-----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, GwihGmdo6Cgz5NDJGKUNYH3BvUoImFzmyuLraojQ//71p1Cd0NNaQwEalH5GK3f2 QQ5bjS7fQBqIuIuiRfL5LA== 0000897101-99-001186.txt : 19991222 0000897101-99-001186.hdr.sgml : 19991222 ACCESSION NUMBER: 0000897101-99-001186 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991221 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: 99777931 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 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ -------------------- COMMISSION FILE NUMBER 0-2382 MTS SYSTEMS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA 612-937-4000 41-0908057 (STATE OR OTHER JURISDICTION OF (TELEPHONE NUMBER OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) REGISTRANT INCLUDING IDENTIFICATION NO.) AREA CODE) 14000 TECHNOLOGY DRIVE, EDEN PRAIRIE, MINNESOTA 55344-9763 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) -------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK (PAR VALUE OF 25(CENT) PER SHARE) INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. __X__ YES _____ NO INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. ( ) AS OF DECEMBER 1, 1999, 20,879,821 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 $174,868,500. -------------------- DOCUMENTS INCORPORATED BY REFERENCE ANNUAL REPORT TO SHAREHOLDERS FOR FISCAL YEAR ENDED SEPTEMBER 30, 1999 - PARTS I, II AND IV. PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS, STATEMENT DATED PRIOR TO JANUARY 25, 2000 - 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 segment, customers use the Company's products and services in research, product development and quality control to determine the mechanical properties and performance of materials, products and structures. Many of the Company's products and services support the customers' mechanical design automation processes. In the Factory Automation segment, customers use the Company's measurement and control instrumentation to measure process variables and to automate production processes. CUSTOMERS AND PRODUCTS BY BUSINESS SEGMENT The Company's operations are organized into two reportable business segments: 1) Mechanical Testing and Simulation (MT&S), and 2) Factory Automation (FA). The operational alignment of the segments allows the Company to maintain a strategic focus on markets with different applications of the Company's technologies and with different competitors. Mechanical Testing and Simulation Reportable Segment: Customers in this segment use MTS's systems and software for research, product development and quality control in the design and manufacture of materials, products and structures. Customer industries in this segment include: 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. MT&S sector accounted for 80% of revenue in 1999, 79% of revenue in 1998 and 81% of revenue in 1997. It represents the oldest and is the principal market for the Company's technology. Factory Automation Reportable Segment: FA customers use MTS products in discrete part manufacturing and chemical process industries. Products in this segment include: DISPLACEMENT POSITION AND LIQUID-LEVEL SENSORS BASED ON MAGNETOSTRICTIVE TECHNOLOGY. Displacement sensors accurately measure position up to 25 feet. They are used where accurate positioning and continuous control are critical, such as in discrete (piece part) manufacturing machinery, mobile equipment, process control elements and continuous measurement devices. Major applications include injection molding machines, servo-hydraulic cylinders, presses of all types, sawmills, logging and other mobile machinery and valve or flow control. Displacement sensors are also used in high volume applications requiring low cost position feedback. MTS builds a version of its technology in various lengths and configurations, but at very high rates affording on-board low cost solutions to industries such as automotive, appliance, medical, agricultural, marine, aeronautic and other non-manufacturing markets. Liquid level sensors accurately measure the level of liquids in tanks and other vessels up to 60 feet. These sensors are marketed to control continuous processes in chemical, pharmaceutical, bio-technology and other related markets. The need for highly reliable accurate measurement of one or more fluid levels is common in most of these applications. MTS markets liquid level sensors to both end users, such as chemical producing companies, and to original equipment manufacturers and private label companies who build level measurement or leak detection into their control systems or as accessories for remote indication and control devices. SERVO MOTORS, AMPLIFIERS AND CONTROLLERS: Customers use high-performance brushless servo motors and amplifiers for challenging factory automation applications in a wide range of industries, including machine tools, fabrication and packaging. Specialized plug-in amplifiers are used in light duty applications such as the semiconductor and textile industries. The Company's controllers are used for precise control of a wide variety of applications ranging from simple applications requiring only one axis of control to high-speed, complex operations requiring up to 28 axes of control. These combined product lines address the need 3 for high performance systems and are used primarily by original equipment manufacturers and large end users. TITANIUM PRODUCTS: The Company, through its wholly owned subsidiary, AeroMet Corporation, has developed an innovative laser direct metal deposition process for manufacturing titanium parts. The process uses a laser to fuse titanium powder, layer upon layer, into solid structures. This computer driven process significantly reduces the time required to produce large complex parts. The FA sector accounted for 20% of revenue in 1999, 21% of revenue in 1998, and 19% of revenue in 1997. COMMON TECHNOLOGIES MTS' systems and products in all segments are constructed using employees' application engineering know-how with common technology building block components generally composed of measuring and actuation devices, electronic controls and application software. Many of these components are proprietary and are developed and manufactured within the Company. MTS employees engineer or configure the components into products and systems to match the application called for in the customer's order. Frequently, special-purpose software is developed to meet a customer's unique requirements. Such software often represents a significant part of the value added by the Company. Services offered to system customers include on-site installation, training of customer personnel, technical manuals and continuing maintenance. Such services are often included in the contract amount charged for completed systems, but these services may be purchased separately, during and after the system warranty period. Certain proprietary products, such as sensors, process controls, motors, actuators and process software and firmware are sold as products to end users and to other companies for incorporation into their systems, machines or processes. All products and most systems are sold on fixed-price contracts. Complex systems and applied research in the MT&S sector are in some cases undertaken on "cost-plus-fixed-fee" contract basis. 1999 PRODUCT DEVELOPMENT HIGHLIGHTS The Company funds new application and product development within its market sectors. Highlights of product development undertaken or completed in 1999 include: Mechanical Testing and Simulation Reportable Segment * The Company introduced the Model 329 6 DOF Road Simulator. This is a new six degree of freedom Road simulator to accurately reproduce all the motions and forces that are introduced into a vehicle through the tire/road interface. This system integrates MTS's new SWIFT Wheel force transducer for more accurate laboratory life testing and to help correlate vehicle models. 4 * The Company introduced the RPC(TM)Pro software produCt. This software, which runs natively on Microsoft NT(TM), is to be used on all advanced vehicle durability testing simulators. This software incorporates newly patented technologies into a state of the art software product, designed for automotive engineers that need to improve the simulation testing process. * The Company introduced the Virtual Engine Simulator. Simulating engine inputs into the vehicle drivetrain is the driving force behind MTS's new Virtual Engine Simulator. By replacing the gasoline or diesel engine with a MTS hydraulic motor and coupling this hydraulic motor through the vehicle's drivetrain to a dynamometer, MTS can excite the vehicle drivetrain with most engine signatures the customer wants to program. This system will be used to evaluate the noise and vibration coming from the drivetrain. * The Company introduced the Model 855 Multiaxial Wheel Fatigue Test System. This is a new wheel fatigue test system designed to test the endurance of a wheel assembly. The system simulates road conditions by applying realistic radial and lateral loads and drive and brake torques. Application of drive and brake torque are most important for studies of fastener loosening phenomenon. Wheel testing has become more important to the auto manufacturers with the proliferation of wheel design and material options. * The Company introduced the Light Truck SWIFT product. This is a new, larger configuration of the SWIFT wheel force transducer that was originally introduced last year. The system's primary purpose is to collect force and moment data in vehicle data acquisitions, and develop simulations in the laboratory for light trucks and SUVs. This technology greatly simplifies and compresses development cycles for new vehicles and associated products. * The Company introduced the Alliance RT material test system. This tabletop electromechanical system was designed for our customer's efficiency needs while enhancing accuracy, precision and flexibility always built into our systems. * The Company introduced the Mini Bionix II test system, which provides a stiffer, more robust load frame with a sturdier base and larger columns. Customers will see enhanced test results from this redesigned frame. Factory Automation Reportable Segment * 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 5 analog outputs, intelligent analog communications and environmental enclosures. * The Company released a new family of linear motors to the market. These motors are used in general factory automation and semi conductor industries. * The Company introduced several new Intelligent Sensors, a new Liquid Level transmitter line designed for Biotechnology, Pharmaceutical and Chemical industries, and an automotive sensor cartridge which is installed in a current series of passenger vehicles. 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, 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 51% of revenue in fiscal 1999, 55% of revenue in fiscal 1998, and 49% of revenue in fiscal 1997 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 MT&S products and services. Employee salespersons are 6 compensated with salary and sales incentives, and independent representatives are paid a commission. A list of major domestic and international offices for the Company's MT&S reportable segment follows: Domestic offices: Akron Dayton 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 In addition, MT&S works with sales and service representative organizations in nearly all industrialized countries of the world and in the developing countries of Latin America, Asia, Africa and the Middle East. The Company offers a mail-order catalog of material testing components, accessories and products. The catalog includes products of complementary vendors and aims to reach a broad range of customers involved in mechanical testing and simulation. The FA segment sells its products through sales channels separate from the MT&S segment. A network of employees, direct sales, external domestic distributors, representatives and system houses market the products of these divisions. International revenue currently accounts for 41% of this segment's volume. Efforts continue to expand sales channels in international markets. International Operations and Export Sales: The sections entitled Geographic Analysis of New Orders and Business Segment Information on pages 17 and 28 of the Company's 1999 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 1999, 1998, and 1997 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 7 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 $146.8 million at September 30, 1999, $187.2 million at September 30, 1998, and $190.8 million at September 30, 1997. The Company believes that approximately $140.0 million of the backlog at September 30, 1999 will become revenue during fiscal 2000. Delays may occur due to technical difficulties, export licensing approval or the customer's preparation of the installation site. Any such delay can affect the period when backlog is recognized as revenue. COMPETITION In the MT&S segment, customers may choose to buy equipment from the Company or from competitors, principally: Instron (U.S.-based), Interlachen (U.S.), AVL (Austria), Zwick (Germany), Saganomiya and Shimadzu (Japan). There are also smaller local competitors in most major countries. In lieu of buying equipment from the Company or its competitors, customers may contract with testing laboratories such as EG&G, Peabody, Wyle, or with universities. Government laboratories also market testing services to the public. Finally, customers may choose to construct their own testing equipment from commercially available components. Customers in the aerospace and automotive industries and universities sometimes choose this approach, purchasing equipment from companies such as Parker Hannifin, Moog and Mannesman (Germany). In the FA segment, the Company competes directly with small to medium-sized specialty suppliers and also with divisions of the large control system companies such as Kollmorgen, Emerson Electric, Indramat (Germany) and Fanuc (Japan). MANUFACTURING AND ENGINEERING The Company conducted a significant portion of its fiscal 1999 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-DSP Technology subsidiary engineers and assembles dynamometer control systems and provides related services from Ann Arbor. Manufacturing and engineering activities for the FA reportable segment occur in 8 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 $27.0, $24.3, and $19.8 million for fiscal years 1999, 1998, and 1997 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. EMPLOYEES MTS employed 2,436 persons as of September 30, 1999, including 420 employees in Europe, 64 in Japan, 6 in China, 4 in Canada, 9 in Korea, 2 in Hong Kong, and 3 in Singapore. None of the Company's U.S. employees are covered by a collective bargaining agreement, and MTS has experienced no work stoppages at any location SOURCES AND AVAILABILITY OF RAW MATERIALS AND COMPONENTS A major portion of products and systems delivered to a customer may consist of equipment and component parts purchased from vendors. The relationship which the Company promotes with its vendors is partnership based with an emphasis on continuous improvement. The Company is dependent upon certain computing hardware and software devices and certain raw materials which have limited sources. However, the Company has not experienced significant problems in procurement or delivery of any essential materials, parts or components in the last several years. Due to the manner in which the Company sells the majority of its products, on a fixed-price contract agreed upon at the time the order is obtained, wide fluctuations up or down in cost of materials and components from order date to delivery date, if not accurately forecast by the Company at an early date, can change the expected profitability of any sale. The Company believes that such fluctuations have not had a material effect on reported earnings, except as affected by changes in foreign currency rates, which have been reported. 9 ENVIRONMENTAL MATTERS Management believes the Company's operations are in compliance with federal, state and local provisions relating to the protection of the environment. BUSINESS SYSTEMS DEVELOPMENT The Company undertook the development and deployment of an enterprise-wide financial and business operations software system in 1997. The company completed the first phase of implementation in early 1999, with subsequent phases to follow. This system is expected to improve business processing and to provide software processing capability beyond the end of the century. ITEM 2. PROPERTIES Domestic Facilities: The Company's corporate headquarters and main MT&S plant, occupying 420,000 square feet, 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. MTS Automation occupies a 30,000 square foot plant in New Ulm, Minnesota (65 miles southwest of Minneapolis). The plant provides assembly operations and office space. The facility was constructed in 1993 by the New Ulm Economic Development Corporation and expanded in 1995. MTS has a seven-year operating lease for the facility with provisions to extend the lease, purchase the property, or terminate the lease. The terms of the lease agreement do not require capitalization of the asset and the related obligation. In addition, MTS Automation occupies 30,000 square feet in Horsham, Pennsylvania, a suburb of Philadelphia. Plant and office space in two buildings is leased under conventional operating lease terms. 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 10 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 Noise and Vibration Division operates in two facilities. A 16,000 square foot facility in Madison Heights, Michigan and a 13,000 square foot facility in Milford, Ohio. Plant and office space in both facilities is leased under conventional operating lease terms. MTS-DSP Technology occupies 26,000 square feet in Ann Arbor, Michigan and 16,000 square feet in Fremont, California. Plant and office space, in both locations, is leased under conventional operating lease terms. MTS-DSP Technology is currently in the process of constructing a 57,000 square foot facility in Ann Arbor to provide manufacturing and office space. The building is expected to be complete by the end of December 1999. The Company leases space in other U.S. cities for sales and service offices. Neither the space nor the rental obligations is significant. International Facilities: MTS Systems GmbH is located in an 80,000 square foot facility in Berlin, Germany. As of September 30, 1999 6,500 square feet has been leased to other companies. The building is situated on land leased by MTS from the city government. The lease expires in 2052. MTS Systems (France) operates in a leased facility in Paris, France, of approximately 38,000 square feet. Approximately 40% of this space is used for 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 were expanded in 1999 and now occupy 35,000 square feet at this location. Custom Servo Motors Antriebstechnik Verwaltungs GmbH operates in two leased facilities in Germany, one in Freiburg, and a new facility in Stralsund. The Freiburg facility totals about 7,000 square feet and the Stralsund location is about 16,000 square feet. Approximately 100% of the Freiburg facility is used for offices while 70% of the Stralsund facility is 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; 11 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 2000. ITEM 3. LEGAL PROCEEDINGS No material legal proceedings were pending or threatened against the Company or its subsidiaries as of September 30, 1999. 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, 1999, 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 December 31, 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, 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 December 31, 1998 $10.875 $15.438 March 31, 1999 $9.625 $14.375 June 30, 1999 $9.813 $13.25 September 30, 1999 $10.00 $14.625 * Source: The Nasdaq Stock Market, Inc. Summary of Activity Report At December 1, 1999 there were 2,055 holders of record of the Company's $.25 par value common stock. The Company estimates that there are an additional 2,200 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 1999, 1998 and 1997, the Company paid dividends totaling $.24, $.24 and $.20 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, 1999, tangible net worth exceeded the minimum by $38.0 million and the Company had $19.0 million available for repurchases of its common stock. The Company has flexibility to declare and pay dividends in the future similar to recent dividends. 13 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 1999 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 1999 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 1999 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 (including the 1999 Annual Report to Shareholders) and in the Company's press releases and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. The following important facts, among others, could affect the Company's actual results in the future and could cause the Company's actual financial performance to differ materially from that expressed in any forward-looking statement: (i) With regard to the Company's 1999 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. (iii) Export controls based on U.S. initiatives and foreign policy, as well as import controls imposed by foreign governments, may 14 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 $146.8 million in backlog orders as of September 30, 1999 (approximately $140.0 million of which are anticipated to be recognized during fiscal 2000) may occur due to technical difficulties, export licensing approval or the customer's preparation of the installation site, any of which can affect the quarterly or annual period when backlog is recognized as revenue and could materially affect the results of any such period. (v) The Company experiences competition on a worldwide basis. Customers may choose to purchase equipment from the Company or from its competitors. For the MT&S reportable segment, customers may also contract with testing laboratories or construct their own testing equipment, purchasing commercially available components. Factors which influence the customer's decision include price, service and required level of technology. (vi) The Company is exposed to market risk from changes in foreign currency exchange rates, which can affect its results from operations and financial condition. The Company regularly assesses these risks and has practices to protect against the adverse effects of these and other potential exposures. To manage the risk arising from exposure to foreign currency changes, the Company, when deemed appropriate, enters into forward contracts. The Company is principally exposed to foreign currency movements related to non-U.S. dollar denominated assets and uncertainty related to future revenues that are denominated in foreign currencies. The Company's most significant foreign currency exposures relate to contracts in backlog and unbilled receivables in the Japanese yen and the German mark, which are undelivered or outstanding at the end of fiscal 1999. A 10 percent increase in the levels of foreign currency exchange rates against the U.S. dollar with all other variables held constant would result in a decrease in future revenues and asset balances of approximately $2.9 million. A 10 percent decrease in the levels of foreign currency exchange rates against the U.S. dollar with all other variables held constant would result in an increase to future revenues and asset balances of approximately $3.5 million. 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 1999 Annual Report to Shareholders. This information is incorporated herein by reference. 15 (vii) The Company's short-term borrowings carry interest rate risk that is generally related to either LIBOR or the prime rate. The Company has minimal earnings and cash flow exposure due to market risks on its long-term debt obligations as a result of the primarily fixed-rate nature of the debt. (viii) 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. 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 1999 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, 1999 were: Name and Age Position Officer Since - ------------ -------- ------------- S. W. Emery, Jr. (53) Chairman, President and 1998 Chief Executive Officer K. D. Zell (57) Executive Vice President 1979 D. E. Hoffman (52) Vice President and CFO 1999 W. G. Anderson (43) Vice President 1998 W. G. Beduhn (58) Vice President 1983 M. L. Carpenter (62) Vice President 1973 S. M. Cohoon (45) Vice President 1996 J. M. Egerdal (48) Vice President 1996 N. L. Quist (44) Vice President 1999 F. G. Troutman (56) Vice President 1999 M. G. Togneri (62) 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 ------- ------------------- S. W. Emery, Jr. Chairman since January 1999. President and Chief Executive Officer since March 17, 1998. Management and executive positions with Honeywell, Inc. from 1985 to 1997. (Area Vice President Western and Southern Europe from 1994 to 1997; Group Vice President, Military Avionics Systems from 1989 to 1994; Vice President and General Manager, Space Systems Division from 1988 to 1989; Vice President Operations, Process Controls Division from 1985 to 1988. K. D. Zell Executive Vice President since 1993. Vice President of Materials Testing Division from 1988 to 1993. Vice President, Sales and Service from 1984 to 1988. Vice President, Product Group from 1979 to 1984. 17 D. E. Hoffman Vice President and CFO since July 1999. Prior to MTS, he was Vice President and CFO of MVE, Inc. from 1998 to 1999, CFO for the Harmon Limited Group of Apogee Enterprises, Inc. from 1994 to 1997, and he held various management positions with ABB Ltd. from 1983 to 1994. W. G. Anderson Vice President, MTS Automation Division, since 1998. President of Custom Servo Motors from 1992 to 1998. 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 since 1973. Vice President and Chief Financial Officer from 1991 to July 1999. Vice President and Treasurer from 1973 to 1991. S. M. Cohoon Vice President of Vehicles Dynamics Division since 1996. Prior to his employment at MTS he held various engineering and management positions at General Motors Corporation. J. M. Egerdal Vice President, MTS Services and Support Division since 1997; Vice President, North American Sales from 1996 to 1997; Regional Sales and Service Management from 1988 to 1996. N. L. Quist Vice President, Materials Testing Division since September 1999. Prior to her employment at MTS she was Vice President, Marketing at Detector Electronics Corp. from 1997 to 1999; Director, Strategic Planning at Fisher-Rosemount from 1991 to 1997. 18 F. G. Troutman Vice President, MTS DSP Division since March 1999. Prior to his employment at MTS he was CEO of DSP Technology, Inc. from 1989 to 1999. 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 25, 2000, and is incorporated herein by reference. (b) There are no family relationships between and among directors or officers. (c) Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference from the Company's Proxy Statement, a definitive copy of which will be filed with the Securities and Exchange Commission prior to January 25, 2000, 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 25, 2000, 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: Form 8-K filed on October 15, 1999 relating to the DSP Technology, Inc. acquisition, is incorporated by reference herein. (c) Exhibits: 2.a Agreement and Plan of Merger among MTS Systems Corporation, Badger Merger Corp., and DSP Technology Inc., filed on Form S-4 (File No. 333-77277) on April 28, 1999, is incorporated by reference herein. 3.a Restated and amended Articles of Incorporation, adopted January 30, 1996, incorporated by reference from exhibit 3.a of Form 10-K for the fiscal year ended September 30, 1996. 3.b Restated Bylaws, reflecting amendments through May 26, 1998, incorporated by reference from exhibit 3.b. of Form 10-K for the fiscal year ended September 30, 1998. 10.a Management Variable Compensation Plan and Long Range Incentive Plan for fiscal 1999, dated December 1, 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. 20 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, incorporated by reference from exhibit 10.f of Form 10-K for the fiscal year ended September 30, 1998. 10.g Severance Agreement, dated May 13, 1998 between the Registrant and Marshall L. Carpenter as amended, incorporated by reference from exhibit 10.g of Form 10-K for the fiscal year ended September 30, 1998. 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 September 22, 1999 between the Registrant and Nancy L. Quist. 10.k Severance Agreement, dated July 28, 1999 between the Registrant and David E. Hoffman. 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, incorporated by reference from exhibit 10.m of Form 10-K for the fiscal year ended September 30, 1998. 10.n Severance Agreement, dated March 24, 1998 between the Registrant and Mauro G. Togneri, as amended, incorporated by reference from exhibit 10.n of Form 10-K for the fiscal year ended September 30, 1998. 10.o 1992 Employee Stock Purchase Plan, incorporated by reference to exhibit 4(a) from Form S-8, File No. 33-45386. 21 10.p 1997 Stock Option Plan, as amended. 10.q Severance Agreement, dated March 18, 1998 between the Registrant and Steven M. Cohoon as amended. 10.r Severance Agreement, dated March 16, 1998 between the Registrant and Sidney W. Emery, incorporated by reference from exhibit 10.r of Form 10-K for the fiscal year ended September 30, 1998. 10.s Change in Control Agreement, dated March 16, 1998 between the Registrant and Sidney W. Emery incorporated by reference from exhibit 10.s of Form 10-K for the fiscal year ended September 30, 1998. 10.t Change in Control Agreement, dated March 27, 1998 between the Registrant and Keith D. Zell incorporated by reference from exhibit 10.t of Form 10-K for the fiscal year ended September 30, 1998. 10.u Change in Control Agreement, dated May 13, 1998 between the Registrant and Marshall L. Carpenter incorporated by reference from exhibit 10.u of Form 10-K for the fiscal year ended September 30, 1998. 10.v Change in Control Agreement, dated March 24, 1998 between the Registrant and Mauro G. Togneri incorporated by reference from exhibit 10.v of Form 10-K for the fiscal year ended September 30, 1998. 10.w Change in Control Agreement, dated March 13, 1998 between the Registrant and William G. Beduhn incorporated by reference from exhibit 10.w of Form 10-K for the fiscal year ended September 30, 1998. 10.x Change in Control Agreement, dated September 22, 1999 between the Registrant and Nancy L. Quist. 10.y Change in Control Agreement, dated July 28, 1999 between the Registrant and David E. Hoffman. 