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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (Fee Required)
For The Fiscal Year Ended September 30, 1998 Commission File Number 0-2382
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MTS SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 612-937-4000 41-0908057
(State or other jurisdiction (Telephone number of registrant (I.R.S. Employer
of incorporation or including area code) Identification No.)
organization)
14000 TECHNOLOGY DRIVE, EDEN PRAIRIE, MINNESOTA 55344-9763
(Address of principle executive offices) (Zip Code)
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK (PAR VALUE OF $.25 PER SHARE)
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
_X_ Yes ___ No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
As of November 30, 1998, 18,598,890 shares of the Registrant's Common
Stock were outstanding and the aggregate market value of such Common Stock
(based upon the average of the high and low prices) held by non-affiliates was
$215,938,000.
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DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for Fiscal Year ended September 30, 1998 - Parts
I, II and IV.
Proxy Statement for Annual Meeting of Shareholders, statement dated prior to
January 26, 1999 - Part III.
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MTS SYSTEMS CORPORATION
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
PART I
ITEM 1. BUSINESS
MTS Systems Corporation (hereafter called "MTS" or "the Company" or "the
Registrant") is a technology-based company providing engineering services,
equipment, and software for applications in research, product development,
quality control and production.
MTS bases its business on a set of building-block technologies and business
processes. Technologies include sensors for measuring machine and process
parameters, control technologies for test and process automation, hydraulic and
electric servodrives for precise actuation, and application software to tailor
the test or automation system to the customer's needs and to analyze results.
Business processes include project and product styles of operations on a
worldwide basis. In combination, they offer solutions to customers in a variety
of markets.
In the Mechanical Testing and Simulation sector, customers use the Company's
products and services in research, product development and quality control to
determine the mechanical properties and performance of materials, products and
structures. Many of the Company's products and services support the customers'
mechanical design automation processes. In the Factory Automation sector,
customers use the Company's measurement and control instrumentation to measure
process variables and to automate production processes.
CUSTOMERS AND PRODUCTS BY BUSINESS SECTOR
The Company's operations are organized into two business sectors: 1) Mechanical
Testing and Simulation (MT&S), and 2) Factory Automation (FA). The operational
alignment of the sectors allows the Company to maintain a strategic focus on
markets with different applications of the Company's technologies and with
different competitors.
Mechanical Testing and Simulation Sector: Customers in this sector use MTS's
systems and software for research, product development and quality control in
the design and manufacture of materials, products and structures. Customer
industries in this sector include:
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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.
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ADVANCED SYSTEMS: The Company also offers highly customized systems for
simulation and testing through its Advanced Engineering Solutions Division
(AESD). These systems frequently embody technology which is new to the
application. Customers of AESD come from all industries served by the MT&S
sector - aerospace and advanced materials, civil engineering, and ground
vehicles - as well as customers from other industries interested in the
development of new manufacturing technologies and systems such as welding and
material processing.
TITANIUM PRODUCTS: The Company, through its wholly owned subsidiary, AeroMet
Corporation, has developed an innovative laser direct metal deposition process
for manufacturing titanium parts. The process uses a laser to fuse titanium
powder, layer upon layer, into solid structures. This computer driven process
significantly reduces the time required to produce large complex parts.
MT&S sector accounted for 78% of revenue in 1998, 79% of revenue in 1997 and 82%
of revenue in 1996. It represents the oldest and is the principal market for the
Company's technology.
Factory Automation Sector: FA customers use MTS products in discrete part
manufacturing and chemical process industries. Products in this sector include:
DISPLACEMENT POSITION AND LIQUID-LEVEL SENSORS BASED ON MAGNETOSTRICTIVE
TECHNOLOGY. Displacement sensors accurately measure position up to 25 feet. They
are used where accurate positioning and continuous control are critical, such as
in discrete (piece part) manufacturing machinery, mobile equipment, process
control elements and continuous measurement devices. Major applications include
injection molding machines, servo-hydraulic cylinders, presses of all types,
sawmills, logging and other mobile machinery and valve or flow control.
Displacement sensors are also used in high volume applications requiring low
cost position feedback. MTS builds a version of its technology in various
lengths and configurations, but at very high rates affording on-board low cost
solutions to industries such as automotive, appliance, medical, agricultural,
marine, aeronautic and other non-manufacturing markets.
Liquid level sensors accurately measure the level of liquids in tanks and other
vessels up to 60 feet. These sensors are marketed to control continuous
processes in chemical, pharmaceutical, bio-technology and other related markets.
The need for highly reliable accurate measurement of one or more fluid levels is
common in most of these applications. MTS markets liquid level sensors to both
end users, such as chemical producing companies, and to original equipment
manufacturers and private label companies who build level measurement or leak
detection into their control systems or as accessories for remote indication and
control devices.
SERVO MOTORS, AMPLIFIERS AND CONTROLLERS: Customers use high-performance
brushless servo motors and amplifiers for challenging factory automation
applications in a wide range of industries, including machine tools, fabrication
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and packaging. Specialized plug-in amplifiers are used in light duty
applications such as the semiconductor and textile industries. The Company's
controllers are used for precise control of a wide variety of applications
ranging from simple applications requiring only one axis of control to
high-speed, complex operations requiring up to 28 axes of control. These
combined product lines address the need for high performance systems and are
used primarily by original equipment manufacturers and large end users.
The FA sector accounted for 22% of revenue in 1998, 21% of revenue in 1997, and
18% of revenue in 1996.
COMMON TECHNOLOGIES
MTS' systems and products in both sectors are constructed using employees'
application engineering know-how with common technology building block
components generally composed of measuring and actuation devices, electronic
controls and application software. Many of these components are proprietary and
are developed and manufactured within the Company.
MTS employees engineer or configure the components into products and systems to
match the application called for in the customer's order. Frequently,
special-purpose software is developed to meet a customer's unique requirements.
Such software often represents a significant part of the value added by the
Company. Services offered to system customers include on-site installation,
training of customer personnel, technical manuals and continuing maintenance.
Such services are often included in the contract amount charged for completed
systems, but these services may be purchased separately, during and after the
system warranty period.
Certain proprietary products, such as sensors, process controls, motors,
actuators and process software and firmware are sold as products to end users
and to other companies for incorporation into their systems, machines or
processes. All products and most systems are sold on fixed-price contracts.
Complex systems and applied research in the MT&S sector are in some cases
undertaken on "cost-plus-fixed-fee" contract basis.
1998 PRODUCT DEVELOPMENT HIGHLIGHTS
The Company funds new application and product development within its market
sectors. Highlights of product development undertaken or completed in 1998
include:
Mechanical Testing and Simulation Sector
* The Company introduced the SilentFlo(TM) hydraulic power unit, a clean
quiet pump that eliminates the need for a separate pump room, allowing
each power unit to be placed near the equipment it powers, minimizing the
need for excessive piping.
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* The Company introduced the MTS Crash Simulator. Automotive engineers will
use this simulator to reproduce increasingly complex crash pulse
waveforms. The incorporation of digital controls and sophisticated
simulation and modeling software will significantly reduce the overall
development cycle.
* The Company completed the Component RPC III(TM) software product, which
runs on Microsoft NT(TM) and is used with standard MTS controller
products. This software is designed for automotive engineers that need an
easy and accurate way to perform simulation testing.
* The Company introduced the TestWorks 4 universal testing software package.
This can be used to test materials, components, subassemblies and finished
goods to support research, product and process development and quality
control. Targeted industries include plastics, biomaterials, electronics,
textiles and consumer goods.
Factory Automation Sector
* The Company developed new variations of its magnetostrictive products,
based upon its modular technology, and the development occurred much more
rapidly than in the past. Past methods required engineering of entirely
new products to address new applications. Examples include custom pulse
and analog outputs, intelligent analog communications and environmental
enclosures.
* The Company released the first four models of a new line of digital
drives. These servo drives will provide high performance, auto tuning and
multiple communications bus options.
* The Company introduced two new lines of smaller MaxPlus servo motors that
provide high performance servo capability to low power or space limited
applications. General factory automation and semi conductor industries are
the primary markets for these products.
* The Company introduced new board level DSP based motion controllers. The
products are expandable up to 16 axis and can be installed on individual
personal computers. They provide for high speed motion control, while at
the same time being user friendly.
CHARACTERISTICS OF SALES
The Company's systems and products are sold and delivered throughout the world
and its customer orders cover a broad spectrum of industries, government
agencies, institutions, applications and geographic locations. As such, MTS is
not dependent upon any single customer for its business.
MT&S systems range in price from less than $20,000 to over $20 million. Large,
individual, fixed-price orders, generally considered to be over $10 million,
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although important to the Company's image and technical advancement, can produce
volatility in both backlog and quarterly operating results. The majority of the
orders received in any one year are based on fixed-price quotations and some
require extensive technical communication with potential customers prior to
receipt of an order. The current typical delivery time for a system ranges from
one to twelve months, depending upon the complexity of the system and the
availability of components in the Company's or suppliers' inventories. Larger
system contracts can run as long as three years and cost-plus-fixed-fee
contracts have run longer.
FA products are sold in quantity at unit prices ranging from $500 to $10,000.
Delivery varies from several days to several months.
Approximately 54% of revenue in fiscal 1998, 47% of revenue in fiscal 1997, and
49% of revenue in fiscal 1996 was from domestic customers. The balance of the
revenue, some of which was sold in currencies other than the U.S. dollar, was to
customers located outside the United States--mainly in Europe, Asia-Pacific,
Latin America and Canada. The Company's foreign operations and foreign revenues
may be affected by local political conditions, export licensing problems and/or
currency restrictions.
Sales Channels: MTS markets its products using a number of sales channels. The
Company sells its MT&S equipment through an employee sales network, independent
sales representatives and a direct mail (catalog) operation. Sales personnel are
generally graduate engineers or highly skilled technicians and are specially
trained to sell MTS products and services. Employee salespersons are compensated
with salary and sales incentives, and independent representatives are paid a
commission.
