit impact SAM 15-17 6-20, depending on profit impact TE 5/5S -9/9S 6-15, depending on profit impact
'98 MVC Plan Page 5 7. OVERRANGING/MAXIMUM POTENTIAL PAYOUT The objectives are set at challenging but realistic levels which are used in the overall process of planning and resource allocation. This is not meant to be a limit to our aspirations, and performance above of those objectives should be rewarded as it is to the benefit of all stakeholders in the enterprise. Payout above the competitive payout potential is termed overranging. Two MVC mixes are possible for participants with a competitive payout potential of 15% or higher. Both versions yield the same maximum potential expressed at a percentage of competitive payout. A) Financial objective at 70% with 300% overranging (O.R.) Other objectives including revenue growth at 30% with no O.R. (70 x 3) + (30 x 1) = 240% B) Financial objectives at 60% with 300% O.R. Revenue growth objective at 20% with 200% O.R. Other objectives at 20% without O.R. (60 x 3) + (20 x 2) + (20 x 1) = 240% The unit VP and CEO determine which mix is appropriate for each participant 8. PAYOUT Payouts under this Plan (and the Non Management Variable Compensation Plan) are considered costs for the calculation of profit objectives (EPS/ROANA/Pretax/Contribution); so simultaneous equations are used for calculations. Payouts are audited by the manager of internal audit and approved by the CFO. Payout will be made within 90 days of the end of the fiscal year. 9. APPROVAL OF PLAN The Plan, and participation therein, are subject to annual review and approval by the Board of Directors. EX-10.F 4 SEVERANCE AGREEMENT EXHIBIT 10.f SEVERANCE AGREEMENT AGREEMENT made as of this 5th day of March, 1998 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and William G. Beduhn (the "Executive"). WHEREAS, MTS considers the establishment and maintenance of a sound and vital management and an orderly succession plan to be essential to protecting and enhancing the best interests of MTS and its shareholders; and WHEREAS, Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of MTS, its policies, methods, personnel and problems, a significant contribution to the profitability, growth and financial strength of MTS; and WHEREAS, Executive is willing to remain in the employ of MTS upon the understanding that MTS will provide income security if the Executive's employment is terminated under certain terms and conditions; and WHEREAS, this Agreement is consistent with the requirements of the executive/high policy-making exception to the Age Discrimination in Employment Act, 29 U.S.C. Section 631(c)(1) (the "Executive Exemption"), benefits in connection therewith are pursuant to pension, profit sharing and deferred compensation plans as defined therein, and Executive, by virtue of his/her duties and responsibilities on behalf of MTS, qualifies under said exception for mandatory retirement on or after his/her 65th birthday; and WHEREAS, MTS is providing Executive, simultaneously with this Agreement, consideration in the form of a Change in Control Agreement, to provide additional benefits to Executive in the event of a change in control; NOW THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until the earlier of (a) the date on which the Executive and MTS agree in writing to terminate this Agreement, or (b) the Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If a change in control occurs, as defined in that certain agreement between the Executive and MTS of even date herewith (the "Change in Control Agreement", attached as Exhibit 1), this Agreement shall be superseded by the provisions of the Change in Control Agreement except as provided in the following sentence. MTS's right under this Agreement to terminate the Executive's employment pursuant to the Executive Exemption shall not be superseded by the Change in Control Agreement and the Executive shall be entitled to receive the benefits to which he/she is entitled under subparagraph 4(d) hereunder if such termination occurs. Severance Agreement Page 2 2. Termination by Reason of Death or Disability. In the event of the Executive's death or disability during the Term of this Agreement, Executive shall be entitled to such benefits provided under any policy, plan or program governing death or disability maintained by MTS and covering such Executive and this Agreement shall not apply. The determination of disability and the amount and entitlement of benefits shall be governed by the terms of such policy, plan or program. In the event of the Executive's disability, the Executive's Date of Termination shall be the date on which Executive has been unable, by reason of physical or mental disability, to perform the services required of him/her for his/her position, even with reasonable accommodation, for the period of time indicated in MTS's group long term disability plan (in which the Executive is a participant) during which a participant must be disabled before benefits become payable. In connection with Executive's termination due to disability, a qualified physician must certify the disability and MTS shall at all times comply with the Americans With Disabilities Act and any other applicable disability discrimination law. 3. Resignation or Termination for Cause. (a) The Executive may resign his/her employment or MTS may terminate the Executive's employment for Cause, effective as of the Date of Termination set forth in the Notice of Termination. If Executive resigns or his/her employment is terminated by MTS for Cause, MTS shall pay to Executive his/her full base salary through the Date of Termination at the rate in effect at the time of Notice of Termination is given and MTS shall have no further obligation to Executive under this Agreement. (b) Termination by MTS of Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (ii) willful misconduct by the Executive; or (iii) violation by the Executive of any employment agreement applicable to the Executive. 4. Termination Other Than for Cause. MTS may terminate Executive's employment for a reason other than Cause, including pursuant to the Executive Exemption on or after Executive's 65th birthday, effective as of the Date of Termination set forth in the Notice of Termination. If Executive's employment is terminated by MTS other than for Cause, death or disability, Executive shall be entitled, subject to subparagraph 4(d)(v) and paragraph 9 of this Agreement, to the benefits described in subparagraphs (a), (b) and (c) below and, if applicable, subparagraph (d) below. (a) Executive shall be paid a monthly Severance Payment equal to the Executive's Monthly Gross Income, as defined in subparagraph (i) below for 12 months. Severance Agreement Page 3 (i) For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts, subject to applicable federal and state withholding. (A) 1/12 of the highest average base salary for any 12- consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination; plus (B) 1/36 of the total Management Variable Compensation earned during the 3 most recent fiscal years 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) for the 3 most recent Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (A) and (B) above. (b) Following the Executive's Date of Termination and while severance payments are being paid to the Executive or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his/her Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his/her Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. MTS will deduct these amounts from its payments to the Executive. Benefits otherwise receivable by Executive pursuant to this subparagraph (b) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. Following the severance pay period, Executive shall be entitled to continue any of said benefits which qualify as group health and life insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law and pursuant to the terms of the plan. (c) The Executive's rights under any existing Employee Stock Option Agreement and any future such agreements, including particularly his/her right to exercise his/her options following his/her termination of employment, shall continue to be fully effective hereunder. In addition, if the Executive's termination of employment occurs pursuant to the Executive Exemption on or after he/she has reached his/her 65th birthday, the Executive shall continue to vest in any stock options in which he/she is not fully vested, as though he/she were continuing his/her employment with MTS as an active employee, subject at all times to the exercise times and Severance Agreement Page 4 other terms and conditions set forth in said Stock Option Agreements and to Executive's signing the release agreement described in paragraph 9 herein. (d) If Executive's termination of employment occurs pursuant to the Executive Exemption on or after he/she has reached his/her 65th birthday, Executive shall be entitled to receive the lump sum equivalent of the amount necessary to purchase a $44,000 pre-tax straight life annuity, said lump sum to be taken from MTS contributions and earnings thereon to Executive's accounts in MTS sponsored pension, profit sharing, and deferred compensation plans, as applicable. If Executive is entitled to less than that amount from the applicable MTS plans in which he/she is a participant as of his/her Date of Termination, then MTS shall make an additional contribution on Executive's behalf to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan. The amount to which Executive is entitled under subparagraph 4(a) of this Agreement shall be reduced by MTS's Section 3.4 contribution to the MTS Systems Corporation Executive Deferred Compensation Plan, as described in subparagraph (v) below. Calculation of the Executive's benefit shall be as follows: (i) The benefits to which Executive is entitled, as of his/her Date of Termination, under all MTS sponsored pension, profit sharing and deferred compensation plans shall be added together. (ii) Amounts in said plans, as determined in accordance with 29 Code of Federal Regulations ss. 1627.17, attributable to Social Security, employee contributions, contributions of prior employers, and rollover contributions, shall be subtracted from the subparagraph (i) amount and the resulting figure shall be the "Qualified Retirement Benefit". (iii) MTS shall determine the lump sum equivalent of the amount necessary to purchase a straight life annuity for Executive, effective as of his/her Date of Termination, which would provide Executive with $44,000 a year for life (the "ADEA Benefit"). MTS shall retain a certified actuary to determine said lump sum equivalent amount, using the applicable mortality table and applicable interest rate under Section 417(e) of the Internal Revenue Code and Regulations issued thereunder. (iv) If the Qualified Retirement Benefit exceeds the ADEA Benefit, the Executive shall have the option (but is not required) to receive the Qualified Retirement Benefit in a lump sum, as provided under the applicable plans, within 60 days following his/her Date of Termination. The Executive may elect to receive the Qualified Retirement Benefit in either a lump sum or a series of periodic payments pursuant to the terms of the applicable plans. The Executive may also receive the payments and benefits set forth in subparagraphs 4(a) and (b) of this Agreement provided he/she executes the release agreement required in paragraph 9 of this Agreement. The benefits set forth in subparagraph 4(c) shall at all times be available to the Executive. Severance Agreement Page 5 (v) If the Qualified Retirement Benefit is less than the ADEA Benefit, MTS shall make a contribution to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan, in an amount equal to the difference between the Qualified Retirement Benefit and the ADEA Benefit (the "Qualified Retirement Benefit Supplement"). The Executive shall have the option (but is not required) to receive the Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement from said Plan within 60 days following his/her Date of Termination. The Executive may elect to receive the Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement, in either a lump sum or a series of periodic payments pursuant to the terms of the applicable plans. The payments to Executive described in subparagraph 4(a) of this Agreement shall be reduced by the amount of MTS's contribution to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan, to create the Qualified Retirement Benefit Supplement. All payments remaining in subparagraph 4(a) after this reduction and the subparagraph 4(b) and (c) benefits shall be paid to Executive in accordance with the terms of those subparagraphs, provided Executive executes the release agreement required in paragraph 9 of this Agreement. (vi) Executive's Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement, shall be nonforfeitable and not subject to reduction or elimination by MTS for any reason. 5. No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise; nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits after the Date of Termination or otherwise except as specifically provided herein. 6. Non-Competition and Confidentiality (a) Executive agrees that, as a condition of receiving benefits under this Agreement, he/she will not render services directly or indirectly to any competing organization located in any market in which MTS is doing business as of Executive's Date of Termination for the period of time during which Executive is receiving benefits under this Agreement or the Change in Control Agreement, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any "Conflicting Product" which as used herein means any product, process, system or service of any person, firm, corporation, organization other than MTS, in existence or under development, which is the same as or similar to or competes with, or has a Severance Agreement Page 6 usage allied to, a product, process, system, or service produced, developed, or used by MTS. (b) Executive further agrees and acknowledges his/her existing obligation that, at all times during and subsequent to his/her employment with MTS, he/she will not divulge or appropriate to his/her own use or the uses of others any secret or confidential information pertaining to the business of MTS, or any of its subsidiaries, obtained during his/her employment by MTS or any of its subsidiaries. (c) If Executive violates his/her obligations under subparagraphs (a) and (b) above, any remaining payments or benefits otherwise due Executive pursuant to subparagraphs 4(a) and (b) of this Agreement shall not be paid. This subparagraph (c) specifically does not apply to the subparagraph 4(a) reduction amount equal to the Qualified Retirement Benefit Supplement, as described in subparagraph 4(d)(v). 7. Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, heirs, and designated beneficiaries. If Executive should die while any amount would still be payable to Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designated beneficiaries, or, if there is no such designated beneficiary, to the Executive's estate. 8. Notice of Termination. (a) Any purported termination of Executive's employment by either Executive or MTS under this Agreement, except as otherwise provided in paragraph 2 of this Agreement, shall be communicated by written notice to the other party. (b) For purposes of this Agreement, "Date of Termination" shall mean the date specified in the written Notice of Termination which shall not be less than 10 nor more than 60 days from the date such Notice of Termination is given. (c) Notice of Termination and all other communications provided for in the Agreement shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage pre-paid, addressed to the last known residence address of the Executive or in the case of MTS, to its principal office to the attention of each of the then directors of MTS with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Release of Claims. Executive's right to the benefits and payments described in subparagraphs 4(a), (b) and (c) of this Agreement, except as otherwise provided in Severance Agreement Page 7 subparagraph 4(d)(v) hereof, is contingent upon Executive's execution of a severance release agreement which shall be provided to Executive by MTS with or following his/her Notice of Termination. The severance release agreement shall require a full release of all claims which Executive may have against MTS or any MTS affiliate or individual associated with MTS, to the extent permitted by and consistent with applicable laws. Such release agreement shall prohibit Executive from recovering any amount in connection with a charge or lawsuit filed against MTS or any MTS affiliate, employee, shareholder, officer, director or other agent by Executive, EEOC or any other agency or entity on Executive's behalf based upon any act occurring prior to execution of said release agreement. The release agreement will be available for Executive's review, consideration and execution at least 45 days prior to his/her Date of Termination. 10. Injunctive Relief. Executive consents that, in the case of any violation or threatened violation of paragraph 6 of this Agreement, MTS may apply for and secure injunctive relief, temporary or provisional, in court, without bond but upon due notice, pending final resolution on the merits pursuant to arbitration as set forth in paragraph 11 hereof. No waiver of any violation of this Agreement shall be implied from any failure by MTS to take action under this paragraph. 11. Arbitration. Any and all claims or disputes between Executive and MTS (including the validity, scope, and enforceability of this paragraph), except as otherwise provided under paragraph 10 or prohibited under applicable law, shall be submitted for arbitration and resolution to an arbitrator. No demand for arbitration may be made after the date when the institution of legal or equitable proceedings based on such claim or dispute would be barred by the applicable statute of limitation. The arbitrator shall be selected by mutual agreement of the parties. Unless otherwise provided for in this Agreement, the Expedited Labor Arbitration Rules of the American Arbitration Association shall apply. If the parties are unable to agree upon an arbitrator, any such dispute shall be solely and finally settled by arbitration in accordance with the Expedited Labor Arbitration Rules of the American Arbitration Association ("AAA"). The parties agree that no punitive damages shall be awarded hereunder. The parties also agree that all awards, decisions and remedies in favor of a winning party hereunder with respect to any issue shall be proportional to the violation caused by the losing party with respect to that issue. All costs in conducting the arbitration, including but not limited to the arbitration filing fee, the arbitrator's fees and expenses, and the reasonable attorney's fees and expenses of the prevailing party (including the attorney's fees and costs incurred by the prevailing party in seeking or resisting temporary or provisional court relief as set out in paragraph 10 above), shall be the responsibility of the losing party. In the event there is more than one issue in dispute and there is no one prevailing party with respect to all issues in dispute, costs and attorney's fees shall be prorated by the arbitrator according to the relative dollar value of each issue. The arbitrator's Award shall be final and binding. In the event either party must resort to the judicial process to enforce the provisions of this Agreement, the award of an arbitrator or equitable relief granted by an arbitrator, the party seeking enforcement shall be entitled to recover from the other Severance Agreement Page 8 party all costs of litigation including, but not limited to, reasonable attorney's fees and court costs. The arbitration proceedings and Award shall be maintained by both parties as strictly confidential, except as otherwise required by court order and with respect to the parties' attorneys and tax advisors, and, with respect to MTS, members of its management, and, with respect to Executive, his/her family. 12. Miscellaneous. (a) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party hereto at any time of any breach by the other party to this Agreement of or compliance with, any other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. (b) No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. (c) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. (d) Any provision of this Agreement which conflicts with applicable law shall be modified to the extent necessary to ensure its enforceability. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. This Agreement supersedes any and all prior oral and written understandings and agreements between the Executive and MTS, including specifically the Employment Agreement between MTS and the Executive dated December 12, 1992 and attached as Exhibit 2. 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/ William G. Beduhn By /s/ Donald M. Sullivan --------------------------- --------------------------------- William G. Beduhn Its Chairman -------------------------------- EX-10.G 5 SEVERANCE AGREEMENT EXHIBIT 10.g SEVERANCE AGREEMENT AGREEMENT made as of this 13th day of May, 1998 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and Marshall L. Carpenter (the "Executive"). WHEREAS, MTS considers the establishment and maintenance of a sound and vital management and an orderly succession plan to be essential to protecting and enhancing the best interests of MTS and its shareholders; and WHEREAS, Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of MTS, its policies, methods, personnel and problems, a significant contribution to the profitability, growth and financial strength of MTS; and WHEREAS, Executive is willing to remain in the employ of MTS upon the understanding that MTS will provide income security if the Executive's employment is terminated under certain terms and conditions; and WHEREAS, this Agreement is consistent with the requirements of the executive/high policy-making exception to the Age Discrimination in Employment Act, 29 U.S.C. Section 631(c)(1) (the "Executive Exemption"), benefits in connection therewith are pursuant to pension, profit sharing and deferred compensation plans as defined therein, and Executive, by virtue of his/her duties and responsibilities on behalf of MTS, qualifies under said exception for mandatory retirement on or after his/her 65th birthday; and WHEREAS, MTS is providing Executive, simultaneously with this Agreement, consideration in the form of a Change in Control Agreement, to provide additional benefits to Executive in the event of a change in control; NOW THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until the earlier of (a) the date on which the Executive and MTS agree in writing to terminate this Agreement, or (b) the Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If a change in control occurs, as defined in that certain agreement between the Executive and MTS of even date herewith (the "Change in Control Agreement", attached as Exhibit 1), this Agreement shall be superseded by the provisions of the Change in Control Agreement except as provided in the following sentence. MTS's right under this Agreement to terminate the Executive's employment pursuant to the Executive Exemption shall not be superseded by the Change in Control Agreement and the Executive shall be entitled to receive the benefits to which he/she is entitled under subparagraph 4(d) hereunder if such termination occurs. Severance Agreement Page 2 2. Termination by Reason of Death or Disability. In the event of the Executive's death or disability during the Term of this Agreement, Executive shall be entitled to such benefits provided under any policy, plan or program governing death or disability maintained by MTS and covering such Executive and this Agreement shall not apply. The determination of disability and the amount and entitlement of benefits shall be governed by the terms of such policy, plan or program. In the event of the Executive's disability, the Executive's Date of Termination shall be the date on which Executive has been unable, by reason of physical or mental disability, to perform the services required of him/her for his/her position, even with reasonable accommodation, for the period of time indicated in MTS's group long term disability plan (in which the Executive is a participant) during which a participant must be disabled before benefits become payable. In connection with Executive's termination due to disability, a qualified physician must certify the disability and MTS shall at all times comply with the Americans With Disabilities Act and any other applicable disability discrimination law. 3. Resignation or Termination for Cause. (a) The Executive may resign his/her employment or MTS may terminate the Executive's employment for Cause, effective as of the Date of Termination set forth in the Notice of Termination. If Executive resigns or his/her employment is terminated by MTS for Cause, MTS shall pay to Executive his/her full base salary through the Date of Termination at the rate in effect at the time of Notice of Termination is given and MTS shall have no further obligation to Executive under this Agreement. (b) Termination by MTS of Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (ii) willful misconduct by the Executive; or (iii) violation by the Executive of any employment agreement applicable to the Executive. 4. Termination Other Than for Cause. MTS may terminate Executive's employment for a reason other than Cause, including pursuant to the Executive Exemption on or after Executive's 65th birthday, effective as of the Date of Termination set forth in the Notice of Termination. If Executive's employment is terminated by MTS other than for Cause, death or disability, Executive shall be entitled, subject to subparagraph 4(d)(v) and paragraph 9 of this Agreement, to the benefits described in subparagraphs (a), (b) and (c) below and, if applicable, subparagraph (d) below. (a) Executive shall be paid a monthly Severance Payment equal to the Executive's Monthly Gross Income, as defined in subparagraph (i) below for 18 months. If Executive's employment is terminated pursuant to the Executive Exemption as Severance Agreement Page 3 described in subparagraph 4(d) hereunder, "12" shall be substituted for 18 in the preceding sentence. (i) For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts, subject to applicable federal and state withholding. (A) 1/12 of the highest average base salary for any 12- consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination; plus (B) 1/36 of the total Management Variable Compensation earned during the 3 most recent fiscal years 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) for the 3 most recent Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (A) and (B) above. (b) Following the Executive's Date of Termination and while severance payments are being paid to the Executive or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his/her Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his/her Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. MTS will deduct these amounts from its payments to the Executive. Benefits otherwise receivable by Executive pursuant to this subparagraph (b) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. Following the severance pay period, Executive shall be entitled to continue any of said benefits which qualify as group health and life insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law and pursuant to the terms of the plan. (c) The Executive's rights under any existing Employee Stock Option Agreement and any future such agreements, including particularly his/her right to exercise his/her options following his/her termination of employment, shall continue to be fully effective hereunder. In addition, if the Executive's termination of employment occurs pursuant to the Executive Exemption on or after he/she has reached his/her 65th birthday, the Executive shall continue to vest in any stock options in which Severance Agreement Page 4 he/she is not fully vested, as though he/she were continuing his/her employment with MTS as an active employee, subject at all times to the exercise times and other terms and conditions set forth in said Stock Option Agreements and to Executive's signing the release agreement described in paragraph 9 herein. (d) If Executive's termination of employment occurs pursuant to the Executive Exemption on or after he/she has reached his/her 65th birthday, Executive shall be entitled to receive the lump sum equivalent of the amount necessary to purchase a $44,000 pre-tax straight life annuity, said lump sum to be taken from MTS contributions and earnings thereon to Executive's accounts in MTS sponsored pension, profit sharing, and deferred compensation plans, as applicable. If Executive is entitled to less than that amount from the applicable MTS plans in which he/she is a participant as of his/her Date of Termination, then MTS shall make an additional contribution on Executive's behalf to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan. The amount to which Executive is entitled under subparagraph 4(a) of this Agreement shall be reduced by MTS's Section 3.4 contribution to the MTS Systems Corporation Executive Deferred Compensation Plan, as described in subparagraph (v) below. Calculation of the Executive's benefit shall be as follows: (i) The benefits to which Executive is entitled, as of his/her Date of Termination, under all MTS sponsored pension, profit sharing and deferred compensation plans shall be added together. (ii) Amounts in said plans, as determined in accordance with 29 Code of Federal Regulations ss. 1627.17, attributable to Social Security, employee contributions, contributions of prior employers, and rollover contributions, shall be subtracted from the subparagraph (i) amount and the resulting figure shall be the "Qualified Retirement Benefit". (iii) MTS shall determine the lump sum equivalent of the amount necessary to purchase a straight life annuity for Executive, effective as of his/her Date of Termination, which would provide Executive with $44,000 a year for life (the "ADEA Benefit"). MTS shall retain a certified actuary to determine said lump sum equivalent amount, using the applicable mortality table and applicable interest rate under Section 417(e) of the Internal Revenue Code and Regulations issued thereunder. (iv) If the Qualified Retirement Benefit exceeds the ADEA Benefit, the Executive shall have the option (but is not required) to receive the Qualified Retirement Benefit in a lump sum, as provided under the applicable plans, within 60 days following his/her Date of Termination. The Executive may elect to receive the Qualified Retirement Benefit in either a lump sum or a series of periodic payments pursuant to the terms of the applicable plans. The Executive may also receive the payments and benefits set forth in subparagraphs 4(a) and (b) of this Agreement provided he/she executes the Severance Agreement Page 5 release agreement required in paragraph 9 of this Agreement. The benefits set forth in subparagraph 4(c) shall at all times be available to the Executive. (v) If the Qualified Retirement Benefit is less than the ADEA Benefit, MTS shall make a contribution to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan, in an amount equal to the difference between the Qualified Retirement Benefit and the ADEA Benefit (the "Qualified Retirement Benefit Supplement"). The Executive shall have the option (but is not required) to receive the Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement from said Plan within 60 days following his/her Date of Termination. The Executive may elect to receive the Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement, in either a lump sum or a series of periodic payments pursuant to the terms of the applicable plans. The payments to Executive described in subparagraph 4(a) of this Agreement shall be reduced by the amount of MTS's contribution to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan, to create the Qualified Retirement Benefit Supplement. All payments remaining in subparagraph 4(a) after this reduction and the subparagraph 4(b) and (c) benefits shall be paid to Executive in accordance with the terms of those subparagraphs, provided Executive executes the release agreement required in paragraph 9 of this Agreement. (vi) Executive's Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement, shall be nonforfeitable and not subject to reduction or elimination by MTS for any reason. 