10.z Change in Control Agreement, dated March 18, 1999 between the Registrant and Steven M. Cohoon. 10.aa Severance Agreement, dated March 13, 1998 between the Registrant and William G. Anderson. 22 10.ab Severance Agreement, dated March 14, 1998 between the Registrant and James M. Egerdal. 10.ac Change in Control Agreement, dated March 13, 1998 between the Registrant and William G. Anderson. 10.ad Change in Control Agreement, dated March 14, 1998 between the Registrant and James M. Egerdal. 10.ae Employment Agreement, dated March 23, 1999 between the Registrant and F. Gil Troutman. 13. Annual Report to Shareholders for the fiscal year ended September 30, 1999. 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. 23 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MTS SYSTEMS CORPORATION By: /s/ Sidney W. Emery, Jr. ----------------------------- Sidney W. Emery Jr. Chairman, President and Chief Executive Officer By: /s/ David E. Hoffmann ----------------------------- David E. Hoffman Vice President and Chief Financial Officer Date: December 21, 1999 24 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: By: /s/ Charles A. Brickman ----------------------------- Charles A. Brickman, December 21, 1999 Director By: /s/ Jean Lou Chameau ----------------------------- Jean Lou Chameau, December 21, 1999 Director By: /s/ Bobby I. Griffin ----------------------------- Bobby I. Griffin, December 21, 1999 Director By: /s/ Russell A. Gullotti ----------------------------- Russell A. Gullotti, December 21, 1999 Director By: /s/ Brendan E. Hegarty ----------------------------- Brendan E. Hegarty, December 21, 1999 Director By: /s/ Thomas E. Holloran ----------------------------- Thomas E. Holloran, December 21, 1999 Director By: /s/ Linda Hall Whitman ----------------------------- Linda Hall Whitman, December 21, 1999 Director 25 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 1999 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, 1999 23 -- and 1998 Consolidated Statements of Income and Shareholders' Investment for the Years Ended September 30, 1999, 1998 and 1997 24 -- Consolidated Statements of Cash Flows for the Years Ended September 30, 1999, 1998 and 1997 25 -- Notes to Consolidated Financial Statements 26 -- Report of Independent Public Accountants 36 -- 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 and Restructuring Reserves -- F-4 All schedules except the one listed above have been omitted as not required, not applicable, or the information required therein is contained in the financial statements or the footnotes thereto. F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 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 24, 1999. 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 24, 1999 F-3 MTS SYSTEMS CORPORATION AND SUBSIDIARIES SCHEDULE II - SUMMARY OF CONSOLIDATED ALLOWANCES FOR DOUBTFUL ACCOUNTS AND RESTRUCTURING RESERVES FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 Balance Amounts Balance Beginning Written-Off/ End of of Year Provisions Payments Year --------- ---------- ------------ ------- (expressed in thousands) Allowance for Doubtful Accounts: - -------------------------------- 1999 $ 2,285 $ 679 $ (732) $ 2,232 1998 2,160 344 (219) 2,285 1997 1,792 549 (181) 2,160 Restructuring Reserves: - ----------------------- 1999 $ -- $ 5,711 $(2,480) $ 3,231 1998 -- -- -- -- 1997 -- -- -- -- F-4 EXHIBIT INDEX Exhibit No. Description - --- ----------- 10.a Management Variable Compensation Plan and Long Range Incentive Plan for fiscal 1999 10.j Severance Agreement, dated September 22, 1999 10.k Severance Agreement, dated July 28, 1999 10.p 1997 Stock Option Agreement, amended 10.q Severance Agreement, dated March 18, 1998, as amended. 10.x Change in Control Agreement, dated September 22, 1999 10.y Change in Control Agreement, dated July 28, 1999 10.z Change in Control Agreement, dated March 18, 1999 10.aa Severance Agreement, dated March 13, 1998 10.ab Severance Agreement, dated March 14, 1998 10.ac Change in Control Agreement, dated March 13, 1998 10.ad Change in Control Agreement, dated March 14, 1998 10.ae Employment Agreement, dated March 23, 1999 13. Annual Report to Shareholders for the fiscal year ended September 30, 1999 21. Subsidiaries of the Company 23. Consent of Independent Public Accountants 27. Financial Data Schedule EX-10.A 2 MANAGEMENT VARIABLE COMPENSATION (MVC) PLAN EXHIBIT 10.a Approved by the HR Committee 12/1/98 Changes noted by strike-through or italic approved 1/25/99 MANAGEMENT VARIABLE COMPENSATION (MVC) PLAN FISCAL `99 1. PURPOSE OF PLAN To focus efforts on achievement of near term financial objectives which are critical to the success of the Company; to reward accomplishment at a level above competition when performance is above that of comparable companies; to more closely couple total compensation (salary plus variable) to the financial results of the enterprise. The Plan's payout is primarily related to achievement of annual Corporate and Sector/Group/Division/Niche profit, resource utilization, and growth objectives. 2. PLAN CONSTRUCTION The attached chart provides an overview of the plan (See attachment A). Details follow regarding each of the components of the plan. 3. ELIGIBILITY AND PARTICIPATION o Corporate officers o Unit vice presidents o Market and functional unit managers o Managers, technical supervisors and key marketing or technical employees who meet certain minimum responsibilities for profitability, financial/human resource acquisition and allocation, balance sheet control, and/or market/technical direction - positions defined as beginning at SAM 15 and TE 5, or equivalent and above. o This plan does not apply to the employees of the Aeromet Corporation. An employee must be in such a position by the December Board of Directors meeting in order to be eligible for the fiscal year plan beginning the preceding 1 October, unless otherwise authorized by the CEO. An officer may recommend that an employee, who is otherwise eligible, not participate but such a recommendation must be authorized by the CEO. Participants are eligible for payout in proportion to the percentage of the fiscal year the participant is responsible for the qualifying position, unless otherwise authorized by the CEO. Employees who transfer to a different officer's unit during the year are paid according to the proportion of the year spent under each plan. Page 1 Employees who work less than full time during a year (e.g., due to a personal leave, but not due to illness) would earn a proportionately reduced payout. Unless authorized by the CEO, no payout will be made to employees who work less than 1,000 hours in the fiscal year. The participant must be on MTS' payroll at the end of the fiscal year to qualify for a payout. Employees resigning or terminated before the end, regardless of cause, are not eligible unless otherwise authorized by the CEO No employment contract is implied by participation in this Plan. 4. ESTABLISHMENT OF OBJECTIVES a. The Board of Directors sets the 1999 Corporate Earnings per Share (EPS), Corporate Return on Average Net Assets (ROANA), and the corporate revenue growth objectives at their December meeting. b. ROANA and revenue objectives for Sector, Group and Division heads will be approved by the Human Resource Committee of the Board of Directors at the December meeting. All other objectives must be finalized by December 15. ROANA, revenue, and other objectives for participants below the direct reports to the CEO require one over one approval levels to: o Integrate objectives into Company operating plan o Guard against conflicting objectives o Help to assure consistency in degree of difficulty The CEO has the final approval over all participants other than himself. 5. CRITERIA FOR OBJECTIVES 5.a CORPORATE LONG RANGE PLANNING The Corporate Profit and Growth Objectives are set by the Board based on the current 3- year Long Range Plan (LRP) for the period FY1999 through 2001. Growth rates are set against 1998 actual results as the baseline. These are: EPS: 20% compounded annual growth ROANA: 21% average across the three years of the plan REVENUE: 15% compounded annual growth For annual MVC purposes, EPS and revenue objectives are adjusted annually as recommended by the CEO and approved by the Board of Directors. All objectives include all transactions, acquisitions, write-offs, sales of assets, etc. unless specifically excluded by the Board in writing. Page 2 5.b CORPORATE '99 MVC FUNDAMENTAL PHILOSOPHY IS THAT ACHIEVING THE FY99 PLAN WILL RESULT IN 100% MVC PAYOUT. For FY99 this translates to MVC corporate level objectives of: EPS: $1.25 ROANA: 20% REVENUE: $371M 5.c MVC IMPLEMENTATION EPS (RULES): EPS PAYOUT --- ------ $1.15 0% $1.25 100% $1.30 200% ROANA (GUIDELINES): ROANA PAYOUT ----- ------ 0.8X BASE 0% BASE = PLAN 100% 1.2X BASE 200% 1.4X BASE 300% GROWTH (GUIDELINES): REVENUE % INCREASE OVER FY98 ACTUALS PAYOUT ------------ ------ 8% 0% BASE = PLAN 100% 15% 200% 5.d UNIT Unit financial goals (ROANA & Revenue) are expressed as Sector/Group/Division/Niche goals. Such goals are set as part of an integrated plan for the overall corporation. Approved Unit levels for FY 99 are: Type ---- CORP Corporate SECTOR SPS GROUP Vehicles Dynamics Page 3 DIV AESD DIV Automation DIV MTD DIV Sensors NICHE NVH NICHE Entertainment Additional NICHES as approved by CEO Other "Non-Financial" objectives are locally established, must be stated in measurable terms and must not be activities (i.e. number of sales calls or technical society presentations). 6. COMPETITIVE PAYOUT POTENTIAL The competitive payout potential, expressed as a % of the midpoint of the salary is shown below:
POSITION COMPETITIVE PAYOUT POTENTIAL % -------- ------------------------------ CEO E5 70% Exec VP, MT&S E4 50% Vice President E3 25-50, depending on revenue level (profit potential) Vice President E2 25-50, depending on revenue level (profit potential) Vice President (Unit) E1 15-45, depending on revenue level (profit potential) Mkt Div P&L Mgrs SAM 17-21 15-35, depending on revenue level (profit potential) All Other Mgmt SAM 18-21 10-25, depending on profit impact SAM 15-17 6-20, depending on profit impact T/E 5/5S - 9/9S 6-15, depending on profit impact
7. OVERRANGING/MAXIMUM POTENTIAL PAYOUT The objectives are set at challenging but realistic levels that are used in the overall process of planning and resource allocation. This is not meant to be a limit to our aspirations, and performance above of those objectives should be rewarded as it is to the benefit of all stakeholders in the enterprise. Payout above the competitive payout potential is termed overranging. Two MVC mixes are possible for participants based on position and salary level. FOR THE MTS EXECUTIVE MANAGEMENT TEAM Corporate Earnings per share (EPS) at 30% with 200% overranging. Corporate, Sector, Group, Division ROANA at 50% with 300% overranging. Revenue growth at 20% with 200% overranging. Base payout potential: 30 + 50 + 20 = 100 Max payout potential: (30x2) + (50x3) + (20x2) = 250 FOR ALL OTHER POSITIONS Page 4 Corporate earnings per share (EPS) at 20% with 200% overranging. Corporate, Sector, Group, Division, or Niche(as applicable) ROANA at 50% with 300% overranging. Revenue growth at 20% with 200% overranging. Other objectives at 10% with no overranging. Base payout potential: 20 + 50 + 20 + 10 = 100 Max payout potential: (20x2) + (50x3) + (20x2) + (10x1) = 240 8. RELATIONSHIP TO OTHER COMPENSATION PLANS 8.a "NON MANAGEMENT" VARIABLE COMPENSATION PLAN (VC) Certain units may have a variable compensation plan for employees who are not eligible for the MVC, sales commissions, or other variable compensation plans. Payout in these VC Plans is linked directly to payout on the unit's MVC profit objectives. These non-management plans are subject to the approval of the unit vice president, corporate Human Resources manager and CEO. The following is an outline summary to which these VC plans must adhere. They are included in this MVC Plan for reference only. 8.a(1) VC Competitive payout potential is 3% of the midpoint of the salary range in which the employee is placed at the beginning of the fiscal year. 8.a(2) VC payout will normally be based on the combination of the results of the Corporation's earnings per share (EPS) and employee's unit vice president's (in some cases the unit manager's) ROANA objective(s) for the year. If the unit's vice president (manager)has more than one such objective, the payout will be based on the weighted average of the officer's objectives. 8.a(3) The entire 3% VC payout potential is eligible for overranging for participating employees. 8.a(4) Eligibility and participation rules for VC will be the same as those for MVC, where appropriate. 8.b RETIREMENT PLAN The calculations for the Management Variable Compensation Plan (and VC) are made after deductions for retirement plans. Payout to a U.S. based participant in the Management Variable Compensation Plan (and VC) is included in the calculation of the Company's contribution to that employee's retirement plan. 9. PAYOUT Payouts under this Plan along with VC are considered costs for the calculation of actual performance against objectives. Page 5 Payouts are audited by the manager of internal audit and approved by the CFO. PAYOUTS FOR THE EXECUTIVE MANAGEMENT TEAM MUST BE APPROVED BY THE CEO. Payout will be made in cash within 90 days of the end of the fiscal year, expected to be on or before December 31, 1999. Page 6 MTS SYSTEMS CORPORATION 1999 LONG RANGE INCENTIVE PLAN SECTION 1. General Purpose of Plan; Definitions. The name of this plan is the MTS Systems Corporation 1999 Long Range Incentive Plan (the "Plan"), adopted by the Board of Directors of MTS Systems Corporation (the "Board") as of December 1, 1999 (the "Effective Date"). The purpose of the Plan is to provide the Company's key employees, upon whom the responsibilities of the successful administration and management of the Company rest, with a means to acquire and maintain stock ownership, thereby strengthening their commitment to the welfare of the Company and their desire to remain in its employ. A further purpose of the Plan is to provide such key employees with additional incentive and reward opportunities designed to enhance the profitable growth of the Company by granting them Performance Options as authorized in the MTS Systems Corporation 1997 Stock Option Plan (the "Stock Option Plan"). For purposes of the Plan, the following terms shall be defined as set forth below. a. "Award" means a grant of Performance Options to a Participant pursuant to Section 5. A "Full Award" means an Award granted as of the Effective Date. A "Partial Award" means an Award granted after the Effective Date. Each Participant shall receive one or more Long Range Incentive Plan Agreements which describe the amount and date of the Participant's grant. b. "Cause" means a felony conviction of a Participant or the failure of a Participant to contest prosecution for a felony, willful misconduct, dishonesty or intentional violation of a statute, rule or regulation, any of which, in the judgment of the Company, is harmful to the business or reputation of the Company. c. "Committee" means the committee referred to in Section 2 which is appointed by the Board to administer the Plan. The Committee shall be the same Committee described in the Stock Option Plan and shall consist of at least two Directors of the Board, all of whom shall be outside, non-employee Directors who shall serve at the pleasure of the Board. If, at any time, no Committee shall be in office, then the functions of the Committee shall be exercised by the Board. d. "Company" means MTS Systems Corporation, a Minnesota corporation, including its subsidiaries and any successor corporation. e. "Disability" means permanent and total disability as defined in Internal Revenue Code Section 22(e)(3). Page 7 f. "Fair Market Value" of Stock on any given date shall be determined by the Committee as follows: (i) if the Stock is listed for trading on one or more national securities exchanges or is traded on the Nasdaq Stock Market, the last reported sales price on the principal such exchange or the Nasdaq Stock Market on the date in question, or if such Stock shall not have been traded on such principal exchange on such date, the last reported sales price on such principal exchange or the Nasdaq Stock Market on the first day prior thereto on which such Stock was so traded; or (ii) if the Stock is not listed for trading on a national securities exchange or the Nasdaq Stock Market but is traded in the over-the-counter market, including the Nasdaq Small Cap Market, the closing bid price for such Stock on the date in question, or if there is no such bid price for such Stock on such date, the closing bid price on the first day prior thereto on which such price existed; or (iii) if neither (i) nor (ii) is applicable, by any means determined to be fair and reasonable by the Committee, which determination shall be final and binding on all parties. g. "Incentive Stock Option", "Option" or "Stock Option" means a Performance Option granted to a Participant pursuant to Section 5 which qualifies as an incentive stock option under Section 422 of the Internal Revenue Code (the "Code"). If, for any reason, a Performance Option ceases to qualify as an Incentive Stock Option under Code Section 422, it shall thereafter be treated as a nonqualified stock option. h. "Option Price" means the Fair Market Value of a share of Stock on the Valuation Date. i. "Participant" means an employee of the Company who as of the Effective Date or at any time between the Effective Date and the Termination Date is selected to participate in the Plan pursuant to Section 5. j. "Performance Goals" means goals established by the Committee as of the Effective Date to be achieved by the Company by the Termination Date. The Committee has the discretion to modify Performance Goals during the Term to reflect significant unforeseen events. k. "Performance Option" means an Award granted to a Participant pursuant to Section 5 of the Plan, as authorized in the Stock Option Plan. Any forfeited, canceled or terminated Performance Options may be awarded by the Committee, in its sole discretion, to new Participants as Partial Awards or they may be distributable under the terms of the Stock Option Plan. l. "Retirement" means a Participant's retirement from active employment with the Company on or after age 65 or prior to age 65 with the written approval of the Committee for purposes of the Participant's rights under this Plan. m. "Stock" means Common Stock of the Company. Page 8 n. "Target Management Variable Compensation" means, without overranging, a bonus equal to a percentage of the midpoint of the Participant's salary range as established in the 1999 Management Variable Compensation Plan, contingent upon achievement of certain performance goals, for each of the three Company fiscal years during the Term (1999, 2000 and 2001). o. "Term" of the Plan means the three-year period between the Effective Date and the Termination Date. p. "Termination Date" means the last day of the Term. q. "TMVC Credit" means an amount equal to thirty percent of a Participant's Target Management Variable Compensation, if any, without overranging, for each fiscal year during the Term or that portion of the Term from the date of the Participant's Award to the Termination Date. TMVC Credit shall be withheld from the Participant's Management Variable Compensation Award for each said fiscal year and used exclusively as a credit towards the Option Price for vested Performance Option Stock purchased by the Participant. Any TMVC Credit not used for this purpose shall be forfeited. TMVC Credit shall not be payable in cash or in any other form if the Participant's Performance Options do not vest or, if vested, if they are canceled, terminated or forfeited by the Company or not exercised by the Participant. TMVC Credit shall not accumulate interest. r. "Valuation Date", for purposes of a Performance Option Award, means the date of the Award or, if the Award date is not a trading day, the first trading day thereafter. "Valuation Date", for purposes of Performance Option exercise, means the date on which the Participant provides the Company with written notice of exercise of his vested Options or, if said date is not a trading day, the first trading day thereafter. SECTION 2. Administration. a. Administration by Committee. The Committee shall administer the Plan. A majority of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present or acts approved in writing by a majority of the Committee shall be deemed acts of the Committee. Subject to the provisions of the Plan, the Committee shall have exclusive power to i. select the employees to participate in the Plan, ii. determine the Awards to be made to each employee selected, iii. determine the time or times when Awards will be made, iv. determine Performance Goals to which the payment of Company Cash Match of TMVC Credit may be subject, and v. prescribe the form or forms evidencing Awards. Page 9 b. Committee to Make Rules and Interpret Plan. The Committee shall have the authority, subject to the provisions of the Plan and the Stock Option Plan, to establish, adopt, or revise such rules and regulations and to make all such determinations relating to the Plan as it may deem necessary or advisable for the administration of the Plan. The Committee's interpretation of the Plan or any Awards granted pursuant thereto and all decisions and determinations by the Committee or its designee with respect to the Plan shall be final, binding, and conclusive on all parties unless otherwise determined by the Board. c. Committee Members Ineligible. No Participant shall be a member of the Committee. SECTION 3. Performance Option Awards Subject to the Plan. The Committee may, from time to time, grant Awards to one or more employees determined by it to be eligible for participation in the Plan, in accordance with the provisions of Section 5, provided however that: a. The aggregated number of shares of Stock made subject to Awards may not exceed the number of shares permitted under the Stock Option Plan. b. Stock delivered to a Participant by the Company following exercise of his vested Performance Options shall be authorized and unissued Stock. SECTION 4. Eligibility. Officers and key employees of the Company (including officers and key employees who are members of the Board but not the Committee) who are, in the opinion of the Committee, principally responsible for the growth, development and financial success of the Company, shall be granted Awards under the Plan. Participation in the Plan for said designated employees shall be mandatory. SECTION 5. Performance Options. a. Grant of Performance Shares. The Committee may grant Performance Options to Participants during the Term. In connection with any such Award, TMVC Credit, if any, without overranging, shall be withheld from the Participant's Management Variable Compensation Award for each said fiscal year during the Term and accounted for separately as a credit towards the Option Price for vested Performance Option Stock purchased by the Participant. An Award of Performance Options as of the Effective Date (a Full Award) shall consist of Incentive Stock Options equal to five times the Participant's regular annual Incentive Stock Option grant under the Stock Option Plan, as determined by the Committee. Any Award hereunder shall (i) be in lieu of any other regular annual stock option grant to which the Participant would otherwise be entitled during the Term and (ii) not affect the Participant's rights under the terms of any other stock option awarded to him prior to his Performance Option Award. Page 10 An Award to any subsequent Participant after the Effective Date shall be a Partial Award calculated according to the following formula: the Full Award shall be multiplied by a fraction with a denominator of 36 and a numerator equal to the number of full months remaining in the Term, as defined in subparagraph 1.o.i. The Committee, in its discretion, may modify the number of Performance Options in any Award or the Partial Award formula to the extent it deems such modification to be in the best interests of the Company. b. Value of Performance Options. All Performance Options will be granted at an Option Price equal to the Stock's Fair Market Value as of the date of the Award. c. Term of Performance Options. The Option term shall be seven years from the Effective Date for Full Awards or seven years from date of Award grant for Partial Awards. d. Vesting of Performance Options. Performance Options for any Participant shall become 100% vested as of the earlier of the following dates: i. the three-year anniversary of the Effective Date, or ii. the date on which the Company experiences a change in control, as defined in any change in control agreement between the Company and the Participant, or a merger or sale of assets, as provided in Subsection 5(c) of the Stock Option Plan. A Participant whose employment terminates due to death, Retirement or Disability prior to vesting of his Performance Options shall become partially vested effective as of the earlier of the dates described in i. or ii. above. The unvested Performance Options of such a Participant shall be forfeited. The percentage of such a Participant's vesting shall be 100% multiplied by a fraction the denominator of which is 36 and the numerator of which is the number of the Participant's fully completed months of service between the Effective Date, or the date of the Participant's Award for a Partial Award, and his termination date. If a Participant's employment is terminated by the Participant or the Company prior to vesting of his Performance Options (other than due to death, Retirement or Disability), his Performance Options shall be forfeited. All vesting rights, as described in this Subsection 5.d., are subject to the terms and conditions of the Plan and the Stock Option Plan. e. Exercise of Performance Options. A Participant may exercise his Performance Options upon vesting. In the event of a change in control, a Participant shall have additional exercise rights, as provided in subparagraph 5(c) of the Stock Option Plan. Any vested Performance Options which qualify as Incentive Stock Options must be exercised within 90 days following a Participant's termination of employment, or in the event of a Participant's Disability, within one year of such event, or, in the event of a Participant's death, within three years of such event or, in all cases, if sooner, by the expiration date of the term of the Option, as described in Subsection 5.c. Page 11 With respect to vested Performance Options which do not qualify as Incentive Stock Options, in the event of death or Disability, a Participant (or his beneficiary or legal representative) may exercise said Options until the three year anniversary of said event or expiration of the term of the Option, whichever occurs first. In the event of Retirement, a Participant may exercise his Options until the expiration of the Option term, as described in subsection 5.c. If a Participant's employment is terminated for Cause, the Participant's vested unexercised Performance Options shall immediately terminate. If a Participant's employment terminates for any other reason after his nonqualified Performance Options have vested, he may exercise said Options within 90 days after such termination or the term of the Option, whichever is shorter. Any Performance Option may be exercisable in full or for different time periods as specified by the Committee pursuant to the authority vested in it in Stock Option Plan Subsection 5(c), subject to the conditions set forth in Section 5 of the Stock Option Plan. f. Company Cash Match of TMVC Credit. The Company will pay cash bonuses to Participants, based on the value of their TMVC Credit, if Performance Goals are met, as described and subject to the conditions set forth in this Subsection. i. If the Company's Compounded Earnings ("CE") for the Term are between 10% and 13% and its Compounded Revenue ("CR") for the Term is between 8% and 10%, the Company will match Participants' TMVC Credit at a proportional rate of between 1% and 100%, as set forth in Exhibit A. There will be no match unless both CE and CR achieve their minimum 10% and 8% thresholds. If either CE or CR exceeds its 13% or 10% maximum under this subparagraph, the proportional match shall be determined pursuant to Exhibit A. ii. If CE for the Term is between 13% and 20% and CR for the Term is between 10% and 15%, the Company will match Participants' TMVC Credit at a proportional rate of between 100% and 200%, as set forth in Exhibit A. In no event will the Company's match exceed 200% of Participants' TMVC Credit. iii. The amount of Company match, if any, shall be determined by the 90th day following the end of the Term. Once determined, Company match amounts shall be distributable to Participants in cash. iv. The Company match for a partially vested Participant whose employment is severed due to Retirement, death or Disability prior to the Termination Date shall equal the fraction determined in Subsection 5.d. multiplied by the amount of the cash bonus match which the Participant would have received if he had been 100% vested. If a Participant's employment is severed by the Participant or the Company prior to the Termination Date (other than due to death, Retirement or Disability), or if the Participant resigns, is discharged for Cause or competes with the Company after the Termination Date but prior to the date of distribution of the cash bonus match, the Participant shall not be entitled to the cash bonus match described in this subsection5.f. Page 12 g. Payment for Performance Option Stock. The Participant's TMVC Credit shall be divided by the number of his Performance Options so that each Performance Option shall be credited with an equal portion of TMVC Credit. When the Participant exercises all or a portion of his Performance Options, each such Option shall be credited with its proportional share of TMVC Credit. The TMVC Credit assigned to unexercised Performance Options shall be forfeited. The Participant shall pay the difference between his TMVC Credit and the Option Price for each share of Stock which he purchases pursuant to his Performance Options. h. Right of Repurchase and Forfeiture. The Company may repurchase a Participant's Performance Option Stock and require forfeiture of his unexercised vested Performance Options if the Participant i. at any time during or within two years following termination of employment with the Company, directly or indirectly competes with, or is employed by or performs services in any capacity for, a competitor of the Company, or ii. is discharged for Cause. Consistent with subsection 8(d) of the Stock