A list of major domestic and international offices for the Company's MT&S sector
follows:
Domestic offices:
Akron Dayton Philadelphia
Austin Denver Raleigh
Baltimore Detroit Pittsburgh
Boston Huntsville San Diego
Chicago Los Angeles San Jose
Cincinnati Minneapolis Seattle
Dallas Washington, D.C.
International offices:
Beijing and other cities, Paris, France
Peoples Republic of China
Berlin and other cities, Seoul, South Korea
Germany Torino, Italy
Gothenburg, Sweden Stroud, United Kingdom
Hong Kong Nagoya and Tokyo, Japan
Singapore
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In addition, MTS works with sales and service representative organizations in
nearly all industrialized countries of the world and in the developing countries
of Latin America, Asia, Africa and the Middle East.
The Company offers a mail-order catalog of material testing components,
accessories and products. The catalog includes products of complementary vendors
and aims to reach a broad range of customers involved in mechanical testing and
simulation.
The FA sector sells its products through sales channels separate from the MT&S
sector. A network of employees, direct sales, external domestic distributors,
representatives and system houses market the products of these divisions.
International revenue currently accounts for 38% of this sector's volume.
Efforts continue to expand sales channels in international markets.
International Operations and Export Sales: The sections entitled Geographic
Analysis of New Orders and Geographic Segment Information on pages 17 and 29 of
the Company's 1998 Annual Report to Shareholders, which sections are
incorporated by reference herein, contain information regarding the Company's
operations by geographic area.
Export Licensing: The Company's foreign shipments in fiscal 1998, 1997, and 1996
included sales to Asia-Pacific, Europe and other regions that may require the
Company to obtain export permission from the U.S. government. The Company does
not undertake manufacturing on custom systems or projects until it is assured
that permission will be granted. However, due to the extended time to process
and receive a license, design work is performed on some systems during the
licensing period. Changes in political relations between the U.S. and countries
requiring import licenses, as well as other factors, can adversely affect the
Company's ability to complete a sale should a previously issued license be
withdrawn. While political reform occurring internationally may relax export
controls, the U.S. government still maintains multilateral controls in agreement
with allies and unilateral controls based on U.S. initiatives and foreign policy
that may cause delays for certain shipments or the rejection of orders by the
Company.
BACKLOG
The Company's backlog, which it defines as firm orders remaining unfilled,
totaled $175.4 million at September 30, 1998, $175.8 million at September 30,
1997, and $120.5 million at September 30, 1996. The Company believes that
approximately $160 million of the backlog at September 30, 1998 will become
revenue during fiscal 1999. Delays may occur due to technical difficulties,
export licensing approval or the customer's preparation of the installation
site. Any such delay can affect the period when backlog is recognized as
revenue.
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COMPETITION
In the MT&S sector, customers may choose to buy equipment from the Company or
from competitors, principally: Instron (U.S.-based), Interlachen (U.S.), AVL
(Austria), Zwick (Germany), Saganomiya and Shimadzu (Japan). There are also
smaller local competitors in most major countries.
In lieu of buying equipment from the Company or its competitors, customers may
contract with testing laboratories such as EG&G, Peabody, Wyle, or with
universities. Government laboratories also market testing services to the
public.
Finally, customers may choose to construct their own testing equipment from
commercially available components. Customers in the aerospace and automotive
industries and universities sometimes choose this approach, purchasing equipment
from companies such as Parker Hannifin, Moog and Mannesman (Germany).
In the FA sector, the Company competes directly with small to medium-sized
specialty suppliers and also with divisions of the large control system
companies such as Rockwell, Emerson Electric, Mannesman (Germany) and Fanuc
(Japan).
MANUFACTURING AND ENGINEERING
The Company conducted a significant portion of its fiscal 1998 MT&S
manufacturing and engineering activities in Minneapolis. Certain engineering,
project management, final system assembly and quality testing may be done in
Berlin, Germany, and Tokyo, Japan. Electromechanical material testing systems
are assembled in the Raleigh, NC, facility and in the Paris, France facility.
The Company's MTS-PowerTek subsidiary engineers and assembles dynamometer
control systems and provides related services from Detroit. Manufacturing and
engineering activities for the FA sector occur in Raleigh, NC, New Ulm, MN,
Ludenscheid, Freiburg, and Stralsund, Germany, and at the Company's
majority-owned subsidiary in Nagoya, Japan.
PATENTS AND TRADEMARKS
The Company holds a number of patents, patent applications, licenses, trademarks
and copyrights which it considers, in the aggregate, to constitute a valuable
asset. The Company's system business is not dependent upon any single patent,
license, trademark or copyright.
RESEARCH AND DEVELOPMENT
The Company does not do basic research, but does fund significant product,
system and application developments. Costs of these development programs are
expensed as incurred, and amounted to $21.9, $17.5, and $17.7 million for fiscal
years 1998, 1997, and 1996 respectively. Additionally, the Company also
undertakes "first of their kind" high-technology, customer-funded contracts
which contain considerable technical pioneering. The combination of internally
sponsored product development and system or application innovation on customer
contracts approximates 10% of annual sales volume.
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EMPLOYEES
MTS employed 2,272 persons as of September 30, 1998, including 397 employees in
Europe, 48 in Japan, 13 in China, 4 in Canada, 12 in Korea, 4 in Hong Kong, and
2 in Singapore.
None of the Company's U.S. employees are covered by a collective bargaining
agreement, and MTS has experienced no work stoppages at any location.
SOURCES AND AVAILABILITY OF RAW MATERIALS AND COMPONENTS
A major portion of products and systems delivered to a customer may consist of
equipment and component parts purchased from vendors. The relationship which the
Company promotes with its vendors is partnership based with an emphasis on
continuous improvement. The Company is dependent upon certain computing hardware
and software devices and certain raw materials which have limited sources.
However, the Company has not experienced significant problems in procurement or
delivery of any essential materials, parts or components in the last several
years.
Due to the manner in which the Company sells the majority of its products, on a
fixed-price contract agreed upon at the time the order is obtained, wide
fluctuations up or down in cost of materials and components from order date to
delivery date, if not accurately forecast by the Company at an early date, can
change the expected profitability of any sale. The Company believes that such
fluctuations have not had a material effect on reported earnings, except as
affected by changes in foreign currency rates, which have been reported.
ENVIRONMENTAL MATTERS
Management believes the Company's operations are in compliance with federal,
state and local provisions relating to the protection of the environment.
BUSINESS SYSTEMS DEVELOPMENT
The Company undertook the development and deployment of an enterprise-wide
financial and business operations software system in 1997. The company expects
to complete its first phase of implementation in early 1999, with subsequent
phases to follow. This system is expected to improve business processing and to
provide software processing capability beyond the end of the century.
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ITEM 2. PROPERTIES
Domestic Facilities:
The Company's corporate headquarters and main MT&S plant, occupying 410,000
square feet, is located on 56 acres of land in Eden Prairie, Minnesota, a suburb
of Minneapolis. The original plant was completed in 1967. Six additions, the
most recent completed in 1997, have expanded the plant to its present size.
Approximately 50% of the Eden Prairie facility is used for manufacturing and
assembly while the balance of the facility is used for office space. In 1998,
17,000 square feet of manufacturing space was leased in Chanhassen, Minnesota
under a five year operating lease expiring in 2003.
Electronic design and component assembly is conducted in a 57,000 square foot
facility in Chaska, Minnesota, approximately 10 miles west of the headquarters
in Eden Prairie. The building was completed in 1996. MTS has a five year
operating lease with provisions to extend, purchase or terminate at the end of
the lease period. The terms of the lease agreement do not require capitalization
of the asset and the related obligation.
Custom Servo Motors, Inc. occupies a 30,000 square foot plant in New Ulm,
Minnesota (65 miles southwest of Minneapolis). The plant provides assembly
operations and office space. The facility was constructed in 1993 by the New Ulm
Economic Development Corporation and expanded in 1995. MTS has a five year
operating lease for the facility with provisions to extend the lease, purchase
the property, or terminate the lease. The terms of the lease agreement do not
require capitalization of the asset and the related obligation.
MTS Sensors Division is located near the Research Triangle Park in Cary, North
Carolina, a suburb of Raleigh. A 40,000 square foot plant constructed in 1988
provides manufacturing and office space. In 1992, 25,000 square feet was added
to the plant.
MTD Raleigh is located adjacent to the MTS Sensors Division site in Cary, North
Carolina. A 25,000 square foot plant, constructed in 1991, provides
manufacturing and office space.
MTS-PowerTek, Inc. occupies 20,000 square feet in Farmington Hills, Michigan, a
suburb of Detroit. Plant and office space in two buildings is leased under
conventional operating lease terms.
The Company leases space in other U.S. cities for sales and service offices.
Neither the space nor the rental obligations is significant.
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International Facilities:
MTS Systems GmbH is located in an 80,000 square foot facility in Berlin,
Germany. As of September 30, 1998 3,000 square feet has been leased to other
companies. The building is situated on land leased by MTS from the city
government. The lease expires in 2069.
MTS Systems (France) operates in a leased facility in Paris, France, of
approximately 38,000 square feet. Approximately 40% of this space is used for
manufacturing with the remainder used as offices. The current lease expires at
the end of fiscal 2000.
MTS Sensors Technologie operates in a leased facility in Ludenscheid, Germany on
approximately six acres of land. The manufacturing and office facilities occupy
18,000 square feet at this location.
Custom Servo Motors Antriebstechnik Verwaltungs GmbH operates in three leased
facilities in Germany, two in Freiburg, and a new facility in Stralsund. The
Freiburg facilities total about 12,000 square feet and the Stralsund location is
about 16,000 square feet. Approximately 50% of the Freiburg facilities and 70%
of the Stralsund facility are used for assembly with the remainder used as
offices.