5. No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise; nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits after the Date of Termination or otherwise except as specifically provided herein. 6. Non-Competition and Confidentiality (a) Executive agrees that, as a condition of receiving benefits under this Agreement, he/she will not render services directly or indirectly to any competing organization located in any market in which MTS is doing business as of Executive's Date of Termination for the period of time during which Executive is receiving benefits under this Agreement or the Change in Control Agreement, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any "Conflicting Product" which as used herein means any product, process, system or service of any person, firm, Severance Agreement Page 6 corporation, organization other than MTS, in existence or under development, which is the same as or similar to or competes with, or has a usage allied to, a product, process, system, or service produced, developed, or used by MTS. (b) Executive further agrees and acknowledges his/her existing obligation that, at all times during and subsequent to his/her employment with MTS, he/she will not divulge or appropriate to his/her own use or the uses of others any secret or confidential information pertaining to the business of MTS, or any of its subsidiaries, obtained during his/her employment by MTS or any of its subsidiaries. (c) If Executive violates his/her obligations under subparagraphs (a) and (b) above, any remaining payments or benefits otherwise due Executive pursuant to subparagraphs 4(a) and (b) of this Agreement shall not be paid. This subparagraph (c) specifically does not apply to the subparagraph 4(a) reduction amount equal to the Qualified Retirement Benefit Supplement, as described in subparagraph 4(d)(v). 7. Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, heirs, and designated beneficiaries. If Executive should die while any amount would still be payable to Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designated beneficiaries, or, if there is no such designated beneficiary, to the Executive's estate. Severance Agreement Page 7 8. Notice of Termination. (a) Any purported termination of Executive's employment by either Executive or MTS under this Agreement, except as otherwise provided in paragraph 2 of this Agreement, shall be communicated by written notice to the other party. (b) For purposes of this Agreement, "Date of Termination" shall mean the date specified in the written Notice of Termination which shall not be less than 10 nor more than 60 days from the date such Notice of Termination is given. (c) Notice of Termination and all other communications provided for in the Agreement shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage pre-paid, addressed to the last known residence address of the Executive or in the case of MTS, to its principal office to the attention of each of the then directors of MTS with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Release of Claims. Executive's right to the benefits and payments described in subparagraphs 4(a), (b) and (c) of this Agreement, except as otherwise provided in subparagraph 4(d)(v) hereof, is contingent upon Executive's execution of a severance release agreement which shall be provided to Executive by MTS with or following his/her Notice of Termination. The severance release agreement shall require a full release of all claims which Executive may have against MTS or any MTS affiliate or individual associated with MTS, to the extent permitted by and consistent with applicable laws. Such release agreement shall prohibit Executive from recovering any amount in connection with a charge or lawsuit filed against MTS or any MTS affiliate, employee, shareholder, officer, director or other agent by Executive, EEOC or any other agency or entity on Executive's behalf based upon any act occurring prior to execution of said release agreement. The release agreement will be available for Executive's review, consideration and execution at least 45 days prior to his/her Date of Termination. 10. Injunctive Relief. Executive consents that, in the case of any violation or threatened violation of paragraph 6 of this Agreement, MTS may apply for and secure injunctive relief, temporary or provisional, in court, without bond but upon due notice, pending final resolution on the merits pursuant to arbitration as set forth in paragraph 11 hereof. No waiver of any violation of this Agreement shall be implied from any failure by MTS to take action under this paragraph. 11. Arbitration. Any and all claims or disputes between Executive and MTS (including the validity, scope, and enforceability of this paragraph), except as otherwise provided under paragraph 10 or prohibited under applicable law, shall be submitted for arbitration and resolution to an arbitrator. No demand for arbitration Severance Agreement Page 8 may be made after the date when the institution of legal or equitable proceedings based on such claim or dispute would be barred by the applicable statute of limitation. The arbitrator shall be selected by mutual agreement of the parties. Unless otherwise provided for in this Agreement, the Expedited Labor Arbitration Rules of the American Arbitration Association shall apply. If the parties are unable to agree upon an arbitrator, any such dispute shall be solely and finally settled by arbitration in accordance with the Expedited Labor Arbitration Rules of the American Arbitration Association ("AAA"). The parties agree that no punitive damages shall be awarded hereunder. The parties also agree that all awards, decisions and remedies in favor of a winning party hereunder with respect to any issue shall be proportional to the violation caused by the losing party with respect to that issue. All costs in conducting the arbitration, including but not limited to the arbitration filing fee, the arbitrator's fees and expenses, and the reasonable attorney's fees and expenses of the prevailing party (including the attorney's fees and costs incurred by the prevailing party in seeking or resisting temporary or provisional court relief as set out in paragraph 10 above), shall be the responsibility of the losing party. In the event there is more than one issue in dispute and there is no one prevailing party with respect to all issues in dispute, costs and attorney's fees shall be prorated by the arbitrator according to the relative dollar value of each issue. The arbitrator's Award shall be final and binding. In the event either party must resort to the judicial process to enforce the provisions of this Agreement, the award of an arbitrator or equitable relief granted by an arbitrator, the party seeking enforcement shall be entitled to recover from the other party all costs of litigation including, but not limited to, reasonable attorney's fees and court costs. The arbitration proceedings and Award shall be maintained by both parties as strictly confidential, except as otherwise required by court order and with respect to the parties' attorneys and tax advisors, and, with respect to MTS, members of its management, and, with respect to Executive, his/her family. 12. Miscellaneous. (a) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party hereto at any time of any breach by the other party to this Agreement of or compliance with, any other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. (b) No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. (c) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. (d) Any provision of this Agreement which conflicts with applicable law shall be modified to the extent necessary to ensure its enforceability. The invalidity or Severance Agreement Page 9 unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. This Agreement supersedes any and all prior oral and written understandings and agreements between the Executive and MTS, including specifically the Employment Agreement between MTS and the Executive dated May 1, 1990 and attached as Exhibit 2. 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/ Marshall L. Carpenter By /s/ Donald M. Sullivan --------------------------- --------------------------------- Marshall L. Carpenter Its Chairman -------------------------------- EX-10.M 6 SEVERANCE AGREEMENT EXHIBIT 10.m SEVERANCE AGREEMENT AGREEMENT made as of this 27th day of March, 1998 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and Keith D. Zell (the "Executive"). WHEREAS, MTS considers the establishment and maintenance of a sound and vital management and an orderly succession plan to be essential to protecting and enhancing the best interests of MTS and its shareholders; and WHEREAS, Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of MTS, its policies, methods, personnel and problems, a significant contribution to the profitability, growth and financial strength of MTS; and WHEREAS, Executive is willing to remain in the employ of MTS upon the understanding that MTS will provide income security if the Executive's employment is terminated under certain terms and conditions; and WHEREAS, this Agreement is consistent with the requirements of the executive/high policy-making exception to the Age Discrimination in Employment Act, 29 U.S.C. Section 631(c)(1) (the "Executive Exemption"), benefits in connection therewith are pursuant to pension, profit sharing and deferred compensation plans as defined therein, and Executive, by virtue of his/her duties and responsibilities on behalf of MTS, qualifies under said exception for mandatory retirement on or after his/her 65th birthday; and WHEREAS, MTS is providing Executive, simultaneously with this Agreement, consideration in the form of a Change in Control Agreement, to provide additional benefits to Executive in the event of a change in control; NOW THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until the earlier of (a) the date on which the Executive and MTS agree in writing to terminate this Agreement, or (b) the Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If a change in control occurs, as defined in that certain agreement between the Executive and MTS of even date herewith (the "Change in Control Agreement", attached as Exhibit 1), this Agreement shall be superseded by the provisions of the Change in Control Agreement except as provided in the following sentence. MTS's right under this Agreement to terminate the Executive's employment pursuant to the Executive Exemption shall not be superseded by the Change in Control Agreement and the Executive shall be entitled to receive the benefits to which he/she is entitled under subparagraph 4(d) hereunder if such termination occurs. Severance Agreement Page 2 2. Termination by Reason of Death or Disability. In the event of the Executive's death or disability during the Term of this Agreement, Executive shall be entitled to such benefits provided under any policy, plan or program governing death or disability maintained by MTS and covering such Executive and this Agreement shall not apply. The determination of disability and the amount and entitlement of benefits shall be governed by the terms of such policy, plan or program. In the event of the Executive's disability, the Executive's Date of Termination shall be the date on which Executive has been unable, by reason of physical or mental disability, to perform the services required of him/her for his/her position, even with reasonable accommodation, for the period of time indicated in MTS's group long term disability plan (in which the Executive is a participant) during which a participant must be disabled before benefits become payable. In connection with Executive's termination due to disability, a qualified physician must certify the disability and MTS shall at all times comply with the Americans With Disabilities Act and any other applicable disability discrimination law. 3. Resignation or Termination for Cause. (a) The Executive may resign his/her employment or MTS may terminate the Executive's employment for Cause, effective as of the Date of Termination set forth in the Notice of Termination. If Executive resigns or his/her employment is terminated by MTS for Cause, MTS shall pay to Executive his/her full base salary through the Date of Termination at the rate in effect at the time of Notice of Termination is given and MTS shall have no further obligation to Executive under this Agreement. (b) Termination by MTS of Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (ii) willful misconduct by the Executive; or (iii) violation by the Executive of any employment agreement applicable to the Executive. 4. Termination Other Than for Cause. MTS may terminate Executive's employment for a reason other than Cause, including pursuant to the Executive Exemption on or after Executive's 65th birthday, effective as of the Date of Termination set forth in the Notice of Termination. If Executive's employment is terminated by MTS other than for Cause, death or disability, Executive shall be entitled, subject to subparagraph 4(d)(v) and paragraph 9 of this Agreement, to the benefits described in subparagraphs (a), (b) and (c) below and, if applicable, subparagraph (d) below. (a) Executive shall be paid a monthly Severance Payment equal to the Executive's Monthly Gross Income, as defined in subparagraph (i) below for 15 months. If Executive's employment is terminated pursuant to the Executive Exemption as Severance Agreement Page 3 described in subparagraph 4(d) hereunder, "12" shall be substituted for 15 in the preceding sentence. (i) For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts, subject to applicable federal and state withholding. (A) 1/12 of the highest average base salary for any 12- consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination; plus (B) 1/36 of the total Management Variable Compensation earned during the 3 most recent fiscal years 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) for the 3 most recent Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (i) and (ii) above. (b) Following the Executive's Date of Termination and while severance payments are being paid to the Executive or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his/her Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his/her Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. MTS will deduct these amounts from its payments to the Executive. Benefits otherwise receivable by Executive pursuant to this subparagraph (b) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. Following the severance pay period, Executive shall be entitled to continue any of said benefits which qualify as group health and life insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law and pursuant to the terms of the plan. (c) The Executive's rights under any existing Employee Stock Option Agreement and any future such agreements, including particularly his/her right to exercise his/her options following his/her termination of employment, shall continue to be fully effective hereunder. In addition, if the Executive's termination of employment occurs pursuant to the Executive Exemption on or after he/she has reached his/her 65th birthday, the Executive shall continue to vest in any stock options in which Severance Agreement Page 4 he/she is not fully vested, as though he/she were continuing his/her employment with MTS as an active employee, subject at all times to the exercise times and other terms and conditions set forth in said Stock Option Agreements and to Executive's signing the release agreement described in paragraph 9 herein. (d) If Executive's termination of employment occurs pursuant to the Executive Exemption on or after he/she has reached his/her 65th birthday, Executive shall be entitled to receive the lump sum equivalent of the amount necessary to purchase a $44,000 pre-tax straight life annuity, said lump sum to be taken from MTS contributions and earnings thereon to Executive's accounts in MTS sponsored pension, profit sharing, and deferred compensation plans, as applicable. If Executive is entitled to less than that amount from the applicable MTS plans in which he/she is a participant as of his/her Date of Termination, then MTS shall make an additional contribution on Executive's behalf to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan. The amount to which Executive is entitled under subparagraph 4(a) of this Agreement shall be reduced by MTS's Section 3.4 contribution to the MTS Systems Corporation Executive Deferred Compensation Plan, as described in subparagraph (v) below. Calculation of the Executive's benefit shall be as follows: (i) The benefits to which Executive is entitled, as of his/her Date of Termination, under all MTS sponsored pension, profit sharing and deferred compensation plans shall be added together. (ii) Amounts in said plans, as determined in accordance with 29 Code of Federal Regulations ss. 1627.17, attributable to Social Security, employee contributions, contributions of prior employers, and rollover contributions, shall be subtracted from the subparagraph (i) amount and the resulting figure shall be the "Qualified Retirement Benefit". (iii) MTS shall determine the lump sum equivalent of the amount necessary to purchase a straight life annuity for Executive, effective as of his/her Date of Termination, which would provide Executive with $44,000 a year for life (the "ADEA Benefit"). MTS shall retain a certified actuary to determine said lump sum equivalent amount, using the applicable mortality table and applicable interest rate under Section 417(e) of the Internal Revenue Code and Regulations issued thereunder. (iv) If the Qualified Retirement Benefit exceeds the ADEA Benefit, the Executive shall have the option (but is not required) to receive the Qualified Retirement Benefit in a lump sum, as provided under the applicable plans, within 60 days following his/her Date of Termination. The Executive may elect to receive the Qualified Retirement Benefit in either a lump sum or a series of periodic payments pursuant to the terms of the applicable plans. The Executive may also receive the payments and benefits set forth in subparagraphs 4(a) and (b) of this Agreement provided he/she executes the Severance Agreement Page 5 release agreement required in paragraph 9 of this Agreement. The benefits set forth in subparagraph 4(c) shall at all times be available to the Executive. (v) If the Qualified Retirement Benefit is less than the ADEA Benefit, MTS shall make a contribution to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan, in an amount equal to the difference between the Qualified Retirement Benefit and the ADEA Benefit (the "Qualified Retirement Benefit Supplement"). The Executive shall have the option (but is not required) to receive the Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement from said Plan within 60 days following his/her Date of Termination. The Executive may elect to receive the Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement, in either a lump sum or a series of periodic payments pursuant to the terms of the applicable plans. The payments to Executive described in subparagraph 4(a) of this Agreement shall be reduced by the amount of MTS's contribution to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan, to create the Qualified Retirement Benefit Supplement. All payments remaining in subparagraph 4(a) after this reduction and the subparagraph 4(b) and (c) benefits shall be paid to Executive in accordance with the terms of those subparagraphs, provided Executive executes the release agreement required in paragraph 9 of this Agreement. (vi) Executive's Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement, shall be nonforfeitable and not subject to reduction or elimination by MTS for any reason. 5. No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise; nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits after the Date of Termination or otherwise except as specifically provided herein. 6. Non-Competition and Confidentiality (a) Executive agrees that, as a condition of receiving benefits under this Agreement, he/she will not render services directly or indirectly to any competing organization located in any market in which MTS is doing business as of Executive's Date of Termination for the period of time during which Executive is receiving benefits under this Agreement or the Change in Control Agreement, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any "Conflicting Product" which as used herein means any product, process, system or service of any person, firm, Severance Agreement Page 6 corporation, organization other than MTS, in existence or under development, which is the same as or similar to or competes with, or has a usage allied to, a product, process, system, or service produced, developed, or used by MTS. (b) Executive further agrees and acknowledges his/her existing obligation that, at all times during and subsequent to his/her employment with MTS, he/she will not divulge or appropriate to his/her own use or the uses of others any secret or confidential information pertaining to the business of MTS, or any of its subsidiaries, obtained during his/her employment by MTS or any of its subsidiaries. (c) If Executive violates his/her obligations under subparagraphs (a) and (b) above, any remaining payments or benefits otherwise due Executive pursuant to subparagraphs 4(a) and (b) of this Agreement shall not be paid. This subparagraph (c) specifically does not apply to the subparagraph 4(a) reduction amount equal to the Qualified Retirement Benefit Supplement, as described in subparagraph 4(d)(v). 7. Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, heirs, and designated beneficiaries. If Executive should die while any amount would still be payable to Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designated beneficiaries, or, if there is no such designated beneficiary, to the Executive's estate. 8. Notice of Termination. (a) Any purported termination of Executive's employment by either Executive or MTS under this Agreement, except as otherwise provided in paragraph 2 of this Agreement, shall be communicated by written notice to the other party. (b) For purposes of this Agreement, "Date of Termination" shall mean the date specified in the written Notice of Termination which shall not be less than 10 nor more than 60 days from the date such Notice of Termination is given. (c) Notice of Termination and all other communications provided for in the Agreement shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage pre-paid, addressed to the last known residence address of the Executive or in the case of MTS, to its principal office to the attention of each of the then directors of MTS with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. Severance Agreement Page 7 9. Release of Claims. Executive's right to the benefits and payments described in subparagraphs 4(a), (b) and (c) of this Agreement, except as otherwise provided in subparagraph 4(d)(v) hereof, is contingent upon Executive's execution of a severance release agreement which shall be provided to Executive by MTS with or following his/her Notice of Termination. The severance release agreement shall require a full release of all claims which Executive may have against MTS or any MTS affiliate or individual associated with MTS, to the extent permitted by and consistent with applicable laws. Such release agreement shall prohibit Executive from recovering any amount in connection with a charge or lawsuit filed against MTS or any MTS affiliate, employee, shareholder, officer, director or other agent by Executive, EEOC or any other agency or entity on Executive's behalf based upon any act occurring prior to execution of said release agreement. The release agreement will be available for Executive's review, consideration and execution at least 45 days prior to his/her Date of Termination. 10. Injunctive Relief. Executive consents that, in the case of any violation or threatened violation of paragraph 6 of this Agreement, MTS may apply for and secure injunctive relief, temporary or provisional, in court, without bond but upon due notice, pending final resolution on the merits pursuant to arbitration as set forth in paragraph 11 hereof. No waiver of any violation of this Agreement shall be implied from any failure by MTS to take action under this paragraph. 11. Arbitration. Any and all claims or disputes between Executive and MTS (including the validity, scope, and enforceability of this paragraph), except as otherwise provided under paragraph 10 or prohibited under applicable law, shall be submitted for arbitration and resolution to an arbitrator. No demand for arbitration may be made after the date when the institution of legal or equitable proceedings based on such claim or dispute would be barred by the applicable statute of limitation. The arbitrator shall be selected by mutual agreement of the parties. Unless otherwise provided for in this Agreement, the Expedited Labor Arbitration Rules of the American Arbitration Association shall apply. If the parties are unable to agree upon an arbitrator, any such dispute shall be solely and finally settled by arbitration in accordance with the Expedited Labor Arbitration Rules of the American Arbitration Association ("AAA"). The parties agree that no punitive damages shall be awarded hereunder. The parties also agree that all awards, decisions and remedies in favor of a winning party hereunder with respect to any issue shall be proportional to the violation caused by the losing party with respect to that issue. All costs in conducting the arbitration, including but not limited to the arbitration filing fee, the arbitrator's fees and expenses, and the reasonable attorney's fees and expenses of the prevailing party (including the attorney's fees and costs incurred by the prevailing party in seeking or resisting temporary or provisional court relief as set out in paragraph 10 above), shall be the responsibility of the losing party. In the event there is more than one issue in dispute and there is no one prevailing party with respect to all issues in dispute, costs and attorney's fees shall be prorated by the arbitrator according to the relative dollar value of each issue. The arbitrator's Award shall be final and binding. In the event either party must resort to the judicial process to enforce the provisions of Severance Agreement Page 8 this Agreement, the award of an arbitrator or equitable relief granted by an arbitrator, the party seeking enforcement shall be entitled to recover from the other party all costs of litigation including, but not limited to, reasonable attorney's fees and court costs. The arbitration proceedings and Award shall be maintained by both parties as strictly confidential, except as otherwise required by court order and with respect to the parties' attorneys and tax advisors, and, with respect to MTS, members of its management, and, with respect to Executive, his/her family. 12. Miscellaneous. (a) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party hereto at any time of any breach by the other party to this Agreement of or compliance with, any other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. (b) No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. (c) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. (d) Any provision of this Agreement which conflicts with applicable law shall be modified to the extent necessary to ensure its enforceability. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. This Agreement supersedes any and all prior oral and written understandings and agreements between the Executive and MTS, including specifically the Employment Agreement between MTS and the Executive dated May 1, 1990 and attached as Exhibit 2. 