Option Plan, the repurchase price shall equal the then Fair Market Value of the Stock for Participants whose Stock is subject to repurchase pursuant to subsection 5.h.i. and, for Participants covered under subsection 5.h.ii., the repurchase price shall equal the Stock Option Price. SECTION 6. General Provisions. a. Government and Other Regulations. The Company's obligation to make payment of Awards in Stock or otherwise is subject to all applicable laws, rules, regulations and required governmental agency approvals. The Company shall be under no obligation to register under the Securities Act of 1933, as amended (the "Act"), any of the Stock issued, delivered or paid in settlement under the Plan. If said Stock may be exempt from registration under the Act, the Company may restrict the transfer of such Stock as it deems advisable to ensure the availability of any such exemption. b. Claim to Awards and Employment Rights. No Participant or other person shall have any claim or right to be granted an Award under the Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any employee any right to be retained in the employ of the Company. c. Unsecured Creditor. The rights of a Participant or any beneficiary under the Plan shall be those of an unsecured creditor. d. Claims Procedures for Participants or Their Representatives. Any claims for benefits under the Plan shall be submitted to a Plan administrator appointed by the Committee. If a claim is denied, the administrator shall provide written notice of the denial within 90 days after submission of the claim which shall include (i) the specific reasons for the denial, (ii) specific references to the Plan provisions on which the denial is based, (iii) any other information necessary for the claimant to perfect the claim and an explanation of why such material is necessary, and (iv) an explanation of the Plan's appeal procedures. The 90-day claims review period may be extended by the Page 13 administrator if such extension is necessary, in the sole discretion of the administrator, to properly review the claim. The appeal procedures are as follows: (A) a claimant may file a notice of appeal of the denial of a claim with the administrator within 90 days following his receipt of the notice of denial, providing a written explanation as to why he believes the denial to be inappropriate, with specific reasons and references to Plan provisions; (B) the appeal will be reviewed and a decision rendered as soon as possible but not later than 90 days after receipt of the appeal notice, unless an extension of time of up to 60 days is deemed appropriate by the administrator to properly review the appeal; and (C) the written decision on the appeal shall be provided to the claimant, with specific references to the Plan provisions on which the denial is based. If the decision is not furnished within the time specified above, the claim shall be deemed to be denied on appeal. e. Beneficiaries. Any payment of an Award due under the Plan to a deceased Participant shall be paid to the beneficiary designated by the Participant on the Beneficiary Designation Form attached as Exhibit B, which shall be filed with the Committee. A Participant may change his designated beneficiary at any time by completing a new Beneficiary Designation Form and providing it to the Committee. The most recent Beneficiary Designation Form shall be effective and all earlier Beneficiary Designation Forms shall be automatically void. If no such beneficiary has been designated or survives the Participant, payment shall be made to the Participant's legal representative. A beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Committee. f. Nonassignability. No Award under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, execution, attachment, garnishment or any other legal process and any attempt to subject an Award to any of the foregoing shall be void. g. Repeal; Amendment. The Plan and any and all provisions of the Plan may be repealed or amended by the affirmative vote of a majority of the Board of Directors. No repeal or amendment of the Plan shall operate to annul or modify any vested Award under the Plan. h. Construction. A pronoun or adjective in the masculine gender includes the feminine gender, and the singular includes the plural, unless the context clearly indicates otherwise. i. Governing Law. The Plan shall be construed, administered and enforced according to the laws of Minnesota and the United States, as appropriate. j. Tax Withholding. The Company shall have the right to deduct from all Awards paid in cash taxes required by law and, in the case of Stock, the Participant or other person receiving such Stock may be required to pay to the Company the amount of any such taxes which the Company is required to withhold with respect to such Stock. k. Authority. The Plan is adopted by the Board as of the Effective Date pursuant to the MTS Systems Corporation 1997 Stock Option Plan, as amended. Any issue relating to Stock or Stock Options not specifically addressed herein shall be governed by the terms of the Stock Option Plan. Page 14 EX-10.J 3 SEVERANCE AGREEMENT EXHIBIT 10.j SEVERANCE AGREEMENT AGREEMENT made as of this 22nd day of September, 1999 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and Nancy L. Quist (the "Executive"). WHEREAS, MTS desires to employ Executive as its Chief Financial Officer and Executive is willing to become employed by MTS in such capacity; and WHEREAS, Executive is expected to make a significant contribution to the profitability, growth and financial strength of MTS; and WHEREAS, MTS considers the establishment and maintenance of a sound and vital management and an orderly succession plan to be essential to protecting and enhancing the best interests of MTS and its shareholders; and WHEREAS, this Agreement is consistent with the requirements of the executive/high policymaking exception to the Age Discrimination in Employment Act, 29 U.S.C. Section 631(c)(1) (the "Executive Exemption"), benefits in connection therewith are pursuant to pension, profit sharing and deferred compensation plans as defined therein, and Executive, by virtue of his duties and responsibilities on behalf of MTS, qualifies under said exception for mandatory retirement on or after his 65th birthday; and WHEREAS, MTS is providing Executive, simultaneously with this Agreement, in addition to Executive's employment with MTS and the special benefits associated therewith, additional consideration in the form of a Change in Control Agreement, to provide additional benefits to Executive in the event of a change in control; NOW THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until the earlier of (a) the date on which the Executive and MTS agree in writing to terminate this Agreement, or (b) the Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If a change in control occurs, as defined in that certain agreement between the Executive and MTS of even date herewith (the "Change in Control Agreement", attached as Exhibit 1), this Agreement shall be superseded by the provisions of the Change in Control Agreement except as provided in the following sentence. MTS's right under this Agreement to terminate the Executive's employment pursuant to the Executive Exemption shall not be superceded by the Change in Control Agreement and the Executive shall be entitled to receive the benefits to which he is entitled under subparagraph 4(d) hereunder if such termination occurs. Sevarance 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 for his 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 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 employment is terminated by MTS for Cause, MTS shall pay to Executive his full base salary through the Date of Termination at the rate in effect at the time 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 9 months. If Executive's employment is terminated pursuant to the Executive Sevarance Agreement Page 3 Exemption as described in subparagraph 4(d) hereunder, "12" shall be substituted for "15" in the preceding sentence. (i) For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts, subject to applicable federal and state withholding. (A) 1/12 of the highest average base salary for any 12-consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination; plus (B) the monthly average of the total Management Variable Compensation (MVC) earned during the lesser of the 3 most recent or the actual number of fiscal years participating in the MVC plan ending immediately prior to the Date of Termination; plus (C) the product of the average percentage of MTS profit sharing contributions to the MTS Systems Corporation Profit Sharing Retirement Plan and Trust (as a percent of Compensation as defined in the Plan up to the federal limit) for the lesser of the 3 most recent or the actual number of participating Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (A) and (B) above. (b) Executive shall be entitled to continue any of said benefits which qualify as group health and life insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law and pursuant to the terms of the plan. Following the Executive's Date of Termination and while severance payments are being paid to the Executive or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his 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 (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. (c) The Executive's rights under any existing Employee Stock Option Agreement and any future such agreements, including particularly his vesting rights and his right to exercise his options following his termination of employment, shall Sevarance Agreement Page 4 continue to be fully effective hereunder. In addition, if the Executive's termination of employment occurs pursuant to the Executive Exemption on or after he has reached his 65th birthday, the Executive shall continue to vest in any stock options in which he is not fully vested, as though he were continuing his employment with MTS as an active employee, subject at all times to the exercise times and other terms and conditions set forth in said Stock Option Agreements and to Executive's signing the release agreement described in paragraph 9 herein. (d) If Executive's termination of employment occurs pursuant to the Executive Exemption on or after he has reached his 65th birthday, Executive shall be entitled to receive the lump sum equivalent of the amount necessary to purchase a $44,000 pre-tax straight life annuity, said lump sum to be taken from MTS contributions and earnings thereon to Executive's accounts in MTS sponsored pension, profit sharing, and deferred compensation plans, as applicable. If Executive is entitled to less than that amount from the applicable MTS plans in which he is a participant as of his 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 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 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 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 Sevarance Agreement Page 5 Executive may also receive the payments and benefits set forth in subparagraphs 4(a) and (b) of this Agreement provided he executes the release agreement required in paragraph 9 of this Agreement. The benefits set forth in subparagraph 4(c) shall at all times be available to the Executive. (v) If the Qualified Retirement Benefit is less than the ADEA Benefit, MTS shall make a contribution to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan, in an amount equal to the difference between the Qualified Retirement Benefit and the ADEA Benefit (the "Qualified Retirement Benefit Supplement"). The Executive shall have the option (but is not required) to receive the Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement from said Plan within 60 days following his Date of Termination. The Executive may elect to receive the Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement, in either a lump sum or a series of periodic payments pursuant to the terms of the applicable plans. The payments to Executive described in subparagraph 4(a) of this Agreement shall be reduced by the amount of MTS's contribution to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan, to create the Qualified Retirement Benefit Supplement. All payments remaining in subparagraph 4(a) after this reduction and the subparagraph 4(b) and (c) benefits shall be paid to Executive in accordance with the terms of those subparagraphs, provided Executive executes the release agreement required in paragraph 9 of this Agreement. (vi) Executive's Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement, shall be nonforfeitable and not subject to reduction or elimination by MTS for any reason. 5. No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise; nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits after the Date of Termination or otherwise except as specifically provided herein. 6. Non-Competition and Confidentiality. (a) Executive agrees that, as a condition of receiving benefits under this Agreement, he will not render services directly or indirectly to any competing 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, Sevarance 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 existing obligation that, at all times during and subsequent to his employment with MTS, he will not divulge or appropriate to his own use or the uses of others any secret or confidential information pertaining to the business of MTS, or any of its subsidiaries, obtained during his employment by MTS or any of its subsidiaries. (c) If Executive violates his 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 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 Notice of Sevarance Agreement Page 7 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 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 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 family. Sevarance Agreement Page 8 12. Miscellaneous. (a) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party hereto at any time of any breach by the other party to this Agreement of, or compliance with, any other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. (b) No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. (c) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. (d) Any provision of this Agreement which conflicts with applicable law shall be modified to the extent necessary to ensure its enforceability. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. This Agreement supersedes any and all prior oral and written understandings and agreements between the Executive and MTS. IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have executed this Agreement as of the day and date first above written. EXECUTIVE: MTS SYSTEMS CORPORATION /s/ Nancy Lee Quist By S. W. Emery, Jr. - ------------------- ----------------- Nancy L. Quist Its Chairman and CEO ----------------------------------- EX-10.K 4 SEVERANCE AGREEMENT Severance Agreement Page 1 Exhibit 10.k SEVERANCE AGREEMENT AGREEMENT made as of this 28th day of July, 1999 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and David E. Hoffman (the "Executive"). WHEREAS, MTS desires to employ Executive as its Chief Financial Officer and Executive is willing to become employed by MTS in such capacity; and WHEREAS, Executive is expected to make a significant contribution to the profitability, growth and financial strength of MTS; and WHEREAS, MTS considers the establishment and maintenance of a sound and vital management and an orderly succession plan to be essential to protecting and enhancing the best interests of MTS and its shareholders; and WHEREAS, this Agreement is consistent with the requirements of the executive/high policymaking exception to the Age Discrimination in Employment Act, 29 U.S.C. Section 631(c)(1) (the "Executive Exemption"), benefits in connection therewith are pursuant to pension, profit sharing and deferred compensation plans as defined therein, and Executive, by virtue of his duties and responsibilities on behalf of MTS, qualifies under said exception for mandatory retirement on or after his 65th birthday; and WHEREAS, MTS is providing Executive, simultaneously with this Agreement, in addition to Executive's employment with MTS and the special benefits associated therewith, additional consideration in the form of a Change in Control Agreement, to provide additional benefits to Executive in the event of a change in control; NOW THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until the earlier of (a) the date on which the Executive and MTS agree in writing to terminate this Agreement, or (b) the Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If a change in control occurs, as defined in that certain agreement between the Executive and MTS of even date herewith (the "Change in Control Agreement", attached as Exhibit 1), this Agreement shall be superseded by the provisions of the Change in Control Agreement except as provided in the following sentence. MTS's Severance Agreement Page 2 right under this Agreement to terminate the Executive's employment pursuant to the Executive Exemption shall not be superceded by the Change in Control Agreement and the Executive shall be entitled to receive the benefits to which he is entitled under subparagraph 4(d) hereunder if such termination occurs. 2. Termination by Reason of Death or Disability. In the event of the Executive's death or disability during the Term of this Agreement, Executive shall be entitled to such benefits provided under any policy, plan or program governing death or disability maintained by MTS and covering such Executive and this Agreement shall not apply. The determination of disability and the amount and entitlement of benefits shall be governed by the terms of such policy, plan or program. In the event of the Executive's disability, the Executive's Date of Termination shall be the date on which Executive has been unable, by reason of physical or mental disability, to perform the services required of him for his 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 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 employment is terminated by MTS for Cause, MTS shall pay to Executive his full base salary through the Date of Termination at the rate in effect at the time 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 Severance Agreement Page 3 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 described in subparagraph 4(d) hereunder, "12" shall be substituted for "15" in the preceding sentence. (i) For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts, subject to applicable federal and state withholding. (A) 1/12 of the highest average base salary for any 12-consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination; plus (B) the monthly average of the total Management Variable Compensation (MVC) earned during the lesser of the 3 most recent or the actual number of fiscal years participating in the MVC plan ending immediately prior to the Date of Termination; plus (C) the product of the average percentage of MTS profit sharing contributions to the MTS Systems Corporation Profit Sharing Retirement Plan and Trust (as a percent of Compensation as defined in the Plan up to the federal limit) for the lesser of the 3 most recent or the actual number of participating Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (A) and (B) above. (b) Executive shall be entitled to continue any of said benefits which qualify as group health and life insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law and pursuant to the terms of the plan. Following the Executive's Date of Termination and while severance payments are being paid to the Executive or, if earlier, until Executive is covered under other group plans, MTS shall continue to pay the employer share of the Executive's MTS group life and health insurance premiums. All premium payments made on Executive's behalf following his Date of Termination and Executive's continued participation in the plans are contingent upon Executive making the appropriate timely written elections to continue his group benefits following his Date Severance Agreement Page 4 of Termination, said group benefits continuing in effect for active MTS employees, Executive continuing to be eligible under the terms of the plans and applicable laws, and Executive's payment of the employee portion of the premiums for such benefits. Benefits otherwise receivable by Executive pursuant to this subparagraph (b) shall be reduced or eliminated to the extent comparable benefits are actually received by Executive during such period from a source outside MTS, and any such benefits actually received by Executive shall be reported to MTS. (c) The Executive's rights under any existing Employee Stock Option Agreement and any future such agreements, including particularly his vesting rights and his right to exercise his options following his termination of employment, shall continue to be fully effective hereunder. In addition, if the Executive's termination of employment occurs pursuant to the Executive Exemption on or after he has reached his 65th birthday, the Executive shall continue to vest in any stock options in which he is not fully vested, as though he were continuing his employment with MTS as an active employee, subject at all times to the exercise times and other terms and conditions set forth in said Stock Option Agreements and to Executive's signing the release agreement described in paragraph 9 herein. (d) If Executive's termination of employment occurs pursuant to the Executive Exemption on or after he has reached his 65th birthday, Executive shall be entitled to receive the lump sum equivalent of the amount necessary to purchase a $44,000 pre-tax straight life annuity, said lump sum to be taken from MTS contributions and earnings thereon to Executive's accounts in MTS sponsored pension, profit sharing, and deferred compensation plans, as applicable. If Executive is entitled to less than that amount from the applicable MTS plans in which he is a participant as of his 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 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 Severance Agreement Page 5 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 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 Date of Termination. The Executive may elect to receive the Qualified Retirement Benefit in either a lump sum or a series of periodic payments pursuant to the terms of the applicable plans. The Executive may also receive the payments and benefits set forth in subparagraphs 4(a) and (b) of this Agreement provided he executes the release agreement required in paragraph 9 of this Agreement. The benefits set forth in subparagraph 4(c) shall at all times be available to the Executive. (v) If the Qualified Retirement Benefit is less than the ADEA Benefit, MTS shall make a contribution to Executive's Deferral Account in the MTS Systems Corporation Executive Deferred Compensation Plan, pursuant to Section 3.4 of said Plan, in an amount equal to the difference between the Qualified Retirement Benefit and the ADEA Benefit (the "Qualified Retirement Benefit Supplement"). The Executive shall have the option (but is not required) to receive the Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement from said Plan within 60 days following his 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, Severance Agreement Page 6 provided Executive executes the release agreement required in paragraph 9 of this Agreement. (vi) Executive's Qualified Retirement Benefit and, if applicable, the Qualified Retirement Benefit Supplement, shall be nonforfeitable and not subject to reduction or elimination by MTS for any reason. 5. No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise; nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits after the Date of Termination or otherwise except as specifically provided herein. 6. Non-Competition and Confidentiality. (a) Executive agrees that, as a condition of receiving benefits under this Agreement, he will not render services directly or indirectly to any competing organization located in any market in which MTS is doing business as of Executive's Date of Termination for the period of time during which Executive is receiving benefits under this Agreement or the Change in Control Agreement, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any "Conflicting Product" which as used herein means any product, process, system or service of any person, firm, corporation, organization other than MTS, in existence or under development, which is the same as or similar to or competes with, or has a usage allied to, a product, process, system, or service produced, developed, or used by MTS. (b) Executive further agrees and acknowledges his existing obligation that, at all times during and subsequent to his employment with MTS, he will not divulge or appropriate to his own use or the uses of others any secret or confidential information pertaining to the business of MTS, or any of its subsidiaries, obtained during his employment by MTS or any of its subsidiaries. (c) If Executive violates his 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). Severance Agreement Page 7 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 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 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 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 Severance Agreement Page 8 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 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 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. Severance Agreement Page 9 (b) No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. (c) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. (d) Any provision of this Agreement which conflicts with applicable law shall be modified to the extent necessary to ensure its enforceability. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. This Agreement supersedes any and all prior oral and written understandings and agreements between the Executive and MTS. IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have executed this Agreement as of the day and date first above written. EXECUTIVE: MTS SYSTEMS CORPORATION /s/ David E. Hoffman By /s/ S. W. Emery, Jr. - --------------------- ---------------------- David E. Hoffman Its Chairman and CEO ------------------------------------- EX-10.P 5 1997 STOCK OPTION AGREEMENT [LOGO] MTS(R) EXHIBIT 10.p STOCK OPTION PLAN AMENDMENTS APPROVED BY THE BOARD OF DIRECTORS DECEMBER 3, 1997 WHEREAS, Section 7 of the 1997 Stock Option Plan provides that the Board of Directors is authorized to amend the formula grant provision set forth in Section 5(k) of the 1997 Stock Option Plan (the "Plan"), NOW, THEREFORE, BE IT RESOLVED, that the Plan is hereby amended to provide for a five year exercise period in connection with all future grants to non-employee directors, and that such options continue to be fully vested upon six months from the date of grant. RESOLVED FURTHER, that all future options granted to non-employee directors be issued pursuant to the 1997 Plan or subsequent plans as determined appropriate by the Human Resources Committee. RESOLVED FURTHER, that the Stock Option Agreements non-employee directors receive upon grant of options be revised to provide for a five year exercise period. RESOLVED FINALLY, that any officer of the corporation be, and hereby is, authorized to take action to effect the amendment of the Plan and revision of the non-employee directors' Stock Option Agreements. STOCK OPTION PLAN AMENDMENTS APPROVED BY THE BOARD OF DIRECTORS DECEMBER 1, 1998 WHEREAS, the MTS Systems Corporation 1987, 1990, 1994 and 1997 Stock Option Plans (the "Plans") limit an optionee's ability to exercise a stock option upon termination of his or employment by reason of Retirement (as that term is defined in the Plans) to the shorter of three years from the date of such termination or the expiration of the stated term of the option, it is RESOLVED, that the appropriate provisions of the Plans be amended in order to eliminate the three-year limitation period on the exercise of options in order to allow an optionee who terminates his or her employment by reason of Retirement to exercise his or her option until the expiration of the stated term of the option, or such shorter period as may be determined by the Committee at the time of grant; provided, however, that the aforementioned amendment shall apply only for those options granted by the Company from and after the date hereof; RESOLVED FURTHER, that the appropriate officers of the Company are hereby authorized and directed to take any and all action necessary or desirable in order to effectuate the foregoing resolution. WHEREAS, the formula grant provision of the MTS Systems Corporation 1997 Stock Option Plan (the "1997 Plan") currently authorizes an automatic grant of stock options to non-employee directors of up to a maximum of 3,000 shares of Common Stock (the actual number of which is determined by the Committee) upon their election or re-election to the Board of Directors of the Company, it is RESOLVED, that the automatic grant provision set forth in Section 5(k) of the 1997 Plan be amended in order to increase from 3,000 shares to 4,000 shares the maximum number of shares of Common Stock available for annual stock option grants to non-employee directors; RESOLVED FURTHER, that the appropriate officers of the Company are hereby authorized and directed to take any and all action necessary or desirable in order to effectuate the foregoing resolution. 