The Company also leases office and general purpose space for its sales and
service subsidiaries in Stroud, United Kingdom; Torino, Italy; Seoul, South
Korea; Tokyo and Nagoya, Japan; Toronto, Canada; Sao Paulo, Brazil; Gothenburg,
Sweden; Beijing and Shanghai, Peoples Republic of China; Singapore; and Hong
Kong. No manufacturing is conducted at these locations.
Expansion Opportunities:
Room remains at its Eden Prairie location for limited facility expansion. Also,
the sites in Cary, North Carolina could be expanded. Other suitable commercial
real property is available for purchase or lease in metropolitan areas where the
Company is presently located. The Company considers its current facilities
adequate to support its operations in 1999.
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ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings were pending or threatened against the Company or
its subsidiaries as of September 30, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended September
30, 1998, for a vote by the shareholders.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's stock is traded on The Nasdaq Stock Market's National Market
(Nasdaq) under the symbol MTSC. The following table shows the Company's low and
high closing sale transactions as reported by Nasdaq. Share prices for fiscal
year 1997 have been restated retroactively for the two-for-one stock split in
the form of a 100% stock dividend effective February 2, 1998.
Quarter Ended Low * High *
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December 31, 1996 $ 9.625 $10.75
March 31, 1997 $ 9.75 $11.312
June 30, 1997 $10.25 $15.25
September 30, 1997 $14.375 $19.625
December 31, 1997 $17.375 $20.00
March 31, 1998 $13.50 $19.00
June 30, 1998 $15.50 $19.25
September 30, 1998 $11.562 $17.75
* Source: The Nasdaq Stock Market, Inc. Summary of Activity Report
At December 1, 1998 there were 1,760 holders of record of the Company's $.25 par
value common stock. The Company estimates that there are an additional 2,000
beneficial shareholders whose stock is held by nominees or broker dealers.
The Company has a history of paying quarterly dividends and expects to continue
such payments in the future. During 1998, 1997 and 1996, the Company paid
dividends totaling $.24, $.20 and $.16 per share, per year, respectively, to
holders of its common stock.
Under the terms of the Company's credit agreements, certain covenants require
that tangible net worth, as defined, must exceed a defined minimum amount and
limit repurchases of its common stock to a defined maximum amount. As of
September 30, 1998, tangible net worth exceeded the minimum by $24.8 million
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and the Company had $16.3 million available for repurchases of its common stock.
The Company has flexibility to declare and pay dividends in the future similar
to recent dividends.
ITEM 6. SELECTED FINANCIAL DATA
A comprehensive summary of selected financial information is presented in the
"Six Year Financial Summary" on page 16 of the Company's 1998 Annual Report to
Shareholders. Data included in the summary is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 17 through 22 of the Company's 1998 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The required disclosures are included in Management's Discussion and Analysis of
Financial Condition and Results of Operations on page 19 and in Note 1 to the
Consolidated Financial Statements included in the Company's 1998 Annual Report
to Shareholders. This information is incorporated herein by reference.
FORWARD LOOKING STATEMENTS
Statements included or incorporated by reference in this Form 10-K which are not
historical or current facts are "forward-looking statements" made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 and are subject to certain risks and uncertainties that could cause actual
results to differ materially from historical results and those presently
anticipated or projected. The following important facts, among others, could
affect the Company's actual results in the future and could cause the Company's
actual financial performance to differ materially from that expressed in any
forward-looking statement:
(i) With regard to the Company's 1998 product developments, there are no
uncertainties known to the Company concerning the expected results.
(ii) Possible significant volatility in both backlog and quarterly
operating results may result from large, individual, fixed price
orders, generally over $10 million, in connection with sales of MT&S
systems.
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(iii) Export controls based on U.S. initiatives and foreign policy, as
well as import controls imposed by foreign governments, may cause
delays for certain shipments or the rejection of orders by the
Company. Such delays could create material fluctuations in quarterly
results and could have a material adverse effect on results of
operations. Foreign revenues may also be affected by local political
conditions and/or currency restrictions.
(iv) Delays in realization of $175.4 million in backlog orders as of
September 30, 1998 (approximately $160 million of which are
anticipated to be recognized during fiscal 1999) may occur due to
technical difficulties, export licensing approval or the customer's
preparation of the installation site, any of which can affect the
quarterly or annual period when backlog is recognized as revenue and
could materially affect the results of any such period.
(v) Company experiences competition on a worldwide basis. Customers may
choose to purchase equipment from the Company or from its
competitors. For the MT&S sector, customers may also contract with
testing laboratories or construct their own testing equipment,
purchasing commercially available components. Factors which
influence the customer's decision include price, service and
required level of technology.
(vi) The Company is exposed to market risk from changes in foreign
currency exchange rates, which can affect its results from
operations and financial condition. Further disclosures are included
in Management's Discussion and Analysis of Financial Condition and
Results of Operations on page 19 and in Note 1 to the Consolidated
Financial Statements included in the Company's 1998 Annual Report to
Shareholders. This information is incorporated herein by reference.
(vii) Risks in connection with the Year 2000 issue, including risks of
anticipated Year 2000 compliance, greater-that-anticipated costs, or
risks of business interruptions due to inability of the Company's
vendors to comply.
The foregoing list is not exhaustive, and the Company disclaims any obligation
subsequently to or revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Report of Independent Public Accountants,
Quarterly Financial Information (unaudited), and Six Year Financial Summary
(unaudited) included in the Company's 1998 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Corporate Executive Officers of the Registrant on September 30, 1998 were:
Name and Age Position Officer Since
- ------------ -------- -------------
D. M. Sullivan (63) Chairman 1976
S. W. Emery, Jr. (52) President and 1998
Chief Executive Officer
K. D. Zell (56) Executive Vice President 1979
W. G. Beduhn (57) Vice President 1983
M. L. Carpenter (61) Vice President 1973
and Chief Financial Officer
M. G. Togneri (61) Vice President 1991
Officers serve at the discretion of and are elected annually by the board of
directors, and serve until their successors are elected. Business experience of
the Executive Officers for at least the last 5 years (consisting of positions
with the Company unless otherwise indicated) is as follows:
Officer Business Experience
------- -------------------
D. M. Sullivan Chairman since 1994. Chief Executive Officer
from 1987 to March 17, 1998. President and
Chief Operating Officer from 1982 to March
17, 1998. Vice President from 1976 to 1982.
Has extensive prior experience in the
management of technology intensive
businesses.
S. W. Emery, Jr. President and Chief Executive Officer since
March 17, 1998. Management and executive
positions with Honeywell, Inc. from 1985 to
1997. (Area Vice President Western and
Southern Europe from 1994 to 1997; Group
Vice President, Military Avionics Systems
from 1989 to 1994; Vice President and
General Manager, Space Systems Division from
1988 to 1989; Vice President Operations,
Process Controls Division from 1985 to 1988.
17
<PAGE>
K. D. Zell Executive Vice President of Mechanical
Testing and Simulation sector since 1993.
Vice President of Materials Testing Division
from 1988 to 1993. Vice President, Sales and
Service from 1984 to 1988. Vice President,
Product Group from 1979 to 1984. Division
manager, Hydro-Mechanical Products from 1978
to 1979.
W. G. Beduhn Vice President of Advanced Engineering
Solutions Division since 1991. Vice
President of Technology Development from
1983 to 1991. Division manager of various
marketing and operating divisions from 1977
to 1983.
M. L. Carpenter Vice President and Chief Financial Officer
since 1991. Vice President and Treasurer
since 1973.
M.G. Togneri Vice President of Sensors Division since
1998. Vice President of Factory Automation
sector from 1991 to 1997. Prior to his
employment at MTS was Vice President at
Square D Corporation and General Manager of
Crisp Automation. Has extensive experience
in the industrial instrumentation and
control business in the U.S. and
internationally.
(a) Information concerning the Company's Directors, including business
experience, can be found in the Company's Proxy Statement, a definitive
copy of which will be filed with the Securities and Exchange Commission
prior to January 26, 1999, and is incorporated herein by reference.
(b) The Company has no other significant employees requiring disclosure in
this Form 10-K.
(c) There are no family relationships between and among directors or officers.
(d) Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated herein by reference from the
Company's Proxy Statement, a definitive copy of which will be filed with
18
<PAGE>
the Securities and Exchange Commission prior to January 26, 1999, pursuant
to Regulation 14A under the Securities Exchange Act of 1934.
ITEM 11. EXECUTIVE COMPENSATION
See Item 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Items 11 and 12 is incorporated herein by reference
from the Company's Proxy Statement, a definitive copy of which will be filed
with the Securities and Exchange Commission prior to January 26, 1999, pursuant
to Regulation 14A under the Securities Exchange Act of 1934.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
The following documents are filed as part of this report:
(a) Financial Statements:
See accompanying Index to Financial Statements on Page F-1.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of
fiscal 1998.
(c) Exhibits:
3.a Restated and amended Articles of Incorporation, adopted
January 30, 1996, incorporated by reference from exhibit 3.a
of Form 10-K for the fiscal year ended September 30, 1996.
3.b Restated Bylaws, reflecting amendments through May 26, 1998.
10.a Management Variable Compensation Plan, Fiscal 1998, dated
December 3, 1998.
10.b 1985 Employee Stock Option Incentive Plan, incorporated by
reference to exhibit 4(a) from Form S-8, File No. 2-99389.
10.c 1987 Stock Option Plan, as amended, incorporated by reference
from exhibit 10.c of Form 10-K for the fiscal year ended
September 30, 1996.
10.d 1990 Stock Option Plan, as amended, incorporated by reference
from exhibit 10.d of Form 10-K for the fiscal year ended
September 30, 1996.