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/ Keith D. Zell By /s/ Donald M. Sullivan --------------------------- --------------------------------- Keith D. Zell Its Chairman -------------------------------- EX-10.N 7 SEVERANCE AGREEMENT EXHIBIT 10.n SEVERANCE AGREEMENT AGREEMENT made as of this 24th day of March, 1998 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and Mauro G. Togneri (the "Executive"). WHEREAS, MTS considers the establishment and maintenance of a sound and vital management and an orderly succession plan to be essential to protecting and enhancing the best interests of MTS and its shareholders; and WHEREAS, Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of MTS, its policies, methods, personnel and problems, a significant contribution to the profitability, growth and financial strength of MTS; and WHEREAS, Executive is willing to remain in the employ of MTS upon the understanding that MTS will provide income security if the Executive's employment is terminated under certain terms and conditions; and WHEREAS, this Agreement is consistent with the requirements of the executive/high policy-making exception to the Age Discrimination in Employment Act, 29 U.S.C. Section 631(c)(1) (the "Executive Exemption"), benefits in connection therewith are pursuant to pension, profit sharing and deferred compensation plans as defined therein, and Executive, by virtue of his/her duties and responsibilities on behalf of MTS, qualifies under said exception for mandatory retirement on or after his/her 65th birthday; and WHEREAS, MTS is providing Executive, simultaneously with this Agreement, consideration in the form of a Change in Control Agreement, to provide additional benefits to Executive in the event of a change in control; NOW THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until the earlier of (a) the date on which the Executive and MTS agree in writing to terminate this Agreement, or (b) the Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If a change in control occurs, as defined in that certain agreement between the Executive and MTS of even date herewith (the "Change in Control Agreement", attached as Exhibit 1), this Agreement shall be superseded by the provisions of the Change in Control Agreement except as provided in the following sentence. MTS's right under this Agreement to terminate the Executive's employment pursuant to the Executive Exemption shall not be superseded by the Change in Control Agreement and the Executive shall be entitled to receive the benefits to which he/she is entitled under subparagraph 4(d) hereunder if such termination occurs. Severance Agreement Page 2 2. Termination by Reason of Death or Disability. In the event of the Executive's death or disability during the Term of this Agreement, Executive shall be entitled to such benefits provided under any policy, plan or program governing death or disability maintained by MTS and covering such Executive and this Agreement shall not apply. The determination of disability and the amount and entitlement of benefits shall be governed by the terms of such policy, plan or program. In the event of the Executive's disability, the Executive's Date of Termination shall be the date on which Executive has been unable, by reason of physical or mental disability, to perform the services required of him/her for his/her position, even with reasonable accommodation, for the period of time indicated in MTS's group long term disability plan (in which the Executive is a participant) during which a participant must be disabled before benefits become payable. In connection with Executive's termination due to disability, a qualified physician must certify the disability and MTS shall at all times comply with the Americans With Disabilities Act and any other applicable disability discrimination law. 3. Resignation or Termination for Cause. (a) The Executive may resign his/her employment or MTS may terminate the Executive's employment for Cause, effective as of the Date of Termination set forth in the Notice of Termination. If Executive resigns or his/her employment is terminated by MTS for Cause, MTS shall pay to Executive his/her full base salary through the Date of Termination at the rate in effect at the time of Notice of Termination is given and MTS shall have no further obligation to Executive under this Agreement. (b) Termination by MTS of Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (ii) willful misconduct by the Executive; or (iii) violation by the Executive of any employment agreement applicable to the Executive. 4. Termination Other Than for Cause. MTS may terminate Executive's employment for a reason other than Cause, including pursuant to the Executive Exemption on or after Executive's 65th birthday, effective as of the Date of Termination set forth in the Notice of Termination. If Executive's employment is terminated by MTS other than for Cause, death or disability, Executive shall be entitled, subject to subparagraph 4(d)(v) and paragraph 9 of this Agreement, to the benefits described in subparagraphs (a), (b) and (c) below and, if applicable, subparagraph (d) below. (a) Executive shall be paid a monthly Severance Payment equal to the Executive's Monthly Gross Income, as defined in subparagraph (i) below for 12 months. Severance Agreement Page 3 (i) For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts, subject to applicable federal and state withholding. (A) 1/12 of the highest average base salary for any 12- consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination; plus (B) 1/36 of the total Management Variable Compensation earned during the 3 most recent fiscal years 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) for the 3 most recent Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (A) and (B) above. (b) Following the Executive's Date of Termination and while severance payments are being paid to the Executive or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his/her Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his/her Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. MTS will deduct these amounts from its payments to the Executive. Benefits otherwise receivable by Executive pursuant to this subparagraph (b) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. Following the severance pay period, Executive shall be entitled to continue any of said benefits which qualify as group health and life insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law and pursuant to the terms of the plan. (c) The Executive's rights under any existing Employee Stock Option Agreement and any future such agreements, including particularly his/her right to exercise his/her options following his/her termination of employment, shall continue to be fully effective hereunder. In addition, if the Executive's termination of employment occurs pursuant to the Executive Exemption on or after he/she has reached his/her 65th birthday, the Executive shall continue to vest in any stock options in which he/she is not fully vested, as though he/she were continuing his/her employment with MTS as an active employee, subject at all times to the exercise times and Severance Agreement Page 4 other terms and conditions set forth in said Stock Option Agreements and to Executive's signing the release agreement described in paragraph 9 herein. (d) If Executive's termination of employment occurs pursuant to the Executive Exemption on or after he/she has reached his/her 65th birthday, Executive shall be entitled to receive the lump sum equivalent of the amount necessary to purchase a $44,000 pre-tax straight life annuity, said lump sum to be taken from MTS contributions and earnings thereon to Executive's accounts in MTS sponsored pension, profit sharing, and deferred compensation plans, as applicable. If Executive is entitled to less than that amount from the applicable MTS plans in which he/she is a participant as of his/her Date of Termination, then MTS shall make an additional contribution on Executive's behalf to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan. The amount to which Executive is entitled under subparagraph 4(a) of this Agreement shall be reduced by MTS's Section 3.4 contribution to the MTS Systems Corporation Executive Deferred Compensation Plan, as described in subparagraph (v) below. Calculation of the Executive's benefit shall be as follows: (i) The benefits to which Executive is entitled, as of his/her Date of Termination, under all MTS sponsored pension, profit sharing and deferred compensation plans shall be added together. (ii) Amounts in said plans, as determined in accordance with 29 Code of Federal Regulations ss. 1627.17, attributable to Social Security, employee contributions, contributions of prior employers, and rollover contributions, shall be subtracted from the subparagraph (i) amount and the resulting figure shall be the "Qualified Retirement Benefit". (iii) MTS shall determine the lump sum equivalent of the amount necessary to purchase a straight life annuity for Executive, effective as of his/her Date of Termination, which would provide Executive with $44,000 a year for life (the "ADEA Benefit"). MTS shall retain a certified actuary to determine said lump sum equivalent amount, using the applicable mortality table and applicable interest rate under Section 417(e) of the Internal Revenue Code and Regulations issued thereunder. (iv) If the Qualified Retirement Benefit exceeds the ADEA Benefit, the Executive shall have the option (but is not required) to receive the Qualified Retirement Benefit in a lump sum, as provided under the applicable plans, within 60 days following his/her Date of Termination. The Executive may elect to receive the Qualified Retirement Benefit in either a lump sum or a series of periodic payments pursuant to the terms of the applicable plans. The Executive may also receive the payments and benefits set forth in subparagraphs 4(a) and (b) of this Agreement provided he/she executes the release agreement required in paragraph 9 of this Agreement. The benefits set forth in subparagraph 4(c) shall at all times be available to the Executive. Severance Agreement Page 5 (v) If the Qualified Retirement Benefit is less than the ADEA Benefit, MTS shall make a contribution to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan, in an amount equal to the difference between the Qualified Retirement Benefit and the ADEA Benefit (the "Qualified Retirement Benefit Supplement"). The Executive shall have the option (but is not required) to receive the Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement from said Plan within 60 days following his/her Date of Termination. The Executive may elect to receive the Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement, in either a lump sum or a series of periodic payments pursuant to the terms of the applicable plans. The payments to Executive described in subparagraph 4(a) of this Agreement shall be reduced by the amount of MTS's contribution to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan, to create the Qualified Retirement Benefit Supplement. All payments remaining in subparagraph 4(a) after this reduction and the subparagraph 4(b) and (c) benefits shall be paid to Executive in accordance with the terms of those subparagraphs, provided Executive executes the release agreement required in paragraph 9 of this Agreement. (vi) Executive's Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement, shall be nonforfeitable and not subject to reduction or elimination by MTS for any reason. 5. No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise; nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits after the Date of Termination or otherwise except as specifically provided herein. 6. Non-Competition and Confidentiality (a) Executive agrees that, as a condition of receiving benefits under this Agreement, he/she will not render services directly or indirectly to any competing organization located in any market in which MTS is doing business as of Executive's Date of Termination for the period of time during which Executive is receiving benefits under this Agreement or the Change in Control Agreement, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any "Conflicting Product" which as used herein means any product, process, system or service of any person, firm, corporation, organization other than MTS, in existence or under development, which is the same as or similar to or competes with, or has a Severance Agreement Page 6 usage allied to, a product, process, system, or service produced, developed, or used by MTS. (b) Executive further agrees and acknowledges his/her existing obligation that, at all times during and subsequent to his/her employment with MTS, he/she will not divulge or appropriate to his/her own use or the uses of others any secret or confidential information pertaining to the business of MTS, or any of its subsidiaries, obtained during his/her employment by MTS or any of its subsidiaries. (c) If Executive violates his/her obligations under subparagraphs (a) and (b) above, any remaining payments or benefits otherwise due Executive pursuant to subparagraphs 4(a) and (b) of this Agreement shall not be paid. This subparagraph (c) specifically does not apply to the subparagraph 4(a) reduction amount equal to the Qualified Retirement Benefit Supplement, as described in subparagraph 4(d)(v). 7. Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, heirs, and designated beneficiaries. If Executive should die while any amount would still be payable to Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designated beneficiaries, or, if there is no such designated beneficiary, to the Executive's estate. 8. Notice of Termination. (a) Any purported termination of Executive's employment by either Executive or MTS under this Agreement, except as otherwise provided in paragraph 2 of this Agreement, shall be communicated by written notice to the other party. (b) For purposes of this Agreement, "Date of Termination" shall mean the date specified in the written Notice of Termination which shall not be less than 10 nor more than 60 days from the date such Notice of Termination is given. (c) Notice of Termination and all other communications provided for in the Agreement shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage pre-paid, addressed to the last known residence address of the Executive or in the case of MTS, to its principal office to the attention of each of the then directors of MTS with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Release of Claims. Executive's right to the benefits and payments described in subparagraphs 4(a), (b) and (c) of this Agreement, except as otherwise provided in Severance Agreement Page 7 subparagraph 4(d)(v) hereof, is contingent upon Executive's execution of a severance release agreement which shall be provided to Executive by MTS with or following his/her Notice of Termination. The severance release agreement shall require a full release of all claims which Executive may have against MTS or any MTS affiliate or individual associated with MTS, to the extent permitted by and consistent with applicable laws. Such release agreement shall prohibit Executive from recovering any amount in connection with a charge or lawsuit filed against MTS or any MTS affiliate, employee, shareholder, officer, director or other agent by Executive, EEOC or any other agency or entity on Executive's behalf based upon any act occurring prior to execution of said release agreement. The release agreement will be available for Executive's review, consideration and execution at least 45 days prior to his/her Date of Termination. 10. Injunctive Relief. Executive consents that, in the case of any violation or threatened violation of paragraph 6 of this Agreement, MTS may apply for and secure injunctive relief, temporary or provisional, in court, without bond but upon due notice, pending final resolution on the merits pursuant to arbitration as set forth in paragraph 11 hereof. No waiver of any violation of this Agreement shall be implied from any failure by MTS to take action under this paragraph. 11. Arbitration. Any and all claims or disputes between Executive and MTS (including the validity, scope, and enforceability of this paragraph), except as otherwise provided under paragraph 10 or prohibited under applicable law, shall be submitted for arbitration and resolution to an arbitrator. No demand for arbitration may be made after the date when the institution of legal or equitable proceedings based on such claim or dispute would be barred by the applicable statute of limitation. The arbitrator shall be selected by mutual agreement of the parties. Unless otherwise provided for in this Agreement, the Expedited Labor Arbitration Rules of the American Arbitration Association shall apply. If the parties are unable to agree upon an arbitrator, any such dispute shall be solely and finally settled by arbitration in accordance with the Expedited Labor Arbitration Rules of the American Arbitration Association ("AAA"). The parties agree that no punitive damages shall be awarded hereunder. The parties also agree that all awards, decisions and remedies in favor of a winning party hereunder with respect to any issue shall be proportional to the violation caused by the losing party with respect to that issue. All costs in conducting the arbitration, including but not limited to the arbitration filing fee, the arbitrator's fees and expenses, and the reasonable attorney's fees and expenses of the prevailing party (including the attorney's fees and costs incurred by the prevailing party in seeking or resisting temporary or provisional court relief as set out in paragraph 10 above), shall be the responsibility of the losing party. In the event there is more than one issue in dispute and there is no one prevailing party with respect to all issues in dispute, costs and attorney's fees shall be prorated by the arbitrator according to the relative dollar value of each issue. The arbitrator's Award shall be final and binding. In the event either party must resort to the judicial process to enforce the provisions of this Agreement, the award of an arbitrator or equitable relief granted by an arbitrator, the party seeking enforcement shall be entitled to recover from the other Severance Agreement Page 8 party all costs of litigation including, but not limited to, reasonable attorney's fees and court costs. The arbitration proceedings and Award shall be maintained by both parties as strictly confidential, except as otherwise required by court order and with respect to the parties' attorneys and tax advisors, and, with respect to MTS, members of its management, and, with respect to Executive, his/her family. 12. Miscellaneous. (a) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party hereto at any time of any breach by the other party to this Agreement of or compliance with, any other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. (b) No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. (c) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. (d) Any provision of this Agreement which conflicts with applicable law shall be modified to the extent necessary to ensure its enforceability. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. This Agreement supersedes any and all prior oral and written understandings and agreements between the Executive and MTS, including specifically the Employment Agreement between MTS and the Executive dated April 1, 1991 and attached as Exhibit 2. 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/ Mauro G. Togneri By /s/ Donald M. Sullivan --------------------------- --------------------------------- Mauro G. Togneri Its Chairman -------------------------------- EX-10.R 8 SEVERANCE AGREEMENT EXHIBIT 10.r SEVERANCE AGREEMENT AGREEMENT made as of this 16th day of March, 1998 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and Sidney W. Emery (the "Executive"). WHEREAS, MTS desires to employ Executive as its President and Chief Executive Officer is willing to become employed by MTS in such capacity; and WHEREAS, Executive is expected to make a significant contribution to the profitability, growth and financial strength of MTS; and WHEREAS, MTS considers the establishment and maintenance of a sound and vital management and an orderly succession plan to be essential to protecting and enhancing the best interests of MTS and its shareholders; and WHEREAS, this Agreement is consistent with the requirements of the executive/high policy-making exception to the Age Discrimination in Employment Act, 29 U.S.C. Section 631(c)(1) (the "Executive Exemption"), benefits in connection therewith are pursuant to pension, profit sharing and deferred compensation plans as defined therein, and Executive, by virtue of his/her duties and responsibilities on behalf of MTS, qualifies under said exception for mandatory retirement on or after his/her 65th birthday; and WHEREAS, MTS is providing Executive, simultaneously with this Agreement, consideration in the form of a Change in Control Agreement, to provide additional benefits to Executive in the event of a change in control; NOW THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until the earlier of (a) the date on which the Executive and MTS agree in writing to terminate this Agreement, or (b) the Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If a change in control occurs, as defined in that certain agreement between the Executive and MTS of even date herewith (the "Change in Control Agreement", attached as Exhibit 1), this Agreement shall be superseded by the provisions of the Change in Control Agreement except as provided in the following sentence. MTS's right under this Agreement to terminate the Executive's employment pursuant to the Executive Exemption shall not be superseded by the Change in Control Agreement and the Executive shall be entitled to receive the benefits to which he/she is entitled under subparagraph 4(d) hereunder if such termination occurs. 2. Termination by Reason of Death or Disability. In the event of the Executive's death or disability during the Term of this Agreement, Executive shall be entitled to such benefits Severance Agreement Page 2 provided under any policy, plan or program governing death or disability maintained by MTS and covering such Executive and this Agreement shall not apply. The determination of disability and the amount and entitlement of benefits shall be governed by the terms of such policy, plan or program. In the event of the Executive's disability, the Executive's Date of Termination shall be the date on which Executive has been unable, by reason of physical or mental disability, to perform the services required of him/her for his/her position, even with reasonable accommodation, for the period of time indicated in MTS's group long term disability plan (in which the Executive is a participant) during which a participant must be disabled before benefits become payable. In connection with Executive's termination due to disability, a qualified physician must certify the disability and MTS shall at all times comply with the Americans With Disabilities Act and any other applicable disability discrimination law. 3. Resignation or Termination for Cause. (a) The Executive may resign his/her employment or MTS may terminate the Executive's employment for Cause, effective as of the Date of Termination set forth in the Notice of Termination. If Executive resigns or his/her employment is terminated by MTS for Cause, MTS shall pay to Executive his/her full base salary through the Date of Termination at the rate in effect at the time of Notice of Termination is given and MTS shall have no further obligation to Executive under this Agreement. (b) Termination by MTS of Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (ii) willful misconduct by the Executive; or (iii) violation by the Executive of any employment agreement applicable to the Executive. 4. Termination Other Than for Cause. MTS may terminate Executive's employment for a reason other than Cause, including pursuant to the Executive Exemption on or after Executive's 65th birthday, effective as of the Date of Termination set forth in the Notice of Termination. If Executive's employment is terminated by MTS other than for Cause, death or disability, Executive shall be entitled, subject to subparagraph 4(d)(v) and paragraph 9 of this Agreement, to the benefits described in subparagraphs (a), (b) and (c) below and, if applicable, subparagraph (d) below. (a) Executive shall be paid a monthly Severance Payment equal to the Executive's Monthly Gross Income, as defined in subparagraph (i) below for 18 months. If Executive's employment is terminated pursuant to the Executive Exemption as described in subparagraph 4(d) hereunder, "12" shall be substituted for 18 in the preceding sentence. Severance Agreement Page 3 (i) For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts, subject to applicable federal and state withholding. (A) 1/12 of the highest average base salary for any 12- consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination; plus (B) the monthly average of the total Management Variable Compensation (MVC) earned during the lesser of the 3 most recent or the actual number of fiscal years participating in the MVC plan ending immediately prior to the Date of Termination; plus (C) the product of the average percentage of MTS profit sharing contributions to the MTS Systems Corporation Profit Sharing Retirement Plan and Trust (as a percent of Compensation as defined in the Plan) for the lesser of the 3 most recent or the actual number of participating Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (A) and (B) above. (b) Following the Executive's Date of Termination and while severance payments are being paid to the Executive or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his/her Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his/her Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. MTS will deduct these amounts from its payments to the Executive. Benefits otherwise receivable by Executive pursuant to this subparagraph (b) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. Following the severance pay period, Executive shall be entitled to continue any of said benefits which qualify as group health and life insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law and pursuant to the terms of the plan. (c) The Executive's rights under any existing Employee Stock Option Agreement and any future such agreements, including particularly his/her right to exercise his/her options following his/her termination of employment, shall continue to be fully effective hereunder. In addition, if the Executive's termination of employment occurs pursuant to the Executive Exemption on or after he/she has reached his/her 65th birthday, the Executive shall continue to vest in any stock options in which Severance Agreement Page 4 he/she is not fully vested, as though he/she were continuing his/her employment with MTS as an active employee, subject at all times to the exercise times and other terms and conditions set forth in said Stock Option Agreements and to Executive's signing the release agreement described in paragraph 9 herein. (d) If Executive's termination of employment occurs pursuant to the Executive Exemption on or after he/she has reached his/her 65th birthday, Executive shall be entitled to receive the lump sum equivalent of the amount necessary to purchase a $44,000 pre-tax straight life annuity, said lump sum to be taken from MTS contributions and earnings thereon to Executive's accounts in MTS sponsored pension, profit sharing, and deferred compensation plans, as applicable. If Executive is entitled to less than that amount from the applicable MTS plans in which he/she is a participant as of his/her Date of Termination, then MTS shall make an additional contribution on Executive's behalf to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan. The amount to which Executive is entitled under subparagraph 4(a) of this Agreement shall be reduced by MTS's Section 3.4 contribution to the MTS Systems Corporation Executive Deferred Compensation Plan, as described in subparagraph (v) below. Calculation of the Executive's benefit shall be as follows: (i) The benefits to which Executive is entitled, as of his/her Date of Termination, under all MTS sponsored pension, profit sharing and deferred compensation plans shall be added together. (ii) Amounts in said plans, as determined in accordance with 29 Code of Federal Regulations ss. 1627.17, attributable to Social Security, employee contributions, contributions of prior employers, and rollover contributions, shall be subtracted from the subparagraph (i) amount and the resulting figure shall be the "Qualified Retirement Benefit". (iii) MTS shall determine the lump sum equivalent of the amount necessary to purchase a straight life annuity for Executive, effective as of his/her Date of Termination, which would provide Executive with $44,000 a year for life (the "ADEA Benefit"). MTS shall retain a certified actuary to determine said lump sum equivalent amount, using the applicable mortality table and applicable interest rate under Section 417(e) of the Internal Revenue Code and Regulations issued thereunder. (iv) If the Qualified Retirement Benefit exceeds the ADEA Benefit, the Executive shall have the option (but is not required) to receive the Qualified Retirement Benefit in a lump sum, as provided under the applicable plans, within 60 days following his/her Date of Termination. The Executive may elect to receive the Qualified Retirement Benefit in either a lump sum or a series of periodic payments pursuant to the terms of the applicable plans. The Executive may also receive the payments and benefits set forth in subparagraphs 4(a) and (b) of this Agreement provided he/she executes the Severance Agreement Page 5 release agreement required in paragraph 9 of this Agreement. The benefits set forth in subparagraph 4(c) shall at all times be available to the Executive. (v) If the Qualified Retirement Benefit is less than the ADEA Benefit, MTS shall make a contribution to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan, in an amount equal to the difference between the Qualified Retirement Benefit and the ADEA Benefit (the "Qualified Retirement Benefit Supplement"). The Executive shall have the option (but is not required) to receive the Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement from said Plan within 60 days following his/her Date of Termination. The Executive may elect to receive the Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement, in either a lump sum or a series of periodic payments pursuant to the terms of the applicable plans. The payments to Executive described in subparagraph 4(a) of this Agreement shall be reduced by the amount of MTS's contribution to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan, to create the Qualified Retirement Benefit Supplement. All payments remaining in subparagraph 4(a) after this reduction and the subparagraph 4(b) and (c) benefits shall be paid to Executive in accordance with the terms of those subparagraphs, provided Executive executes the release agreement required in paragraph 9 of this Agreement. (vi) Executive's Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement, shall be nonforfeitable and not subject to reduction or elimination by MTS for any reason. 