2 STOCK OPTION PLAN(S) AMENDMENTS THE FOLLOWING RESOLUTIONS WERE APPROVED AT THE AUGUST 17, 1999 HUMAN RESOURCES COMMITTEE MEETING WHEREAS, the Human Resources Committee of the Board of Directors deems it in the best interest of the Corporation to amend the Corporation's 1987 Stock Option Plan (the "1987 Plan"), the 1990 Stock Option Plan (the "1990 Plan"), the 1994 Stock Plan (the "1994 Plan") and the 1997 Stock Option Plan (the "1997 Plan") to provide for accelerated vesting of all unvested stock options upon the death of any optionee and to make consistent the exercise periods for exercising stock options under such plans following the death of an optionee; NOW, THEREFORE, BE IT RESOLVED, that Section 10.2 of the 1987 Plan, Section 10.2 of the 1990 Plan, Section 5(f) of the 1994 Plan and Section 5(f) of the 1997 Plan be, and each of them hereby are, amended in their entirety as follows (provided that the section headings in Section 5(f) of the 1994 Plan and the 1997 Plan shall be retained): If an Optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of death, any Stock Option may thereafter be immediately exercised, without regard to any vesting requirements or periods previously established, by the legal representative of the estate or by the legatee of the Optionee under the will of the Optionee, for a period of three (3) years from the date of such death or until the expiration of the stated term of the Option, whichever period is shorter. In the event of termination of employment by reason of death, if an Incentive Stock Option (ISO) is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the Option will thereafter be treated as a Non-Qualified Stock Option (NQO) WHEREAS, the Human Resources Committee deems it in the best interest of the Corporation to amend the 1994 Plan and the 1997 Plan to eliminate all provisions which permit optionees to pay all or part of the option exercise price by requesting that the Corporation withhold shares that would otherwise have been issued pursuant to the exercised option (other than for payment of statutory taxes due, which are authorized by Section 13(d) of the 1994 Plan and Section 8(c) of the 1997 Plan); NOW, THEREFORE, BE IT RESOLVED, that Section 5(d) of the 1994 Plan shall be amended in its entirety as follows: 3 (d) Method of Exercise. Stock Options may be exercised in whole or in part at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by certified or bank check, or by any other form of legal consideration deemed sufficient by the Committee and consistent with the Plan's purpose and applicable law, including promissory notes or a properly executed exercise notice together with irrevocable instructions to a broker acceptable to the Company to promptly deliver to the Company the amount of sale or loan proceeds to pay the exercise price. As determined by the Committee, in its sole discretion, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee or in the case of the exercise of a Non-Qualified Stock Option, Restricted Stock or Deferred Stock subject to an award hereunder (based, in each case, on the Fair Market Value of the Stock on the date immediately preceding the date the option is exercised, as determined by the Committee); provided, however, that in the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares may be authorized only at the time the option is granted, and provided further that in the event payment is made in the form of shares of Restricted Stock or a Deferred Stock award, the optionee will receive a portion of the option shares in the form of, and in an amount equal to, the Restricted Stock or Deferred Stock award tendered as payment by the optionee. No shares of Stock shall be issued until full payment therefor has been made. An optionee shall generally have the rights to dividends and other rights of a shareholder with respect to shares subject to the option when the optionee has given written notice of exercise and has paid in full for such shares. 4 RESOLVED FURTHER, that Section 5(d) of the 1997 Plan shall be amended in its entirety as follows: (d) Method of Exercise. Stock Options may be exercised in whole or in part at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by certified or bank check, or by any other form of legal consideration deemed sufficient by the Committee and consistent with the Plan's purpose and applicable law, including promissory notes or a properly executed exercise notice together with irrevocable instructions to a broker acceptable to the Company to promptly deliver to the Company the amount of sale or loan proceeds to pay the exercise price. As determined by the Committee at the time of grant or exercise, in its sole discretion, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee (which in the case of Stock acquired upon exercise of an option have been owned for more than six months on the date of surrender), provided, however, that in the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares may be authorized only at the time the option is granted. No shares of Stock shall be issued until full payment therefor has been made. An optionee shall generally have the rights to dividends and other rights of a shareholder with respect to shares subject to the option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in paragraph (a) of Section 8. 5 EX-10.Q 6 SEVERANCE AGREEMENT EXHIBIT 10.q SEVERANCE AGREEMENT AGREEMENT made as of this 18th day of March 1998 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and Steven M. Cohoon (the "Executive"). WHEREAS, MTS desires to employ Executive as its Vice President 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 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 Severance Agreement Page 2 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 9 months. (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 Severance Agreement Page 3 (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 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 Severance Agreement Page 4 $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. (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 Severance Agreement Page 5 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 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 Severance Agreement Page 5 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 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 Severance Agreement Page 7 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 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. Severance Agreement Page 8 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/ Steven M. Cohoon By /s/ S. W. Emery, Jr. -------------------- ----------------------- Steven M. Cohoon Its Chairman and CEO EX-10.X 7 CHANGE IN CONTROL AGREEMENT EXHIBIT 10.x CHANGE IN CONTROL AGREEMENT AGREEMENT made as of this 22nd day of September, 1999 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and Nancy L. Quist (the "Executive"). WHEREAS, MTS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of MTS and its shareholders; and WHEREAS, the Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of MTS, its policies, methods, personnel and problems, a significant contribution to the profitability, growth and financial strength of MTS; and WHEREAS, MTS, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of the Executive in the performance of the Executive's duties to the detriment of MTS and its shareholders; and WHEREAS, Executive is becoming employed by MTS upon the understanding that MTS will provide income security if the Executive's employment is terminated under certain terms and conditions; and WHEREAS, it is in the best interests of MTS and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including Executive, to their assigned duties without distraction and to ensure the continued availability to MTS of the Executive in the event of a Change in Control; THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until the earlier of (A) the date that any and all benefits due to Executive under this Agreement upon the happening of the events set forth herein have been paid and satisfied and all obligations of MTS to the Executive have been performed or (B) the date the Executive and MTS agree in writing to terminate this Agreement. Notwithstanding the preceding sentence, if a Change in Control occurs, this Agreement shall remain in effect for a period of 36 months from the date of the occurrence of a Change in Control. 2. Change in Control. If a Change in Control shall have occurred during the term of this Agreement, the provisions of this Agreement shall become operative and MTS agrees to employ the Executive and to provide the benefits stated in this Agreement. Change in Control Agreement Page 2 (a) Change in Control, shall, for purposes of this Agreement, means a change in control of MTS which would be required to be reported in response to Item 1 of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not MTS is then subject to such reporting requirement, including, without limitation, if: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, including any affiliate or associate as defined in Rule 12(b)-2 under the Exchange Act of such person, other than MTS, any trustee or other fiduciary holding securities under an employee benefit plan of MTS, or any corporation owned, directly or indirectly, by the stockholders of MTS in substantially the same proportions as their ownership of stock of MTS) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of MTS representing 35% or more of the combined voting power of MTS' then outstanding securities; or (ii) the Board of Directors is comprised of fewer than 65% of the individuals described in subsection (b) below; or (iii) the stockholders of MTS approve a definitive agreement to merge or consolidate MTS with or into another corporation or other enterprise in which the holders of outstanding stock of MTS entitled to vote in elections of directors immediately before such merger or consolidation hold less than 80% of the voting power of the survivor of such merger or consolidation or its parent, or approve a plan of liquidation; or (iv) at least 60% of MTS' assets are sold 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. Change in Control Agreement Page 3 (d) Unfriendly Change in Control shall mean a Change in Control that is not a "Friendly Change in Control" as defined above. An Unfriendly Change in Control shall not thereafter become a Friendly Change in Control. 3. Termination by Reason of Death or Disability. If Executive's employment shall be terminated by MTS by reason of death or disability, MTS shall immediately commence payment to the Executive (or Executive's designated beneficiaries or estate, if no beneficiary is designated) of any and all benefits to which the Executive is entitled under MTS retirement and insurance programs them in effect. Except for such benefits, MTS shall have no further obligations to Executive under this Agreement. 4. Termination for Cause. (a) If Executive's employment with MTS shall be terminated by MTS for Cause as defined below, MTS shall pay to Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and MTS shall have no further obligation to Executive under this Agreement. (b) Termination by MTS of Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (ii) willful gross misconduct or gross negligence in the performance of his duties by the Executive; or (iii) material violation by the Executive of any employment agreement applicable to the Executive. 5. Termination Following Friendly Change in Control. (a) If, after a Friendly Change in Control, Executive's employment with MTS shall be terminated (1) by MTS other than for cause, death or disability or (2) by Executive for Good Reason, then Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay the Executive as a severance payment (the "Severance Payment") an amount equal to the product of 18 multiplied by the Executive's Monthly Gross Income as defined below. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts: Change in Control Agreement Page 4 (A) 1/12 of the highest average base salary for any 12-consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination (without taking into account any reduction in such base salary that would constitute Good Reason); plus (B) the monthly average of the total Management Variable Compensation (MVC) earned during the lesser of the 3 most recent or the actual number of fiscal years participating in the MVC plan ending immediately prior to the Date of Termination; plus (C) the product of the average percentage of MTS profit sharing contributions to the MTS Systems Corporation Profit Sharing Retirement Plan and Trust (as a percent of Compensation as defined in the Plan up to the federal limit) for the lesser of the 3 most recent or the actual number of participating Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (A) and (B) above. (ii) Benefits. For an 18-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the respective percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive during this period, and any such benefits actually received by Executive shall be reported to MTS. At the expiration of said 18-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Reconciliation Act ("COBRA") or applicable state law. (b) Good Reason. Executive shall be entitled to terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without Executive's express written consent, any of the following: (i) the assignment to Executive of any duties inconsistent with Executive's status or position with MTS, or a substantial alteration in the nature or status of Executive's responsibilities; or (ii) a reduction by MTS in Executive's annual base salary other than a reduction comparable to other senior Executives of MTS in connection with a company-wide cost reduction program; or (iii) the relocation of MTS' principal executive offices to a location more than fifty miles from Eden Prairie, Minnesota or MTS requiring Change in Control Agreement Page 5 Executive to be based anywhere other than MTS' principal executive offices except for required travel on MTS' business to an extent substantially consistent with Executive's prior business travel obligations; or (iv) the failure by MTS to continue to provide Executive with benefits at least as favorable to those enjoyed by Executive under any of MTS' pension, life insurance, medical, health and accident, disability, deferred compensation, incentive awards, incentive stock options, or savings plans in which Executive was participating at the time of the Change in Control, the taking of any action by MTS which would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed by him at the time of the Change in Control, or the failure by MTS to provide Executive with the number of paid vacation days to which Executive is entitled at the time of the Change in Control, provided, however, that MTS may amend any such plan or programs as long as such amendments do not reduce any benefits to which Executive would be entitled upon termination; or (v) the failure of MTS to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 12; or (vi) MTS requests Executive's resignation from employment; or (vii) any purported termination of Executive's employment which is not made pursuant to a Notice of Termination satisfying the requirements of this Agreement; for purposes of this Agreement, no such purported termination shall be effective; or (viii) any material violation by MTS of this Agreement. (c) Voluntary Termination Deemed Good Reason. Notwithstanding anything herein to the contrary, during the period commencing on the 30th day following a Change in Control (whether Friendly or Unfriendly) and ending on the 180th day following a Change in Control, Executive may voluntarily terminate his employment for any reason, and such termination shall be deemed "Good Reason" for all purposes of this Agreement. 6. Termination - Unfriendly Change in Control. (a) If, after an Unfriendly Change in Control, Executive's employment with MTS is terminated (1) by MTS other than for Cause, death or disability, or (2) by Executive for Good Reason, the Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay the Executive as a severance payment (the "Severance Payment") an amount equal to the product of 36 multiplied by the Executive's Monthly Gross Income as defined in Section 5(a)(i) above. The Severance Payment shall be made in a single lump sum Change in Control Agreement Page 6 within 30 days after the Date of Termination, subject to all applicable federal and state withholding. (ii) Benefits. For a 36-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the responsive percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive shall be reported to MTS. At the expiration of said 36-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law. (b) If the Executive voluntarily terminates his employment other than for Good Reason but more than 180 days after an Unfriendly Change in Control, Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay to Executive as a severance payment (the "Severance Payment") an amount equal to the product of 18 multiplied by the Executive's monthly Gross Income as defined in Section 5(a)(i) above. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. (ii) Benefits. For 18-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the respective percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive during such period, and any such benefits actually received by Executive shall be reported to MTS. At the expiration of said 18-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law. 7. Additional Benefits. In addition to all other amounts payable and benefits receivable to Executive upon termination of employment covered under this Agreement, Executive shall be entitled to the following benefits: 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 right to exercise his option rights following his termination of employment, shall continue to be fully effective hereunder. 8. No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits after the Date of Termination, or except as otherwise provided in this Agreement. 9. Potential Excise Tax; Indemnification (a) Excise Tax. Should any payments hereunder or contemplated hereby be subject to excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as may be amended, or any successor or similar provision thereto, or comparable state or local tax laws, MTS shall pay to the Executive such additional compensation as is necessary (after taking into account all federal, state and local income taxes payable by the Executive as a result of the receipt of such compensation) to place the Executive in the same after-tax position he would have been in had no such excise tax (or any interest or penalties thereon) been paid or incurred. MTS shall pay such additional compensation upon the earlier of: (i) the time at which MTS withholds such excise tax from any payments to the Executive; or (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 Change in Control Agreement Page 8 with MTS in good faith with respect to procedures reasonably requested by MTS which would afford MTS the ability to contest the imposition of such excise tax; provided, however, that the Executive will not be required to afford MTS any right to contest the applicability of any such excise tax to the extent that the Executive reasonably determines that such contest is inconsistent with the overall tax interests of the Executive. MTS agrees to hold in confidence and not to disclose, without the Executive's prior written consent, any information with regard to the Executive's tax position which MTS obtains pursuant to this subsection. (b) Indemnification. MTS will indemnify the Executive (and his legal representative or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of the proceeding) by the laws of the State of Minnesota, as in effect at the time of the subject act or omission, or the Articles of Incorporation and By-Laws of MTS as in effect at such time or on the date of this Agreement, whichever affords or afforded greater protection to the Executive; and the Executive shall be entitled to the protection of any insurance policies MTS may elect to maintain generally for the benefit of its directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by him or his legal representatives in connection with any action, suit or proceeding to which he (or his legal representative or other successors) may be made a party by reason of his being or having been a director, officer or employee of MTS or any of its subsidiaries or his serving or having served any other enterprise as a director, officer or employee at the request of MTS, provided that MTS shall cause to be maintained in effect for not less than six years from the date of a Change in Control (to the extent available) policies of directors' and officers' liability insurance of at least the same coverage as those maintained by MTS on the date of this Agreement and containing terms and conditions which are no less advantageous than such policies. 10. Non-Competition and Confidentiality. (a) Noncompetition. Except as provided in subsection (c) below, Executive agrees that, as a condition of receiving benefits under this Agreement, he will not render services directly or indirectly to any competing organization, wherever located, for a period of one year following the Date of Termination, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any "Conflicting Product" which as used herein means any product, process, system or service of any person, firm, corporation, organization other than MTS, in existence or under development, which is the same as or similar to or competes with, or has a usage allied to, a product, process, system, or service produced, developed, or used by MTS. Executive agrees that violation of this covenant not to compete with MTS shall result in immediate cessation of all benefits hereunder, other than insurance benefits, which Executive may continue where permitted under federal and state law at his own expense. Change in Control Agreement Page 9 (b) Confidentiality. Executive further agrees and acknowledges his existing obligation that at all times during and subsequent to his employment with MTS, he will not divulge or appropriate to his own use or the uses of others any secret or confidential information or knowledge pertaining to the business of MTS, or any of its subsidiaries, obtained during his employment by MTS or any of its subsidiaries. (c) Waiver - Unfriendly Change in Control. Notwithstanding anything herein to the contrary: the restriction on competition under subsection (a) shall not apply if the Executive's employment terminates following an Unfriendly Change in Control. Furthermore, in such event, MTS waives any other restriction on Executive's employment and consents unconditionally to any employment Executive may subsequently obtain. 11. Funding of Payments. In order to assure the performance of MTS or its successor of its obligations under this Agreement, MTS may deposit in a so-called "rabbi" trust an amount equal to the maximum payment that will be due the Executive under the terms hereof; provided, however, that MTS shall deposit in trust the amount equal to the maximum payment due Executive immediately upon an Unfriendly Change in Control. Under such written trust instrument, the Trustee shall be instructed to pay to the Executive (or the Executive's legal representative, as the case may be) the amount to which the Executive shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to MTS. If MTS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. The written instrument governing the trust shall be irrevocable from and after such Change in Control and shall contain such provisions protective of the Executive as are contained in similar trust agreements approved by the Internal Revenue Service in published private letter rulings (provided that the assets of the trust shall be reachable by creditors of MTS as required by such rulings). The trustee shall be a national bank selected by MTS with the consent of the Executive, with trust powers and whose principal officers are located in the Minneapolis/St. Paul metropolitan area. The trustee shall invest the assets of the trust in any readily marketable securities of U.S. corporations (other than MTS, its successor, or any affiliate of MTS or its successor). If and to the extent there are not amounts in trust sufficient to pay Executive under this Agreement, MTS shall remain liable for any and all payments due to Executive. 12. Successors; Binding Agreement. (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 Change in Control Agreement Page 10 that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, successors, heirs, and designated beneficiaries. If Executive should die while any amount would still be payable to Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designated beneficiaries or, if there is no such designated beneficiary, to the Executive's estate. 13. Notice. (a) Form and Delivery. All notices and other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the last known residence address of the Executive or in the case of MTS, to its principal office to the attention of each of the then directors of MTS with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (b) Notice of Termination. Any purported termination of Executive's employment by MTS or by Executive shall be communicated by written Notice of Termination to the other party hereto, which shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circumstances claimed to provide a basis for termination of Executive's employment. (c) Date of Termination. For purposes of this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination which shall not be less than 10 nor more than 30 days, respectively, from the date such Notice of Termination is given. (d) Dispute of Termination. If, within 10 days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final 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 Change in Control Agreement Page 11 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 or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have executed this Agreement as of the day and date first above written. Change in Control Agreement Page 12 EXECUTIVE: MTS SYSTEMS CORPORATION /s/ Nancy Lee Quist By /s/ S. W. Emery, Jr. - ------------------- ---------------------- Nancy L. Quist Its Chairman and CEO --------------------------- EX-10.Y 8 CHANGE IN CONTROL AGREEMENT EXHIBIT 10.y CHANGE IN CONTROL AGREEMENT AGREEMENT made as of this 28th day of July, 1999 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and David E. Hoffman (the "Executive"). WHEREAS, MTS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of MTS and its shareholders; and WHEREAS, the Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of MTS, its policies, methods, personnel and problems, a significant contribution to the profitability, growth and financial strength of MTS; and WHEREAS, MTS, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of the Executive in the performance of the Executive's duties to the detriment of MTS and its shareholders; and WHEREAS, Executive is becoming employed by MTS upon the understanding that MTS will provide income security if the Executive's employment is terminated under certain terms and conditions; and WHEREAS, it is in the best interests of MTS and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including Executive, to their assigned duties without distraction and to ensure the continued availability to MTS of the Executive in the event of a Change in Control; THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until the earlier of (A) the date that any and all benefits due to Executive under this Agreement upon the happening of the events set forth herein have been paid and satisfied and all obligations of MTS to the Executive have been performed or (B) the date the Executive and MTS agree in writing to terminate this Agreement. Notwithstanding the preceding sentence, if a Change in Control occurs, this Agreement shall remain in effect for a period of 36 months from the date of the occurrence of a Change in Control. 2. Change in Control. If a Change in Control shall have occurred during the term of this Agreement, the provisions of this Agreement shall become operative and MTS agrees to employ the Executive and to provide the benefits stated in this Agreement. (a) Change in Control, shall, for purposes of this Agreement, means a change in control of MTS which would be required to be reported in response to Item 1 of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not MTS is then subject to such reporting requirement, including, without limitation, if: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, including any affiliate or associate as defined in Rule 12(b)-2 under the Exchange Act of such person, other than MTS, any trustee or other fiduciary holding securities under an employee benefit plan of MTS, or any corporation owned, directly or indirectly, by the stockholders of MTS in substantially the same proportions as their ownership of stock of MTS) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of MTS representing 35% or more of the combined voting power of MTS' then outstanding securities; or (ii) the Board of Directors is comprised of fewer than 65% of the individuals described in subsection (b) below; or (iii) the stockholders of MTS approve a definitive agreement to merge or consolidate MTS with or into another corporation or other enterprise in which the holders of outstanding stock of MTS entitled to vote in elections of directors immediately before such merger or consolidation hold less than 80% of the voting power of the survivor of such merger or consolidation or its parent, or approve a plan of liquidation; or (iv) at least 60% of MTS' assets are sold and transferred to another corporation or other enterprise that is not a subsidiary, direct or indirect, or other affiliate of MTS; or (v) the Board of Directors of MTS determines, by a vote of a majority of its entire membership, that a tender offer statement by any person (as defined above) indicates an intention on the part of such person to acquire control of MTS. (b) Board of Directors shall, for purposes of subsection (a), mean: (i) individuals who on the date hereof constituted the Board of MTS, and (ii) any new director who subsequently was elected or nominated for election by a majority of the directors who held such office immediately prior to a Change in Control. (c) Friendly Change in Control shall mean a Change in Control which arises from a transaction or series of transactions authorized, recommended or approved at the time by formal action of the Board of Directors. (d) Unfriendly Change in Control shall mean a Change in Control that is not a "Friendly Change in Control" as defined above. An Unfriendly Change in Control shall not thereafter become a Friendly Change in Control. 3. Termination by Reason of Death or Disability. If Executive's employment shall be terminated by MTS by reason of death or disability, MTS shall immediately commence payment to the Executive (or Executive's designated beneficiaries or estate, if no beneficiary is designated) of any and all benefits to which the Executive is entitled under MTS retirement and insurance programs them in effect. Except for such benefits, MTS shall have no further obligations to Executive under this Agreement. 4. Termination for Cause. (a) If Executive's employment with MTS shall be terminated by MTS for Cause as defined below, MTS shall pay to Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and MTS shall have no further obligation to Executive under this Agreement. (b) Termination by MTS of Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (ii) willful gross misconduct or gross negligence in the performance of his duties by the Executive; or (iii) material violation by the Executive of any employment agreement applicable to the Executive. 