10.e 1994 Stock Plan, as amended, incorporated by reference from
exhibit 10.e of Form 10-K for the fiscal year ended September
30, 1996.
10.f Severance Agreement, dated March 5, 1998 between the
Registrant and William G. Beduhn as amended.
20
<PAGE>
10.g Severance Agreement, dated May 13, 1998 between the Registrant
and Marshall L. Carpenter as amended.
10.h Severance Agreement, dated December 3, 1990 between the
Registrant and Kenneth E. Floren, incorporated by reference to
exhibit 10.k of Form 10-K for the fiscal year ended September
30, 1990.
10.i Severance Agreement, dated May 1, 1990 between the Registrant
and Werner Ongyert, incorporated by reference to exhibit 10.m
of Form 10-K for the fiscal year ended September 30, 1990.
10.j Severance Agreement, dated May 1, 1990 between the Registrant
and J. Howell Owens, incorporated by reference to exhibit 10.n
of Form 10-K for the fiscal year ended September 30, 1990.
10.k Severance Agreement, dated May 20, 1997 between the Registrant
and Donald M. Sullivan, incorporated by reference to exhibit
10.k of Form 10-K for the fiscal year ended September 30,
1997.
10.l Severance Agreement, dated May 1, 1990 between the Registrant
and Richard S. White, incorporated by reference to exhibit
10.q of Form 10-K for the fiscal year ended September 30,
1990.
10.m Severance Agreement, dated March 27, 1998 between the
Registrant and Keith D. Zell, as amended.
10.n Severance Agreement, dated March 24, 1998 between the
Registrant and Mauro G. Togneri, as amended.
10.o 1992 Employee Stock Purchase Plan, incorporated by reference
to exhibit 4(a) from Form S-8, File No. 33-45386.
10.p 1997 Stock Option Plan, incorporated by reference to exhibit
10.p of Form 10-K for the fiscal year ended September 30, 1996
10.q Severance Agreement, dated September 30, 1996 between the
Registrant and Steven M. Cohoon, incorporated by reference
from exhibit 10.q of Form 10-K for the fiscal year ended
September 30, 1996.
10.r Severance Agreement, dated March 16, 1998 between the
Registrant and Sidney W. Emery.
21
<PAGE>
10.s Change in Control Agreement, dated March 16, 1998 between the
Registrant and Sidney W. Emery.
10.t Change in Control Agreement, dated March 27, 1998 between the
Registrant and Keith D. Zell.
10.u Change in Control Agreement, dated May 13, 1998 between the
Registrant and Marshall L. Carpenter.
10.v Change in Control Agreement, dated March 24, 1998 between the
Registrant and Mauro G. Togneri.
10.w Change in Control Agreement, dated March 13, 1998 between the
Registrant and William G. Beduhn.
13. Annual Report to Shareholders for the fiscal year ended
September 30, 1998.
21. Subsidiaries of the Company.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule.
(d) Financial Statement Schedules:
See accompanying Index to Financial Statements on page F-1.
22
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MTS SYSTEMS CORPORATION
By: /s/ Donald M. Sullivan
-----------------------------
Donald M. Sullivan
Chairman
By: /s/ Sidney W. Emery, Jr.
-----------------------------
Sidney W. Emery Jr.
President and Chief Executive
Officer
By: /s/ Marshall L. Carpenter
-----------------------------
Marshall L. Carpenter
Vice President and Chief Financial
Officer
Date: December 18, 1998
23
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
By: /s/ Charles A. Brickman
-----------------------------
Charles A. Brickman, December 18, 1998
Director
By: /s/ Jean Lou Chameau
-----------------------------
Jean Lou Chameau, December 18, 1998
Director
By: /s/ Bobby I. Griffin
-----------------------------
Bobby I. Griffin, December 18, 1998
Director
By: /s/ Russell A. Gullotti
-----------------------------
Russell A. Gullotti, December 18, 1998
Director
By: /s/ Brendan E. Hegarty
-----------------------------
Brendan E. Hegarty, December 18, 1998
Director
By: /s/ Thomas E. Holloran
-----------------------------
Thomas E. Holloran, December 18, 1998
Director
By: /s/ Linda Hall Whitman
-----------------------------
Linda Hall Whitman, December 18, 1998
Director
By: /s/ Thomas E. Stelson
-----------------------------
Thomas E. Stelson, December 18, 1998
Director
24
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
A. CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to the consolidated financial statements in the
Company's 1998 Annual Report to Shareholders which are incorporated by
reference in accordance with Rule 12b-23 under the Securities Exchange Act
of 1934 and attached hereto.
Annual
Report 10-K
Page Page
---- ----
Quarterly Financial Information (Unaudited) 22 ---
Consolidated Balance Sheets - September 30, 1998 23 ---
and 1997
Consolidated Statements of Income and Shareholders'
Investment for the Years Ended September 30, 1998,
1997 and 1996 24 ---
Consolidated Statements of Cash Flows for the
Years Ended September 30, 1998, 1997 and 1996 25 ---
Notes to Consolidated Financial Statements 26 ---
Report of Independent Public Accountants 35 ---
F-1
<PAGE>
Annual
Report 10-K
Page Page
---- ----
B. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SCHEDULE --- F-3
C. CONSOLIDATED SCHEDULE
Schedule Description
- -------- -----------
II Summary of Consolidated Allowances for
Doubtful Accounts --- F-4
All schedules except the one listed above have
been omitted as not required, not applicable,
or the information required therein is
contained in the financial statements or the
footnotes thereto.
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To MTS Systems Corporation:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in MTS Systems Corporation's annual
report to shareholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated November 20, 1998. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
(page F-4) listed as a part of Item 14 in this Form 10-K is the responsibility
of the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
November 20, 1998
F-3
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
SCHEDULE II - SUMMARY OF CONSOLIDATED ALLOWANCES
FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
Balance Provision Amounts Balance
Beginning Charged to Written End of
of Year Operations Off Year
------- ---------- ------- -------
(expressed in thousands)
1998 $2,010 $344 $(219) $2,135
1997 1,742 449 (181) 2,010
1996 1,824 330 (412) 1,742
F-4
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
3.b Restated Bylaws
10.a Management Variable Compensation Plan Fiscal 1998
10.f Severance Agreement, dated March 5, 1998, as amended
10.g Severance Agreement, dated May 13, 1998, as amended
10.m Severance Agreement, dated March 27, 1998, as
amended
10.n Severance Agreement, dated March 24, 1998, as
amended
10.r Severance Agreement, dated March 16, 1998
10.s Change in Control Agreement, dated March 16, 1998
10.t Change in Control Agreement, dated March 27, 1998
10.u Change in Control Agreement, dated May 13, 1998
10.v Change in Control Agreement, dated March 24, 1998
10.w Change in Control Agreement, dated March 13, 1998
13. Annual Report to Shareholders for the fiscal year
ended September 30, 1998
21. Subsidiaries of the Company
23. Consent of Independent Public Accountants
27. Financial Data Schedule
EXHIBIT 3.b
BYLAWS
OF
MTS SYSTEMS CORPORATION
(Reflecting Amendments through May 26, 1998)
-----------------------------------------------------
ARTICLE I
Shareholders
Section 1. The annual meeting of the shareholders of this corporation
shall be held on such date in January of each year and at such place as may be
designated by the Board of Directors. A notice setting out the time and place of
the annual meeting shall be mailed, postage prepaid, to each shareholder of
record at his address as it appears on the records of the corporation, or if no
such address appears, at his last known address, at least ten days prior to the
annual meeting, but any shareholder may waive such notice either before, at, or
after such meeting by a signed waiver in writing.
Section 2. At the annual meeting, the shareholders shall elect
directors of the corporation and shall transact such other business as may
properly come before them. To be properly brought before the meeting, business
must be of a nature that is appropriate for consideration at an annual meeting
and must be (i) specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board of Directors, (ii) otherwise properly
brought before the meeting by or at the direction of the Board of Directors, or
(iii) otherwise properly brought before the meeting by a shareholder. In
addition to any other applicable requirements, for business to be properly
brought before the annual meeting by a shareholder, the shareholder must have
given timely notice thereof in writing to the secretary of the corporation. To
be timely, each such notice must be given, either by personal delivery or by
United States mail, postage prepaid, to the secretary of the corporation, not
less than 45 days nor more than 75 days prior to a meeting date corresponding to
the previous year's annual meeting. Each such notice to the secretary shall set
forth as to each matter the shareholder proposes to bring before the annual
meeting (a) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (b) the name and address of record of the shareholder proposing such
business, (c) the class or series (if any) and number of shares of the
corporation which are owned by the shareholder, and (d) any material interest of
the shareholder in such business. Notwithstanding anything in these Bylaws to
the contrary, no business shall be transacted at the annual meeting except in
accordance with the procedures set forth in this Article; provided, however,
that nothing in this Article shall be deemed to preclude discussion by any
shareholder of any business properly brought before the annual meeting, in
accordance with these Bylaws.
Section 3. A special meeting of the shareholders may be called at any
time by the Chairman of the Board of Directors of the corporation and shall be
called by the Secretary upon the request in writing by two or more members of
the Board of Directors, upon the vote of the Directors, or upon the request in
writing of shareholders holding not less than one-tenth of the outstanding
shares of voting stock. Such meeting shall be called by mailing a notice thereof
as above provided. Such notice shall state the time, place, and object of the
meeting.
1
<PAGE>
Section 4. At any shareholders' meeting, each shareholder shall be
entitled to one vote for each share of stock standing in his name on the books
of the corporation as of the date of the meeting. Any shareholder may vote
either in person or by proxy. The presence in person or by proxy of the holders
of a majority of the shares of stock entitled to vote at any shareholders'
meeting shall constitute a quorum for the transaction of business. If no quorum
be present at any meeting, the shareholders present in person or by proxy may
adjourn the meeting to such future time as they shall agree upon without further
notice other than by announcement at the meeting at which such adjournment is
taken.