5. No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise; nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits after the Date of Termination or otherwise except as specifically provided herein. 6. Non-Competition and Confidentiality (a) Executive agrees that, as a condition of receiving benefits under this Agreement, he/she will not render services directly or indirectly to any competing organization located in any market in which MTS is doing business as of Executive's Date of Termination for the period of time during which Executive is receiving benefits under this Agreement or the Change in Control Agreement, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any "Conflicting Product" which as used herein means any product, process, system or service of any person, firm, Severance Agreement Page 6 corporation, organization other than MTS, in existence or under development, which is the same as or similar to or competes with, or has a usage allied to, a product, process, system, or service produced, developed, or used by MTS. (b) Executive further agrees and acknowledges his/her existing obligation that, at all times during and subsequent to his/her employment with MTS, he/she will not divulge or appropriate to his/her own use or the uses of others any secret or confidential information pertaining to the business of MTS, or any of its subsidiaries, obtained during his/her employment by MTS or any of its subsidiaries. (c) If Executive violates his/her obligations under subparagraphs (a) and (b) above, any remaining payments or benefits otherwise due Executive pursuant to subparagraphs 4(a) and (b) of this Agreement shall not be paid. This subparagraph (c) specifically does not apply to the subparagraph 4(a) reduction amount equal to the Qualified Retirement Benefit Supplement, as described in subparagraph 4(d)(v). 7. Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, heirs, and designated beneficiaries. If Executive should die while any amount would still be payable to Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designated beneficiaries, or, if there is no such designated beneficiary, to the Executive's estate. 8. Notice of Termination. (a) Any purported termination of Executive's employment by either Executive or MTS under this Agreement, except as otherwise provided in paragraph 2 of this Agreement, shall be communicated by written notice to the other party. (b) For purposes of this Agreement, "Date of Termination" shall mean the date specified in the written Notice of Termination which shall not be less than 10 nor more than 60 days from the date such Notice of Termination is given. (c) Notice of Termination and all other communications provided for in the Agreement shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage pre-paid, addressed to the last known residence address of the Executive or in the case of MTS, to its principal office to the attention of each of the then directors of MTS with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. Severance Agreement Page 7 9. Release of Claims. Executive's right to the benefits and payments described in subparagraphs 4(a), (b) and (c) of this Agreement, except as otherwise provided in subparagraph 4(d)(v) hereof, is contingent upon Executive's execution of a severance release agreement which shall be provided to Executive by MTS with or following his/her Notice of Termination. The severance release agreement shall require a full release of all claims which Executive may have against MTS or any MTS affiliate or individual associated with MTS, to the extent permitted by and consistent with applicable laws. Such release agreement shall prohibit Executive from recovering any amount in connection with a charge or lawsuit filed against MTS or any MTS affiliate, employee, shareholder, officer, director or other agent by Executive, EEOC or any other agency or entity on Executive's behalf based upon any act occurring prior to execution of said release agreement. The release agreement will be available for Executive's review, consideration and execution at least 45 days prior to his/her Date of Termination. 10. Injunctive Relief. Executive consents that, in the case of any violation or threatened violation of paragraph 6 of this Agreement, MTS may apply for and secure injunctive relief, temporary or provisional, in court, without bond but upon due notice, pending final resolution on the merits pursuant to arbitration as set forth in paragraph 11 hereof. No waiver of any violation of this Agreement shall be implied from any failure by MTS to take action under this paragraph. 11. Arbitration. Any and all claims or disputes between Executive and MTS (including the validity, scope, and enforceability of this paragraph), except as otherwise provided under paragraph 10 or prohibited under applicable law, shall be submitted for arbitration and resolution to an arbitrator. No demand for arbitration may be made after the date when the institution of legal or equitable proceedings based on such claim or dispute would be barred by the applicable statute of limitation. The arbitrator shall be selected by mutual agreement of the parties. Unless otherwise provided for in this Agreement, the Expedited Labor Arbitration Rules of the American Arbitration Association shall apply. If the parties are unable to agree upon an arbitrator, any such dispute shall be solely and finally settled by arbitration in accordance with the Expedited Labor Arbitration Rules of the American Arbitration Association ("AAA"). The parties agree that no punitive damages shall be awarded hereunder. The parties also agree that all awards, decisions and remedies in favor of a winning party hereunder with respect to any issue shall be proportional to the violation caused by the losing party with respect to that issue. All costs in conducting the arbitration, including but not limited to the arbitration filing fee, the arbitrator's fees and expenses, and the reasonable attorney's fees and expenses of the prevailing party (including the attorney's fees and costs incurred by the prevailing party in seeking or resisting temporary or provisional court relief as set out in paragraph 10 above), shall be the responsibility of the losing party. In the event there is more than one issue in dispute and there is no one prevailing party with respect to all issues in dispute, costs and attorney's fees shall be prorated by the arbitrator according to the relative dollar value of each issue. The arbitrator's Award shall be final and binding. In the event either party must resort to the judicial process to enforce the provisions of Severance Agreement Page 8 this Agreement, the award of an arbitrator or equitable relief granted by an arbitrator, the party seeking enforcement shall be entitled to recover from the other party all costs of litigation including, but not limited to, reasonable attorney's fees and court costs. The arbitration proceedings and Award shall be maintained by both parties as strictly confidential, except as otherwise required by court order and with respect to the parties' attorneys and tax advisors, and, with respect to MTS, members of its management, and, with respect to Executive, his/her family. 12. Miscellaneous. (a) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party hereto at any time of any breach by the other party to this Agreement of or compliance with, any other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. (b) No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. (c) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. (d) Any provision of this Agreement which conflicts with applicable law shall be modified to the extent necessary to ensure its enforceability. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in frill force and effect. This Agreement supersedes any and all prior oral and written understandings and agreements between the Executive and MTS, provided however that the Change in Control Agreement signed of even date herewith shall, if applicable, supersede this Agreement, except as otherwise provided in Paragraph 1 of this Agreement. 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/ Sidney W. Emery By /s/ Donald M. Sullivan --------------------------- --------------------------------- Sidney W. Emery Its Chairman -------------------------------- EX-10.S 9 CHANGE IN CONTROL AGREEMENT EXHIBIT 10.s CHANGE IN CONTROL AGREEMENT AGREEMENT made as of this16th day of March, 1998 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and Sidney W. Emery (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 willing to remain in the employ of MTS upon the understanding that MTS will provide income security if the Executive's employment is terminated under certain terms and conditions; 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. (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 Change in Control Agreement Page 2 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's 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's assets are sold and transferred to another corporation or other enterprise that is not a subsidiary, direct or indirect, or other affiliate of MTS; or (v) the Board of Directors of MTS determines, by a vote of a majority of its entire membership, that a tender offer statement by any person (as defined above) indicates an intention on the part of such person to acquire control of MTS. (b) Board of Directors shall, for purposes of subsection (a), mean: (i) individuals who on the date hereof constituted the Board of MTS, and (ii) any new director who subsequently was elected or nominated for election by a majority of the directors who held such office immediately prior to a Change in Control. (c) Friendly Change in Control shall mean a Change in Control which arises from a transaction or series of transactions authorized, recommended or approved at the time by formal action of the Board of Directors. (d) Unfriendly Change in Control shall mean a Change in Control that is not a "Friendly Change in Control" as defined above. An Unfriendly Change in Control shall not thereafter become a Friendly Change in Control. 3. Termination by Reason of Death or Disability. In the event of the Executive's death or disability during the Term of this Agreement, Executive shall be entitled to such benefits provided under any policy, plan or program governing death or disability maintained by Change in Control Agreement Page 3 MTS and covering such Executive and this Agreement shall not apply. The determination of disability and the amount and entitlement of benefits shall be governed by the terms of such policy, plan or program. In the event of the Executive's disability, the Executive's Date of Termination shall be the date on which Executive has been unable, by reason of physical or mental disability, to perform the services required of him/her for his/her position, even with reasonable accommodation, for the period of time indicated in MTS's group long term disability plan (in which the Executive is a participant) during which a participant must be disabled before benefits become payable. In connection with Executive's termination due to disability, a qualified physician must certify the disability and MTS shall at all times comply with the Americans With Disabilities Act and any other applicable disability discrimination law. 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/her full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and MTS shall have no further obligation to Executive under this Agreement. (b) Termination by MTS of Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (ii) willful gross misconduct or gross negligence in the performance of his/her 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 (A) by MTS other than for cause, death or disability or (B) 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. 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 Change in Control Agreement Page 4 (B) the monthly average of the total Management Variable Compensation (MVC) paid 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 (without taking into account any reduction or termination of such variable compensation that would constitute Good Reason); 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) 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 18 months following the Executive's Date of Termination or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his/her Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his/her Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. Benefits otherwise receivable by Executive pursuant to this subparagraph (ii) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. (b) Good Reason. Executive shall be entitled to terminate his/her employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without Executive's express written consent, any of the following: (i) the assignment to Executive of any duties inconsistent with Executive's status or position with MTS, or a substantial alteration in the nature or status of Executive's responsibilities; or (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's 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's principal executive offices except for required travel on MTS's business to an extent substantially consistent with Executive's prior business travel obligations; or Change in Control Agreement Page 5 (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's 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 Executive 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. 6. Termination - Unfriendly Change in Control. (a) If, after an Unfriendly Change in Control, Executive's employment with MTS is terminated (A) by MTS other than for Cause, death or disability, or (B) 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 36 months following the Executive's Date of Termination or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and Change in Control Agreement Page 6 health insurance premiums or, if group continuation coverage is no longer available for any reason other than the Executive's coverage under other group plans, the full premiums under other plans which MTS shall obtain for the Executive's benefit and with the Executive's approval. All MTS group plan premium payments made on Executive's behalf following his/her Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his/her Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. Benefits otherwise receivable by Executive pursuant to this subparagraph (ii) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. (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 months following the Executive's Date of Termination or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. Benefits otherwise receivable by Executive pursuant to this subparagraph (ii) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported td MTS. 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: Change in Control Agreement Page 7 (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/her right to exercise his/her 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/she 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 (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 Change in Control Agreement Page 8 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/her legal representative or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of the proceeding) by the laws of the State of Minnesota, as in effect at the time of the subject act or omission, or the Articles of Incorporation and By-Laws of MTS as in effect at such time or on the date of this Agreement, whichever affords or afforded greater protection to the Executive; and the Executive shall be entitled to the protection of any insurance policies MTS may elect to maintain generally for the benefit of its directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by the Executive or his/her legal representatives in connection with any action, suit or proceeding to which he/she (or his/her legal representative or other successors) may be made a party by reason of his/her being or having been a director, officer or employee of MTS or any of its subsidiaries or his/her serving or having served any other enterprise as a director, officer or employee at the request of MTS, provided that MTS shall cause to be maintained in effect for not less than six years from the date of a Change in Control (to the extent available) policies of directors' and officers' liability insurance of at least the same coverage as those maintained by MTS on the date of this Agreement and containing terms and conditions which are no less advantageous than such policies. 10. Non-Competition and Confidentiality. (a) Noncompetition. Except as provided in subsection (c) below, Executive agrees that, as a condition of receiving benefits under this Agreement, he/she 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, 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/her own expense. (b) Confidentiality. Executive further agrees and acknowledges his/her existing obligation that at all times during and subsequent to his/her employment with MTS, he/she will not divulge or appropriate to his/her own use or the uses of others any secret or confidential information or knowledge pertaining to the business of MTS, Change in Control Agreement Page 9 or any of its subsidiaries, obtained during his/her employment by MTS or any of its subsidiaries. (c) Waiver - Unfriendly Change in Control. Notwithstanding anything herein to the contrary: the restriction on competition under subsection (a) shall not apply if the Executive's employment terminates following an Unfriendly Change in Control. Furthermore, in such event, MTS waives any other restriction on Executive's employment and consents unconditionally to any employment Executive may subsequently obtain. 11. Funding of Payments. In order to assure the performance of MTS or its successor of its obligations under this Agreement, MTS may deposit in a so-called "rabbi" trust an amount equal to the maximum payment that will be due the Executive under the terms hereof provided, however, that MTS shall deposit in trust the amount equal to the maximum payment due Executive immediately upon an Unfriendly Change in Control. Under such written trust instrument, the Trustee shall be instructed to pay to the Executive (or the Executive's legal representative, as the case may be) the amount to which the Executive shall be entitled under the terms hereof and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to MTS. If MTS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. The written instrument governing the trust shall be irrevocable from and after such Change in Control and shall contain such provisions protective of the Executive as are contained in similar trust agreements approved by the Internal Revenue Service in published private letter rulings (provided that the assets of the trust shall be reachable by creditors of MTS as required by such rulings). The trustee shall be a national bank selected by MTS with the consent of the Executive, with trust powers and whose principal officers are located in the Minneapolis/St. Paul metropolitan area. The trustee shall invest the assets of the trust in any readily marketable securities of U.S. corporations (other than MTS, its successor, or any affiliate of MTS or its successor). If and to the extent there are not amounts in trust sufficient to pay Executive under this Agreement, MTS shall remain liable for any and all payments due to Executive. 12. Successors; Binding Agreement. (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 Change in Control Agreement Page 10 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 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. (d) Severability. The invalidity or unenforceability of 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/ Sidney W. Emery By /s/ Donald M. Sullivan --------------------------- --------------------------------- Sidney W. Emery Its Chairman -------------------------------- EX-10.T 10 CHANGE IN CONTROL AGREEMENT EXHIBIT 10.t CHANGE IN CONTROL AGREEMENT AGREEMENT made as of this 27th day of March 1998 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and Keith D. Zell (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 willing to remain in the employ of MTS upon the understanding that MTS will provide income security if the Executive's employment is terminated under certain terms and conditions; 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. (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 Change in Control Agreement Page 2 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's 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's assets are sold and transferred to another corporation or other enterprise that is not a subsidiary, direct or indirect, or other affiliate of MTS; or (v) the Board of Directors of MTS determines, by a vote of a majority of its entire membership, that a tender offer statement by any person (as defined above) indicates an intention on the part of such person to acquire control of MTS. (b) Board of Directors shall, for purposes of subsection (a), mean: (i) individuals who on the date hereof constituted the Board of MTS, and (ii) any new director who subsequently was elected or nominated for election by a majority of the directors who held such office immediately prior to a Change in Control. (c) Friendly Change in Control shall mean a Change in Control which arises from a transaction or series of transactions authorized, recommended or approved at the time by formal action of the Board of Directors. (d) Unfriendly Change in Control shall mean a Change in Control that is not a "Friendly Change in Control" as defined above. An Unfriendly Change in Control shall not thereafter become a Friendly Change in Control. 3. Termination by Reason of Death or Disability. In the event of the Executive's death or disability during the Term of this Agreement, Executive shall be entitled to such benefits provided under any policy, plan or program governing death or disability maintained by Change in Control Agreement Page 3 MTS and covering such Executive and this Agreement shall not apply. The determination of disability and the amount and entitlement of benefits shall be governed by the terms of such policy, plan or program. In the event of the Executive's disability, the Executive's Date of Termination shall be the date on which Executive has been unable, by reason of physical or mental disability, to perform the services required of him/her for his/her position, even with reasonable accommodation, for the period of time indicated in MTS's group long term disability plan (in which the Executive is a participant) during which a participant must be disabled before benefits become payable. In connection with Executive's termination due to disability, a qualified physician must certify the disability and MTS shall at all times comply with the Americans With Disabilities Act and any other applicable disability discrimination law. 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/her full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and MTS shall have no further obligation to Executive under this Agreement. (b) Termination by MTS of Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (ii) willful gross misconduct or gross negligence in the performance of his/her 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 (A) by MTS other than for cause, death or disability or (B) 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 sun within 30 days after the Date of Termination, subject to all applicable federal and state withholding. For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts: (A) 1/12 of the highest average base salary for any 12-consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination (without taking into account any reduction in such base salary that would constitute Good Reason); plus Change in Control Agreement Page 4 (B) 1/36 of the total variable compensation paid during the 3 most recent fiscal years ending immediately prior to the Date of Termination (without taking into account any reduction or termination of such variable compensation that would constitute Good Reason); 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) for the 3 most recent Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (A) and (B) above. (ii) Benefits. For 18 months following the Executive's Date of Termination or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his/her Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his/her Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. Benefits otherwise receivable by Executive pursuant to this subparagraph (ii) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. (b) Good Reason. Executive shall be entitled to terminate his/her employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without Executive's express written consent, any of the following: (i) the assignment to Executive of any duties inconsistent with Executive's status or position with MTS, or a substantial alteration in the nature or status of Executive's responsibilities; or (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's 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's principal executive offices except for required travel on MTS's 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's pension, life insurance, medical, health and accident, disability, deferred compensation, incentive awards, incentive stock options, or savings plans in which Executive Change in Control Agreement Page 5 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 Executive 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. 6. Termination - Unfriendly Change in Control. (a) If, after an Unfriendly Change in Control, Executive's employment with MTS is terminated (A) by MTS other than for Cause, death or disability, or (B) 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 36 months following the Executive's Date of Termination or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums or, if group continuation coverage is no longer available for any reason other than the Executive's coverage under other group plans, the full premiums under other plans which MTS shall obtain for the Executive's benefit and with the Executive's approval. All MTS group plan Change in Control Agreement Page 6 premium payments made on Executive's behalf following his/her Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his/her Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. Benefits otherwise receivable by Executive pursuant to this subparagraph (ii) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. (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 months following the Executive's Date of Termination or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. Benefits otherwise receivable by Executive pursuant to this subparagraph (ii) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported td MTS. 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. Change in Control Agreement Page 7 (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/her right to exercise his/her 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/she 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 (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. Change in Control Agreement Page 8 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/her legal representative or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of the proceeding) by the laws of the State of Minnesota, as in effect at the time of the subject act or omission, or the Articles of Incorporation and By-Laws of MTS as in effect at such time or on the date of this Agreement, whichever affords or afforded greater protection to the Executive; and the Executive shall be entitled to the protection of any insurance policies MTS may elect to maintain generally for the benefit of its directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by the Executive or his/her legal representatives in connection with any action, suit or proceeding to which he/she (or his/her legal representative or other successors) may be made a party by reason of his/her being or having been a director, officer or employee of MTS or any of its subsidiaries or his/her serving or having served any other enterprise as a director, officer or employee at the request of MTS, provided that MTS shall cause to be maintained in effect for not less than six years from the date of a Change in Control (to the extent available) policies of directors' and officers' liability insurance of at least the same coverage as those maintained by MTS on the date of this Agreement and containing terms and conditions which are no less advantageous than such policies. 10. Non-Competition and Confidentiality. (a) Noncompetition. Except as provided in subsection (c) below, Executive agrees that, as a condition of receiving benefits under this Agreement, he/she 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, 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/her own expense. (b) Confidentiality. Executive further agrees and acknowledges his/her existing obligation that at all times during and subsequent to his/her employment with MTS, he/she will not divulge or appropriate to his/her own use or the uses of others any secret or confidential information or knowledge pertaining to the business of MTS, or any of its subsidiaries, obtained during his/her employment by MTS or any of its subsidiaries. Change in Control Agreement Page 9 (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. (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 Change in Control Agreement Page 10 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 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 Change in Control Agreement Page 11 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. (d) Severability. The invalidity or unenforceability of 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/ Keith D. Zell By /s/ Donald M. Sullivan --------------------------- --------------------------------- Keith D. Zell Its Chairman -------------------------------- EX-10.U 11 CHANGE IN CONTROL AGREEMENT EXHIBIT 10.u CHANGE IN CONTROL AGREEMENT AGREEMENT made as of this13th day of May1998 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and Marshall L. Carpenter (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 willing to remain in the employ of MTS upon the understanding that MTS will provide income security if the Executive's employment is terminated under certain terms and conditions; 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. (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 Change in Control Agreement Page 2 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's 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's assets are sold and transferred to another corporation or other enterprise that is not a subsidiary, direct or indirect, or other affiliate of MTS; or (v) the Board of Directors of MTS determines, by a vote of a majority of its entire membership, that a tender offer statement by any person (as defined above) indicates an intention on the part of such person to acquire control of MTS. (b) Board of Directors shall, for purposes of subsection (a), mean: (i) individuals who on the date hereof constituted the Board of MTS, and (ii) any new director who subsequently was elected or nominated for election by a majority of the directors who held such office immediately prior to a Change in Control. (c) Friendly Change in Control shall mean a Change in Control which arises from a transaction or series of transactions authorized, recommended or approved at the time by formal action of the Board of Directors. (d) Unfriendly Change in Control shall mean a Change in Control that is not a "Friendly Change in Control" as defined above. An Unfriendly Change in Control shall not thereafter become a Friendly Change in Control. 