5. Termination Following Friendly Change in Control. (a) If, after a Friendly Change in Control, Executive's employment with MTS shall be terminated (1) by MTS other than for cause, death or disability or (2) by Executive for Good Reason, then Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay the Executive as a severance payment (the "Severance Payment") an amount equal to the product of 18 multiplied by the Executive's Monthly Gross Income as defined below. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts: (A) 1/12 of the highest average base salary for any 12-consecutive month period during the 36 calendar month period ending immediately prior to the Date of Termination (without taking into account any reduction in such base salary that would constitute Good Reason); plus (B) the monthly average of the total Management Variable Compensation (MVC) earned during the lesser of the 3 most recent or the actual number of fiscal years participating in the MVC plan ending immediately prior to the Date of Termination; plus (C) the product of the average percentage of MTS profit sharing contributions to the MTS Systems Corporation Profit Sharing Retirement Plan and Trust (as a percent of Compensation as defined in the Plan up to the federal limit) for the lesser of the 3 most recent or the actual number of participating Plan Years ending immediately prior to the Date of Termination multiplied by the sum of (A) and (B) above. (ii) Benefits. For an 18-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the respective percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive during this period, and any such benefits actually received by Executive shall be reported to MTS. At the expiration of said 18-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Reconciliation Act ("COBRA") or applicable state law. (b) Good Reason. Executive shall be entitled to terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without Executive's express written consent, any of the following: (i) the assignment to Executive of any duties inconsistent with Executive's status or position with MTS, or a substantial alteration in the nature or status of Executive's responsibilities; or (ii) a reduction by MTS in Executive's annual base salary other than a reduction comparable to other senior Executives of MTS in connection with a company-wide cost reduction program; or (iii) the relocation of MTS' principal executive offices to a location more than fifty miles from Eden Prairie, Minnesota or MTS requiring Executive to be based anywhere other than MTS' principal executive offices except for required travel on MTS' business to an extent substantially consistent with Executive's prior business travel obligations; or (iv) the failure by MTS to continue to provide Executive with benefits at least as favorable to those enjoyed by Executive under any of MTS' pension, life insurance, medical, health and accident, disability, deferred compensation, incentive awards, incentive stock options, or savings plans in which Executive was participating at the time of the Change in Control, the taking of any action by MTS which would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed by him at the time of the Change in Control, or the failure by MTS to provide Executive with the number of paid vacation days to which Executive is entitled at the time of the Change in Control, provided, however, that MTS may amend any such plan or programs as long as such amendments do not reduce any benefits to which Executive would be entitled upon termination; or (v) the failure of MTS to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 12; or (vi) MTS requests Executive's resignation from employment; or (vii) any purported termination of Executive's employment which is not made pursuant to a Notice of Termination satisfying the requirements of this Agreement; for purposes of this Agreement, no such purported termination shall be effective; or (viii) any material violation by MTS of this Agreement. (c) Voluntary Termination Deemed Good Reason. Notwithstanding anything herein to the contrary, during the period commencing on the 30th day following a Change in Control (whether Friendly or Unfriendly) and ending on the 180th day following a Change in Control, Executive may voluntarily terminate his employment for any reason, and such termination shall be deemed "Good Reason" for all purposes of this Agreement. 6. Termination - Unfriendly Change in Control. (a) If, after an Unfriendly Change in Control, Executive's employment with MTS is terminated (1) by MTS other than for Cause, death or disability, or (2) by Executive for Good Reason, the Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay the Executive as a severance payment (the "Severance Payment") an amount equal to the product of 36 multiplied by the Executive's Monthly Gross Income as defined in Section 5(a)(i) above. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. (ii) Benefits. For a 36-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the responsive percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive shall be reported to MTS. At the expiration of said 36-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law. (b) If the Executive voluntarily terminates his employment other than for Good Reason but more than 180 days after an Unfriendly Change in Control, Executive shall be entitled to the following benefits: (i) Severance. MTS shall pay to Executive as a severance payment (the "Severance Payment") an amount equal to the product of 18 multiplied by the Executive's monthly Gross Income as defined in Section 5(a)(i) above. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination, subject to all applicable federal and state withholding. (ii) Benefits. For 18-month period after the Date of Termination, MTS shall continue to pay its portion of Executive's life and health insurance benefits which the Executive is receiving immediately prior to the Notice of Termination. Executive shall be responsible for payment of his portion of the premiums for such benefits. The MTS portion and the Executive's portion shall be the respective percentages of such premiums paid immediately prior to the Date of Termination. Benefits otherwise receivable by Executive pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by Executive during such period, and any such benefits actually received by Executive shall be reported to MTS. At the expiration of said 18-month period, Executive shall be entitled to continue any of said benefits which qualify as group insurance benefits for continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") or applicable state law. 7. Additional Benefits. In addition to all other amounts payable and benefits receivable to Executive upon termination of employment covered under this Agreement, Executive shall be entitled to the following benefits: (a) Legal Fees. In the event of any termination of employment under this Agreement, other than termination for Cause, MTS shall pay to Executive all legal fees and expenses reasonably incurred by Executive in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement. (b) Retirement Plan. Executive shall, upon termination of employment, be entitled to receive all benefits payable to the Executive under the MTS Systems Corporation Profit Sharing Retirement Plan and any other plan or agreement relating to retirement benefits. (c) Employee Stock Option Certificate. The Executive's rights under any existing Employee Stock Option Agreement and any future such agreements, including particularly his right to exercise his option rights following his termination of employment, shall continue to be fully effective hereunder. 8. No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits after the Date of Termination, or except as otherwise provided in this Agreement. 9. Potential Excise Tax; Indemnification (a) Excise Tax. Should any payments hereunder or contemplated hereby be subject to excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as may be amended, or any successor or similar provision thereto, or comparable state or local tax laws, MTS shall pay to the Executive such additional compensation as is necessary (after taking into account all federal, state and local income taxes payable by the Executive as a result of the receipt of such compensation) to place the Executive in the same after-tax position he would have been in had no such excise tax (or any interest or penalties thereon) been paid or incurred. MTS shall pay such additional compensation upon the earlier of: (i) the time at which MTS withholds such excise tax from any payments to the Executive; or (ii) 30 days after the Executive notifies MTS that the Executive has paid such excise tax pursuant to a tax return filed by the Executive which takes the position that such excise tax is due and payable in reliance on a written opinion of the Executive's tax counsel that it is more likely than not that such excise tax is due and payable, or, if later, the date the IRS notifies Executive that such amount is due and payable. Without limiting the obligation of MTS hereunder, the Executive agrees, in the event the Executive makes any payment pursuant to the preceding sentence, to negotiate with MTS in good faith with respect to procedures reasonably requested by MTS which would afford MTS the ability to contest the imposition of such excise tax; provided, however, that the Executive will not be required to afford MTS any right to contest the applicability of any such excise tax to the extent that the Executive reasonably determines that such contest is inconsistent with the overall tax interests of the Executive. MTS agrees to hold in confidence and not to disclose, without the Executive's prior written consent, any information with regard to the Executive's tax position which MTS obtains pursuant to this subsection. (b) Indemnification. MTS will indemnify the Executive (and his legal representative or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of the proceeding) by the laws of the State of Minnesota, as in effect at the time of the subject act or omission, or the Articles of Incorporation and By-Laws of MTS as in effect at such time or on the date of this Agreement, whichever affords or afforded greater protection to the Executive; and the Executive shall be entitled to the protection of any insurance policies MTS may elect to maintain generally for the benefit of its directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by him or his legal representatives in connection with any action, suit or proceeding to which he (or his legal representative or other successors) may be made a party by reason of his being or having been a director, officer or employee of MTS or any of its subsidiaries or his serving or having served any other enterprise as a director, officer or employee at the request of MTS, provided that MTS shall cause to be maintained in effect for not less than six years from the date of a Change in Control (to the extent available) policies of directors' and officers' liability insurance of at least the same coverage as those maintained by MTS on the date of this Agreement and containing terms and conditions which are no less advantageous than such policies. 10. Non-Competition and Confidentiality. (a) Noncompetition. Except as provided in subsection (c) below, Executive agrees that, as a condition of receiving benefits under this Agreement, he will not render services directly or indirectly to any competing organization, wherever located, for a period of one year following the Date of Termination, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any "Conflicting Product" which as used herein means any product, process, system or service of any person, firm, corporation, organization other than MTS, in existence or under development, which is the same as or similar to or competes with, or has a usage allied to, a product, process, system, or service produced, developed, or used by MTS. Executive agrees that violation of this covenant not to compete with MTS shall result in immediate cessation of all benefits hereunder, other than insurance benefits, which Executive may continue where permitted under federal and state law at his own expense. (b) Confidentiality. Executive further agrees and acknowledges his existing obligation that at all times during and subsequent to his employment with MTS, he will not divulge or appropriate to his own use or the uses of others any secret or confidential information or knowledge pertaining to the business of MTS, or any of its subsidiaries, obtained during his employment by MTS or any of its subsidiaries. (c) Waiver - Unfriendly Change in Control. Notwithstanding anything herein to the contrary: the restriction on competition under subsection (a) shall not apply if the Executive's employment terminates following an Unfriendly Change in Control. Furthermore, in such event, MTS waives any other restriction on Executive's employment and consents unconditionally to any employment Executive may subsequently obtain. 11. Funding of Payments. In order to assure the performance of MTS or its successor of its obligations under this Agreement, MTS may deposit in a so-called "rabbi" trust an amount equal to the maximum payment that will be due the Executive under the terms hereof; provided, however, that MTS shall deposit in trust the amount equal to the maximum payment due Executive immediately upon an Unfriendly Change in Control. Under such written trust instrument, the Trustee shall be instructed to pay to the Executive (or the Executive's legal representative, as the case may be) the amount to which the Executive shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to MTS. If MTS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. The written instrument governing the trust shall be irrevocable from and after such Change in Control and shall contain such provisions protective of the Executive as are contained in similar trust agreements approved by the Internal Revenue Service in published private letter rulings (provided that the assets of the trust shall be reachable by creditors of MTS as required by such rulings). The trustee shall be a national bank selected by MTS with the consent of the Executive, with trust powers and whose principal officers are located in the Minneapolis/St. Paul metropolitan area. The trustee shall invest the assets of the trust in any readily marketable securities of U.S. corporations (other than MTS, its successor, or any affiliate of MTS or its successor). If and to the extent there are not amounts in trust sufficient to pay Executive under this Agreement, MTS shall remain liable for any and all payments due to Executive. 12. Successors; Binding Agreement. (a) Successors. MTS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of MTS to expressly assume and agree to perform this Agreement in the same manner and to the same extent that MTS would be required to perform it if no such succession had taken place. Failure of MTS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from MTS in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, successors, heirs, and designated beneficiaries. If Executive should die while any amount would still be payable to Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designated beneficiaries or, if there is no such designated beneficiary, to the Executive's estate. 13. Notice. (a) Form and Delivery. All notices and other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the last known residence address of the Executive or in the case of MTS, to its principal office to the attention of each of the then directors of MTS with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (b) Notice of Termination. Any purported termination of Executive's employment by MTS or by Executive shall be communicated by written Notice of Termination to the other party hereto, which shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circumstances claimed to provide a basis for termination of Executive's employment. (c) Date of Termination. For purposes of this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination which shall not be less than 10 nor more than 30 days, respectively, from the date such Notice of Termination is given. (d) Dispute of Termination. If, within 10 days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final 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 or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have executed this Agreement as of the day and date first above written. EXECUTIVE: MTS SYSTEMS CORPORATION /s/ David E. Hoffman By /s/ S. W. Emery, Jr. - -------------------- --------------------- David E. Hoffman Its Chairman and CEO --------------------- EX-10.Z 9 CHANGE IN CONTROL AGREEMENT EXHIBIT 10.z CHANGE IN CONTROL AGREEMENT AGREEMENT made as of this 18th day of March 1998 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and Steven M. Cohoon (the "Executive"). WHEREAS, MTS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of MTS and its shareholders; and WHEREAS, the Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of MTS, its policies, methods, personnel and problems, a significant contribution to the profitability, growth and financial strength of MTS; and WHEREAS, 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 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: Change in Control Agreement Page 2 (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 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 Change in Control Agreement Page 3 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 (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 Change in Control Agreement Page 4 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 (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/ Steven M. Cohoon By /s/ S. W. Emery, Jr. --------------------- ---------------------- Steven M. Cohoon Its Chairman and CEO EX-10.AA 10 SEVERANCE AGREEMENT EXHIBIT 10.aa SEVERANCE AGREEMENT AGREEMENT made as of this 13th day of March, 1998 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and William G. Anderson (the "Executive"). WHEREAS, MTS desires to employ Executive as its President, Custom Servo Motors, 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. 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) 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 he/she is not fully vested, as though he/she were continuing his/her employment Severance Agreement Page 4 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/ William G. Anderson By /s/Donald M. Sullivan ----------------------- ------------------------------ William G. Anderson Its CEO and Chairman EX-10.AB 11 SEVERANCE AGREEMENT EXHIBIT 10.ab SEVERANCE AGREEMENT AGREEMENT made as of this 14th day of March, 1998 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and James M. Egerdal (the "Executive"). WHEREAS, MTS desires to employ Executive as its Vice President and Executive is willing to become employed by MTS in such capacity; and WHEREAS, Executive is expected to make a significant contribution to the profitability, growth and financial strength of MTS; and WHEREAS, MTS considers the establishment and maintenance of a sound and vital management and an orderly succession plan to be essential to protecting and enhancing the best interests of MTS and its shareholders; and WHEREAS, this Agreement is consistent with the requirements of the executive/high 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 9 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 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/ James M. Egerdal By /s/ Donald M. Sullivan -------------------------------- -------------------------------- James M. Egerdal Its CEO and Chairman ------------------------------- EX-10.AC 12 CHANGE IN CONTROL AGREEMENT EXHIBIT 10.ac CHANGE IN CONTROL AGREEMENT AGREEMENT made as of this13th day of March, 1998 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and William G. Anderson (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. Change in Control Agreement Page 2 (a) Change in Control, shall, for purposes of this Agreement, means a change in control of MTS which would be required to be reported in response to Item 1 of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not MTS is then subject to such reporting requirement, including, without limitation, if: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, including any affiliate or associate as defined in Rule 12(b)-2 under the Exchange Act of such person, other than MTS, any trustee or other fiduciary holding securities under an employee benefit plan of MTS, or any corporation owned, directly or indirectly, by the stockholders of MTS in substantially the same proportions as their ownership of stock of MTS) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of MTS representing 35% or more of the combined voting power of MTS'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. Change in Control Agreement Page 3 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 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 Change in Control Agreement Page 4 the Date of Termination (without taking into account any reduction in such base salary that would constitute Good Reason); plus (B) the monthly average of the total Management Variable Compensation (MVC) 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 the Executive's principal office except for required Change in Control Agreement Page 5 travel on MTS business to an extent substantially consistent with Executive's prior business travel obligations; or (iv) the failure by MTS to continue to provide Executive with benefits at least as favorable to those enjoyed by Executive under any of MTS'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 Change in Control Agreement Page 6 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 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 Change in Control Agreement Page 7 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. (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. Change in Control Agreement Page 8 Without limiting the obligation of MTS hereunder, the Executive agrees, in the event the Executive makes any payment pursuant to the preceding sentence, to negotiate with MTS in good faith with respect to procedures reasonably requested by MTS which would afford MTS the ability to contest the imposition of such excise tax; provided, however, that the Executive will not be required to afford MTS any right to contest the applicability of any such excise tax to the extent that the Executive reasonably determines that such contest is inconsistent with the overall tax interests of the Executive. MTS agrees to hold in confidence and not to disclose, without the Executive's prior written consent, any information with regard to the Executive's tax position which MTS obtains pursuant to this subsection. (b) Indemnification. MTS will indemnify the Executive (and his/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. Change in Control Agreement Page 9 (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. (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. Change in Control Agreement Page 10 (b) Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, successors, heirs, and designated beneficiaries. If Executive should die while any amount would still be payable to Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designated beneficiaries or, if there is no such designated beneficiary, to the Executive's estate. 13. Notice. (a) Form and Delivery. All notices and other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the last known residence address of the Executive or in the case of MTS, to its principal office to the attention of each of the then directors of MTS with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (b) Notice of Termination. Any purported termination of Executive's employment by MTS or by Executive shall be communicated by written Notice of Termination to the other party hereto, which shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circumstances claimed to provide a basis for termination of Executive's employment. (c) Date of Termination. For purposes of this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination which shall not be less than 10 nor more than 30 days, respectively, from the date such Notice of Termination is given. (d) Dispute of Termination. If, within 10 days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final 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 Change in Control Agreement Page 11 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/ William G. Anderson By /s/ Donald M. Sullivan ------------------------ ---------------------- William G. Anderson Its CEO and Chairman ----------------- EX-10.AD 13 CHANGE IN CONTROL AGREEMENT EXHIBIT 10.ad CHANGE IN CONTROL AGREEMENT AGREEMENT made as of this14th day of March 1998 by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and James M. Egerdal (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. Change in Control Agreement Page 2 (a) Change in Control, shall, for purposes of this Agreement, means a change in control of MTS which would be required to be reported in response to Item 1 of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not MTS is then subject to such reporting requirement, including, without limitation, if: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, including any affiliate or associate as defined in Rule 12(b)-2 under the Exchange Act of such person, other than MTS, any trustee or other fiduciary holding securities under an employee benefit plan of MTS, or any corporation owned, directly or indirectly, by the stockholders of MTS in substantially the same proportions as their ownership of stock of MTS) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of MTS representing 35% or more of the combined voting power of MTS'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. Change in Control Agreement Page 3 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 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 Change in Control Agreement Page 4 the Date of Termination (without taking into account any reduction in such base salary that would constitute Good Reason); plus (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 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 MTS the ability to contest the imposition of such excise tax; provided, however, that the Executive will not be required to afford Change in Control Agreement Page 8 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 Change in Control Agreement Page 11 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/ James M. Egerdal By /s/ Donald M. Sullivan --------------------- ------------------------- James M. Egerdal Its CEO and Chairman EX-10.AE 14 EMPLOYMENT AGREEMENT EXHIBIT 10.ae EMPLOYMENT AGREEMENT THIS AGREEMENT (the "Agreement") is made and entered into as of this 23th day March, 1999, by and between MTS Systems Corporation, a Minnesota corporation ("MTS") and Frank (Gil) Troutman (the "Executive"). WHEREAS, MTS has entered into the Agreement and Plan of Merger (the "Merger Agreement") of even date hereof with DSP Technology Inc. ("DSP") pursuant to which a wholly-owned subsidiary of MTS will merge with and into DSP. WHEREAS, the Executive has been employed as the President of DSP and has unique expertise, skill, knowledge and know-how with respect to the business, management and operation of DSP which have contributed substantially to the profitability, growth and financial strength of DSP; WHEREAS, MTS desires to retain and secure the services of the Executive and employ the Executive as its Vice President from and after the Effective Time (as defined in the Merger Agreement)(the "Effective Time") subject to the terms and conditions of this Agreement; WHEREAS, the Executive is willing to become employed by MTS in such capacity from and after the Effective Time and on the terms and conditions set forth in this Agreement; WHEREAS, this Agreement and the obligations of the Executive hereunder serve as a material inducement for and as an express condition of the consummation by MTS of the transactions set forth in and contemplated by the Merger Agreement; WHEREAS, the Executive is expected to make a significant contribution to the profitability, growth and financial strength of DSP and MTS; and WHEREAS, the Executive agrees, in consideration of his employment with MTS and the consideration furnished by MTS to the Executive under this Agreement and the Merger Agreement, to recognize and honor his obligations to MTS under this Agreement from and after the Effective Time; 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. The term of this Agreement shall be for a period of thirty-six (36) months from the Effective Time, unless sooner terminated as hereinafter provided. The Agreement shall thereafter continue in effect from year to year unless altered or terminated as hereinafter provided in paragraphs 6, 7 or 8. 