ARTICLE II
Directors
Section 1. The Board of Directors shall have the general management and
control of all business and affairs of the corporation and shall exercise all
the powers that may be exercised or performed by the corporation under the
statutes, its Articles of Incorporation, and its Bylaws.
Section 2. The Board of Directors of this corporation shall consist of
up to ten Directors, and majority of the Directors then holding office shall
constitute a quorum.
Section 3. Each director shall be elected for a term of one year, and
shall hold office for that term and until his successor is elected and
qualified. If a vacancy in the Board occurs by reason of death, resignation, or
otherwise, the vacancy may be filled for the unexpired portion of the term in
which it occurs by a majority vote of the remaining Directors.
Section 4. The Board of Directors may meet regularly at such time and
place as it shall fix by resolution, and no notice of regular meetings shall be
required. Special meetings of the Board of Directors may be called by the
President or any two Directors by giving at least three days' notice to each of
the other Directors by mail, telephone, telegraph, or in person, provided that
such notice may be waived either before, at, or after a meeting by any Director
by a signed waiver in writing.
Section 5. Any action which might have been taken at a meeting of the
Board of Directors may be taken without a meeting if done in writing, signed by
all of the Directors, and any such action shall be as valid and effective in all
respects as if taken by the Board at a regular meeting.
Section 6. The Board of Directors shall fix and change as it may from
time to time determine by a majority vote, the compensation to be paid the
officers of the corporation, and, if deemed appropriate, the members of the
Board of Directors.
Section 7. Subject to the provisions of applicable laws and its
Articles of Incorporation, the Board of Directors shall have full power to
determine whether any, and if any, what part of any, funds legally available for
the payment of the dividends shall be declared in dividends and
2
<PAGE>
paid to the shareholders; the division of the whole or any part of such funds of
this corporation shall rest wholly within the discretion of the Board of
Directors, and it shall not be required at any time, against such discretion, to
divide or pay any part of such funds among or to the stockholders as dividends
or otherwise.
Section 8. Except as otherwise provided in Article III of these Bylaws,
the Board of Directors may, in its discretion, by the affirmative vote of a
majority of the Directors, appoint committees which shall have and may exercise
such powers as shall be conferred or authorized by the resolutions appointing
them. A majority of any such committee, if the committee be composed of more
than two members, may determine its action and fix the time and place of its
meetings, unless the Board of Directors shall otherwise provide. The Board of
Directors shall have power at any time to fill vacancies in, to change the
membership of, or to discharge any such committee.
ARTICLE III
Executive Committee
The Board of Directors may by unanimous affirmative action of the
entire Board designate two or more of their number to constitute an Executive
Committee which, to the extent determined by unanimous affirmative action of the
Board, shall have and exercise the authority of the Board in the management of
the business of the corporation. Such Executive Committee shall act only in the
interval between meetings of the Board and shall be subject at all times to the
control and direction of the Board.
ARTICLE IV
Officers
Section 1. The officers of this corporation shall be a Chairman of the
Board of Directors, a President (one of which may be designated Chief Executive
Officer in the discretion of the Directors), one or more Vice Presidents (any
one of which may be designated as Executive Vice President in the discretion of
the Directors), a Treasurer, a Secretary, and such other and further officers,
including any number of Assistant Secretaries and Assistant Treasurers as may be
deemed necessary from time to time by the Board of Directors, each of whom shall
be elected by the Board of Directors. One person may hold any two offices other
than those of President and Vice President. No more than two offices shall be
held by any one person. Each officer shall serve at the pleasure of the Board of
Directors until the next annual meeting of Directors and until his successor is
duly elected and qualifies. Notwithstanding the foregoing, the Board of
Directors shall have the power and authority to cause the corporation to enter
into Employment Agreements or Contracts with any of the officers of the
corporation for periods exceeding one year.
3
<PAGE>
Section 2. The Chairman of the Board of Directors shall preside at
meetings of shareholders and Directors.
Section 3. The Chief Executive Officer shall have general and active
management of the business under the supervision and direction of the Board of
Directors and he shall be responsible for carrying into effect all orders and
resolutions of the Board of Directors. He shall also have such other powers and
perform such other duties as the Board of Directors may from time to time
prescribe. The position of Chief Executive Officer shall be filled, at the Board
of Directors' discretion, either by the Chairman or the President.
Section 4. The Board of Directors may also appoint a Chief Operating
Officer with duties to be determined by the Chief Executive Officer. Unless he
is also serving as the Chief Executive Officer, the President would be appointed
as Chief Operating Officer. If the President is also serving as Chief Executive
Officer, the President shall nominate an Executive Vice President to be
appointed by the Board as Chief Operating Officer.
Section 5. The Vice Presidents of the corporation shall each have such
powers and duties as generally pertain to their respective offices as well as
such powers and duties as from time to time may be conferred by the Board of
Directors.
Section 6. The Secretary shall keep a record of the meetings and
proceedings of the Directors and shareholders, have custody of the corporate
seal and of other corporate records specifically entrusted to him by these
Bylaws or by direction of the Board of Directors, and shall give notice of such
meetings as are required by these Bylaws or by the Directors.
Section 7. The Treasurer shall keep accounts of all monies and assets
of the corporation received or disbursed, shall deposit all funds in the name of
and to the credit of the corporation in such banks or depositories or with such
custodians as may be authorized to receive the same by these Bylaws or the Board
of Directors, and shall render such accounts thereof as may be required by the
Board of Directors, the Chairman of the Board of Directors, the Chief Executive
Officer, the President, or the shareholders.
ARTICLE V
Fiscal Year
The fiscal year of the corporation shall be from the first day of
October to the 30th day of September in the succeeding year.
ARTICLE VI
Office
The principal office of this corporation shall be at such place as the
Board of Directors shall fix from time to time. The corporation may also have an
office or offices at such other places and in such other states or countries as
the Board of Directors may from time to time authorize and establish.
4
<PAGE>
ARTICLE VII
Seal
The corporation shall have a corporate seal which shall bear the name
of the corporation and the name of the state of incorporation and the words
"corporate seal". It shall be in such form and bear such other inscription as
the Board of Directors may determine or approve.
ARTICLE VIII
General Provisions
Section 1. Shares of stock in this corporation not exceeding the
authorized number thereof as specified in the Articles of Incorporation may be
issued, and certificates therefore shall be authenticated by the Chairman of the
Board of Directors, or the President or any Vice President and the Secretary or
Treasurer upon authorization by the Board of Directors and receipt by the
corporation of such consideration for such shares as shall be specified by the
Board of Directors. In the event that a bank, trust company of other similarly
qualified corporation is designated and agrees to act as the registrar and/or
transfer agent for the corporation, then the signatures of the officers
specified above and the seal of the corporation may be imprinted upon the stock
certificates by facsimile and said certificates may be authenticated by
signature of an authorized agent of the said registrar and/or transfer agent.
The officers of the corporation may delegate to such transfer agent and/or
registrar such of the duties relating to the recording and maintenance of
records relating to shares of stock and shareholders of the corporation as may
be deemed expedient and convenient and as are assumed by said registrar and/or
transfer agent.
Section 2. The Board of Directors may establish reasonable regulations
for recording of transfers of shares of stock in this corporation, and may
establish a date, not earlier than 60 days prior to any shareholders' meeting,
as of which the shareholders entitled to vote and participate in any
shareholders' meeting shall be determined.
Section 3. From time to time as it may deem appropriate and
advantageous to the best interests of this corporation, the Board of Directors
may establish such bonus, pension, profit sharing, stock bonus, stock purchase,
stock option, or other employee incentive plans, as and for the benefit of such
of the corporation's employees as it in its sole discretion shall determine.
Section 4. No certificate for shares of stock in the corporation, or
any other security issued by this corporation, shall be issued in place of any
certificate alleged to have been lost, destroyed or stolen, except on production
of such evidence of such loss, destruction or theft and on delivery to the
corporation, if the Board of Directors shall so require, of a bond of indemnity
in such amount (not exceeding twice the value of the shares represented by such
certificate), upon such terms and secured by such surety as the Board of
Directors may in its discretion require.
Section 5. Any person who at any time shall serve or shall have served
as a director, officer or employee of the corporation, or of any other
enterprise at the request of the
5
<PAGE>
corporation, and the heirs, executors and administrators of such person, shall
be indemnified by the corporation in accordance with, and to the fullest extent
permitted by, the provisions of the Minnesota Business Corporation Act, as it
may be amended from time to time.
ARTICLE IX
Adoption and Amendment
Section 1. These Bylaws shall become and remain effective until amended
or superseded as hereinafter provided when they shall have been adopted by the
Board of Directors named in the Articles of Incorporation or in the absence of
such adoption, by the shareholders.
Section 2. The Board of Directors may alter or may amend these Bylaws
and may make or adopt additional Bylaws, subject to the power of the
shareholders to change or repeal the Bylaws; provided the Board of Directors
shall not make or alter any Bylaw fixing their qualifications, classifications,
term of office, or number, except the Board of Directors may make or alter any
Bylaw to increase their number.
Section 3. The shareholder may alter or amend these Bylaws and may make
or adopt additional Bylaws by a majority vote at any annual meeting of the
shareholders or at any special meeting called for that purpose.
6
EXHIBIT 10.a
(Approved by the Board HR Committee
December 3, 1997)
MANAGEMENT VARIABLE COMPENSATION (MVC) PLAN
FISCAL '98
EFFECTIVE FOR ALL UNITS EXCEPT CUSTOM SERVO MOTORS AND AEROMET
1. PURPOSE OF PLAN
To focus efforts on achievement of objectives which are critical to the
success of the Company; to reward accomplishment at a level above
competition when performance is above that of comparable companies; to
more closely couple total compensation costs (salary plus variable) to
the financial results of the enterprise.