3. Termination by Reason of Death or Disability. In the event of the Executive's death or disability during the Term of this Agreement, Executive shall be entitled to such benefits provided under any policy, plan or program governing death or disability maintained by Change in Control Agreement Page 3 MTS and covering such Executive and this Agreement shall not apply. The determination of disability and the amount and entitlement of benefits shall be governed by the terms of such policy, plan or program. In the event of the Executive's disability, the Executive's Date of Termination shall be the date on which Executive has been unable, by reason of physical or mental disability, to perform the services required of him/her for his/her position, even with reasonable accommodation, for the period of time indicated in MTS's group long term disability plan (in which the Executive is a participant) during which a participant must be disabled before benefits become payable. In connection with Executive's termination due to disability, a qualified physician must certify the disability and MTS shall at all times comply with the Americans With Disabilities Act and any other applicable disability discrimination law. 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/her full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and MTS shall have no further obligation to Executive under this Agreement. (b) Termination by MTS of Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (ii) willful gross misconduct or gross negligence in the performance of his/her 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 (A) by MTS other than for cause, death or disability or (B) 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 sun within 30 days after the Date of Termination, subject to all applicable federal and state withholding. For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts: (A) 1/12 of the highest average base salary for any 12-consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination (without taking into account any reduction in such base salary that would constitute Good Reason); plus Change in Control Agreement Page 4 (B) 1/36 of the total variable compensation paid during the 3 most recent fiscal years ending immediately prior to the Date of Termination (without taking into account any reduction or termination of such variable compensation that would constitute Good Reason); 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) for the 3 most recent Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (A) and (B) above. (ii) Benefits. For 18 months following the Executive's Date of Termination or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his/her Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his/her Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. Benefits otherwise receivable by Executive pursuant to this subparagraph (ii) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. (b) Good Reason. Executive shall be entitled to terminate his/her employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without Executive's express written consent, any of the following: (i) the assignment to Executive of any duties inconsistent with Executive's status or position with MTS, or a substantial alteration in the nature or status of Executive's responsibilities; or (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's 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's principal executive offices except for required travel on MTS's 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's pension, life insurance, medical, health and accident, disability, deferred compensation, incentive awards, incentive stock options, or savings plans in which Executive Change in Control Agreement Page 5 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 Executive 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. 6. Termination - Unfriendly Change in Control. (a) If, after an Unfriendly Change in Control, Executive's employment with MTS is terminated (A) by MTS other than for Cause, death or disability, or (B) 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 36 months following the Executive's Date of Termination or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums or, if group continuation coverage is no longer available for any reason other than the Executive's coverage under other group plans, the full premiums under other plans which MTS shall obtain for the Executive's benefit and with the Executive's approval. All MTS group plan Change in Control Agreement Page 6 premium payments made on Executive's behalf following his/her Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his/her Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. Benefits otherwise receivable by Executive pursuant to this subparagraph (ii) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. (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 months following the Executive's Date of Termination or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. Benefits otherwise receivable by Executive pursuant to this subparagraph (ii) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. 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. Change in Control Agreement Page 7 (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/her right to exercise his/her 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/she 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 (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. Change in Control Agreement Page 8 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/her legal representative or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of the proceeding) by the laws of the State of Minnesota, as in effect at the time of the subject act or omission, or the Articles of Incorporation and By-Laws of MTS as in effect at such time or on the date of this Agreement, whichever affords or afforded greater protection to the Executive; and the Executive shall be entitled to the protection of any insurance policies MTS may elect to maintain generally for the benefit of its directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by the Executive or his/her legal representatives in connection with any action, suit or proceeding to which he/she (or his/her legal representative or other successors) may be made a party by reason of his/her being or having been a director, officer or employee of MTS or any of its subsidiaries or his/her serving or having served any other enterprise as a director, officer or employee at the request of MTS, provided that MTS shall cause to be maintained in effect for not less than six years from the date of a Change in Control (to the extent available) policies of directors' and officers' liability insurance of at least the same coverage as those maintained by MTS on the date of this Agreement and containing terms and conditions which are no less advantageous than such policies. 10. Non-Competition and Confidentiality. (a) Noncompetition. Except as provided in subsection (c) below, Executive agrees that, as a condition of receiving benefits under this Agreement, he/she 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, 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/her own expense. (b) Confidentiality. Executive further agrees and acknowledges his/her existing obligation that at all times during and subsequent to his/her employment with MTS, he/she will not divulge or appropriate to his/her own use or the uses of others any secret or confidential information or knowledge pertaining to the business of MTS, or any of its subsidiaries, obtained during his/her employment by MTS or any of its subsidiaries. Change in Control Agreement Page 9 (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. (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 Change in Control Agreement Page 10 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 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 Change in Control Agreement Page 11 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. (d) Severability. The invalidity or unenforceability of 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/ Marshall L. Carpenter By /s/ Donald M. Sullivan --------------------------- --------------------------------- Marshall L. Carpenter Its Chairman -------------------------------- EX-10.V 12 CHANGE IN CONTROL AGREEMENT EXHIBIT 10.v CHANGE IN CONTROL AGREEMENT AGREEMENT made as of this 24th day of March1998 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and Mauro G. Togneri (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 willing to remain in the employ of MTS upon the understanding that MTS will provide income security if the Executive's employment is terminated under certain terms and conditions; 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. (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 Change in Control Agreement Page 2 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's 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's assets are sold and transferred to another corporation or other enterprise that is not a subsidiary, direct or indirect, or other affiliate of MTS; or (v) the Board of Directors of MTS determines, by a vote of a majority of its entire membership, that a tender offer statement by any person (as defined above) indicates an intention on the part of such person to acquire control of MTS. (b) Board of Directors shall, for purposes of subsection (a), mean: (i) individuals who on the date hereof constituted the Board of MTS, and (ii) any new director who subsequently was elected or nominated for election by a majority of the directors who held such office immediately prior to a Change in Control. (c) Friendly Change in Control shall mean a Change in Control which arises from a transaction or series of transactions authorized, recommended or approved at the time by formal action of the Board of Directors. (d) Unfriendly Change in Control shall mean a Change in Control that is not a "Friendly Change in Control" as defined above. An Unfriendly Change in Control shall not thereafter become a Friendly Change in Control. 3. Termination by Reason of Death or Disability. In the event of the Executive's death or disability during the Term of this Agreement, Executive shall be entitled to such benefits provided under any policy, plan or program governing death or disability maintained by Change in Control Agreement Page 3 MTS and covering such Executive and this Agreement shall not apply. The determination of disability and the amount and entitlement of benefits shall be governed by the terms of such policy, plan or program. In the event of the Executive's disability, the Executive's Date of Termination shall be the date on which Executive has been unable, by reason of physical or mental disability, to perform the services required of him/her for his/her position, even with reasonable accommodation, for the period of time indicated in MTS's group long term disability plan (in which the Executive is a participant) during which a participant must be disabled before benefits become payable. In connection with Executive's termination due to disability, a qualified physician must certify the disability and MTS shall at all times comply with the Americans With Disabilities Act and any other applicable disability discrimination law. 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/her full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and MTS shall have no further obligation to Executive under this Agreement. (b) Termination by MTS of Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (ii) willful gross misconduct or gross negligence in the performance of his/her 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 (A) by MTS other than for cause, death or disability or (B) 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 sun within 30 days after the Date of Termination, subject to all applicable federal and state withholding. For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts: (A) 1/12 of the highest average base salary for any 12-consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination (without taking into account any reduction in such base salary that would constitute Good Reason); plus Change in Control Agreement Page 4 (B) 1/36 of the total variable compensation paid during the 3 most recent fiscal years ending immediately prior to the Date of Termination (without taking into account any reduction or termination of such variable compensation that would constitute Good Reason); 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) for the 3 most recent Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (A) and (B) above. (ii) Benefits. For 18 months following the Executive's Date of Termination or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his/her Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his/her Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. Benefits otherwise receivable by Executive pursuant to this subparagraph (ii) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. (b) Good Reason. Executive shall be entitled to terminate his/her employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without Executive's express written consent, any of the following: (i) the assignment to Executive of any duties inconsistent with Executive's status or position with MTS, or a substantial alteration in the nature or status of Executive's responsibilities; or (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's 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's principal executive offices except for required travel on MTS's 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's pension, life insurance, medical, health and accident, disability, deferred compensation, incentive awards, incentive stock options, or savings plans in which Executive Change in Control Agreement Page 5 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 Executive 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. 6. Termination - Unfriendly Change in Control. (a) If, after an Unfriendly Change in Control, Executive's employment with MTS is terminated (A) by MTS other than for Cause, death or disability, or (B) 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 36 months following the Executive's Date of Termination or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums or, if group continuation coverage is no longer available for any reason other than the Executive's coverage under other group plans, the full premiums under other plans which MTS shall obtain for the Executive's benefit and with the Executive's approval. All MTS group plan Change in Control Agreement Page 6 premium payments made on Executive's behalf following his/her Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his/her Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. Benefits otherwise receivable by Executive pursuant to this subparagraph (ii) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. (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 months following the Executive's Date of Termination or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. Benefits otherwise receivable by Executive pursuant to this subparagraph (ii) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported td MTS. 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. Change in Control Agreement Page 7 (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/her right to exercise his/her 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/she 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 (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. Change in Control Agreement Page 8 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/her legal representative or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of the proceeding) by the laws of the State of Minnesota, as in effect at the time of the subject act or omission, or the Articles of Incorporation and By-Laws of MTS as in effect at such time or on the date of this Agreement, whichever affords or afforded greater protection to the Executive; and the Executive shall be entitled to the protection of any insurance policies MTS may elect to maintain generally for the benefit of its directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by the Executive or his/her legal representatives in connection with any action, suit or proceeding to which he/she (or his/her legal representative or other successors) may be made a party by reason of his/her being or having been a director, officer or employee of MTS or any of its subsidiaries or his/her serving or having served any other enterprise as a director, officer or employee at the request of MTS, provided that MTS shall cause to be maintained in effect for not less than six years from the date of a Change in Control (to the extent available) policies of directors' and officers' liability insurance of at least the same coverage as those maintained by MTS on the date of this Agreement and containing terms and conditions which are no less advantageous than such policies. 10. Non-Competition and Confidentiality. (a) Noncompetition. Except as provided in subsection (c) below, Executive agrees that, as a condition of receiving benefits under this Agreement, he/she 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, 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/her own expense. (b) Confidentiality. Executive further agrees and acknowledges his/her existing obligation that at all times during and subsequent to his/her employment with MTS, he/she will not divulge or appropriate to his/her own use or the uses of others any secret or confidential information or knowledge pertaining to the business of MTS, or any of its subsidiaries, obtained during his/her employment by MTS or any of its subsidiaries. Change in Control Agreement Page 9 (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. (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 Change in Control Agreement Page 10 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 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 Change in Control Agreement Page 11 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. (d) Severability. The invalidity or unenforceability of 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/ Mauro G. Togneri By /s/ Donald M. Sullivan --------------------------- --------------------------------- Mauro G. Togneri Its Chairman -------------------------------- EX-10.W 13 CHANGE IN CONTROL AGREEMENT EXHIBIT 10.w CHANGE IN CONTROL AGREEMENT AGREEMENT made as of this 13th day of March 1998 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and William G. Beduhn (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 willing to remain in the employ of MTS upon the understanding that MTS will provide income security if the Executive's employment is terminated under certain terms and conditions; 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. (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 Change in Control Agreement Page 2 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's 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's assets are sold and transferred to another corporation or other enterprise that is not a subsidiary, direct or indirect, or other affiliate of MTS; or (v) the Board of Directors of MTS determines, by a vote of a majority of its entire membership, that a tender offer statement by any person (as defined above) indicates an intention on the part of such person to acquire control of MTS. (b) Board of Directors shall, for purposes of subsection (a), mean: (i) individuals who on the date hereof constituted the Board of MTS, and (ii) any new director who subsequently was elected or nominated for election by a majority of the directors who held such office immediately prior to a Change in Control. (c) Friendly Change in Control shall mean a Change in Control which arises from a transaction or series of transactions authorized, recommended or approved at the time by formal action of the Board of Directors. (d) Unfriendly Change in Control shall mean a Change in Control that is not a "Friendly Change in Control" as defined above. An Unfriendly Change in Control shall not thereafter become a Friendly Change in Control. 3. Termination by Reason of Death or Disability. In the event of the Executive's death or disability during the Term of this Agreement, Executive shall be entitled to such benefits provided under any policy, plan or program governing death or disability maintained by Change in Control Agreement Page 3 MTS and covering such Executive and this Agreement shall not apply. The determination of disability and the amount and entitlement of benefits shall be governed by the terms of such policy, plan or program. In the event of the Executive's disability, the Executive's Date of Termination shall be the date on which Executive has been unable, by reason of physical or mental disability, to perform the services required of him/her for his/her position, even with reasonable accommodation, for the period of time indicated in MTS's group long term disability plan (in which the Executive is a participant) during which a participant must be disabled before benefits become payable. In connection with Executive's termination due to disability, a qualified physician must certify the disability and MTS shall at all times comply with the Americans With Disabilities Act and any other applicable disability discrimination law. 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/her full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and MTS shall have no further obligation to Executive under this Agreement. (b) Termination by MTS of Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (ii) willful gross misconduct or gross negligence in the performance of his/her 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 (A) by MTS other than for cause, death or disability or (B) 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 sun within 30 days after the Date of Termination, subject to all applicable federal and state withholding. For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts: (A) 1/12 of the highest average base salary for any 12-consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination (without taking into account any reduction in such base salary that would constitute Good Reason); plus Change in Control Agreement Page 4 (B) 1/36 of the total variable compensation paid during the 3 most recent fiscal years ending immediately prior to the Date of Termination (without taking into account any reduction or termination of such variable compensation that would constitute Good Reason); 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) for the 3 most recent Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (A) and (B) above. (ii) Benefits. For 18 months following the Executive's Date of Termination or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his/her Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his/her Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. Benefits otherwise receivable by Executive pursuant to this subparagraph (ii) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. (b) Good Reason. Executive shall be entitled to terminate his/her employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without Executive's express written consent, any of the following: (i) the assignment to Executive of any duties inconsistent with Executive's status or position with MTS, or a substantial alteration in the nature or status of Executive's responsibilities; or (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's 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's principal executive offices except for required travel on MTS's 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's pension, life insurance, medical, health and accident, disability, deferred compensation, incentive awards, incentive stock options, or savings plans in which Executive Change in Control Agreement Page 5 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 Executive 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. 6. Termination - Unfriendly Change in Control. (a) If, after an Unfriendly Change in Control, Executive's employment with MTS is terminated (A) by MTS other than for Cause, death or disability, or (B) 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 36 months following the Executive's Date of Termination or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums or, if group continuation coverage is no longer available for any reason other than the Executive's coverage under other group plans, the full premiums under other plans which MTS shall obtain for the Executive's benefit and with the Executive's approval. All MTS group plan Change in Control Agreement Page 6 premium payments made on Executive's behalf following his/her Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his/her Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. Benefits otherwise receivable by Executive pursuant to this subparagraph (ii) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. (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 months following the Executive's Date of Termination or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his/her group benefits following his Date of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. Benefits otherwise receivable by Executive pursuant to this subparagraph (ii) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported td MTS. 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. Change in Control Agreement Page 7 (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/her right to exercise his/her 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/she 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 (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. Change in Control Agreement Page 8 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/her legal representative or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of the proceeding) by the laws of the State of Minnesota, as in effect at the time of the subject act or omission, or the Articles of Incorporation and By-Laws of MTS as in effect at such time or on the date of this Agreement, whichever affords or afforded greater protection to the Executive; and the Executive shall be entitled to the protection of any insurance policies MTS may elect to maintain generally for the benefit of its directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by the Executive or his/her legal representatives in connection with any action, suit or proceeding to which he/she (or his/her legal representative or other successors) may be made a party by reason of his/her being or having been a director, officer or employee of MTS or any of its subsidiaries or his/her serving or having served any other enterprise as a director, officer or employee at the request of MTS, provided that MTS shall cause to be maintained in effect for not less than six years from the date of a Change in Control (to the extent available) policies of directors' and officers' liability insurance of at least the same coverage as those maintained by MTS on the date of this Agreement and containing terms and conditions which are no less advantageous than such policies. 10. Non-Competition and Confidentiality. (a) Noncompetition. Except as provided in subsection (c) below, Executive agrees that, as a condition of receiving benefits under this Agreement, he/she 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, 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/her own expense. (b) Confidentiality. Executive further agrees and acknowledges his/her existing obligation that at all times during and subsequent to his/her employment with MTS, he/she will not divulge or appropriate to his/her own use or the uses of others any secret or confidential information or knowledge pertaining to the business of MTS, or any of its subsidiaries, obtained during his/her employment by MTS or any of its subsidiaries. Change in Control Agreement Page 9 (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. (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 Change in Control Agreement Page 10 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 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 Change in Control Agreement Page 11 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. (d) Severability. The invalidity or unenforceability of 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/ William G. Beduhn By /s/ Donald M. Sullivan --------------------------- --------------------------------- William G. Beduhn Its Chairman -------------------------------- EX-13 14 1998 ANNUAL REPORT EXHIBIT 13 SIX YEAR FINANCIAL SUMMARY - -------------------------------------------------------------------------------- (September 30)