2. Cancellation of Former Employment Contracts. The Executive hereby covenants that any and all contracts, whether written or oral, between the Executive and DSP will be canceled or terminated in their entirety as of the Effective Time and are superseded in their entirety by this Agreement as of the Effective Time. This shall be performed by the execution of a separate agreement between the Executive and DSP in the form attached hereto as Exhibit A. 3. Duties. The Executive agrees, unless otherwise specifically authorized by MTS, to devote his full business time and effort to his duties as set forth in his job description for the profit, benefit and advantage of the business of DSP and MTS. It is acknowledged and agreed that the services to be rendered by the Executive to DSP and MTS hereunder shall be rendered in Ann Arbor, MI. 4. Compensation. MTS agrees to provide the Executive with the following compensation during the term of this Agreement: (a) Salary: The Executive will be provided a base salary of Sixteen Thousand Six Hundred and Sixty Six Dollars and Sixty Six Cents ($16,666.66) per month (the "Base Salary"), payable bi-weekly. Base salary will be reviewed annually, with the first review to coincide with the review of other MTS executives following the close of fiscal year 1999, but in no event later than one (1) year after the start date, provided that the Executive's salary may not be decreased. Any pay increase made prior to the completion of the Executive's first twelve months as an employee shall be prorated from the date of such increase to the end of that year. (b) Bonus: The Executive will be eligible for MTS's Management Variable Compensation Bonus (the "Bonus") at a rate of twenty percent (20%) of midpoint for D-2 in the MTS salary level structure in accordance with the MTS Management Variable Compensation Plan (or at a comparable level under any successor plan or an equivalent bonus if the bonus plan is discontinued), provided that target goals for the determination of any bonus award will be mutually agreed in advance between the Executive and MTS. Nine thousand two hundred and fifty ($9,250) of the Bonus is guaranteed for fiscal year 1999 and shall be paid in a lump sum no later than December 31, 1999. No Bonus is guaranteed after fiscal year 1999. (c) Automobile: MTS will provide the Executive with an automobile subject to and in accordance with MTS's Executive Plan. (d) 401(k) Plan: The Executive will be entitled to participate in MTS's 401(k) Plan to the extent allowed by MTS's 401(k) Plan eligibility requirements. (e) Retirement Plan: The Executive will be entitled to take part in MTS's Profit Sharing Retirement Plan to the extent allowed by that Plan's eligibility requirements. (f) Stock Options: The Executive will be granted as of the Effective Time an option (the "Option") to purchase 10,000 shares of MTS common stock awarded and priced at fair market value as of the Effective Time. In January of the year 2000, the Executive will be eligible to participate in the MTS Stock Option Plan (the "Stock Plan") then in effect. From and after that date and subject to the approval of such grant by the Human Resources Committee pursuant to the terms of the Stock Plan, the Executive will be granted each year at the same time 2 as options are granted to other executives at MTS, an Option to purchase at least 5,500 shares of MTS common stock, to the extent available under such Stock Plan. All Options shall vest annually in equal installments over three (3) years from the date of grant and are subject to all of the terms and conditions of the Stock Plan. All shares subject to the Option shall vest immediately in the event of involuntary termination of employment (as that term is defined in the Stock Plan). This accelerated vesting provision shall not, however, apply in the event of termination for Cause. (g) Benefit Plans and Programs. In addition to any other compensation to be paid the Executive under this paragraph 4 of the Agreement, the Executive will be entitled to participate in and receive benefits under any other benefit plans or programs (including group health, disability and life insurance programs) or additional compensation, retirement or remuneration plans or programs of MTS as adopted from time to time by MTS of the type and in an amount comparable to that provided to other executive employees of MTS in similar positions. MTS is not, however, obligated to adopt or continue any benefit plans or programs set forth in this paragraph 4 during the term of this Agreement, and Employees' participation in any of the plans or programs of MTS will be subject to the provisions, limitations and rules applicable to such plans or programs. (h) Expenses. MTS will pay or reimburse the Executive for all reasonable expenses incurred in connection with the performance of his duties under this Agreement, provided that such expenses are properly accounted for and in accordance with the policies of MTS. (i) Change in Control. As soon as practicable after the Effective Time, MTS and the Executive shall enter into a change in control/severance agreement in the form then available to executive officers at MTS generally. 5. Insurance. In addition to and without any limitation of Executive's rights under any health, disability, life or other insurance plan or policy under which Employee participates pursuant to paragraph 4(g), the Executive agrees that MTS may, from time to time, apply for and take out in its own expense life, health, disability, accident or other insurance upon the Executive that MTS may deem necessary or advisable to protect its interests hereunder; and the Executive agrees to submit to any medical or other examination necessary for such purposes and to assist and cooperate with MTS in preparing such insurance; and the Executive agrees that he shall have no right, title, or interest in or to such insurance or any proceeds which may emanate therefrom. 6. Termination by Reason of Death or Disability. In the event of the Executive's death or disability during the term of this Agreement, the Executive shall be entitled to such benefits provided under any policy, plan or program governing death or disability maintained by MTS and covering the Executive described in paragraph 4(g) above. 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 the Executive has been unable, by reason of physical or mental disability, to perform the services required of him for his position, even with reasonable 3 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 the 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. 7. Resignation or Termination for Cause. (a) The Executive may resign his 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 (as defined in paragraph 13 hereof). If the Executive resigns or his employment is terminated by MTS for Cause, MTS shall pay to the Executive the Base Salary and any Bonus with respect to which all conditions giving rise to payment have been met (including, but not limited to, the bonus guaranteed under paragraph 4(b) of this Agreement), but which remains unpaid 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 the Executive under this Agreement, except to the extent provided by law. (b) Termination by MTS of the Executive's employment for "Cause" shall mean termination as a result of: (i) the conviction of the Executive by a court of competent jurisdiction of any felony criminal conduct; or (ii) the conviction of the Executive by a court of competent jurisdiction of a misdemeanor involving the misappropriation or improper use of the assets of MTS or DSP; or (iii) the habitual neglect by the Executive of his duties to MTS or DSP under this Agreement or his failure to correct material performance deficiencies after being given written notice of the deficiencies and thirty (30) days to correct them; or (iv) the material violation by the Executive of any existing or future policies of MTS after being given written notice of such violation and thirty (30) days to remedy such violation, to the extent such violation can be remedied; or (v) the engagement by the Executive in conduct substantially detrimental to the business, reputation or goodwill of MTS or DSP after being given written notice of such conduct and thirty (30) days to remedy such conduct, to the extent such conduct can be remedied; or (vi) the violation by the Executive of any material provision of this Agreement including, without limitation, paragraphs 10 and 11 of this Agreement or any other written agreement applicable to the Executive. 4 8. Termination Other Than for Cause. MTS may terminate the Executive's employment for a reason other than Cause, including pursuant to the Executive Exemption as defined in the Age Discrimination in Employment Act, 29 U.S.C. Section 631(c)(1) on or after the Executive's 65th birthday, effective as of the Date of Termination set forth in the Notice of Termination. If the Executive's employment is terminated by MTS other than for: (X) death; (Y) disability; or (Z) Cause at any time during the first thirty-six (36) months of this Agreement, the Executive shall be entitled, subject to subparagraph 10(e) and paragraph 14 of this Agreement, to payment of the sum of his Base Salary, as outlined in subparagraph 4(a) of this Agreement, and, subject to the modification in the next sentence, an amount equal to 1/24 of the Bonus earned during the two (2) most recent fiscal years ending immediately prior the Date of Termination per month, payable bi-weekly from the Date of Termination to the end of the first thirty-six (36) months that the Agreement is in place, and for a period of nine (9) months from the Date of Termination, the benefits in subparagraphs 8(b), (c) and, if applicable, (d) below; provided, however, that if less than nine (9) months remain to the first thirty-six (36) month period, after payment of the benefits set forth above for the remainder of the 36 month period, the benefits described in subparagraphs 8(a), (b) and (c) and, if applicable, subparagraph (d) below shall be paid for a period of months equal to nine (9) minus the number of months which had remained of the first thirty-six (36) month period. If the Executive's employment is terminated under the preceding sentence during the fiscal year ending September 30, 2000, the amount under the preceding sentence shall be 1/12 of the Bonus earned during the fiscal year ending September 30, 1999, and if the Executive's employment is terminated under the preceding sentence during the fiscal year ending September 30, 1999, the amount under the preceding sentence shall be 1/12 of the Bonus that would have been earned for the fiscal year ending September 30, 1999 based on actual achievement of the established targets; provided that, following the determination of such amount, the Executive shall be paid a lump sum equal to the number of months between the Date of Termination and the determination of the Bonus multiplied by such amount. In addition, to the extent not previously paid, the amount of the guaranteed bonus under subparagraph 4(b) shall be paid. If the Executive's employment is terminated by MTS other than for: (X) death; (Y) disability; or (Z) Cause at any time after the first thirty-six (36) months of this Agreement, the Executive shall be entitled, subject to subparagraph 10(e) and paragraph 14 of this Agreement, to the benefits described in subparagraphs 8(a), (b) and (c) below and, if applicable, subparagraph 8(d) below. (a) The Executive shall be paid a monthly Severance Payment equal to the Executive's Monthly Gross Income, as defined in subparagraphs (i)-(iii) below for a period of nine (9) months. For purposes of this Agreement, Monthly Gross Income shall mean the sum of the following amounts, subject to applicable federal and state withholding. 5 (i) 1/12 of the highest average monthly base salary of the Executive for any twelve (12) consecutive month period during the twenty four (24) calendar month period ending immediately prior to the Date of Termination; plus (ii) 1/24 of the Bonus earned during the two (2) most recent fiscal years ending immediately prior the Date of Termination; plus (iii) the product of the average percentage of MTS profit sharing contributions to the MTS Systems Corporation Profit Sharing Retirement Plan and Trust (as a percent of Compensation as defined in the Plan) for the two (2) 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, the Executive shall be entitled to continuation coverage of any benefits which qualify as group health and life insurance benefits under the Consolidated Omnibus Budget Reconciliation Act ("COBRA") or applicable state law and pursuant to the terms of the plan(s). Following the Executive's Date of Termination and while severance payments are being paid to the Executive or, if earlier, until the Executive is covered under other group plans, MTS shall pay the employer share of the Executive's MTS group life and health insurance premiums under COBRA. All premium payments made on the Executive's behalf following his Date of Termination and the Executive's continued participation in the plans are contingent upon the Executive making the appropriate timely written elections to continue his group benefits following his Date of Termination, said group benefits continuing in effect for active MTS employees, the Executive continuing to be eligible under the terms of the plans and applicable laws, and the Executive's payment of the employee portion of the premiums for such benefits. Executive shall send to MTS payment of the employee portion of the premiums for such benefits in accordance with the terms of the plans and applicable laws. Benefits otherwise receivable by the Executive pursuant to this subparagraph (b) shall be reduced or eliminated to the extent comparable benefits are actually received by the Executive during such period from a source outside MTS, and any such benefits actually received by the Executive shall be reported to MTS. (c) Following the severance pay period, the Executive shall be entitled to continuation coverage of any of said benefits which qualify as group health and life insurance benefits for the remaining period under COBRA or applicable state law and pursuant to the terms of the plan(s). (d) The Executive's rights under any existing Employee Stock Option Agreement and any future such agreements, including particularly the right to exercise his options following his termination of employment, shall continue to be fully effective hereunder. In addition, if the Executive's termination of employment occurs pursuant to the Executive Exemption on or after he has reached his 65th birthday, the Executive shall continue to vest in any stock options in which he is not fully vested, as though he were continuing his employment with MTS as an active employee, subject at all times to the exercise times and other terms and 6 conditions set forth in said Stock Option Agreements and to the Executive's signing the release agreement described in paragraph 14 herein. 9. No Mitigation. The 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 the 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. 10. Non-Competition; Confidentiality and Trade Secrets. (a) MTS and the Executive acknowledge that (i) the business of MTS and DSP is highly competitive; (ii) the essence of such business consists of confidential information and trade secrets; (iii) the Executive has and, in the course of his employment, will acquire the information described in subparagraph 10(c) and that MTS and DSP would be adversely affected if such information subsequently, and in the event of the termination of the Executive's employment, is used for the purposes of competing with MTS or DSP; and (iv) the Executive has received and, in the future will receive, substantial consideration for the covenants and obligations contained in paragraphs 10 and 11 of this Agreement (including, without limitation, the consideration received under this Agreement and the Merger Agreement). (b) The Executive agrees that from and after the date hereof for the term of employment and, for the greater of the period under which the Executive receives benefits under paragraph 8(a) above or a period of twelve (12) months from the Date of Termination of the Executive's employment hereunder, he will not, without the express written permission of MTS, directly or indirectly (i) own, manage, operate, control, lend money to, endorse the obligations of, be a creditor of, or participate or be connected as an officer, director, 5% or more stockholder of a publicly-held company or securityholder of a closely-held company, employee, partner, member, consultant or otherwise render services to any enterprise or individual (x) located in any state or country in which MTS or DSP is doing business as of the Executive's Date of Termination (or any state or country for which MTS or DSP has developed a marketing plan for its products or services even if such a plan is not yet in effect), and (y) engaged in the business of developing, processing, manufacturing or marketing products, technologies, processes, systems or services that have been developed or provided by DSP or MTS in the automotive powertrain design and testing sector or any other sector in which the Executive had any responsibility and/or actively participated in as of his Date of Termination; (ii) interfere with or attempt to interfere with the relationship of MTS or DSP with any of their current customers, distributors or suppliers and any potential customers, distributors or suppliers identified in any marketing plan developed with the direct assistance of the Executive in the automotive powertrain design and testing sector or any other sector in which the Executive had any responsibility or actively participated in as of his Date of Termination; or (iii) solicit himself or on behalf of any individual or entity competing with MTS or DSP (as defined in subsection (i)), any person who is an employee of MTS or DSP to become an employee of his or any such person. The written permission of MTS contemplated 7 by this subparagraph (b) hereof, shall not be unreasonably withheld for such business or product areas that are in competition with MTS; provided, that the activities contemplated by the Executive are not regarded by MTS as an actual or potential threat to MTS's existing business or any potential business identified in any marketing plan developed with the direct assistance of the Executive. (c) The Executive acknowledges that he has acquired and will acquire information and knowledge respecting the intimate and confidential affairs of MTS and DSP including, without limitation, confidential information and trade secrets with respect to DSP's and MTS's products, services, designs, practices, processes, techniques, sales or distribution methods or other confidential information pertaining to the business or financial affairs of MTS and DSP, which may or may not be patentable, which have been, are being, or will be developed by MTS and DSP at considerable time and expense, and which could be unfairly utilized in competition with MTS and DSP (the "Confidential Information"). The Executive agrees and acknowledges his existing obligation that, at all times during and subsequent to his employment with MTS, he will not, without the written consent of MTS, disclose to any person or entity, other than an employee of MTS or DSP to whom disclosure is reasonably necessary in connection with the performance by the Executive of his duties, or appropriate to his own use or the uses of others any of the Confidential Information. (d) Upon termination of employment, the Executive agrees to deliver to MTS all materials that include the Confidential Information, such as customer list, product formulations, instruction sheets, drawings, manuals, letters, notes, notebooks, books, reports and copies thereof, and all other materials of a confidential nature which belong to or relate to the business of MTS or DSP. (e) If the Executive violates his obligations under subparagraphs (a), (b), (c) and (d) above, or if the provisions of this section 10 are held to be substantially unenforceable against the Executive, any remaining payments or benefits otherwise due the Executive pursuant to paragraph 8 of this Agreement shall not be paid. 11. Improvements and Inventions. (a) The Executive shall promptly and fully disclose to MTS, any and all ideas, improvements, discoveries and inventions, whether or not they are believed to be patentable (all of which are hereinafter referred to as "Inventions"), which the Executive conceives or first actually reduces to practice, either solely or jointly with others, during the period of Employee's employment or within one (1) year after termination of employment and which relate to the business now or hereafter carried on or presently part of the business plan of MTS or which results from any work performed by the Executive for MTS. If, subsequent to the Executive's termination, except for Cause, the Executive desires to use these Inventions, he may request written permission from MTS. The written permission of MTS to use these Inventions shall not be unreasonably withheld for such business or product areas that are not in competition with MTS; provided, that the activities contemplated by the Executive are not regarded by MTS as an actual or potential threat to its existing or future business. 8 (b) All such Inventions shall be the sole and exclusive property of MTS, and during the term of his employment and thereafter, whenever requested to do so by the MTS, the Employee shall execute and assign any and all applications, assignments and other instruments which MTS shall deem necessary or convenient in order to apply for and obtain Letters Patent of the United States and/or of any foreign countries for such Inventions and in order to assign and convey to MTS or its nominee the sole and exclusive right, title and interest in and to such Inventions, and the Executive will render aid and assistance in any interference or litigation pertaining thereto, all expenses reasonably incurred by the Executive at the request of MTS shall be borne by MTS. (c) Minnesota Statute Section 181.78 provides that the Agreement does not apply, and written notification is hereby given to the Executive that this Agreement does not apply, to an Invention for which no equipment, supplies, facility or trade secret information of the Company was used and which was developed entirely on the Executive's own time, and (1) which does not relate (a) directly to the business of the MTS or DSP, or (b) to MTS's or DSP's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the Executive for MTS or DSP. 12. Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, heirs, and designated beneficiaries. If the Executive should die while any amount would still be payable to the 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 of Termination. (a) Any purported termination of the Executive's employment by either the Executive or MTS under 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 ten (10) nor more than sixty (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 the Chief Executive Officer 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. 14. Release of Claims. The Executive's right to the benefits and payments described in paragraph 8 of this Agreement, except as otherwise provided in subparagraph 10(e) hereof, is 9 subject to and contingent upon the Executive's execution of a severance release agreement which shall be provided to Executive by MTS with or following his Notice of Termination. The severance release agreement shall require a full release of all claims which the Executive may have against MTS, DSP or any affiliate or individual associated with MTS or DSP, to the extent that the claims released are related to this Agreement or the Executive's employment relationship with MTS or DSP and permitted by and consistent with applicable laws. Such release agreement shall prohibit the Executive from recovering any amount in connection with a charge or lawsuit filed against MTS or DSP or any MTS affiliate, employee, shareholder, officer, director or other agent by the Executive, EEOC or any other agency or entity on the Executive's behalf based upon any act occurring prior to execution of said release agreement. The release agreement will be available for the Executive's review, consideration and execution at least forty-five (45) days prior to his Date of Termination. 15. Injunctive Relief. The Executive acknowledges that a breach by the Executive of any of the terms of paragraphs 10 or 11 of this Agreement will render irreparable harm to MTS and DSP. Accordingly, the Executive agrees that, in the case of any violation or threatened violation of paragraphs 10 or 11 of this Agreement, MTS or DSP may, in addition to any and all other avenues of relief available, 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 16 hereof. No waiver of any violation of this Agreement shall be implied from any failure by MTS or DSP to take action under this paragraph. 16. Arbitration. Any and all claims or disputes between the Executive and MTS (including the making, validity, scope, and enforceability of this Agreement), except as otherwise provided under paragraph 15 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. All costs in conducting the arbitration, including but not limited to the arbitration filing fee, the arbitrator's fees and expenses, and the reasonable attorneys' fees and expenses of the prevailing party (including the attorneys' fees and costs incurred by the prevailing party in seeking or resisting temporary or provisional court relief as set out in paragraph 15 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 attorneys' fees shall be prorated by the arbitrator according to the relative dollar value of each issue. The arbitrators' 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 attorneys' fees and court costs. The 10 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 the Executive, his family. The parties agree that any such arbitration shall take place in Minneapolis or St. Paul, Minnesota and the Executive waives any argument that venue in such locale is inconvenient. 17. 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 parties acknowledge that the principal place of business of MTS is located in the State of Minnesota, that this Agreement has been entered into in the State of Minnesota and they wish legal certainty and predictability as to the terms of their undertaking. Accordingly, the parties agree that the validity, interpretation, construction and performance of this Agreement shall be governed by the internal laws (not the laws of conflicts) of the State of Minnesota. (d) The Executive represents warrants and covenants that his principal place of full time employment is Ann Arbor, Michigan. (e) The Executive acknowledges that the provisions contained in this Agreement, including the covenants contained in paragraphs 10 and 11 of this Agreement, are fair and reasonable. Nonetheless, the parties agree that if a court or other tribunal finds any of provision of this Agreement to be invalid in whole or in part under the laws of any state, such finding shall not invalidate the covenants, nor the Agreement in its entirety, but rather the covenants shall be construed and/or blue-lined, reformed or rewritten by the court or tribunal as if the most restrictive covenants permissible under applicable law were contained herein. (f) This Agreement shall be binding on the parties' successors and assigns, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by or against each party's successors or assigns. (g) This Agreement supersedes any and all prior oral and written understandings and agreements between the Executive and MTS. IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have 11 executed this Agreement as of the day and date first above written. EXECUTIVE MTS SYSTEMS CORPORATION /s/ Frank Troutman By /s/ S. W. Emery Jr. - -------------------------------- -------------------------------- Frank (Gil) Troutman Its Chairman and CEO ------------------------------- 12 EXHIBIT A Termination and Cancellation of Retention Agreement and Other Agreements THIS AGREEMENT is made and entered into by and between Frank (Gil) Troutman ("Executive") and DSP Technologies, Inc. ("DSP") and shall be effective as set forth below. WHEREAS, the Executive has entered into certain agreements with DSP with respect to his employment; and WHEREAS, DSP has entered into the Agreement and Plan of Merger (the "Merger Agreement") dated March 22, 1999 with MTS Systems Corporation ("MTS"); THEREFORE, in consideration for the employment agreement between MTS and the Executive dated as of March 22, 1999 and other good and valuable consideration, the receipt of which is hereby acknowledged, the Executive and DSP agree as follows: 1. Pursuant to the authority to amend granted under ss. 16 of the Retention Agreement entered into as of January 18, 1999 between the Executive and DSP, the Retention Agreement is hereby terminated, canceled and of no force and effect, and the Executive hereby waives any and all rights under that agreement effective as of the Effective Time. 2. Except as set forth in section 3 below, any and all other agreements between the Executive and DSP are hereby terminated, cancelled and of no force and effect, and the Executive hereby waives any and all rights under those agreements effective as of the Effective Time, provided that nothing herein shall impair the Executive's right to receive Merger Consideration under the Merger Agreement for outstanding options for DSP common stock held by the Executive as of the Effective Time. 3. The Relocation Agreement dated as of March 5, 1998 between the Executive and DSP shall remain in full force and effect, and any loan amount outstanding as of the Effective Time shall be repaid in accordance with the provisions of the Relocation 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 DSP TECHNOLOGIES, INC. /s/ Frank G. Troutman By /s/ Larry D. Moulton - ---------------------- ---------------------- Frank (Gil) Troutman Its General Manager ---------------------- 13 EX-13 15 1999 ANNUAL REPORT EXHIBIT 13 SIX YEAR FINANCIAL SUMMARY (September 30)
1999 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBERS OF SHAREHOLDERS AND EMPLOYEES) OPERATIONS(5) - ----------------------------------------------------------------------------------------------------------------------- Net revenue $390,542 $362,163 $323,424 $278,170 $247,793 $212,215 United States revenue 200,556 200,490 156,877 140,249 136,862 111,312 International revenue 189,986 161,673 166,547 137,921 110,931 100,903 Gross profit 151,171 142,227 132,073 116,047 99,923 86,684 Income before income taxes 18,770 33,448 29,986(1) 21,813 15,244 13,804 Net income 12,445 21,539 19,237(1) 15,170 11,105 9,394 Net income per share, diluted basis .59 1.01 .92(1) .72 .55 .45 Research and development expense 26,966 24,348 19,798 19,776 15,471 13,873 Net interest expense 4,597 1,948 1,125 1,123 2,424 1,860 Depreciation and amortization 14,424 10,880 9,608 8,673 7,912 6,745 FINANCIAL POSITION(5) - ----------------------------------------------------------------------------------------------------------------------- Current assets $223,651 $204,311 $162,814 $137,584 $138,159 $129,042 Current liabilities 104,713 110,223 83,413 63,465 69,312 68,692 Current ratio 2.1:1 1.9:1 2.0:1 2.2:1 2.0:1 1.9:1 Net working capital 118,938 94,088 79,401 74,119 68,847 60,350 Property and equipment, net 73,633 69,942 51,790 49,476 49,465 48,241 Total assets 333,347 313,022 229,075 197,679 198,320 183,767 Interest bearing debt 71,637 74,682 12,865 11,836 22,965 23,851 Shareholders' investment 162,859 152,689 133,524 120,578 113,311 105,886 Shareholders' investment per share 7.80 7.39 6.56 5.90 5.54 5.20 OTHER STATISTICS AND RATIOS(5) - ----------------------------------------------------------------------------------------------------------------------- Diluted shares outstanding(2) 21,184 21,330 20,945 21,184 20,258 20,750 Number of common shareholders of record 2,055 1,760 1,575 1,523 1,395 1,394 Number of employees 2,436 2,424 2,125 1,866 1,729 1,654 New orders $350,190 $352,282 $380,870 $302,824 $261,487 $209,405 Backlog of orders $146,833 $187,185 $190,784 $130,621 $105,967 $ 89,896 Gross profit percent 38.7% 39.3% 40.8% 41.7% 40.3% 40.8% Research and development costs as a percent of net revenue 6.9% 6.7% 6.1% 7.1% 6.2% 6.5% Net income as a percent of net revenue 3.2% 5.9% 5.9%(1) 5.5% 4.5% 4.4% Effective tax rate 34% 36% 36% 31% 27% 32% Interest bearing debt to shareholders' investment percent 44% 49% 10% 10% 20% 23% Return on average net assets(4) 10.7% 20.9% 22.7% 17.6% 13.2% 12.0% Return on beginning shareholders' investment per share 8.0% 15.4% 15.6%(1) 13.0% 10.6% 9.3% Cash dividends paid per share $ .24 $ .24 $ .20 $ .16 $ .14 $ .14 - -----------------------------------------------------------------------------------------------------------------------