The Plan's payout is primarily related to achievement of
Corporate/Sector/Division/Niche profit and growth objectives. Other
measurable objectives may be included at the discretion of the
cognizant officer with approval by the CEO.
2. RELATIONSHIP TO OTHER COMPENSATION PLANS
2.a SALARY PLAN
The midpoint of a given salary range will be suppressed by 1/4th of the
average competitive payout potential of participants in that range to
conform to the Company's fixed vs. variable compensation strategy
(i.e., if the participants in a range have an average competitive
payout potential of 20%, the midpoint of that range will be suppressed
5%).
2.b "NON MANAGEMENT" VARIABLE COMPENSATION PLAN (NMVC)
Certain units may have a variable compensation plan for employees who
are not eligible for the MVC, sales commissions, or other variable
compensation plans. Payout in these NMVC Plans is linked directly to
payout on the unit's MVC profit objectives. These non-management plans
are subject to the approval of the unit vice president, corporate Human
Resources manager and CEO.
The following is an outline summary to which these NMVC plans must
adhere. They are included in this MVC Plan for reference only.
2.b(1) NMVC Competitive payout potential is 3% of the midpoint of the salary
range in which the employee is placed at the beginning of the fiscal
year.
2.b(2) NMVC payout will normally be based on the results of the employee's
unit vice president's (in some cases the unit manager's) profit
objective(s) for the year. If the unit's vice president (manager)has
more than one such objective, the payout will be based on the weighted
average of the officer's objectives.
<PAGE>
'98 MVC Plan
Page 2
2.b(3) The entire 3% NMVC payout potential is eligible for overranging for
participating employees. The overranging will be at the same ratio as
the unit officer (manager's) profit objective(s) overranging, if any.
2.b(4) Eligibility and participation rules for NMVC will be the same as those
for MVC, where appropriate.
2.c RETIREMENT PLAN
The calculations for the Management Variable Compensation Plan (and
"NMVC") are made after deductions for retirement plans.
Payout to a U.S. based participant in the Management Variable
Compensation Plan (and "NMVC") is included in the calculation of the
Company's contribution to that employee's retirement plan.
3. ELIGIBILITY AND PARTICIPATION
* Corporate officers
* Unit vice presidents
* Market and functional unit managers
* Managers, technical supervisors and key marketing or technical
employees who meet certain minimum responsibilities for
profitability, financial/human resource acquisition and
allocation, balance sheet control, and/or market/technical
direction - defined as beginning at SAM 15 and TE 5, or
equivalent.
An employee must be in such a position by the November Board of
Directors meeting in order to be eligible for the fiscal year plan
beginning the preceding 1 October, unless otherwise authorized by the
CEO.
Certain subsidiaries may have other management variable compensation
plans approved by the cognizant corporate vice president, corporate HR
manager and CEO.
An officer may recommend that an employee, who is otherwise eligible,
not participate but such a recommendation must be agreed to by the CEO.
Participants are eligible for payout in proportion to the % of the
fiscal year the participant is responsible for the qualifying position,
unless otherwise authorized by the CEO.
Employees who work less than full time during a year (e.g., due to a
personal leave, but not due to illness) would earn a proportionately
reduced payout.
Unless authorized by the CEO, no payout will be made to employees who
work less than 1,000 hours in the fiscal year.
<PAGE>
'98 MVC Plan
Page 3
The participant must be on MTS' payroll at the end of the fiscal year
to qualify for a payout. Employees resigning or terminated before the
end, regardless of cause, are not eligible unless otherwise authorized
by the CEO. (An example of an exception could be early retirement or
voluntary separation under a workforce reduction plan.)
No employment contract is implied by participation in this Plan.
4. ESTABLISHMENT OF OBJECTIVES
a. The Board of Directors sets the CEO's Corporate profit
objectives (Return on Beginning Equity [ROBE]/share and Return
on Average Net Assets [ROANA]), the revenue growth objective,
and the CEO's individual "other" objective, at their November
meeting.
b. Profit objectives for other participants (typically ROANA, but
may be contribution or pretax for other than officers) and
their revenue growth objective will also be finalized by the
December '97 Board of Directors' meeting. They are not
renegotiable. All other objectives must be finalized by 15
December.
The cognizant officers and CEO approve the profit and revenue
growth objectives for other participants. The purpose of these
approvals is to:
* Integrate objectives into Company operating plan
* Guard against conflicting objectives
* Help to assure consistency in degree of difficulty
The cognizant vice president and one other manager approve all
"other" objectives
c. Each participant whose competitive payout potential exceeds
10% will have a mix of objectives per paragraph 7.
5. CRITERIA FOR OBJECTIVES
5.a CORPORATE
The Corporate Profit and Growth, Objectives are set by the Board based
on the current 3 Year Business Plan. Currently they are:
ROBE/Share: 15% return on beginning equity/share (span -1/3 to + 2/3)
Or
A EPS: 15% increase (span -1/3 to + 2/3)
ROANA: 21% (span -1/3 to + 2/3), calculated with net assets
including cash above short term borrowings.
<PAGE>
'98 MVC Plan
Page 4
(Both ROBE and ROANA may be increased in '98 based on an
analysis of comparable company performance and MTS's cost
of capital.)
Revenue Growth 12% /year; span +/-1/3
All objectives include all transactions, acquisitions, write-offs, sale
of assets, etc. unless specifically excluded by the Board in writing.
5.b UNIT
Sector/Division/Niche profit and growth objectives are set as
appropriate for the 3 Year Business Plan for the unit. For example,
(MT&S + MTS PowerTek + ASD) ROANA objectives are 19.25% cashless for
'97; and 22.5% cashless for '98.
Sector/Niches whose ROANA budget in a given year exceeds the equivalent
of the Corporate ROANA goal without cash (22.5%) could have their
budget number as their MVC goal, but it would not more than 120% of the
equivalent Corporate goal (1.2 x 22.5 = 27%)
Revenue growth objectives are set on a year-to-year basis using the
current three year business plan as a reference.
"Other" objectives must be stated in measurable terms and must not be
activities (i.e. number of sales calls or technical society
presentations).
6. COMPETITIVE PAYOUT POTENTIAL
The competitive payout potential, when added to the mid-point of the
salary range is intended to yield total cash compensation somewhat
above that of comparable companies to compensate for the salary
suppression (ref. 2a).
The competitive payout potential, expressed as a % of the midpoint of
the salary structure, or actual salary in the case of subsidiary
management, is shown below:
<TABLE>
<CAPTION>
POSITION COMPETITIVE PAYOUT POTENTIAL %
<S> <C> <C>
CEO E5 70
Executive Vice President,
MT&S E-4 50
Vice President E-3 25-50, depending on revenue level (profit potential)
Vice President E-2 25-50, depending on revenue level (profit potential)
Vice President (Unit) E-1 15-45, depending on revenue level (profit potential)
Market Division P&L Mgrs. SAM 17-21 15-35, depending on revenue level (profit potential)
All Other Management/
Leadership SAM 18-21 10-25, depending on profit impact
SAM 15-17 6-20, depending on profit impact
TE 5/5S -9/9S 6-15, depending on profit impact
</TABLE>
<PAGE>
'98 MVC Plan
Page 5
7. OVERRANGING/MAXIMUM POTENTIAL PAYOUT
The objectives are set at challenging but realistic levels which are
used in the overall process of planning and resource allocation. This
is not meant to be a limit to our aspirations, and performance above of
those objectives should be rewarded as it is to the benefit of all
stakeholders in the enterprise. Payout above the competitive payout
potential is termed overranging.
Two MVC mixes are possible for participants with a competitive payout
potential of 15% or higher. Both versions yield the same maximum
potential expressed at a percentage of competitive payout.
A) Financial objective at 70% with 300% overranging (O.R.)
Other objectives including revenue growth at 30% with no O.R.
(70 x 3) + (30 x 1) = 240%
B) Financial objectives at 60% with 300% O.R.
Revenue growth objective at 20% with 200% O.R.
Other objectives at 20% without O.R.
(60 x 3) + (20 x 2) + (20 x 1) = 240%
The unit VP and CEO determine which mix is appropriate for
each participant
8. PAYOUT
Payouts under this Plan (and the Non Management Variable Compensation
Plan) are considered costs for the calculation of profit objectives
(EPS/ROANA/Pretax/Contribution); so simultaneous equations are used for
calculations.
Payouts are audited by the manager of internal audit and approved by
the CFO.
Payout will be made within 90 days of the end of the fiscal year.
9. APPROVAL OF PLAN
The Plan, and participation therein, are subject to annual review and
approval by the Board of Directors.
EXHIBIT 10.f
SEVERANCE AGREEMENT
AGREEMENT made as of this 5th day of March, 1998 by and between MTS Systems
Corporation, a Minnesota corporation ("MTS") and William G. Beduhn (the
"Executive").