1998 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBERS OF SHAREHOLDERS AND EMPLOYEES) OPERATIONS - -------------------------------------------------------------------------------------------------------------------------------- Net revenue $ 339,682 $ 303,480 $261,029 $ 234,131 $200,550 $ 189,499 United States revenue 182,505 143,913 128,593 125,659 101,747 92,153 International revenue 157,177 159,567 132,436 108,472 98,803 97,346 Gross profit 130,364 121,503 106,104 91,638 79,840 78,882 Income before income taxes 31,473 28,380(1) 20,006 14,031 12,629 14,937 Net income 20,766 18,209(1) 14,109 10,461 8,659 10,382 Net income per share, diluted basis 1.08 .96(1) .74 .58 .46 .57 Research and development expense 21,930 17,511 17,696 13,733 12,645 13,697 Net interest expense 1,948 1,125 1,123 2,424 1,860 1,207 Depreciation and amortization 9,715 8,557 7,820 7,217 6,214 5,648 FINANCIAL POSITION - -------------------------------------------------------------------------------------------------------------------------------- Current assets $ 193,593 $ 152,805 $130,382 $ 131,589 $123,206 $ 123,445 Current liabilities 105,214 79,479 60,834 67,014 66,361 66,961 Current ratio 1.8:1 1.9:1 2.1:1 2.0:1 1.9:1 1.8:1 Net working capital 88,379 73,326 69,548 64,575 56,845 56,484 Property and equipment, net 67,737 50,419 48,090 48,490 47,368 37,254 Total assets 298,448 216,132 187,396 189,500 175,708 165,716 Interest bearing debt 74,682 12,865 11,836 22,965 23,851 33,299 Shareholders' investment 143,036 124,619 112,814 106,677 100,046 93,011 Shareholders' investment per share 7.70 6.82 6.15 5.80 5.48 5.12 OTHER STATISTICS AND RATIOS - -------------------------------------------------------------------------------------------------------------------------------- Diluted shares outstanding(2) 19,252 18,956 19,106 18,180 18,672 18,288 Number of common shareholders of record 1,760(3) 1,575 1,523 1,395 1,394 1,400 Number of employees 2,272 1,981 1,725 1,612 1,557 1,447 New orders $ 332,998 $ 356,123 $282,753 $ 245,919 $195,260 $ 178,786 Backlog of orders $ 175,439 $ 175,841 $120,481 $ 98,757 $ 84,591 $ 88,731 Gross profit percent 38.4% 40.0% 40.6% 39.1% 39.8% 41.6% Research and development costs as a percent of net revenue 6.5% 5.8% 6.8% 5.9% 6.3% 7.2% Net income as a percent of net revenue 6.1% 6.0%(1) 5.4% 4.5% 4.3% 5.5% Effective tax rate 34% 36% 29% 25% 31% 30% Interest bearing debt to shareholders' investment percent 52% 10% 10% 22% 24% 36% Return on average net assets(4) 20.9% 22.9%(1) 17.2% 12.9% 11.6% 16.3% Return on beginning shareholders' investment per share 15.8% 15.6%(1) 12.8% 10.5% 9.0% 11.9% Cash dividends paid per share $ .24 $ .20 $ .16 $ .14 $ .14 $ .12 - --------------------------------------------------------------------------------------------------------------------------------
(1) EXCLUDES AN AFTER-TAX GAIN OF $2,654,000 FROM THE SALE OF LAND IN MAY 1997, WHICH IS EQUAL TO $.14 PER SHARE (2) PRESENTED ON A WEIGHTED AVERAGE BASIS OF COMMON SHARES ASSUMING CONVERSION OF POTENTIAL COMMON SHARES DURING EACH YEAR AFTER RETROACTIVE ADJUSTMENTS FOR ISSUED SHARES, FOR STOCK SPLITS AND FOR REDUCTION OF SHARES FROM TREASURY STOCK PURCHASES (IN THOUSANDS OF SHARES). (3) ON DECEMBER 1, 1998, THERE WERE 1,760 COMMON SHAREHOLDERS OF RECORD, WITH ANOTHER ESTIMATED 2,000 BENEFICIAL SHAREHOLDERS WHOSE STOCK IS HELD BY NOMINEES OR BROKER DEALERS. (4) (INCOME BEFORE INCOME TAXES PLUS NET INTEREST EXPENSE) DIVIDED BY (AVERAGE QUARTERLY ASSETS MINUS NON-INTEREST BEARING LIABILITIES). 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- BACKLOG/NEW ORDERS 1998 1997 1996 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) New Orders: North America* $ 179,779 $ 186,155 $ 139,725 International 153,219 169,968 143,028 - -------------------------------------------------------------------------------- Total $ 332,998 356,123 $ 282,753 - -------------------------------------------------------------------------------- Backlog $ 175,439 175,841 $ 120,481 ================================================================================ *INCLUDES U.S. AND CANADA 1998 new orders of $333.0 million were down 6% from 1997 but represented a 18% increase over 1996. 1997 orders included a $18.5 million contract for a large crash simulation system and 1996 orders included a $23.3 million earthquake simulator. There were no orders over $10 million in 1998. In 1998, the Mechanical Test and Simulation sector (MT&S) new orders of $254.6 million decreased 13% from 1997 but represented a 9% increase over 1996. Orders from the ground vehicle industry and for civil engineering applications were particularly strong in 1997 and 1996 but declined in 1998 due to the Asian situation and the Japan recession. Solid growth in our materials business and specialty entertainment projects partially offset the loss of business in Asia and Japan. The Factory Automation sector (FA) new orders in 1998 of $78.4 million increased 24% over the prior year (70% of the increase from the acquisition of Performance Controls, Inc. [PCI]) and represented a 63% increase over 1996. About 17% of the order growth in 1997 came from the acquisition of Bregenhorn-Butow & Co., (BB & Co.). The European and Japanese markets for FA products reflected solid growth in local currencies but were affected in translation due to the strengthening dollar. Orders for industrial automation applications (servo motors, amplifiers, and motion controllers) and industrial sensors were affected, in 1998, by a soft domestic market. North American orders decreased 3% in 1998, but increased 33%, in 1997, and 1% in 1996. International orders decreased 10% in 1998 but increased 19% in 1997, and 32% in 1996. See Geographic Analysis of New Orders (below) for the percentage breakdown by geographic area. See Foreign Currencies Effects (page 19) for the impact on orders due to changing foreign currency rates. The backlog of undelivered orders at September 30, 1998 amounted to $175.4 million, which was about flat with the prior year. The order backlog at the end of 1997 had increased 46% from 1996 as a result of the record new orders received in 1997. Approximately 10% of the orders in backlog have delivery dates beyond fiscal 1999. NET REVENUES 1998 1997 1996 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) United States $ 182,505 $143,913 $ 128,593 International 157,177 159,567 132,436 - -------------------------------------------------------------------------------- Total $ 339,682 $303,480 $ 261,029 ================================================================================ Record 1998 net revenues of $339.7 million were up 12% from the prior year and represented a 30% increase over 1996 revenues. For 1998, MT&S revenues of $265.6 million increased 10% from 1997 and represented a 25% increase over 1996 revenues. FA revenues in 1998 of $74.1 million increased 18% over the previous year and represented a 53% increase over 1996 revenues (the PCI acquisition in 1998 represented 78% of the 1998 growth). For industry sector and geographic information, see Note 2 of "Notes to Consolidated Financial Statements." See Foreign Currencies Effects (page 19) for impact on revenues due to changing foreign currency rates. Revenues in the United States increased over the prior years: 27% in 1998, 12% in 1997, and 2% in 1996. The domestic market, which was strong in 1997 for most of the Company's business segments, softened somewhat for our FA sector and certain niches of our MT&S sector in 1998.The domestic market was soft in 1996. International revenues decreased 1% in 1998 and increased 20% in 1997, and 22% in 1996. International revenues grew at a faster rate in 1997 and 1996 reflecting improved economic conditions which began late in 1995. In 1998, the Asian economies and Japan were in a deep recession which caused the decline in revenues between years. Europe continued to show recovery from its low point in 1995. The MT&S sector revenue increases for 1998 and 1997 reflected positive worldwide demand from our ground vehicle customers, solid growth in our entertainment projects niche, a strong market for aftermarket sales of accessories and services, and, in 1998, an improvement in market share for our materials test business. Our civil engineering structural test business which was strong in 1997 declined in 1998 due to the Asian situation. The FA sector revenue increase for 1998 reflected good growth in demand from European original equipment manufacturers for our sensor products and the PCI acquisition. The demand for our servo motor, amplifier, and motion control products was soft for most of 1998 but strengthened in the fourth quarter. Selective price increases and decreases were implemented in all three years. However, the overall impact of pricing changes did not have a material effect on reported revenue volume. GEOGRAPHIC ANALYSIS OF NEW ORDERS 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------- North America 54% 52% 49% 57% 52% - -------------------------------------------------------------------------------- Europe/Africa/Middle East 30 28 22 25 21 - -------------------------------------------------------------------------------- Asia Pacific/Japan 14 18 26 17 26 - -------------------------------------------------------------------------------- Latin America/Rest of the World 2 2 3 1 1 - -------------------------------------------------------------------------------- 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- GROSS PROFIT 1998 1997 1996 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Gross Profit $ 130,364 $ 121,503 $ 106,104 ================================================================================ % of Net Revenue 38.4% 40.0% 40.6% ================================================================================ The gross profit percentage for 1998 decreased to 38.4% from 40.0% in 1997. The decrease was principally caused by a higher revenue content of "specialty" projects that are sold at a lower gross margin than in our core automotive and material test business, and a high unfavorable overhead manufacturing variance caused by increased expenses and lost direct labor due to training associated with our new enterprise-wide financial and operating software system. The small decrease in the gross profit percentage in 1997 compared to 1996 was due to higher continuing product engineering costs in the MT&S sector, associated with enhancing current product offerings, and a material cost problem at our FA plants in Germany. RESEARCH AND DEVELOPMENT EXPENSE 1998 1997 1996 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) R & D Expense $ 21,930 $ 17,511 $ 17,696 ================================================================================ % of Net Revenue 6.5% 5.8% 6.8% ================================================================================ The Company provides funds for product, system and application developments (R&D) in both the MT&S and FA sectors. The majority of the R&D expenditures in all three years were for new systems and system components such as software, controls and mechanical products; new measurement products; servo motors and amplifiers; and accessories. 1998 product introductions included low-force actuators, a family of quiet hydraulic pumps, wheel force transducers, a microforce material testing system, and an array of bio-mechanical testing products. The R&D as a percentage of net revenue reflected above are representative of the ratio range the Company normally commits to in its annual planning process. A shift of some MT&S engineering personnel from R&D to continuing product engineering caused the R&D expense and ratio reduction in 1997 versus 1996. Accelerated development programs in both the MT&S and FA sectors and a shift from customer funded development caused the higher percentages in 1998 and 1996. The Company also undertakes "first of their kind" system level development efforts as part of its custom projects sold to customers. The cost of these efforts is reported as cost of revenue. The combination of internally funded R&D and these customer funded system innovations typically approximates about 10% of net revenue. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 1998 1997 1996 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Selling Expense $ 51,905 $ 52,229 $ 48,260 General & Administrative Expense 23,254 20,898 17,260 - -------------------------------------------------------------------------------- Total $ 75,159 $ 73,127 $ 65,520 ================================================================================ % of Net Revenue 22.1% 24.1% 25.1% ================================================================================ Selling and General & Administrative (SG&A) expenses for 1998 as a percentage of net revenue was 2.0 percentage points lower than 1997 and 3.0 percentage points lower than 1996. Full year spending for 1998 totaled $75.2 million, which represented a $2.0 million (3%) increase over 1997 and a $9.7 million (15%) increase over 1996. All three years were similar in that cost control and alignment of existing resources with markets having the greatest potential were heavily emphasized during the annual planning process. New investments were made based on evaluations as to how to serve our markets better or to support long-term business strategies. Specific expenses in the selling category are variable, such as commissions, and increased significantly in 1997 due to record new orders. SG&A expenses of newly acquired companies represented $1.1 million of the expense increase in 1998 and $1.9 million of the increase in 1997. INCOME 1998 1997 1996 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) Income Before Income Taxes $ 31,473 $32,712 $ 20,006 ================================================================================ % of Net Revenue 9.3% 10.8% 7.7% ================================================================================ Net Income $ 20,766 $20,863 $ 14,109 ================================================================================ % of Net Revenue 6.1% 6.9% 5.4% ================================================================================ Effective Tax Rate 34.0% 36.2% 29.5% ================================================================================ Return On Beginning Shareholder's Investment Per Share 15.8% 17.9% 12.8% ================================================================================ Basic Earnings Per Share $ 1.13 $ 1.15 $ .76 ================================================================================ Diluted Earnings Per Share $ 1.08 $ 1.10 $ .74 ================================================================================ Income before Income Taxes (pretax income) in 1998 increased $3.1 million or 11% from 1997 (1997 pretax income excluding the $4.3 million land sale gain amounted to $28.4 million or 9.4% of net revenue), and represented a $11.5 million or 57% increase over 1996. The improved pretax income percentage in both 1998 and 1997 compared to 1996 reflects revenue growth that was achieved with lower operating expense ratios. The MT&S pretax income of $24.6 million, in 1998, was slightly better than 18 1997 pretax (excluding the $4.3 million land sale gain). FA pretax operating income increased 64% to $6.9 million from 1997. FA pretax operating income had decreased 9% in 1997 from 1996 which was primarily caused by integration costs associated with the BB & Co. acquisition, higher development costs for new and expanded uses of our industrial sensors products, and a material cost problem at our plants in Germany. (See Note 2 of "Notes to Consolidated Financial Statements"). Net income increased $2.6 million or 14% from 1997 (excluding the gain from the sale of land which amounted to $2.7 million after taxes, or $.14 per diluted share) and represented a $6.7 million or 47% increase over 1996. The effective tax rate is influenced by the level of tax credits available from the Company's Foreign Sales Corporation and qualified Research and Development expense; and on the level of foreign sourced income which is taxed at a higher rate than domestic sourced income. See Note 4 of "Notes to Consolidated Financial Statements" for the reconciliation between the federal statutory and effective income tax rates and other related tax information. FOREIGN CURRENCIES EFFECTS The Company is exposed to market risk from changes in foreign currency exchange rates which can affect its results from operations and financial condition. To minimize the 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 losses and gains on the assets, liabilities, and transactions being hedged. Approximately 50% of the Company's revenue occurs outside of the United States and about 65% (approximately 30% of the Company's net revenue) of these revenues are denominated in currencies other than the U.S. dollar. As a result, a strengthening of the U.S. dollar decreases translated foreign currency denominated revenues and earnings. Conversely, weakening of the U.S. dollar has the reverse impact on revenues and earnings. During 1998, 1997 and 1996, 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 and the gains and losses on forward exchange contracts used to hedge these exposures, are included in other expense (income). The total effect of foreign exchange rate fluctuations on translation of orders, revenues, and net income plus transaction gains and losses reported in other expense (income) is set forth in the following table: 1998 1997 1996 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Increase (Decrease) from Translation: Orders $ (10,838) $(13,150) $ (8,980) Revenues (6,704) (8,852) (4,921) Net Income (236) (237) (66) ================================================================================ Transaction Gain in "Other Expense (Income)" $ 2,340 $ 1,266 $ 104 ================================================================================ LIQUIDITY AND CAPITAL RESOURCES 1998 1997 1996 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) Total Interest Bearing Debt $ 74,682 $ 12,865 $ 11,836 % of Total Capitalization 34.3% 9.4% 9.5% ================================================================================ Shareholders' Investment $ 143,036 $124,619 $ 112,814 ================================================================================ Per Share $ 7.70 $ 6.82 $ 6.15 ================================================================================ At September 30, 1998, the Company's capital structure was comprised of $29.4 million of current debt, $45.3 million of long-term debt and $143.0 million of shareholders' investment. The ratio of total debt to total capitalization was 34.3% compared to 9.4% at September 30, 1997. Total debt increased $61.8 million during 1998 to $74.7 million. This resulted from a $23.8 million increase in notes payable to banks, and a $37.7 million increase in long-term debt. The increase in notes payable to banks principally financed an increase in the Company's working capital needs in 1998. The long-term debt increased as a result of the Company's $35 million private placement of long-term notes. Proceeds of the private placement were used to fund acquisitions made by the Company in 1998 and to fund the Company's investment in an enterprise-wide data processing system. In May 1998, the Company amended its multi-currency revolving credit facility with its principal bank, increasing the commitment to $35 million, and extending the commitment to September 2001. There was $20.8 million outstanding under this facility at September 30, 1998. Additionally, the Company has an additional $35 million of uncommitted lines of credit, of which $8 million was outstanding at year end. Shareholders' investment increased $18.4 million in 1998 to $143.0 million. The increase was primarily due to an increase in retained earnings of $20.8 million from current year net earnings and $3.2 million from the Company's employee stock option and purchase plans. These increases were offset by $4.4 million of dividend payments and $1.2 million of treasury stock purchases. The Company believes that the combination of present capital resources, internally generated funds, and unused financing sources will be adequate to finance on-going operations, allow for reinvestment in the business and strategic acquisitions. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- CASH FLOWS During 1998 operating activities used $5.0 million of cash, compared with $9.6 million that was generated in 1997 and $36.1 million in 1996. The decrease in cash generated in 1998 was largely due to increased accounts receivable from strong shipments in the fourth quarter. Major uses of cash included $29.0 million for acquisition of businesses, $24.1 million for additions to property and equipment, and $4.4 million of dividend payments. Capital expenditures for property and equipment additions totaled $24.1 million in 1998, $12.4 million in 1997, and $7.4 million in 1996. Significant additions in 1998 were associated with an enterprise-wide financial and operations software system. Capital spending in 1999 is planned to be about $12 million. The Company anticipates that 1999 capital expenditures will be financed primarily with funds from operations. DIVIDENDS The Company's dividend policy is to maintain a payout ratio which allows dividends to increase with the long-term growth of earnings per share, while sustaining dividends in down years. The Company's dividend payout ratio target is about 25 percent of earnings per share. The current quarterly dividend of 6 cents per share equates to 26 percent of the 1996 through 1998 average net earnings per share. SHARE REPURCHASE PLAN In 1998, the Company repurchased 76,000 shares of common stock on the open market for $1.2 million, at an average cost of $15.56 per share. The Company repurchased 698,130 shares in 1997 for $7.6 million, at an average cost of $10.91 per share. The Company's purpose for share repurchases is to offset the dilutive effect of shares of common stock issued from the Company's stock option and stock purchase plans, and for other corporate stock-based programs. During the past two years, the Company issued 1,000,000 shares of its common stock from these stock option and stock purchase plans. In November 1996, the Company's Board of Directors authorized the repurchase of 1,000,000 shares of common stock in the open market within the Securities and Exchange Commission guidelines. At September 30,1998, 533,780 shares remained available to be repurchased under this authorization. The above share amounts have been adjusted for the Company's two-for-one stock split in the form of a 100% stock dividend, effective February 2, 1998. QUARTERLY STOCK ACTIVITY(1) The Company's common shares trade on The Nasdaq Stock Market's National Market under the symbol MTSC. The following table sets forth the high, low and volume of shares traded (expressed in thousands) for the periods indicated: 1998 1997 - -------------------------------------------------------------------------------- SHARES SHARES HIGH LOW TRADED HIGH LOW TRADED - -------------------------------------------------------------------------------- 1st Quarter 20 17 3/8 3049 10 3/4 9 5/8 1574 2nd Quarter 19 13 1/2 5298 11 5/16 9 3/4 1538 3rd Quarter 19 1/4 15 1/2 2379 15 1/4 10 1/4 4388 4th Quarter 17 3/4 11 9/16 1600 19 5/8 14 3/8 2196 - -------------------------------------------------------------------------------- (1) SOURCE: THE NASDAQ STOCK MARKET THE ABOVE PRICES AND SHARE VOLUMES HAVE BEEN ADJUSTED FOR THE COMPANY'S TWO-FOR-ONE STOCK SPLIT IN THE FORM OF A 100% STOCK DIVIDEND, EFFECTIVE FEBRUARY 2, 1998. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarter-to-quarter revenue and earnings comparisons do not necessarily reflect changes in the demand for the Company's products or its operating efficiency. Revenues and earnings in any quarter can be significantly affected by delivery delays or acceleration of one or more high-value systems, not accounted for using the percentage-of-completion accounting method. The use of the percentage-of-completion revenue recognition method for large long-term projects helps alleviate those fluctuations. (See Note 1 of "Notes to Consolidated Financial Statements"). High-value, state-of-the-art custom orders can also contain leading-edge applications of the Company's technology, which in some cases have resulted in lower gross profit margins, albeit not necessarily low marginal profit contribution. Product development in these state-of-the-art custom orders is as essential to the Company's long term growth as is Company funded research and development. Quarterly earnings also vary based on the use of estimated, effective income tax rates for providing federal, state, and foreign income taxes. See Note 4 of "Notes to Consolidated Financial Statements" for more information on the Company's income taxes. EURO CONVERSION On January 1, 1999, certain member countries of the European Economic and Monetary Union (EMU) will adopt a common currency, the Euro. For a three-year transition period, both the Euro and individual participants' currencies will remain in use. The Company is upgrading systems, where necessary, to properly handle the Euro. It is expected that the Company's European operations will formally begin reporting in euro currency starting in October, 2000. However, beginning January 1, 1999, the Company will be able to process euro transactions in dealing with its customers. The costs of addressing the euro conversion are not expected to have a material impact on the Company's financial condition or operating results. 20 - -------------------------------------------------------------------------------- YEAR 2000 The following is a Year 2000 Readiness Disclosure pursuant to the Year 2000 Information and Readiness Disclosure Act. The Company is evaluating the potential impact of what is commonly referred to as the Year 2000 issue, concerning the inability of certain computer-based products and systems to operate correctly into and during the year 2000. If not corrected, these products and systems could fail or create erroneous results. Following preliminary work done in fiscal 1997, in early fiscal 1998 the Company established a full-time Year 2000 central project office led by a senior technical manager reporting directly to an executive. The project is being executed solely by company personnel who use third party testing software where appropriate. The central project office has been working with each of the Company's twelve producing sites to evaluate the following areas: 1. Site Infrastructure, Equipment and Vendors * Business Information Systems * End User Computing Systems * Telecommunications Infrastructure * Service Providers * Material Suppliers * Manufacturing and Metrology Equipment and Facilities 2. Products Manufactured at Site Except for a noise and vibration product line acquired at the end of fiscal 1998 (which will be included in the project in 1999), all of the Company's twelve producing sites had been audited by October 31, 1998 and the areas which were not yet Year 2000 ready, or where questions remain as to readiness, were identified and schedules set to become ready. A summary of the results of these audits is presented below. SITE INFRASTRUCTURE, EQUIPMENT AND VENDORS The Company's major Business Information, End User Computing and Telecom Systems have been identified at each site, and the vast majority of these systems that have been tested are compliant. Each site has developed a plan for completion of testing and remediation of critical systems. No projects have been accelerated due to Year 2000 nor are Year 2000 efforts precluding other important efforts in these areas. The Company believes its greatest Year 2000 exposure lies with a limited number of critical/sole source service providers and material suppliers. A failure of these vendors to be able to operate up to and through the year 2000 could have a material adverse effect on the Company's business, financial condition and operating results. The Company has sent surveys to such vendors and has received responses from most of them about their Year 2000 readiness. Where the Company does not have sufficient comfort that a critical vendor will be ready, site management will obtain more detailed information and establish a plan for working with the vendor to prevent an interruption of supply. During fiscal 1999, the Company will develop contingency plans, where feasible, in those cases where such interruption remains reasonably possible. The Company's manufacturing and metrology equipment and facilities contain embedded processors and code which have been inventoried and evaluated for Year 2000 readiness. A few instances require remediation. The Company's target date is June 30, 1999 for the completion of testing and remediation at each site. By the same date, the Company expects to complete verification of readiness (or contingency plan) for each of its critical vendors. PRODUCTS MANUFACTURED AT SITE The Company's FA Sector products contain few date sensitive computer and embedded processors. The Company has completed an evaluation of the vast majority of these products and will complete the balance in early fiscal 1999. All of the products evaluated to date have been found to be year 2000 ready, in some cases with stipulations, and the Company believes that will be the case with the products yet to be evaluated. The Company's MT&S products are by their nature computer intensive. The Company has assessed the vast majority of the products in the sector and advised its customers as to their Year 2000 readiness via its web site and written communication. The balance of products will be assessed by March, 1999. In those cases where MT&S's products were found to be non-compliant, less than 2%, or in the case of discontinued products that were not evaluated, the Company is actively working with its customers to provide upgrades that are year 2000 ready. The Company considers this process to be business as usual in its MT&S sector due to the rapid evolution in computer and software technology. The Company does not expect the costs to be incurred or revenue to be lost in this process, if any, to have a material impact on its financial condition or operating results. SUMMARY The Company estimates that the costs directly related to its Year 2000 project were $300,000 in fiscal 1998 and will be $800,000 in fiscal 1999. Such costs are expensed as incurred. This Readiness Disclosure is a Forward Looking statement as defined by the Securities and Exchange Commission and the Company recognizes that, although not expected, there are risks of project delays, costs incurred, vendor compliance, and loss of business which are outside the direct control of the Company and/or could prove to be material. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Selected quarterly financial information, for the three fiscal years ended September 30, 1998, is presented below.