(1) Excludes an after-tax gain of $2,654,000 from the sale of land in May 1997, which is equal to $.13 per share (2) Presented on a weighted average basis of common shares assuming conversion of potential common shares during each year after retroactive adjustments for issued shares, for stock splits and for reduction of shares from treasury stock purchases (in thousands of shares). (3) On December 1, 1999, there were 2,055 common shareholders of record, with another estimated 2,200 beneficial shareholders whose stock is held by nominees or broker dealers. (4) (Income before income taxes plus net interest expense) divided by (average quarterly assets minus non-interest bearing liabilities). (5) All amounts have been restated to reflect the acquisition of DSPTechnology, Inc., accounted for under pooling-of-interests. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All amounts have been restated to reflect the acquisition of DSP Technology, Inc., accounted for under pooling-of-interests. BACKLOG/NEW ORDERS 1999 1998 1997 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) New Orders: North America* $196,367 $195,206 $202,241 International 153,823 157,076 178,629 - -------------------------------------------------------------------------------- Total $350,190 $352,282 $380,870 - -------------------------------------------------------------------------------- Backlog $146,833 $187,185 $190,784 ================================================================================ *INCLUDES U.S. AND CANADA 1999 new orders of $350.2 million were down .6% from 1998 and 1998 new orders were down 8% from 1997. 1997 new orders represented a 26% increase over 1996. 1997 orders included a $18.5 million contract for a large crash simulation system. There were no orders over $10 million in 1999 or 1998. In 1999, the Mechanical Testing and Simulation segment (MT&S) new orders of $277.4 million increased $3.6 million over 1998 but represented a 13% decrease from 1997. Orders from the ground vehicle industry and for civil engineering applications were particularly strong in 1997 but declined in both 1999 and 1998 due to the Asian situation and the lingering Japan recession. Europe, in both 1999 and 1998, was a growth area for Vehicle Testing Systems but did not offset the decline in business in Asia and Japan. The Factory Automation segment (FA) new orders in 1999 of $72.8 million decreased $5.7 million from the prior year but represented a 15% increase over 1997. The European and Japanese markets for FA products reflected solid growth in 1999. Orders for industrial automation applications (servo motors, amplifiers, and motion controllers) and industrial sensors were affected, in both 1999 and 1998, by a soft North American market. Total North American orders for the Company in 1999 were up slightly from 1998 but remained below the record order level achieved in 1997. Inter national orders decreased $3.3 million from 1998 reflecting continued softness from Asia. 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, 1999 amounted to $146.8 million, down $40.4 million from the prior year. The order backlog of $190.8 million at the end of 1997 had increased 46% from 1996 as a result of the record new orders received in 1997 which included the large crash simulation system mentioned above and a strong Asia order rate. Approximately 5% of the orders in the 1999 backlog have delivery dates beyond fiscal 2000. NET REVENUE 1999 1998 1997 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) United States $200,556 $200,490 $156,877 International 189,986 161,673 166,547 - -------------------------------------------------------------------------------- Total $390,542 $362,163 $323,424 ================================================================================ Record 1999 net revenue of $390.5 million was up 8% from the prior year and represented a 21% increase over 1997 revenue. For 1999, MT&S revenue of $313.7 million increased 9% from 1998 and represented a 20% increase over 1997 revenue. FA revenue in 1999 of $76.8 million increased $2.4 million from the previous year and represented a 22.4% increase over 1997 revenue (the PCI acquisition in 1998 represented 74% of the 1998 growth). For industry segment 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. Net revenue in the United States was flat with the prior year but was 28% higher than 1997. International revenue increased 18% in 1999 but decreased $4.9 million in 1998 from 1997. International revenue grew at a faster rate in 1997 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 reflect growth in all three years. The MT&S segment year over year revenue increases reflected positive worldwide demand from our ground vehicle customers, solid growth in our entertainment projects niche from orders booked in 1998, and a strong market for aftermarket sales of accessories and services. Our civil engineering structural test business which was strong in 1997 declined in 1998 and 1999 due to the Asian situation. The FA sector revenue was up $2.4 million or 3.3% from 1998 reflecting a continuing strong European demand. Both 1999 and 1998 were solid growth years in Europe reflecting strong demand from European original equipment manufacturers for our sensor products. The North American demand for our servo motor, amplifier, and motion control products declined in 1999. Selective price changes were implemented in all three years. However, the overall impact of pricing changes did not have a material effect on reported revenue volume. GEOGRAPHIC ANALYSIS OF NEW ORDERS 1999 1998 1997 - -------------------------------------------------------------------------------- North America 56% 55% 53% - -------------------------------------------------------------------------------- Europe/Africa/Middle East 30 29 27 - -------------------------------------------------------------------------------- Asia Pacific/Japan 13 14 18 - -------------------------------------------------------------------------------- Latin America/Rest of the World 1 2 2 ================================================================================ 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GROSS PROFIT 1999 1998 1997 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Gross Profit $151,171 $142,227 $132,073 ================================================================================ % of Net Revenue 38.7% 39.3% 40.8% ================================================================================ The gross profit percentage for 1999 decreased to 38.7% from 39.3% in 1998. This decline in the gross profit percentage was caused by higher than expected costs to complete certain custom entertainment projects, an inventory charge for realigning certain products, and lost productivity early in the year related to the implementation of our new enterprise-wide software system. The decrease in the gross profit percentage in 1998 compared to 1997 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. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 1999 1998 1997 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Selling Expense $61,490 $56,479 $54,610 General & Administrative Expense 30,038 27,833 26,402 - -------------------------------------------------------------------------------- Total $91,528 $84,312 $81,012 ================================================================================ % of Net Revenue 23.4% 23.3% 25.1% ================================================================================ Selling, General and Administrative (SG&A) expenses for 1999 as a percentage of net revenue was .1 percentage point higher than 1998 but 1.7 percentage points lower than 1997. Full year spending for 1999 totaled $91.5 million, which represented a $7.2 million (8.5%) increase over 1998 and a $10.5 million (13%) increase over 1997. All three years were similar in that cost control and alignment of existing resources with markets having the greatest potential were heavily emphasized. 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, which increased significantly in 1997 due to record new orders. SG&A expenses of newly acquired companies, including goodwill amortization, represented $2.7 million of the expense increase in 1999 and $1.5 million of the increase in 1998. RESEARCH AND DEVELOPMENT EXPENSE 1999 1998 1997 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) R & D Expense $26,966 $24,348 $19,798 ================================================================================ % of Net Revenue 6.9% 6.7% 6.1% ================================================================================ The Company provides funds for product, system and application developments (R&D) in both the MT&S and FA segments. 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. 1999 product introductions included road and virtual engine simulation systems, wheel force transducer, wheel fatigue testing system, material test systems and several new intelligent sensors. 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. Accelerated development programs in both the MT&S and FAsegments and a shift from customer funded development caused the higher percentage in 1998 as compared to 1997. The Company also undertakes "first of 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. INCOME 1999 1998 1997 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) Income Before Income Taxes $18,770 $33,448 $34,318 ================================================================================ % of Net Revenue 4.8% 9.2% 10.6% ================================================================================ Net Income $12,445 $21,539 $21,891 ================================================================================ % of Net Revenue 3.2% 5.9% 6.8% ================================================================================ Effective Tax Rate 33.7% 35.6% 36.2% ================================================================================ Return On Beginning Shareholder's Investment Per Share 8.0% 15.4% 15.6% ================================================================================ Basic Earnings Per Share $ .60 $ 1.05 $ 1.08 ================================================================================ Diluted Earnings Per Share $ .59 $ 1.01 $ 1.05 ================================================================================ Income before Income Taxes (pretax income) in 1999 decreased $14.7 million from 1998. 1999 pretax income included $5.7 million for restructuring (see Note 8 of "Notes to Consolidated Financial Statements") and $1.4 million for acquisition expenses (see Note 7 of "Notes to Consolidated Financial Statements"). Also, leading to a decline in the 1999 pretax income was higher interest expense related to higher debt outstanding for the entire 1999 fiscal year relative to the debt carried in fiscal 1998 18 and a change in other expense (income) principally related to a currency transaction loss of $375 recognized in 1999 as compared to a gain of $2,340 in 1998. Pretax income was also affected by higher costs on certain custom entertainment projects, an inventory charge for realignment of certain products, and lost productivity related to the implementation of our new enterprise-wide software system. Pretax income in 1998 increased $3.4 million or 11.3% from 1997 (1997 pretax income excluding the $4.3 million land sale gain amounted to $30.0 million or 9.3% of net revenue). The improved pretax in both 1998 and 1997 reflects revenue growth that was achieved with lower operating expense ratios. The MT&S 1999 operating income, before restructuring and acquisition charges, of $22.3 million was $2.7 million lower than 1998. FA1999 operating income, before restructuring, of $10.4 million increased $1.8 million from 1998 reflecting a strong European demand offset by an operating loss associated with the startup of our laser direct metal deposition process for manufacturing titanium parts (see Note 2 of "Notes to Consolidated Financial Statements"). Net income in 1999 decreased $9.1 million from 1998 to $12.4 million or $.59 per diluted share (includes $.18 for restructuring and $.04 for acquisition charges). Net income in 1998 increased $2.3 million or 12% from 1997 (excluding the gain from the sale of land which amounted to $2.7 million after taxes, or $.13 per diluted share). 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 reconcilia tion 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. In 1999, the dollar slightly strengthened against European currencies but weakened against the Yen. 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, net revenue, and net income plus transaction gains and losses reported in other expense (income) is set forth in the following table: 1999 1998 1997 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Increase (Decrease) from Translation: New orders $ 4,961 $(10,838) $(13,150) Net revenue 3,313 (6,704) (8,852) Net income 60 (236) (237) - -------------------------------------------------------------------------------- Transaction Gain (Loss) in "Other Expense (Income)" $ (375) $ 2,340 $ 1,266 - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES 1999 1998 1997 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) Total Interest Bearing Debt $ 71,637 $ 74,682 $ 12,865 % of Total Capitalization 30.5% 32.8% 8.8% - -------------------------------------------------------------------------------- Shareholders' Investment $162,859 $152,689 $133,524 - -------------------------------------------------------------------------------- Per Share $ 7.80 $ 7.39 $ 6.56 - -------------------------------------------------------------------------------- At September 30, 1999, the Company's capital structure was comprised of $11.4 million of current debt, $60.2 million of long-term debt and $162.9 million of shareholders' investment. The ratio of total debt to total capitalization was 30.5% compared to 32.8% at September 30, 1998. Total debt decreased $3.1 million during 1999 to $71.6 million. This resulted from a $18.2 million decrease in notes payable to banks offset by a $15.1 million increase in long-term debt. 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 $9.3 million outstanding under this facility at September 30, 1999. Additionally, the Company has an additional $35 million of uncommitted lines of credit, of which none was outstanding at year end. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Shareholders' investment increased $10.2 million in 1999 to $162.9 million. The increase was primarily due to an increase in retained earnings of $12.4 million from current year net earnings and $2.5 million from the Company's employee stock option and purchase plans. These increases were offset by $4.6 million of dividend payments and $.1 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. CASH FLOWS During 1999 operating activities generated $26.7 million of cash, compared with $3.1 million that was used in 1998 and $11.7 million that was generated in 1997. The increase in cash generated in 1999 was largely due to lower increases in accounts receivable and inventory over 1998 and 1997. Major uses of cash included $16.0 million for additions to property and equipment and $4.6 million of dividend payments. Capital expenditures for property and equipment additions totaled $16.0 million in 1999, $25.5 million in 1998, and $13.0 million in 1997. Significant additions in 1998 were associated with an enterprise-wide financial and operations software system. Capital spending in 2000 is planned to be about $18 million. The Company anticipates that 2000 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 27 percent of the 1997 through 1999 average net earnings per share. SHARE REPURCHASE PLAN In 1999, the Company repurchased 8,292 shares of common stock on the open market for $.1 million, at an average cost of $11.36 per share. The Company repurchased 76,000 shares in 1998 for $1.2 million, at an average cost of $15.56 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 600,000 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 30,1999, 525,488 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: 1999 1998 - -------------------------------------------------------------------------------- SHARES SHARES HIGH LOW TRADED HIGH LOW TRADED - -------------------------------------------------------------------------------- 1st Quarter 15 7/16 10 7/8 2,631 20 17 3/8 3,049 2nd Quarter 14 3/8 9 5/8 2,486 19 13 1/2 5,298 3rd Quarter 13 1/4 9 13/16 2,379 19 1/4 15 1/2 2,379 4th Quarter 14 5/8 10 3,259 17 3/4 11 9/16 1,600 ================================================================================ (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 State ments" for more information on the Company's income taxes. EURO CONVERSION On January 1, 1999, certain member countries of the European Economic and Monetary Union (EMU) adopted 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, 2001. How ever, beginning January 1, 1999, the Company began processing euro transactions 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 continues to evaluate the potential impact of what is commonly referred to as the Year 2000 issue, concerning the inability of certain computer-based products and systems to operate correctly into and during the year 2000. If not corrected, these products and systems could fail or create erroneous results. Following preliminary work done in fiscal 1997, in early 1998 the Company established a full-time Year 2000 central project office led by a senior technical manager reporting directly to an executive. The central project office worked 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 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. The vast majority of these systems were tested and found to be compliant. Each site developed a plan for completion of testing and remediation of critical systems. The Company believes its greatest Year 2000 exposure lies with a limited number of critical/sole source service providers and material suppliers. A failure of these vendors to be able to operate up to and through the year 2000 could have a material adverse effect on the Company's business, financial condition and operating results. The Company has sent surveys to such vendors and has received responses about their Year 2000 readiness. Where the Company does not have sufficient comfort that a critical vendor will be ready, site management has obtained more detailed information and during the first quarter of fiscal 1999 began to develop contingency plans, where feasible, in those cases where such interruption remains reasonably possible. The Company's manufacturing and metrology equipment and facilities contain embedded processors and code which have been inventoried and evaluated for Year 2000 readiness. A few instances required remediation. The Company completed testing and where necessary remediation of the above items by June 30, 1999 as scheduled. The Company will continue to monitor events and information relevant to Year 2000 issues so that additional action can be taken where necessary. PRODUCTS MANUFACTURED AT SITE The Company's Factory Automation products contain few date sensitive computer and embedded processors. The Company has completed an evaluation of these products. All of the products evaluated have been found to be Year 2000 ready, in some cases with stipulations. The Company's MT&S products are by their nature computer intensive. The Company has evaluated these products and advised its customers as to their Year 2000 readiness via its web site and written communication. In those cases where MT&S's products were found to be non-compliant, less than 2%, or in the case of discontinued products that were not evaluated, the Company is working with its customers to provide upgrades that are Year 2000 ready. SUMMARY The Company estimates that the costs directly related to its Year 2000 project were $400,000 in fiscal 1999 and $300,000 in fiscal 1998. Total costs remaining are expected to be immaterial. 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, 1999, is presented below.
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year - ---------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) 1999 Net revenue $ 96,142 $ 93,262 $ 95,363 $ 105,775 $ 390,542 Gross profit 38,064 36,775 37,818 38,514 151,171 Income before income taxes 5,722 4,666 8,269 113 18,770 - ---------------------------------------------------------------------------------------------------------------------- Net income $ 3,726 $ 3,146 $ 5,293 $ 280 $ 12,445 - ---------------------------------------------------------------------------------------------------------------------- Net income per share Basic $ .18 $ .15 $ .25 $ .01 $ .60 Diluted .18 .15 .25 .01 .59 - ---------------------------------------------------------------------------------------------------------------------- 1998 Net revenue $ 80,338 $ 87,160 $ 91,899 $ 102,766 $ 362,163 Gross profit 33,753 34,560 35,691 38,223 142,227 Income before income taxes 7,937 8,009 8,521 8,981 33,448 - ---------------------------------------------------------------------------------------------------------------------- Net income $ 5,192 $ 4,921 $ 5,667 $ 5,759 $ 21,539 - ---------------------------------------------------------------------------------------------------------------------- Net income per share(2) Basic $ .25 $ .24 $ .28 $ .28 $ 1.05 Diluted .24 .23 .27 .27 1.01 - ---------------------------------------------------------------------------------------------------------------------- 1997 Net revenue $ 71,755 $ 78,374 $ 79,268 $ 94,027 $ 323,424 Gross profit 30,002 32,445 32,476 37,150 132,073 Income before income taxes 5,377 6,548 12,173(1) 10,220 34,318(1) - ---------------------------------------------------------------------------------------------------------------------- Net income $ 3,775 $ 4,055 $ 7,928(1) $ 6,133 $ 21,891(1) - ---------------------------------------------------------------------------------------------------------------------- Net income per share(2) Basic $ .19 $ .20 $ .39(1) $ .30 $ 1.08(1) Diluted .18 .19 .38(1) .29 1.05(1) - ----------------------------------------------------------------------------------------------------------------------
(1) INCLUDES $4.3 MILLION PRETAX GAIN ON LAND SALE EQUAL TO $.13 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 1999 1998 - ---------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) CURRENT ASSETS: Cash and cash equivalents $ 18,083 $ 12,589 Accounts receivable, net of allowance for doubtful accounts of $2,232 and $2,285 102,011 93,313 Unbilled contracts and retainage receivable 38,628 35,891 Inventories 56,948 57,982 Prepaid expenses 7,981 4,536 - ---------------------------------------------------------------------------------------------------------------- Total current assets 223,651 204,311 - ---------------------------------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT: Land 3,247 3,202 Buildings and improvements 42,332 40,702 Machinery and equipment 101,140 93,726 Accumulated depreciation (73,086) (67,688) - ---------------------------------------------------------------------------------------------------------------- Total property and equipment, net 73,633 69,942 - ---------------------------------------------------------------------------------------------------------------- OTHER ASSETS 36,063 38,769 - ---------------------------------------------------------------------------------------------------------------- $ 333,347 $ 313,022 ================================================================================================================ LIABILITIES AND SHAREHOLDERS' INVESTMENT 1999 1998 - ---------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Notes payable to banks $ 10,071 $ 28,243 Current maturities of long-term debt 1,308 1,180 Accounts payable 21,062 20,274 Accrued compensation and benefits 28,662 26,919 Advance billings to customers 25,943 17,360 Other accrued liabilities 17,667 16,247 - ---------------------------------------------------------------------------------------------------------------- Total current liabilities 104,713 110,223 - ---------------------------------------------------------------------------------------------------------------- Deferred income taxes 5,517 4,851 Long-term debt 60,258 45,259 - ---------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 9) SHAREHOLDERS' INVESTMENT: Common stock, .25 par; 64,000,000 shares authorized: 20,883,639 and 20,657,186 shares issued and outstanding 5,221 5,164 Additional paid-in capital 8,122 5,818 Retained earnings 147,615 139,782 Accumulated other comprehensive income 1,901 1,925 - ---------------------------------------------------------------------------------------------------------------- Total shareholders' investment 162,859 152,689 - ---------------------------------------------------------------------------------------------------------------- $ 333,347 $ 313,022 ================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE SHEETS. 23 CONSOLIDATED STATEMENTS OF INCOME AND SHAREHOLDERS' INVESTMENT (For the Years Ended September 30)
INCOME 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) NET REVENUE $ 390,542 $ 362,163 $ 323,424 COST OF REVENUE 239,371 219,936 191,351 - ------------------------------------------------------------------------------------------------------------------------------ GROSS PROFIT 151,171 142,227 132,073 - ------------------------------------------------------------------------------------------------------------------------------ OPERATING EXPENSES: Selling 61,490 56,479 54,610 General and administrative 30,038 27,833 26,402 Research and development 26,966 24,348 19,798 Restructuring 5,711 -- -- Acquisition 1,391 -- -- - ------------------------------------------------------------------------------------------------------------------------------ INCOME FROM OPERATIONS 25,575 33,567 31,263 - ------------------------------------------------------------------------------------------------------------------------------ Interest expense 5,067 2,327 1,531 Interest income (470) (379) (406) Other expense (income), net 2,208 (1,829) (4,180) - ------------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 18,770 33,448 34,318 PROVISION FOR INCOME TAXES 6,325 11,909 12,427 - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 12,445 $ 21,539 $ 21,891 ============================================================================================================================== NET INCOME PER SHARE Basic $ .60 $ 1.05 $ 1.08 Diluted .59 1.01 1.05 - ------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT
Common Stock -------------------- Additional Accumulated Other Total Shares Paid-In Retained Comprehensive Shareholders' Issued Amount Capital Earnings Income (Loss) Investment - ------------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) BALANCE, SEPTEMBER 30, 1996 11,251,223 $2,812 $ 2,468 $111,262 $ 4,036 $ 120,578 =============================================================================================================================== Comprehensive income: Net income 21,891 Foreign currency translation (82) (2,300) Total Comprehensive income 19,509 Exercise of stock options 311,313 78 4,617 4,695 Common stock purchased and retired (349,065) (87) (3,073) (4,453) (7,613) Cash dividends, .20 per share (3,645) (3,645) - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1997 11,213,471 2,803 4,012 124,973 1,736 133,524 =============================================================================================================================== Comprehensive income: Net income Foreign currency translation 189 Total Comprehensive income 21,728 Stock split 2 for 1 9,204,424 2,301 (2,301) Exercise of stock options 300,091 75 3,405 3,480 Common stock purchased and retired (60,800) (15) (1,599) (1,614) Cash dividends, .24 per share (4,429) (4,429) - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1998 20,657,186 5,164 5,818 139,782 1,925 152,689 =============================================================================================================================== Comprehensive income: Net income 12,445 Foreign currency translation 36 Unrealized loss on investment, net of tax (60) Total Comprehensive income 12,421 Exercise of stock options 234,745 59 2,396 2,455 Common stock purchased and retired (8,292) (2) (92) (94) Cash dividends, .24 per share (4,612) (4,612) - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1999 20,883,639 $5,221 $ 8,122 $147,615 $ 1,901 $162,859 ===============================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 24 CONSOLIDATED STATEMENTS OF CASH FLOWS (For the Years Ended September 30)