WHEREAS, MTS considers the establishment and maintenance of a sound and vital
management and an orderly succession plan to be essential to protecting and
enhancing the best interests of MTS and its shareholders; and
WHEREAS, Executive has made and is expected to make, due to Executive's intimate
knowledge of the business and affairs of MTS, its policies, methods, personnel
and problems, a significant contribution to the profitability, growth and
financial strength of MTS; and
WHEREAS, Executive is willing to remain in the employ of MTS upon the
understanding that MTS will provide income security if the Executive's
employment is terminated under certain terms and conditions; and
WHEREAS, this Agreement is consistent with the requirements of the
executive/high policy-making exception to the Age Discrimination in Employment
Act, 29 U.S.C. Section 631(c)(1) (the "Executive Exemption"), benefits in
connection therewith are pursuant to pension, profit sharing and deferred
compensation plans as defined therein, and Executive, by virtue of his/her
duties and responsibilities on behalf of MTS, qualifies under said exception for
mandatory retirement on or after his/her 65th birthday; and
WHEREAS, MTS is providing Executive, simultaneously with this Agreement,
consideration in the form of a Change in Control Agreement, to provide
additional benefits to Executive in the event of a change in control;
NOW THEREFORE, in consideration of the foregoing and other respective covenants
and agreements of the parties herein contained, the parties hereto agree as
follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until the earlier of (a) the date on which the
Executive and MTS agree in writing to terminate this Agreement, or (b)
the Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If
a change in control occurs, as defined in that certain agreement
between the Executive and MTS of even date herewith (the "Change in
Control Agreement", attached as Exhibit 1), this Agreement shall be
superseded by the provisions of the Change in Control Agreement except
as provided in the following sentence. MTS's right under this Agreement
to terminate the Executive's employment pursuant to the Executive
Exemption shall not be superseded by the Change in Control Agreement
and the Executive shall be entitled to receive the benefits to which
he/she is entitled under subparagraph 4(d) hereunder if such
termination occurs.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Severance Agreement Page 8
party all costs of litigation including, but not limited to, reasonable
attorney's fees and court costs. The arbitration proceedings and Award
shall be maintained by both parties as strictly confidential, except as
otherwise required by court order and with respect to the parties'
attorneys and tax advisors, and, with respect to MTS, members of its
management, and, with respect to Executive, his/her family.
12. Miscellaneous.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the parties. No waiver by
either party hereto at any time of any breach by the other
party to this Agreement of or compliance with, any other party
shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or similar time.
(b) No agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in
this Agreement.
(c) The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of
Minnesota.
(d) Any provision of this Agreement which conflicts with
applicable law shall be modified to the extent necessary to
ensure its enforceability. The invalidity or unenforceability
or any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
This Agreement supersedes any and all prior oral and written understandings and
agreements between the Executive and MTS, including specifically the Employment
Agreement between MTS and the Executive dated December 12, 1992 and attached as
Exhibit 2.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have
executed this Agreement as of the day and date first above written.
EXECUTIVE MTS SYSTEMS CORPORATION
/s/ William G. Beduhn By /s/ Donald M. Sullivan
--------------------------- ---------------------------------
William G. Beduhn
Its Chairman
--------------------------------
EXHIBIT 10.g
SEVERANCE AGREEMENT
AGREEMENT made as of this 13th day of May, 1998 by and between MTS Systems
Corporation, a Minnesota corporation ("MTS") and Marshall L. Carpenter (the
"Executive").
WHEREAS, MTS considers the establishment and maintenance of a sound and vital
management and an orderly succession plan to be essential to protecting and
enhancing the best interests of MTS and its shareholders; and
WHEREAS, Executive has made and is expected to make, due to Executive's intimate
knowledge of the business and affairs of MTS, its policies, methods, personnel
and problems, a significant contribution to the profitability, growth and
financial strength of MTS; and
WHEREAS, Executive is willing to remain in the employ of MTS upon the
understanding that MTS will provide income security if the Executive's
employment is terminated under certain terms and conditions; and
WHEREAS, this Agreement is consistent with the requirements of the
executive/high policy-making exception to the Age Discrimination in Employment
Act, 29 U.S.C. Section 631(c)(1) (the "Executive Exemption"), benefits in
connection therewith are pursuant to pension, profit sharing and deferred
compensation plans as defined therein, and Executive, by virtue of his/her
duties and responsibilities on behalf of MTS, qualifies under said exception for
mandatory retirement on or after his/her 65th birthday; and
WHEREAS, MTS is providing Executive, simultaneously with this Agreement,
consideration in the form of a Change in Control Agreement, to provide
additional benefits to Executive in the event of a change in control;
NOW THEREFORE, in consideration of the foregoing and other respective covenants
and agreements of the parties herein contained, the parties hereto agree as
follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until the earlier of (a) the date on which the
Executive and MTS agree in writing to terminate this Agreement, or (b)
the Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If
a change in control occurs, as defined in that certain agreement
between the Executive and MTS of even date herewith (the "Change in
Control Agreement", attached as Exhibit 1), this Agreement shall be
superseded by the provisions of the Change in Control Agreement except
as provided in the following sentence. MTS's right under this Agreement
to terminate the Executive's employment pursuant to the Executive
Exemption shall not be superseded by the Change in Control Agreement
and the Executive shall be entitled to receive the benefits to which
he/she is entitled under subparagraph 4(d) hereunder if such
termination occurs.
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Severance Agreement Page 2
2. Termination by Reason of Death or Disability. In the event of the
Executive's death or disability during the Term of this Agreement,
Executive shall be entitled to such benefits provided under any policy,
plan or program governing death or disability maintained by MTS and
covering such Executive and this Agreement shall not apply. The
determination of disability and the amount and entitlement of benefits
shall be governed by the terms of such policy, plan or program. In the
event of the Executive's disability, the Executive's Date of
Termination shall be the date on which Executive has been unable, by
reason of physical or mental disability, to perform the services
required of him/her for his/her position, even with reasonable
accommodation, for the period of time indicated in MTS's group long
term disability plan (in which the Executive is a participant) during
which a participant must be disabled before benefits become payable. In
connection with Executive's termination due to disability, a qualified
physician must certify the disability and MTS shall at all times comply
with the Americans With Disabilities Act and any other applicable
disability discrimination law.
3. Resignation or Termination for Cause.
(a) The Executive may resign his/her employment or MTS may
terminate the Executive's employment for Cause, effective as
of the Date of Termination set forth in the Notice of
Termination. If Executive resigns or his/her employment is
terminated by MTS for Cause, MTS shall pay to Executive
his/her full base salary through the Date of Termination at
the rate in effect at the time of Notice of Termination is
given and MTS shall have no further obligation to Executive
under this Agreement.
(b) Termination by MTS of Executive's employment for "Cause" shall
mean termination as a result of:
(i) the conviction of the Executive by a court of
competent jurisdiction for felony criminal conduct;
or
(ii) willful misconduct by the Executive; or
(iii) violation by the Executive of any employment
agreement applicable to the Executive.
4. Termination Other Than for Cause. MTS may terminate Executive's
employment for a reason other than Cause, including pursuant to the
Executive Exemption on or after Executive's 65th birthday, effective as
of the Date of Termination set forth in the Notice of Termination. If
Executive's employment is terminated by MTS other than for Cause, death
or disability, Executive shall be entitled, subject to subparagraph
4(d)(v) and paragraph 9 of this Agreement, to the benefits described in
subparagraphs (a), (b) and (c) below and, if applicable, subparagraph
(d) below.
(a) Executive shall be paid a monthly Severance Payment equal to
the Executive's Monthly Gross Income, as defined in
subparagraph (i) below for 18 months. If Executive's
employment is terminated pursuant to the Executive Exemption
as
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Severance Agreement Page 3
described in subparagraph 4(d) hereunder, "12" shall be
substituted for 18 in the preceding sentence.
(i) For purposes of this Agreement, Monthly Gross Income
shall mean the sum of the following amounts, subject
to applicable federal and state withholding.
(A) 1/12 of the highest average base salary for
any 12- consecutive month period during the
36 calendar month period ending immediately
prior to the Date of Termination; plus
(B) 1/36 of the total Management Variable
Compensation earned during the 3 most recent
fiscal years ending immediately prior to the
Date of Termination; plus
(C) the product of the average percentage of MTS
profit sharing contributions to the MTS
Systems Corporation Profit Sharing
Retirement Plan and Trust (as a percent of
Compensation as defined in the Plan) for the
3 most recent Plan Years ending immediately
prior to the Date of Termination multiplied
by the sum of (A) and (B) above.
(b) Following the Executive's Date of Termination and while
severance payments are being paid to the Executive or, if
earlier, until Executive is covered under other group plans,
MTS shall continue to pay the employer share of the
Executive's MTS group life and health insurance premiums. All
premium payments made on Executive's behalf following his/her
Date of Termination and Executive's continued participation in
the plans are contingent upon Executive making the appropriate
timely written elections to continue his/her group benefits
following his/her Date of Termination, said group benefits
continuing in effect for active MTS employees, Executive
continuing to be eligible under the terms of the plans and
applicable laws, and Executive's payment of the employee
portion of the premiums for such benefits. MTS will deduct
these amounts from its payments to the Executive. Benefits
otherwise receivable by Executive pursuant to this
subparagraph (b) shall be reduced or eliminated to the extent
comparable benefits are actually received by Executive during
such period from a source outside MTS, and any such benefits
actually received by Executive shall be reported to MTS.
Following the severance pay period, Executive shall be
entitled to continue any of said benefits which qualify as
group health and life insurance benefits for continuation
coverage under the Comprehensive Omnibus Budget Reconciliation
Act ("COBRA") or applicable state law and pursuant to the
terms of the plan.
(c) The Executive's rights under any existing Employee Stock
Option Agreement and any future such agreements, including
particularly his/her right to exercise his/her options
following his/her termination of employment, shall continue to
be fully effective hereunder. In addition, if the Executive's
termination of employment occurs pursuant to the Executive
Exemption on or after he/she has reached his/her 65th
birthday, the Executive shall continue to vest in any stock
options in which
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Severance Agreement Page 4
he/she is not fully vested, as though he/she were continuing
his/her employment with MTS as an active employee, subject at
all times to the exercise times and other terms and conditions
set forth in said Stock Option Agreements and to Executive's
signing the release agreement described in paragraph 9 herein.