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year - ---------------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) 1998 Net revenue $73,938 $ 81,685 $ 85,826 $98,233 $ 339,682 Gross profit 30,239 31,612 32,278 36,235 130,364 Income before income taxes 6,712 7,523 7,751 9,487 31,473 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 4,312 $ 4,866 $ 5,087 $ 6,501 $ 20,766 - ---------------------------------------------------------------------------------------------------------------------------------- Net income per share(2) Basic $ .24 $ .27 $ .27 $ .35 $ 1.13 Diluted .22 .26 .26 .34 1.08 - ---------------------------------------------------------------------------------------------------------------------------------- 1997 Net revenue $66,841 $ 73,880 $ 74,153 $88,606 $ 303,480 Gross profit 27,091 30,359 29,481 34,572 121,503 Income before income taxes 4,683 7,060 10,947(1) 10,022 32,712(1) - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 3,221 $ 4,642 $ 6,741(1) $ 6,259 $ 20,863(1) - ---------------------------------------------------------------------------------------------------------------------------------- Net income per share(2) Basic $ .18 $ .26 $ .37(1) $ .34 $ 1.15(1) Diluted .17 .25 .36(1) .32 1.10(1) - ---------------------------------------------------------------------------------------------------------------------------------- 1996 Net revenue $56,135 $ 67,082 $ 60,630 $77,182 $ 261,029 Gross profit 23,867 28,066 24,374 29,797 106,104 Income before income taxes 3,570 5,363 4,286 6,787 20,006 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 2,430 $ 3,632 $ 2,914 $ 5,133 $ 14,109 - ---------------------------------------------------------------------------------------------------------------------------------- Net income per share(2) Basic $ .13 $ .20 $ .15 $ .28 $ .76 Diluted .13 .19 .15 .27 .74 - ----------------------------------------------------------------------------------------------------------------------------------
(1) INCLUDES $4.3 MILLION PRETAX GAIN ON LAND SALE EQUAL TO $.14 PER SHARE AFTER TAXES. (2) NET INCOME PER SHARE HAS BEEN RESTATED RETROACTIVELY FOR THE TWO-FOR-ONE STOCK SPLIT EFFECTIVE FEBRUARY 2, 1998. 22 CONSOLIDATED BALANCE SHEETS (September 30) - -------------------------------------------------------------------------------
ASSETS 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) CURRENT ASSETS: Cash and cash equivalents $ 10,512 $ 10,285 Accounts receivable, net of allowance for doubtful accounts of $2,135 and $2,010 89,278 62,023 Unbilled contracts and retainage receivable 35,891 32,653 Inventories 53,675 43,591 Prepaid expenses 4,237 4,253 - -------------------------------------------------------------------------------------------------------------------------------- Total current assets 193,593 152,805 - -------------------------------------------------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT: Land 2,437 2,453 Buildings and improvements 40,432 37,779 Machinery and equipment 88,626 68,071 Accumulated depreciation (63,758) (57,884) - -------------------------------------------------------------------------------------------------------------------------------- Total property and equipment, net 67,737 50,419 - -------------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS 37,118 12,908 - -------------------------------------------------------------------------------------------------------------------------------- $ 298,448 $216,132 ================================================================================================================================ LIABILITIES AND SHAREHOLDERS' INVESTMENT - -------------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Notes payable to banks $ 28,243 $ 4,356 Current maturities of long-term debt 1,180 920 Accounts payable 19,406 17,771 Accrued compensation and benefits 26,919 25,487 Advance billings to customers 17,360 21,065 Other accrued liabilities 12,106 9,880 - -------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 105,214 79,479 - -------------------------------------------------------------------------------------------------------------------------------- Deferred income taxes 4,939 4,445 Long-term debt 45,259 7,589 - -------------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' INVESTMENT: Common stock, 25(cent) par; 64,000,000 shares authorized: 18,579,481 and 9,135,766 shares issued and outstanding 4,645 2,284 Additional paid-in capital 3,322 1,438 Retained earnings 133,203 119,167 Cumulative translation adjustment 1,866 1,730 - -------------------------------------------------------------------------------------------------------------------------------- Total shareholders' investment 143,036 124,619 - -------------------------------------------------------------------------------------------------------------------------------- $ 298,448 $216,132 ================================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE BALANCE SHEETS. 23 CONSOLIDATED STATEMENTS OF INCOME AND SHAREHOLDERS' INVESTMENT (For the Years Ended September 30) - --------------------------------------------------------------------------------
INCOME 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) NET REVENUE $ 339,682 $ 303,480 $261,029 COST OF REVENUE 209,318 181,977 154,925 - -------------------------------------------------------------------------------------------------------------------------------- GROSS PROFIT 130,364 121,503 106,104 - -------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Selling 51,905 52,229 48,260 General and administrative 23,254 20,898 17,260 Research and development 21,930 17,511 17,696 - -------------------------------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 33,275 30,865 22,888 - -------------------------------------------------------------------------------------------------------------------------------- Interest expense 2,327 1,531 1,524 Interest income (379) (406) (401) Other expense (income), net (146) (2,972) 1,759 - -------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 31,473 32,712 20,006 PROVISION FOR INCOME TAXES 10,707 11,849 5,897 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 20,766 $ 20,863 $ 14,109 ================================================================================================================================ NET INCOME PER SHARE Basic $ 1.13 $ 1.15 $ .76 Diluted 1.08 1.10 .74 - --------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT - -------------------------------------------------------------------------------------------------------------------------------- Common Stock -------------------------- Additional Cumulative Shares Paid-In Retained Translation Issued Amount Capital Earnings Adjustment - -------------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) BALANCE, SEPTEMBER 30, 1995 4,598,311 $1,150 $ 255 $100,443 $ 4,829 ================================================================================================================================ Exercise of stock options 264,604 66 3,642 -- -- Translation adjustment -- -- -- -- (793) Common stock purchased and retired (381,055) (95) (3,897) (3,904) -- Stock split, 2 for 1 4,691,658 1,172 -- (1,172) -- Net income -- -- -- 14,109 -- Cash dividends, 16 (cent) per share -- -- -- (2,991) -- - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1996 9,173,518 2,293 -- 106,485 4,036 ================================================================================================================================ Exercise of stock options 311,313 78 4,511 -- -- Translation adjustment -- -- -- (83) (2,306) Common stock purchased and retired (349,065) (87) (3,073) (4,453) -- Net income -- -- -- 20,863 -- Cash dividends, 20 (cent) per share -- -- -- (3,645) -- - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1997 9,135,766 2,284 1,438 119,167 1,730 ================================================================================================================================ Exercise of stock options 300,091 75 3,086 -- -- Translation adjustment -- -- -- -- 136 Common stock purchased and retired (60,800) (15) (1,202) -- -- Stock Split, 2 for 1 9,204,424 2,301 -- (2,301) -- Net income -- -- -- 20,766 -- Cash dividends, 24 (cent) per share -- -- -- (4,429) -- - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1998 18,579,481 $4,645 $ 3,322 $133,203 $ 1,866 ================================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 24 CONSOLIDATED STATEMENTS OF CASH FLOWS (For the Years Ended September 30) - --------------------------------------------------------------------------------
1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) OPERATING ACTIVITIES: Net income $ 20,766 $ 20,863 $ 14,109 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 9,715 8,557 7,820 Deferred income taxes 319 (227) 740 Gain from sale of real estate -- (4,332) -- Changes in operating assets and liabilities, exclusive of aquisitions: Accounts receivable, unbilled contracts and retainage receivable (27,974) (26,056) 13,362 Inventories (6,470) (6,954) (1,071) Prepaid expenses 587 363 (2,380) Advance billings to customers (3,736) 8,157 (455) Other liabilities, net 1,802 9,197 3,969 - -------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,991) 9,568 36,094 - -------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Property and equipment additions (24,149) (12,374) (7,437) Proceeds from sale of real estate -- 5,700 -- Acquisition of businesses, net of cash received (29,012) (5,947) -- Other assets (334) (223) (649) - -------------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (53,495) (12,844) (8,086) - -------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net borrowings under notes payable to banks 23,770 3,743 (10,386) Proceeds from issuance of long-term debt 38,637 1,008 2,202 Repayments of long-term debt (1,152) (2,745) (2,169) Cash dividends (4,429) (3,645) (2,991) Proceeds from employee stock option and stock purchase plans 3,160 4,589 3,708 Payments to purchase and retire common stock (1,217) (7,613) (7,896) - -------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 58,769 (4,663) (17,532) - -------------------------------------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (56) (1,007) 19 - -------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 227 (8,946) 10,495 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,285 19,231 8,736 - -------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10,512 $ 10,285 $ 19,231 ================================================================================================================================ SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: Cash paid during the year for: Interest $ 1,881 $ 1,531 $ 1,458 Income taxes 8,024 13,295 6,677 ================================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CONSOLIDATION AND TRANSLATION The consolidated financial statements include the accounts of MTS Systems Corporation (the Company) and its wholly and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated. All balance sheet accounts of foreign subsidiaries are translated to U.S. dollars at the current exchange rates as of the end of the fiscal year. Income statement items are translated at average exchange rates during the year. The resulting translation adjustment is recorded as a separate component of shareholders' investment. Gains and losses from translation of foreign currency denominated transactions and from foreign exchange hedge contracts are included in "Other expense (income) net" in the Consolidated Statements of Income and amounted to $2,340,000 in 1998, $1,266,000 in 1997 and $104,000 in 1996. REVENUE RECOGNITION Revenue is recognized upon shipment of equipment when the customer's order can be manufactured, delivered, and installed in less than twelve months. Revenue on contracts requiring longer delivery periods (long-term contracts) and other customized orders that permit progress billings is recognized using the percentage-of-completion method based on the cost incurred to date relative to estimated total cost of the contract (cost-to-cost method). The cumulative effects of revisions of estimated total contract costs and impact on revenues are recorded in the period in which the facts become known. When a loss is anticipated on a contract, the amount is provided currently. LONG-TERM CONTRACTS The Company enters into long-term contracts for customized equipment sold to its customers. Under terms of such contracts, revenue recognized using the percentage of completion method may not be invoiced until completion of contractual milestones, upon shipment of the equipment, or upon installation and acceptance by the customer. Unbilled amounts for these contracts appear in the Consolidated Balance Sheets as Unbilled Contracts and Retainage Receivable. Amounts unbilled or retained at September 30, 1998 are expected to be invoiced during fiscal 1999. Long-term contracts consider the duration of the manufacturing and collection cycles at the time the contract is bid. Accordingly, Accounts receivable in the accompanying Consolidated Balance Sheets approximate fair value. WARRANTY OBLIGATIONS The Company warrants its products against defects in materials and workmanship under normal use and service, generally for one year. The Company maintains reserves for warranty costs based upon its past experience with warranty claims. RESEARCH AND DEVELOPMENT Research and product development costs associated with new products are charged to operations as incurred. CASH EQUIVALENTS Cash equivalents represent short-term liquid investments which have original maturities of three months or less and approximate fair value. ACCOUNTS RECEIVABLE The Company grants credit to customers, but generally does not require collateral or other security from domestic customers. International receivables, where deemed necessary, are supported by letters of credit from banking institutions. INVENTORIES Inventories consist of material, labor and overhead and are stated at the lower of cost or market, determined by the first-in, first-out method. Inventory components as of September 30, were as follows: 1998 1997 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Customer projects in various stages of completion $ 10,750 $ 5,559 Components, assemblies and parts 42,925 38,032 - -------------------------------------------------------------------------------- Total $ 53,675 $ 43,591 ================================================================================ 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 12 years. Most major building and equipment purchases are depreciated on a straight-line basis for financial reporting purposes and on an accelerated basis for income tax purposes. DERIVATIVE FINANCIAL INSTRUMENTS The Company periodically enters into forward exchange contracts principally to hedge the eventual dollar cash flow of foreign currency denominated transactions (primarily British Pound, German Deutschemark, French Franc, Swedish Krona, Italian Lira, and Japanese Yen). Gains and losses on forward exchange contracts entered into to hedge foreign currency denominated undelivered orders and net exposed assets are included in "Other expense (income) net" in the Consolidated Statements of Income. 26 - -------------------------------------------------------------------------------- The Company's accounting policy for these contracts is based on the Company's designation of foreign currency contracts as hedging transactions. The Company does not use derivative financial instruments for speculative or trading purposes. The criteria the Company uses for designating a contract as a hedge include the contract's effectiveness in risk reduction and matching of contracts to underlying transactions. On September 30, 1998, there were open hedge contracts totaling $2,800,000 with an unrealized loss of $3,000. On September 30, 1997, there were no open hedge contracts. OTHER ASSETS Other assets consist principally of patents and excess cost over net assets acquired (goodwill), net of accumulated amortization. The carrying value of goodwill less accumulated amortization was $31,468,000 and $10,861,000 in 1998 and 1997, respectively. These assets are being amortized over various periods ranging from 7 to 40 years. The Company periodically evaluates whether events and circumstances have occurred that may affect the estimated useful life of its goodwill and other long-lived assets. If such events or circumstances were to indicate that the carrying amount of these assets would not be recoverable, an impairment loss would be recognized. No such impairment has been recognized for the year ended September 30, 1998. NET INCOME PER SHARE The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" during the first quarter of fiscal 1998. As a result, all prior periods presented have been restated to conform to the provisions of SFAS No. 128, which requires the presentation of basic and diluted earnings per share. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share includes the dilutive effect of potential common shares. Weighted average common shares and per share computations have been restated retroactively for the two-for-one stock split effective February 2, 1998. 1998 1997 1996 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) Weighted average common shares outstanding 18,441 18,207 18,669 Dilutive potential common shares 811 749 437 - -------------------------------------------------------------------------------- Total dilutive common shares 19,252 18,956 19,106 - -------------------------------------------------------------------------------- Basic net income per share $ 1.13 $ 1.15 $ .76 Diluted net income per share 1.08 1.10 .74 ================================================================================ USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from reported amounts based upon those assumptions and estimates. The Company undertakes significant technological innovation on some of its Long-term Contracts. These contracts involve performance risk which may result in delayed delivery of product and/or in revenue and gross profit variation from difficulties in estimating the ultimate cost of such contracts. FUTURE ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes requirements for disclosure of comprehensive income and becomes effective beginning with the Company's first quarter ending on December 31, 1998. Reclassification of earlier financial statements for comparative purposes is required. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires reported segments to be those used by management to disaggregate a company. The new standard becomes effective for the Company's fiscal year ending September 30, 1999, and requires that comparative information from earlier years be restated. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company anticipates that the effect of adopting SFAS Nos. 130, 131 and 133 will not have a material impact on the Company's financial statements. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- 2. INDUSTRY SECTOR AND GEOGRAPHIC INFORMATION: Customers use the Company's hardware and software products and services to improve product quality, stimulate innovation, and increase machine and worker productivity. MTS sells these products and services in two markets--Mechanical Testing and Simulation (MT&S) and Factory Automation (FA). MT&S customers use the Company's products and services to determine how their products (materials, vehicles, components, or structures) will perform under actual service conditions. FA customers use the Company's instrumentation products to monitor and automate industrial processes and equipment. Financial information by sector follows:
1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) NET REVENUE Mechanical Testing & Simulation $ 265,612 $ 240,706 $ 212,763 Factory Automation 74,070 62,774 48,266 - -------------------------------------------------------------------------------------------------------------------------------- Total $ 339,682 $ 303,480 $ 261,029 - -------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES Mechanical Testing & Simulation $ 24,558 $ 28,485(1) $ 15,299 Factory Automation 6,915 4,227 4,707 - -------------------------------------------------------------------------------------------------------------------------------- Total $ 31,473 $ 32,712(1) $ 20,006 ================================================================================================================================ IDENTIFIABLE ASSETS Mechanical Testing & Simulation $ 268,829 $ 189,727 $ 165,110 Factory Automation 51,766 46,194 38,670 Eliminations between sectors (22,147) (19,789) (16,384) - -------------------------------------------------------------------------------------------------------------------------------- Total $ 298,448 $ 216,132 $ 187,396 ================================================================================================================================ OTHER SECTOR DATA Mechanical Testing & Simulation: Capital expenditures $ 20,564 $ 10,614 $ 6,198 Depreciation 6,834 5,979 5,706 Amortization 371 379 380 - -------------------------------------------------------------------------------------------------------------------------------- Factory Automation: Capital expenditures $ 3,959 $ 1,787 $ 1,803 Depreciation 1,674 1,532 1,216 Amortization 836 667 518 ================================================================================================================================
(1) INCLUDES $4.3 MILLION PRETAX GAIN ON LAND SALE EQUAL TO $.14 PER SHARE AFTER TAXES. 28 - -------------------------------------------------------------------------------- A geographic summary of the Company's operations and related year-end asset information for the three years ended September 30, 1998 follows:
International ---------------------------------------------------- United Elimi- Consoli- States Far East Europe Other Nations Dated - ------------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1998 Net revenue $182,505 $ 53,112 $ 85,181 $ 18,884 $ -- $339,682 Transfers between geographic areas(1) 1,092 12,679 29,625 -- (43,396) -- - ------------------------------------------------------------------------------------------------------------------------------ Total $183,597 $ 65,791 $114,806 $ 18,884 $ (43,396) $339,682 ============================================================================================================================== Income before income taxes $ 16,469 $ 7,547 $ 2,783 $ 4,674 $ -- $ 31,473 ============================================================================================================================== OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1997 Net revenue $143,913 $ 74,710 $ 66,905 $ 17,952 $ -- $303,480 Transfers between geographic areas(1) 825 26,988 27,927 -- (55,740) -- - ------------------------------------------------------------------------------------------------------------------------------ Total $144,738 $101,698 $ 94,832 $ 17,952 $ (55,740) $303,480 ============================================================================================================================== Income (loss) before income taxes $ 17,327 $ 13,600 $ (1,481) $ 3,266 $ -- $ 32,712 ============================================================================================================================== OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1996 Net revenue $128,593 $ 54,392 $ 63,023 $ 15,021 $ -- $261,029 Transfers between geographic areas(1) 2,513 18,411 21,499 3 (42,426) -- - ------------------------------------------------------------------------------------------------------------------------------ Total $131,106 $ 72,803 $ 84,522 $ 15,024 $ (42,426) $261,029 ============================================================================================================================== Income before income taxes $ 10,690 $ 2,208 $ 3,876 $ 3,232 $ -- $ 20,006 ============================================================================================================================== IDENTIFIABLE ASSETS AT SEPTEMBER 30 1998 $293,829 $ 10,026 $ 56,787 $ 306 $ (62,500) $298,448 1997 198,055 11,335 50,670 266 (44,194) 216,132 1996 174,507 12,060 42,098 175 (41,444) 187,396 ==============================================================================================================================