1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) OPERATING ACTIVITIES: Net income $ 12,445 $ 21,539 $ 21,891 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 14,424 10,880 9,608 Deferred income taxes 889 127 (11) Gain from sale of real estate -- -- (4,332) Changes in operating assets and liabilities, exclusive of acquisitions: Accounts receivable, unbilled contracts and retainage receivable (11,285) (27,765) (26,645) Inventories 373 (7,644) (7,655) Prepaid expenses (3,493) 647 221 Advance billings to customers 8,711 (2,874) 8,949 Other liabilities, net 4,676 2,015 9,708 - -------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 26,740 (3,075) 11,734 - -------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Property and equipment additions (15,990) (25,545) (12,963) Proceeds from sale of real estate -- -- 5,700 Acquisition of businesses, net of cash received (1,036) (29,012) (5,947) Other assets (132) (1,026) (537) - -------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (17,158) (55,583) (13,747) - -------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net borrowings under notes payable to banks (18,168) 23,770 3,743 Proceeds from issuance of long-term debt 16,837 38,637 1,008 Repayments of long-term debt (924) (1,152) (2,745) Cash dividends (4,612) (4,429) (3,645) Proceeds from employee stock option and stock purchase plans 2,455 3,480 4,695 Payments to purchase and retire common stock (94) (1,614) (7,613) - -------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (4,506) 58,692 (4,557) - -------------------------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 418 (3) (1,001) - -------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,494 31 (7,571) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,589 12,558 20,129 - -------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,083 $ 12,589 $ 12,558 ==================================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: Cash paid during the year for: Interest $ 4,291 $ 1,881 $ 1,531 Income taxes 6,731 8,756 13,523 ====================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL 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 a loss of $(375,000) in 1999, a gain of $2,340,000 in 1998 and a gain of $1,266,000 in 1997. REVENUE RECOGNITION Revenue is recognized upon shipment of equipment when the customer's order can be manufactured, delivered, and installed in generally less than a year. 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. Un billed amounts for these contracts appear in the Consolidated Balance Sheets as Unbilled Contracts and Retainage Receiv able. Amounts unbilled or retained at September 30, 1999 are expected to be invoiced during fiscal 2000. Long-term contracts consider the duration of the manufacturing and collection cycles at the time the contract is bid. Accordingly, accounts receivable in the accompanying Consolidated Balance Sheets approximate fair value. WARRANTY OBLIGATIONS The Company warrants its products against defects in materials and workmanship under normal use and service, generally for one year. The Company maintains reserves for warranty costs based upon its past experience with war ranty claims. 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 are recorded at cost, which approximates 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: 1999 1998 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Customer projects in various stages of completion $ 3,625 $12,701 Components, assemblies and parts 53,323 45,281 - -------------------------------------------------------------------------------- Total $56,948 $57,982 ================================================================================ PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Additions, replacements and improvements are capitalized at cost, while main tenance 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 de preciated 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, when the underlying transaction is closed. 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 design ating a contract as a hedge include the contract`s effective ness in risk reduction and matching of contracts to underlying transactions. On September 30, 1999, there were open hedge contracts totaling $7,300,000 with an unrealized loss of $202,000. On September 30, 1998, there were open hedge contracts totaling $2,800,000 with an unrealized loss of $3,000. 26 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 $27.5 million and $31.6 million in 1999 and 1998, respectively. These assets are being amortized on a straight basis over various periods ranging from 7 to 40 years. Amortization expense was $3.3 million in 1999, $1.5 million in 1998 and $1.0 million in 1997. 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 occurred which would require recognition during the year ended September 30, 1999. PENSIONS AND OTHER POSTRETIREMENT BENEFIT PLANS Effective September 30, 1999, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The provisions of SFAS No. 132 revise employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of these plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable. 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. 1999 1998 1997 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) Weighted average common shares outstanding 20,763 20,519 20,285 Dilutive potential common shares 421 811 660 - -------------------------------------------------------------------------------- Total dilutive common shares 21,184 21,330 20,945 - -------------------------------------------------------------------------------- Basic net income per share $ .60 $ 1.05 $ 1.08 Diluted net income per share .59 1.01 1.05 ================================================================================ COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" during fiscal 1999. This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income, foreign currency translation adjustments and unrealized loss on investment and is presented in the accompanying Consolidated Statement of Shareholders' Investment. The adoption of SFAS No. 130 had no impact on total shareholders' investment. Prior year financial statements have been reclassified to conform to the SFAS No. 130 requirements. RECLASSIFICATIONS Certain amounts included in the consolidated financial statements have been reclassified in prior years to conform with the 1999 financial statement presentation. These amounts had no effect on previously reported shareholder's investment or net income. USE OF ESTIMATES The preparation of financial statements in conformity with 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 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, 2000. The Company anticipates that the effect of adopting SFAS No. 133 will not have a material impact on the Company's financial statements. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. BUSINESS SEGMENT INFORMATION: In 1999, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments on an Enterprise and Related Information". SFAS No. 131 supersedes SFAS No. 14 replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial condition but did affect the disclosure of segment information. The Company evaluated its business activities that are regularly reviewed by the Chief Executive Officer for which discrete financial information is available. As a result of this evaluation, the Company has determined that it has five operating segments: Vehicle Testing Systems, Material Testing Systems, Advanced Systems, Automation and Sensors. The Vehicle Testing Systems business manufactures and markets systems for vehicle and component manufacturers to aid in the acceleration of design development work and decrease the cost to manufacture their products. The Material Testing Systems business manufacturers and markets systems to aid their customers in product development and quality control through material and product characterization. The Advanced Systems business provides highly customized systems for principally simulation and manufacturing. The Automation business manufactures and markets products for high performance industrial machine applications in a wide range of industries. The Sensor business manufactures and markets displacement and liquid level sensors used in various applications to monitor and automate industrial processes. The economic characteristics, nature of products and services, production processes, type or class of customer, method of distribution and regulatory environments are similar for the Vehicle Testing Systems, Material Testing Systems and Advanced Systems business segments. As a result of these similarities, these segments have been aggregated into one reportable segment called Mechanical Testing and Simulation (MT&S) for financial statement purposes. Also, the economic characteristics, nature of products and services, production processes, type or class of customer, method of distribution and regulatory environments are similar for the Automation and Sensor business segments. As a result, these segments have been aggregated into one reportable segment called Factory Automation. The accounting policies of the business segments are the same as those described in Note 1. In evaluating the segment performance, management focuses on income from operations. This measurement excludes special charges (e.g. restructuring charges, acquisition expenses, etc.), interest expense, interest income, income tax expense and other non-operating income or expense. Corporate expenses are allocated to segments primarily on the basis of revenue. This allocation includes expenses for various support functions such as human resources, information technology and finance. Financial information by reportable segment follows: 28
1999 1998 1997 - --------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) NET REVENUE BY SEGMENT Mechanical Testing & Simulation $ 313,685 $ 287,761 $ 260,650 Factory Automation 76,857 74,402 62,774 - --------------------------------------------------------------------------------------------------------- Total $ 390,542 $ 362,163 $ 323,424 - --------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS BY SEGMENT Mechanical Testing & Simulation Before restructuring and acquisition $ 22,289 $ 25,011 $ 25,219 Restructuring (5,510) -- -- Acquisition (1,391) -- -- - --------------------------------------------------------------------------------------------------------- Total $ 15,388 $ 25,011 $ 25,219 - --------------------------------------------------------------------------------------------------------- Factory Automation Before restructuring and acquisition 10,388 8,556 6,044 Restructuring (201) -- -- - --------------------------------------------------------------------------------------------------------- Total $ 10,187 $ 8,556 $ 6,044 - --------------------------------------------------------------------------------------------------------- Total Income from Operations $ 25,575 $ 33,567 $ 31,263 - --------------------------------------------------------------------------------------------------------- IDENTIFIABLE ASSETS BY SEGMENT Mechanical Testing & Simulation $ 272,491 $ 255,816 $ 190,456 Factory Automation 60,856 57,206 38,619 - --------------------------------------------------------------------------------------------------------- Total Assets $ 333,347 $ 313,022 $ 229,075 ========================================================================================================= OTHER SEGMENT DATA Mechanical Testing & Simulation: Capital expenditures $ 13,822 $ 21,251 $ 11,203 Depreciation and Amortization 11,028 8,333 7,409 - --------------------------------------------------------------------------------------------------------- Factory Automation: Capital expenditures $ 2,168 $ 4,668 $ 1,787 Depreciation and Amortization 3,396 2,547 2,199 - ---------------------------------------------------------------------------------------------------------
A geographic summary of the Company's operations and asset information as of and for the years ended September 30, were as follows:
1999 1998 1997 - --------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) TOTAL NET REVENUE United States $ 200,556 $ 200,490 $ 156,877 Germany 47,172 37,643 31,778 Other Europe 69,185 51,495 38,826 Far East 56,897 53,652 77,851 Other 16,732 18,883 18,092 - --------------------------------------------------------------------------------------------------------- Total $ 390,542 $ 362,163 $ 323,424 - --------------------------------------------------------------------------------------------------------- TOTAL LONG-LIVED ASSETS United States $ 232,177 $ 227,816 $ 153,707 Germany 42,913 39,882 36,648 Other Europe 38,799 30,626 22,228 Far East 18,882 14,242 16,226 Other 576 456 266 - --------------------------------------------------------------------------------------------------------- Total $ 333,347 $ 313,022 $ 229,075 - ---------------------------------------------------------------------------------------------------------
Net revenue by geographic location is based on net revenue generated from each country's operations. No individual country, other than the United States and Germany, exceeded 10% of consolidated net revenue on a recurrent annual basis. The Company did not have sales to any individual customer greater than 10% of total net revenue in 1999, 1998 and 1997. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FINANCING: Long-term debt as of September 30 was as follows:
1999 1998 - -------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Variable Rate Note, due May 2015, collateralized by building $ 1,837 $ -- 6.6% Notes, unsecured, due in July 2008 35,000 35,000 5.4% Mortgage, due in October 2015, collateralized by building 5,742 6,444 5.3% Note, unsecured, due in March 2003 1,503 1,264 6.0% Note, unsecured, due in May 2008 1,943 1,943 7.5% Note, unsecured, due in July 2009 15,000 -- Other 541 1,788 - -------------------------------------------------------------------------------------------- TOTAL $ 61,566 $ 46,439 LESS CURRENT MATURITIES (1,308) (1,180) - -------------------------------------------------------------------------------------------- TOTAL LONG-TERM DEBT $ 60,258 $ 45,259 ============================================================================================
Aggregate annual maturities of long-term debt for the next five fiscal years are as follows: 2000--$1,308,000; 2001--$5,599,000; 2002--$5,494,000; 2003--$7,152,000; 2004--$7,384,000 and $34,629,000 thereafter. The carrying value of the Company's long-term debt at September 30, 1999, 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. In addition, the Company has standby letter-of-credit lines totaling $30,000,000. At September 30, 1999, standby letters of credit outstanding totaled $13,382,000. 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, 1999, net worth exceeded the defined minimum amount by $38,000,000 and the Company had $18,959,000 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, 1999. Information on short-term borrowings for the years ended September 30 were as follows:
1999 1998 1997 - -------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Balance outstanding at September 30 $ 10,071 $ 28,243 $ 4,356 Average balance outstanding 24,903 23,498 11,903 Maximum balance outstanding 34,700 51,216 23,458 Year-end interest rate 6.0% 5.9% 6.0% Weighted-average interest rate 5.7% 6.1% 6.0% ============================================================================================
30 4. INCOME TAXES: The provision for income taxes for the years ended September 30 consisted of the following:
1999 1998 1997 - ------------------------------------------------------------------------------------------ (EXPRESSED IN THOUSANDS) Current payable (receivable): Federal $ 2,239 $ 6,911 $ 7,801 State 432 1,129 953 Foreign 2,773 4,104 3,658 Deferred 881 (235) 15 - ------------------------------------------------------------------------------------------ Total provision $ 6,325 $ 11,909 $ 12,427 - ------------------------------------------------------------------------------------------
A reconciliation from the Federal statutory income tax rate to the Company's effective rate for the years ended September 30 were as follows:
1999 1998 1997 - ------------------------------------------------------------------------------------------ Statutory rate 35% 35% 35% Tax benefit of Foreign Sales Corporation (3) (2) (2) Foreign provision in excess of U.S. tax rate 4 3 3 State income taxes, net of Federal benefit 2 2 2 Research and development tax credits (5) (2) (2) Other, net 1 -- -- - ------------------------------------------------------------------------------------------ Effective rate 34% 36% 36% - ------------------------------------------------------------------------------------------
DEFERRED TAX ASSET:
1999 1998 - ------------------------------------------------------------------------------------------ (EXPRESSED IN THOUSANDS) Accrued compensation and benefits $ 1,017 $ 2,151 Inventory reserves 2,398 2,309 Allowance for doubtful accounts 194 244 Other assets (1,276) (11) - ------------------------------------------------------------------------------------------ TOTAL DEFERRED TAX ASSET $ 2,333 $ 4,693 ========================================================================================== DEFERRED TAX LIABILITY: 1999 1998 - ------------------------------------------------------------------------------------------ Property and equipment $ 5,517 $ 4,851 - ------------------------------------------------------------------------------------------ NET DEFERRED TAX LIABILITY $ 3,184 $ 158 ==========================================================================================
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, 1999, the Company had awarded incentive stock options and non-qualified stock options. 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 1999 and 1998, option holders exchanged 25,029 and 22,335 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, 1999, 1998, and 1997, and changes during the years ended were as follows:
1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- SHARES WAEP* SHARES WAEP* SHARES WAEP* - ----------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 2,143 $10.30 1,920 $ 8.35 1,964 $ 7.12 - ----------------------------------------------------------------------------------------------------------------- Granted 880 $12.95 545 $15.79 608 $10.72 - ----------------------------------------------------------------------------------------------------------------- Exercised (138) $ 7.25 (295) $ 6.51 (616) $ 6.78 - ----------------------------------------------------------------------------------------------------------------- Forfeited (69) $13.38 (27) $10.40 (36) $ 7.87 - ----------------------------------------------------------------------------------------------------------------- Outstanding at end of year 2,816 $11.21 2,143 $10.30 1,920 $ 8.35 ================================================================================================================= Options exercisable at year-end 1,566 $ 9.46 1,156 $ 8.19 894 $ 7.59 =================================================================================================================
SHARES IN THOUSANDS *WEIGHTED-AVERAGE EXERCISE PRICE The following table summarizes information concerning outstanding and exercisable options as of September 30, 1999:
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 - ----------------------------------------------------------------------------------------------------------------- $5.78-8.13 921 1.6 $ 7.40 921 $ 7.40 - ----------------------------------------------------------------------------------------------------------------- $9.69-13.00 650 3.0 $10.80 410 $10.64 - ----------------------------------------------------------------------------------------------------------------- $13.13-13.13 735 5.4 $13.13 36 $13.13 - ----------------------------------------------------------------------------------------------------------------- $14.63-19.38 510 3.4 $15.82 199 $15.86 - ----------------------------------------------------------------------------------------------------------------- TOTAL 2,816 3.2 $11.21 1,566 $ 9.46 =================================================================================================================
SHARES IN THOUSANDS *IN YEARS These options will expire if not exercised at specific dates ranging from January 2000 to September 2006. Prices for options exercised during the three-year period ended September 30, 1999 ranged from $5.78 to $15.75. Total options available for future grant as of September 30, 1999 were 370,162. 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 1999 and 1998 phases, all at dates specified in the Purchase Plan, were issued 121,810 shares in 1999 and 105,240 shares in 1998. During 1999, participants subscribed to purchase 147,869 shares at 85% of market price for issuance in 2000. 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, as reported below, has been estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions: 1999 1998 1997 - -------------------------------------------------------------------------------- Expected life (in years) 2.7 2.0 2.1 Risk-free interest rate 5.8% 4.2% 5.8% Volatility .49 .40 .49 Dividend yield 2.3% 1.6% 1.2% ================================================================================ 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 1999 and 1998 was $4.47 and $4.39 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): 1999 1998 1997 - -------------------------------------------------------------------------------- Pro forma net income $10,553 $20,247 $21,048 Pro forma earnings per share, basic $ .51 $ .99 $ 1.04 Pro forma earnings per share, diluted $ .50 $ .95 $ 1.01 ================================================================================ 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 offers a 401(K) Pay Conversion Plan for all of its U.S. employees. Employees can supplement their retirement income by participating in this voluntary pre-tax savings plan by designating a percentage of their gross income, subject to limitations imposed by federal law. The Company will match $.50 per each dollar of the first 3% that employees contribute capped at $500 per fiscal year. Employees are automatically vested. The matching contributions under the 401(K) plan were $730,000 in 1999, $557,000 in 1998 and $483,000 in 1997. 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 4.3% of participant compensation in 1999 and 4.4% in 1998 and 1997, respectively. The provisions for profit sharing were $3,883,000 in 1999, $3,577,000 in 1998 and $3,163,000 in 1997, 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:
1999 1998 1997 - ------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Service cost-benefit earned during the period $ 209 $ 178 $ 327 Interest cost on projected benefit obligation 249 218 269 Net amortization and deferral 17 11 29 - ------------------------------------------------------------------------------------------------- NET PERIODIC PENSION COST $ 475 $ 407 $ 625 =================================================================================================
The change in benefit obligation and plan assets consisted of the following for the years ended September 30, 1999 and 1998.
1999 1998 - ------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Change in benefit obligation: Projected benefit obligation, beginning of year $ 5,110 $ 4,723 Service cost 173 188 Interest cost 212 216 Translation difference 80 (20) Actuarial (gain)loss 332 8 Benefits paid (30) (5) - ------------------------------------------------------------------------------------------------- PROJECTED BENEFIT OBLIGATION, END OF YEAR $ 5,877 $ 5,110 ================================================================================================= Change in plan assets: Fair value of plan assets, beginning of year $ -- $ -- Actual return on plan assets -- -- Employer contributions 30 5 Benefits paid (30) (5) - ------------------------------------------------------------------------------------------------- FAIR VALUE OF PLAN ASSETS, END OF YEAR $ -- $ -- =================================================================================================
The funded status of the Company`s benefit plans and the amounts recognized in the consolidated financial statements are:
1999 1998 - ------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Funded status (5,877) (5,110) Unrecognized net gain (88) (460) Unrecognized net liability being amortized 536 478 Adjustment required to recognize minimum liability (33) (25) - ------------------------------------------------------------------------------------------------- ACCRUED PENSION LIABILITY $ (5,462) $ (5,117) ================================================================================================= Major assumptions at year-end are: Discount rate 3.5 to 6.0% 3.5 to 6.2% Rate of increase in future compensation levels 3.0% 3.0% =================================================================================================
7. ACQUISITIONS: On May 28, 1999, the Company completed a merger with DSP Technology, Inc. (DSP), an enterprise that is active in automotive engine development market segments. Under the terms of the agreement, the Company initially issued 2,076,913 shares of common stock and subsequently issued an additional 792 shares of common stock in exchange for all of the outstanding shares and vested stock options of DSPs' common stock. In connection with the acquisition, the Company incurred approximately $1.4 million of acquisition related costs which were charged to operations in the third quarter of fiscal year 1999. The acquisition was accounted for as a pooling-of-interests. Accordingly, all periods included in these historical consolidated financial statements have been restated to give effect to the merger. The following are the results of operations for the separate companies for the years ended September 30: 1999 1998 1997 - -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Net Revenue: MTS $362,708 $339,682 $303,480 DSP 27,834 22,481 19,944 - -------------------------------------------------------------------------------- COMBINED NET REVENUE $390,542 $362,163 $323,424 - -------------------------------------------------------------------------------- Income before income taxes (note A): MTS $ 18,445 $ 31,473 $ 32,712 DSP 325 1,975 1,606 - -------------------------------------------------------------------------------- COMBINED INCOME BEFORE INCOME TAXES $ 18,770 $ 33,448 $ 34,318 - -------------------------------------------------------------------------------- NOTE A: 1999 AMOUNTS INCLUDE $0.3 MILLION AND $1.1 MILLION IN ACQUISITION RELATED COST FOR THE COMPANY AND DSP RESPECTIVELY. No significant adjustments were made to the prior years financial statements of either the Company or DSP. 34 On September 29, 1999 the Company acquired the exclusive license for the PowerBlok product line technology, related inventory and fixed assets, and trade names from Semipower, Inc. The transaction was accounted for by the purchase method of accounting. In fiscal 1998 the Company acquired three entities, all accounted for by the purchase method of accounting, with an aggregate purchase price of approximately $29 million, net of cash acquired. The Company acquired all the outstanding stock of Performance Controls, Inc., a manufacturer of high performance power amplifiers for factory auto mation 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, exclusive of the DSP merger, for 1999, 1998 and 1997, assuming these acquisitions had been made at the beginning of the year, would not be materially different from reported results. 8. RESTRUCTURING AND OTHER CHARGES: The Company has taken a series of actions to better align its organizational structure with market elements, improve operational performance and reduce costs. These actions resulted in a restructuring charge during the first quarter of fiscal year 1999 of $2.1 million ($1.4 million after tax, or $.07 per share). This charge related principally to employee severance costs of $1.8 million and $0.3 million for other costs. In the first quarter of fiscal year 1999, DSP Technology, Inc. (see note 7) announced its strategic decision to relocate its corporate headquarters and consolidate its Transportation Group operations in Ann Arbor, Michigan from Freemont, California. This decision resulted in a restructuring charge of $0.5 million ($0.3 million after tax or $.01 cents per share). This charge relates to employee severance cost of $0.3 million and $0.2 million in idle facility and wind down costs. As of September 30, 1999, $.1 million of the restructuring charge remains to be paid. In the fourth quarter of fiscal 1999, the Company identified actions necessary to rationalize certain of its business capacity. These actions resulted in a total restructuring charge during the fourth quarter of fiscal 1999 of $3.1 million ($2.1 million after tax, or $.10 per share). This charge relates to employee severance costs of $2.8 million and $0.3 million of other costs. In conjunction with the rationalization of business capacity, the Company took an additional charge to cost of sales of $0.9 million related to inventory write-downs. No amounts recorded in the fourth quarter have been paid. 9. COMMITMENTS AND CONTINGENCIES: LITIGATION: The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. It is the opinion of management that the final resolution of these matters will not have a material adverse effect on the financial position or results of operation of the Company. LEASES: The Company has noncancelable operating lease commitments for equipment and facilities that expire on various dates through 2005. Minimum annual rental commitments at September 30, 1999 for the fiscal years 2000 through 2004 and thereafter are $3,647, $2,644, $1,626, $1,225, $980 and $302. Total lease expense was $4,197 in 1999, $3,118 in 1998 and $2,693 in 1997. 35 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, 1999 and 1998, and the related consolidated statements of income, shareholders` investment and cash flows for each of the three years in the period ended September 30, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, November 24, 1999 REPORT OF MANAGEMENT The management of MTS Systems Corporation is responsible for the integrity and objectivity of the financial information presented in this report. The financial statements have been prepared in accordance with generally accepted accounting principles and include certain amounts based on management's best estimates and judgment. Management is also responsible for establishing and maintaining the Company's accounting systems and related internal controls, which are designed to provide reasonable assurance that assets are safeguarded, transactions are properly recorded, and the policies and procedures are implemented by qualified personnel. The Audit Committee of the Board of Directors, which is comprised solely of outside directors, meets regularly with management and its independent auditors to review audit activities, internal controls, and other accounting, reporting, and financial matters. This Committee also recommends independent auditors for appointment by the full Board, subject to shareholder ratification. The financial statements included in this annual report have been audited by Arthur Andersen LLP, independent public accountants. We have been advised that their audits were conducted in accordance with generally accepted auditing standards and included such reviews of internal controls and tests of transactions as they considered necessary in setting the scope of their audits. Sidney W. Emery, Jr Chairman and Chief Executive Officer /s/ Sidney W. Emery, Jr David E. Hoffman Vice President and Chief Financial Officer /s/ David E. Hoffman 36 EX-21 16 SUBSIDIARIES OF THE REGISTRANT 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 DSP Technology, Inc. Delaware, U.S.A Nano Instruments, Inc. Tennessee, U.S.A. EX-23 17 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our reports dated November 24, 1999 included in the Company's previously filed Registration Statements on Form S-8 (Registration Nos. 333-28661, 2-99389, 33-21699, 33-35288, and 33-45386) and Form S-3 (Registration No. 33-60485). ARTHUR ANDERSEN LLP Minneapolis, Minnesota, December 21, 1999 EX-27 18 FINANCIAL DATA SCHEDULE
5 12-MOS SEP-30-1999 OCT-01-1998 SEP-30-1999 18,083 0 142,871 2,232 56,948 223,651 146,719 73,086 333,347 104,713 61,566 0 0 5,221 157,638 333,347 390,542 390,542 239,371 371,772 0 0 5,067 18,770 6,325 18,770 0 0 0 12,445 .60 .59
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