(1) TRANSFERS BETWEEN GEOGRAPHIC AREAS ARE MADE AT PRICES WHICH ALLOW APPROPRIATE MARKUP TO THE MANUFACTURING OR SELLING UNIT. No individual country, other than the United States, exceeded 10% of consolidated revenues on a recurrent annual basis. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- 3. FINANCING: Long-term debt as of September 30 follows:
1998 1997 - ----------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) 6.6% Notes, unsecured, due in July 2008 35,000 -- 7.8% Mortgage, due in October 2015, collateralized by building 6,444 6,287 5.3% Note, unsecured, due in March 2003 1,264 -- 6.0% Note, unsecured, due in May 2008 1,943 -- Other 1,788 2,222 - ----------------------------------------------------------------------------------------------------- TOTAL $ 46,439 $ 8,509 LESS CURRENT MATURITIES (1,180) (920) - ----------------------------------------------------------------------------------------------------- TOTAL LONG-TERM DEBT $ 45,259 $ 7,589 =====================================================================================================
Aggregate annual maturities of long-term debt for the next five fiscal years are as follows: 1999--$1,180,000; 2000--$1,174,000; 2001--$3,928,000; 2002--$6,888,000; 2003--$7,428,000 and $25,841,000 thereafter. The carrying value of the Company's long-term debt at September 30, 1998, approximates the fair value at current interest rates offered to the Company for debt with the same remaining maturities. The Company has credit agreements with two domestic banks totaling $40,000,000. One credit agreement, for $5,000,000, permits the Company to issue domestic and Euro-currency notes. The other credit agreement, for $35,000,000, permits the Company to issue domestic notes, Euro-currency notes, and banker's acceptances. As part of the same credit agreement, the bank has agreed to issue term loans up to a maximum of $10,000,000 until March 30, 2002. This agreement provides for repayment of these term loans through September 2005. The Company compensates both banks with loan commitment fees for the unused portion of the credit lines. The Company also has three uncommitted lines of credit with banks that total $35,000,000, of which $8,000,000 is outstanding at September 30, 1998. In addition, the Company has standby letter-of-credit lines totaling $30,000,000. At September 30, 1998, standby letters of credit outstanding totaled $13,619,000. Under the terms of its credit agreements, the Company has agreed, among other matters, that (a) its defined cash flow or fixed charge coverage will exceed a defined minimum level; (b) its interest bearing debt will not exceed a defined percentage of total capital; (c) repurchases of its common stock will not exceed a maximum amount. At September 30, 1998, net worth exceeded the defined minimum amount by $24,808,000 and the Company had $16,346,000 available for repurchases of its common stock. The Company was in compliance with the terms and covenants of its credit agreements and its lines of credit at September 30, 1998. Information on short-term borrowings for the years ended September 30 follows:
1998 1997 1965 - ----------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Balance outstanding at September 30 $ 28,243 $ 4,356 $ 56 Average balance outstanding 23,498 11,903 3,282 Maximum balance outstanding 51,216 23,458 11,223 Year-end interest rate 5.9% 6.0% 7.0% Weighted-average interest rate 6.1% 6.0% 6.9% =========================================================================================
30 4. INCOME TAXES: The provision for income taxes for the years ended September 30 consisted of:
1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ (EXPRESSED IN THOUSANDS) Current payable (receivable): Federal $ 5,966 $ 7,389 $ 3,717 State 898 835 499 Foreign 3,894 3,568 1,830 Deferred (52) 57 (149) - ------------------------------------------------------------------------------------------------------------------------------ Total provision $ 10,706 $ 11,849 $ 5,897 - ------------------------------------------------------------------------------------------------------------------------------
A reconciliation from the Federal statutory income tax rate to the Company's effective rate for the years ended September 30 follows:
1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ Statutory rate 35% 35% 35% Tax benefit of Foreign Sales Corporation (2) (2) (5) Foreign provision in excess of U.S. tax rate 3 3 2 State income taxes, net of Federal benefit 2 2 2 Research and development tax credits (2) (2) (3) Other, net (2) -- (2) - ------------------------------------------------------------------------------------------------------------------------------ Effective rate 34% 36% 29% - ------------------------------------------------------------------------------------------------------------------------------ DEFERRED TAX ASSET: 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ (EXPRESSED IN THOUSANDS) Accrued compensation and benefits $ 2,151 $1,703 Inventory reserves 2,309 2,088 Allowance for doubtful accounts 244 301 Other assets (11) (15) - ------------------------------------------------------------------------------------------------------------------------------ TOTAL DEFERRED TAX ASSET $ 4,693 $4,077 ============================================================================================================================== DEFERRED TAX LIABILITY: 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ Property and equipment $ 4,881 $4,445 - ------------------------------------------------------------------------------------------------------------------------------ NET DEFERRED TAX LIABILITY $ 188 $ 368 ==============================================================================================================================
31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- 5. STOCK OPTIONS: The Company has made certain stock-based awards to its officers, non-employee directors, and key employees under various stock plans. Awards under these plans can include incentive stock options (qualified), non-qualified stock options, stock appreciation rights, restricted stock, deferred stock, and other stock-based and non stock-based awards. At September 30, 1998, the Company had awarded incentive stock options, non-qualified stock options and restricted stock. These were granted at exercise prices that are 100% of the fair-market value at the day of grant. Beginning one year after grant, the options generally can be exercised proportionately each year for periods of three, four, or six years, as defined in the respective plans. Options currently expire no later than seven years from the grant date, as defined. Option holders may exercise options by delivering Company stock already owned, cash, or a combination of stock and cash. The shares tendered in the exchange are cancelled and, therefore, reduce shares issued. During 1998 and 1997, option holders exchanged 22,335 and 77,266 shares, respectively, of the Company's stock in payment of options exercised. (All share and share price data herein have been restated retroactively for the two-for-one stock split, effective February 2, 1998.) A summary of the status of the Company's stock option plans as of September 30, 1998, 1997, and 1996, and changes during the years ending on those dates follows:
1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- SHARES WAEP* SHARES WAEP* SHARES WAEP* - ------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 1,920 $ 8.35 1,964 $ 7.12 2,156 $ 6.11 - ------------------------------------------------------------------------------------------------------------------- Granted 545 $15.79 608 $10.72 642 $ 8.14 - ------------------------------------------------------------------------------------------------------------------- Exercised (295) $ 6.51 (616) $ 6.78 (788) $ 5.23 - ------------------------------------------------------------------------------------------------------------------- Forfeited (27) $10.40 (36) $ 7.87 (46) $ 6.37 - ------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 2,143 $10.30 1,920 $ 8.35 1,964 $ 7.12 =================================================================================================================== Options exercisable at year-end 1,156 $ 8.19 894 $ 7.59 926 $ 6.77 ===================================================================================================================
SHARES IN THOUSANDS *WEIGHTED-AVERAGE EXERCISE PRICE The following table summarizes information concerning outstanding and exercisable options as of September 30, 1998:
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 - ---------------------------------------------------------------------------------------------------------------------------- $5.78-7.88 340 3.1 $ 5.88 333 $ 5.85 - ---------------------------------------------------------------------------------------------------------------------------- $7.94-8.13 711 2.3 $ 8.06 539 $ 8.04 - ---------------------------------------------------------------------------------------------------------------------------- $9.69-14.63 683 3.5 $ 11.31 256 $ 10.70 - ---------------------------------------------------------------------------------------------------------------------------- $15.38-19.38 409 4.3 $ 16.19 28 $ 15.99 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL 2,143 3.20 $ 10.30 1,156 $ 8.19 ============================================================================================================================
SHARES IN THOUSANDS *IN YEARS These options will expire if not exercised at specific dates ranging from January 1999 to August 2002. Prices for options exercised during the three-year period ended September 30, 1998 ranged from $5.78 to $15.75. In January 1992 the Company's shareholders authorized an Employee Stock Purchase Plan (the Purchase Plan), whereby 1,000,000 shares of the Company's common stock were reserved for sale to employees until April 2002. Participants in the 1998 and 1997 phases, all at dates specified in the Purchase Plan, were issued 105,240 shares in 1998, and 83,368 shares in 1997. During 1998, participants subscribed to purchase 137,861 shares at 85% of market price for issuance in 1999. 32 - -------------------------------------------------------------------------------- PRO FORMA INFORMATION: The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its employee stock options. Under this pronouncement, no compensation expense is recognized in the Company's financial statements because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant. However, Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," requires the use of option valuation models to estimate compensation expense from the granting of employee stock options and to present the pro forma effect of such expense on reported net income and earnings per share. SFAS No. 123 requires this information be determined as if the Company had accounted for employee stock options granted in fiscal years beginning subsequent to December 31, 1994 under the fair value method of that statement. The fair value of options granted in 1998 and 1997 reported below has been estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions: 1998 1997 1996 - -------------------------------------------------------------------------------- Expected life (in years) 2.0 2.1 2.1 Risk-free interest rate 4.2% 5.8% 5.8% Volatility .40 .49 .50 Dividend yield 1.6% 1.2% 1.9% - -------------------------------------------------------------------------------- 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. Because the Company's options have characteristics significantly different from those of traded options, and because change in the subjective input assumptions can affect materially the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable measure of the fair value of its options. The weighted average estimated fair value of employee stock options granted during 1998 and 1997 was $4.39 and $10.54 per share, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share data): 1998 1997 1996 - -------------------------------------------------------------------------------- Pro forma net income $19,474 $20,020 $13,556 Pro forma earnings per share $ 1.01 $ 1.06 $ .71 - -------------------------------------------------------------------------------- The effects on pro forma disclosures of applying SFAS No. 123 are not likely to be representative of the effects on pro forma disclosures of future years. Because SFAS No. 123 is applicable only to options granted in fiscal years subsequent to December 31, 1994, the pro forma effect will not be fully reflected until 2002. 6. EMPLOYEE BENEFIT PLANS: The Company's profit sharing plan functions as a retirement program for most U.S. and certain international employees. Employees who have completed 1,000 hours of service during the plan year are eligible to participate. The formula for calculating the Company's contribution is approved annually by the Board of Directors and is based primarily on operating results for the year, before management variable compensation. The plan provides for a minimum contribution of 4% of participant compensation, as defined, up to the social security taxable wage base, and 8% of participant compensation in excess of the taxable wage base up to the maximum profit sharing contribution allowed by federal law, so long as the entire contribution calculation does not exceed pretax income. The contributions were 4.4% of participant compensation in 1998 and 1997, respectively, and 4.3% in 1996. The provisions for profit sharing were $3,577,000 in 1998, $3,163,000 in 1997 and $2,338,000 in 1996, and are distributed among the various operating expenses shown in the accompanying Consolidated Statements of Income. Prior to 1998, two of the Company's international subsidiaries had noncontributory, unfunded retirement plans for eligible employees. These plans provide benefits based on the employee's years of service and compensation during the years immediately preceding retirement, early retirement, termination, disability, or death, as defined in the respective plans. In 1998, one of the plans was modified to provide for contributions based solely on annual compensation levels. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- The expenses for these plans consist of the following components:
1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Service cost-benefit earned during the period $ 178 $ 327 $ 360 Interest cost on projected benefit obligation 218 269 261 Net amortization and deferral 11 29 5 - -------------------------------------------------------------------------------------------------------------------------------- NET PERIODIC PENSION COST $ 407 $ 625 $ 626 ================================================================================================================================
The status of the Company's benefit plans and the amounts recognized in the consolidated financial statements are:
1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) ACTUARIAL PRESENT VALUE: Accumulated benefit obligation: Vested $ 3,778 $3,332 Nonvested 542 575 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL $ 4,320 $3,907 ================================================================================================================================ Projected benefit obligation 5,110 4,723 Unrecognized net gain 460 464 Unrecognized net liability being amortized (478) (528) Adjustment required to recognize minimum liability 25 29 - -------------------------------------------------------------------------------------------------------------------------------- ACCRUED PENSION LIABILITY $ 5,117 $4,688 ================================================================================================================================ Major assumptions at year-end are: - -------------------------------------------------------------------------------------------------------------------------------- Discount rate 3.5 to 6.2% 3.5 to 6.5% Rate of increase in future compensation levels 3.0% 3.0% ================================================================================================================================
7. ACQUISITIONS: In fiscal 1998 the Company acquired three entities, all accounted for by the purchase method of accounting, with an aggregate purchase price of approximately $29 million, net of cash acquired. The Company acquired all the outstanding stock of Performance Controls, Inc., a manufacturer of high performance power amplifiers for factory automation and magnetic resonance machine applications, in an all cash transaction. The Company acquired the stock of Nano Instruments Inc., a manufacturer of instrumented indentation systems for ultra-low force nanoindentation testing surfaces and thin films, for cash and debt. In addition to the stock purchase of Nano Instruments Inc., the Company purchased the rights to a patent from the two principal shareholders of Nano Instruments, Inc. The Company also acquired the assets and technology of SDRC's noise and vibration test software business along with a major portion of SDRC's noise and vibration consulting engineering services, in an all cash transaction. The total purchase price exceeded the fair value of the net assets acquired by approximately $23.2 million. This amount was recorded as goodwill and other intangibles with useful lives between 7 and 20 years. The results of the operations of the acquired companies are included in the Company's financial statements for the periods in which they were owned. In fiscal 1997 the Company acquired the stock of Bregenhorn-Butow & Co., Freiburg, Germany (name subsequently changed to Custom Servo Motors Antriebstechnik GmbH & Co KG), a privately held supplier of low power, electronic servo motors and drives, for cash and debt. The transaction was accounted for by the purchase method of accounting. The pro forma results for 1998 and 1997, assuming these acquisitions had been made at the beginning of the year, would not be materially different from reported results. 8. FIRST QUARTER FISCAL YEAR 1999 RESTRUCTURING CHARGE: The Company has taken a series of actions to better align its organizational structure with market elements, improve operational performance, and reduce costs. These actions will result in a one-time charge in the first quarter of fiscal year 1999 of approximately $2.1 million ($1.3 million after-tax, or $.07 per share). This charge relates principally to a workforce reduction and $.3 million for operational consolidations. Annualized pretax cost savings from reducing the number of employees and contractors is estimated to be $5 million. 34 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, 1998 and 1997, and the related consolidated statements of income, shareholders' investment and cash flows for each of the three years in the period ended September 30, 1998. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MTS Systems Corporation and Subsidiaries as of September 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, November 20, 1998 REPORT OF MANAGEMENT The management of MTS Systems Corporation is responsible for the integrity and objectivity of the financial information presented in this report. The financial statements have been prepared in accordance with generally accepted accounting principles and include certain amounts based on management's best estimates and judgment. Management is also responsible for establishing and maintaining the Company's accounting systems and related internal controls, which are designed to provide reasonable assurance that assets are safeguarded, transactions are properly recorded, and the policies and procedures are implemented by qualified personnel. The Audit Committee of the Board of Directors, which is comprised solely of outside directors, meets regularly with management and its independent auditors to review audit activities, internal controls, and other accounting, reporting, and financial matters. This Committee also recommends independent auditors for appointment by the full Board, subject to shareholder ratification. The financial statements included in this annual report have been audited by Arthur Andersen LLP, independent public accountants. We have been advised that their audits were conducted in accordance with generally accepted auditing standards and included such reviews of internal controls and tests of transactions as they considered necessary in setting the scope of their audits. Sidney W. Emery, Jr President and Chief Executive Officer /s/ Sidney W. Emery, Jr Marshall L. Carpenter Vice President and Chief Financial Officer /s/ Marshall L. Carpenter 35 EX-21 15 MTS SYSTEMS CORPORATION AND SUBSIDIARIES EXHIBIT 21 MTS SYSTEMS CORPORATION AND SUBSIDIARIES OF THE COMPANY Incorporation Name Jurisdiction ---- ------------ MTS Systems (Hong Kong) Inc. Minnesota, U.S.A. MTS Testing Systems (Canada) Ltd. Canada MTS Systems GmbH (Berlin) Germany MTS Sensor Technologie GmbH and Co. KG Germany MTS Systems France MTS Holdings France, SARL France MTS (Japan) Ltd. Japan MTS Sensor Technology K.K. Japan MTS Systems Limited (London) United Kingdom MTS Systems SRL (Italy) Italy MTS International, Ltd. West Indies MTS Systems Norden AB Sweden MTS Systems do Brasil, Ltda. Brazil MTS Systems (China) Inc. Minnesota, U.S.A. Custom Servo Motors, Inc. Minnesota, U.S.A. MTS Korea, Inc. Republic of Korea MTS-PowerTek, Inc. Michigan, U.S.A. MTS Systems (Singapore) Pte Ltd Singapore MTS Services Ltd Japan MTS Automotive Sensors GmbH Germany MTS Sensor Technology Verwaltungs GmbH and Co. KG Germany MTS Systems Holding for Europe GmbH Germany Customer Servo Motors Antriebstechnik Verwaltungs GmbH Germany Custom Servo Motors Antriebstechnik GmbH & Co. KG Germany MTS Systems GmbH Germany AeroMet Corporation Minnesota, U.S.A Performance Controls, Inc. Delaware, U.S.A. Nano Instruments, Inc. Tennessee, U.S.A. EX-23 16 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 and into the previously filed Registration Statements on Form S-8 (Registration Nos. 333-28661, 2-99389, 33-21699, 33-35288, and 33-45386) and Form S-3 (Registration No. 33-60485). ARTHUR ANDERSEN LLP Minneapolis, Minnesota, December 18, 1998 EX-27 17 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS SEP-30-1998 OCT-01-1997 SEP-30-1998 10,512 0 127,304 2,135 53,675 193,593 131,495 63,758 298,448 105,214 46,439 0 0 4,645 138,391 298,448 339,682 339,682 209,318 308,209 0 0 2,327 31,473 10,707 31,473 0 0 0 20,766 1.13 1.08
-----END PRIVACY-ENHANCED MESSAGE-----