(d) If Executive's termination of employment occurs pursuant to
the Executive Exemption on or after he/she has reached his/her
65th birthday, Executive shall be entitled to receive the lump
sum equivalent of the amount necessary to purchase a $44,000
pre-tax straight life annuity, said lump sum to be taken from
MTS contributions and earnings thereon to Executive's accounts
in MTS sponsored pension, profit sharing, and deferred
compensation plans, as applicable. If Executive is entitled to
less than that amount from the applicable MTS plans in which
he/she is a participant as of his/her Date of Termination,
then MTS shall make an additional contribution on Executive's
behalf to Executive's Deferral Account in the MTS Systems
Corporation Executive Deferred Compensation Plan, pursuant to
Section 3.4 of said Plan. The amount to which Executive is
entitled under subparagraph 4(a) of this Agreement shall be
reduced by MTS's Section 3.4 contribution to the MTS Systems
Corporation Executive Deferred Compensation Plan, as described
in subparagraph (v) below. Calculation of the Executive's
benefit shall be as follows:
(i) The benefits to which Executive is entitled, as of
his/her Date of Termination, under all MTS sponsored
pension, profit sharing and deferred compensation
plans shall be added together.
(ii) Amounts in said plans, as determined in accordance
with 29 Code of Federal Regulations ss. 1627.17,
attributable to Social Security, employee
contributions, contributions of prior employers, and
rollover contributions, shall be subtracted from the
subparagraph (i) amount and the resulting figure
shall be the "Qualified Retirement Benefit".
(iii) MTS shall determine the lump sum equivalent of the
amount necessary to purchase a straight life annuity
for Executive, effective as of his/her Date of
Termination, which would provide Executive with
$44,000 a year for life (the "ADEA Benefit"). MTS
shall retain a certified actuary to determine said
lump sum equivalent amount, using the applicable
mortality table and applicable interest rate under
Section 417(e) of the Internal Revenue Code and
Regulations issued thereunder.
(iv) If the Qualified Retirement Benefit exceeds the ADEA
Benefit, the Executive shall have the option (but is
not required) to receive the Qualified Retirement
Benefit in a lump sum, as provided under the
applicable plans, within 60 days following his/her
Date of Termination. The Executive may elect to
receive the Qualified Retirement Benefit in either a
lump sum or a series of periodic payments pursuant to
the terms of the applicable plans. The Executive may
also receive the payments and benefits set forth in
subparagraphs 4(a) and (b) of this Agreement provided
he/she executes the
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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,
<PAGE>
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.
<PAGE>
Severance Agreement Page 7
8. Notice of Termination.
(a) Any purported termination of Executive's employment by either
Executive or MTS under this Agreement, except as otherwise
provided in paragraph 2 of this Agreement, shall be
communicated by written notice to the other party.
(b) For purposes of this Agreement, "Date of Termination" shall
mean the date specified in the written Notice of Termination
which shall not be less than 10 nor more than 60 days from the
date such Notice of Termination is given.
(c) Notice of Termination and all other communications provided
for in the Agreement shall be deemed to have been duly given
when delivered or mailed by United States registered or
certified mail, return receipt requested, postage pre-paid,
addressed to the last known residence address of the Executive
or in the case of MTS, to its principal office to the
attention of each of the then directors of MTS with a copy to
its Secretary, or to such other address as either party may
have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective
only upon receipt.
9. Release of Claims. Executive's right to the benefits and payments
described in subparagraphs 4(a), (b) and (c) of this Agreement, except
as otherwise provided in subparagraph 4(d)(v) hereof, is contingent
upon Executive's execution of a severance release agreement which shall
be provided to Executive by MTS with or following his/her Notice of
Termination. The severance release agreement shall require a full
release of all claims which Executive may have against MTS or any MTS
affiliate or individual associated with MTS, to the extent permitted by
and consistent with applicable laws. Such release agreement shall
prohibit Executive from recovering any amount in connection with a
charge or lawsuit filed against MTS or any MTS affiliate, employee,
shareholder, officer, director or other agent by Executive, EEOC or any
other agency or entity on Executive's behalf based upon any act
occurring prior to execution of said release agreement. The release
agreement will be available for Executive's review, consideration and
execution at least 45 days prior to his/her Date of Termination.
10. Injunctive Relief. Executive consents that, in the case of any
violation or threatened violation of paragraph 6 of this Agreement, MTS
may apply for and secure injunctive relief, temporary or provisional,
in court, without bond but upon due notice, pending final resolution on
the merits pursuant to arbitration as set forth in paragraph 11 hereof.
No waiver of any violation of this Agreement shall be implied from any
failure by MTS to take action under this paragraph.
11. Arbitration. Any and all claims or disputes between Executive and MTS
(including the validity, scope, and enforceability of this paragraph),
except as otherwise provided under paragraph 10 or prohibited under
applicable law, shall be submitted for arbitration and resolution to an
arbitrator. No demand for arbitration
<PAGE>
Severance Agreement Page 8
may be made after the date when the institution of legal or equitable
proceedings based on such claim or dispute would be barred by the
applicable statute of limitation. The arbitrator shall be selected by
mutual agreement of the parties. Unless otherwise provided for in this
Agreement, the Expedited Labor Arbitration Rules of the American
Arbitration Association shall apply. If the parties are unable to agree
upon an arbitrator, any such dispute shall be solely and finally
settled by arbitration in accordance with the Expedited Labor
Arbitration Rules of the American Arbitration Association ("AAA"). The
parties agree that no punitive damages shall be awarded hereunder. The
parties also agree that all awards, decisions and remedies in favor of
a winning party hereunder with respect to any issue shall be
proportional to the violation caused by the losing party with respect
to that issue. All costs in conducting the arbitration, including but
not limited to the arbitration filing fee, the arbitrator's fees and
expenses, and the reasonable attorney's fees and expenses of the
prevailing party (including the attorney's fees and costs incurred by
the prevailing party in seeking or resisting temporary or provisional
court relief as set out in paragraph 10 above), shall be the
responsibility of the losing party. In the event there is more than one
issue in dispute and there is no one prevailing party with respect to
all issues in dispute, costs and attorney's fees shall be prorated by
the arbitrator according to the relative dollar value of each issue.
The arbitrator's Award shall be final and binding. In the event either
party must resort to the judicial process to enforce the provisions of
this Agreement, the award of an arbitrator or equitable relief granted
by an arbitrator, the party seeking enforcement shall be entitled to
recover from the other party all costs of litigation including, but not
limited to, reasonable attorney's fees and court costs. The arbitration
proceedings and Award shall be maintained by both parties as strictly
confidential, except as otherwise required by court order and with
respect to the parties' attorneys and tax advisors, and, with respect
to MTS, members of its management, and, with respect to Executive,
his/her family.
12. Miscellaneous.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the parties. No waiver by
either party hereto at any time of any breach by the other
party to this Agreement of or compliance with, any other party
shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or similar time.
(b) No agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in
this Agreement.
(c) The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of
Minnesota.
(d) Any provision of this Agreement which conflicts with
applicable law shall be modified to the extent necessary to
ensure its enforceability. The invalidity or
<PAGE>
Severance Agreement Page 9
unenforceability or any provision of this Agreement shall not
affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and
effect.
This Agreement supersedes any and all prior oral and written understandings and
agreements between the Executive and MTS, including specifically the Employment
Agreement between MTS and the Executive dated May 1, 1990 and attached as
Exhibit 2.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have
executed this Agreement as of the day and date first above written.
EXECUTIVE MTS SYSTEMS CORPORATION
/s/ Marshall L. Carpenter By /s/ Donald M. Sullivan
--------------------------- ---------------------------------
Marshall L. Carpenter
Its Chairman
--------------------------------
EXHIBIT 10.m
SEVERANCE AGREEMENT
AGREEMENT made as of this 27th day of March, 1998 by and between MTS Systems
Corporation, a Minnesota corporation ("MTS") and Keith D. Zell (the
"Executive").
WHEREAS, MTS considers the establishment and maintenance of a sound and vital
management and an orderly succession plan to be essential to protecting and
enhancing the best interests of MTS and its shareholders; and
WHEREAS, Executive has made and is expected to make, due to Executive's intimate
knowledge of the business and affairs of MTS, its policies, methods, personnel
and problems, a significant contribution to the profitability, growth and
financial strength of MTS; and
WHEREAS, Executive is willing to remain in the employ of MTS upon the
understanding that MTS will provide income security if the Executive's
employment is terminated under certain terms and conditions; and
WHEREAS, this Agreement is consistent with the requirements of the
executive/high policy-making exception to the Age Discrimination in Employment
Act, 29 U.S.C. Section 631(c)(1) (the "Executive Exemption"), benefits in
connection therewith are pursuant to pension, profit sharing and deferred
compensation plans as defined therein, and Executive, by virtue of his/her
duties and responsibilities on behalf of MTS, qualifies under said exception for
mandatory retirement on or after his/her 65th birthday; and
WHEREAS, MTS is providing Executive, simultaneously with this Agreement,
consideration in the form of a Change in Control Agreement, to provide
additional benefits to Executive in the event of a change in control;
NOW THEREFORE, in consideration of the foregoing and other respective covenants
and agreements of the parties herein contained, the parties hereto agree as
follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until the earlier of (a) the date on which the
Executive and MTS agree in writing to terminate this Agreement, or (b)
the Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If
a change in control occurs, as defined in that certain agreement
between the Executive and MTS of even date herewith (the "Change in
Control Agreement", attached as Exhibit 1), this Agreement shall be
superseded by the provisions of the Change in Control Agreement except
as provided in the following sentence. MTS's right under this Agreement
to terminate the Executive's employment pursuant to the Executive
Exemption shall not be superseded by the Change in Control Agreement
and the Executive shall be entitled to receive the benefits to which
he/she is entitled under subparagraph 4(d) hereunder if such
termination occurs.
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Severance Agreement Page 2
2. Termination by Reason of Death or Disability. In the event of the
Executive's death or disability during the Term of this Agreement,
Executive shall be entitled to such benefits provided under any policy,
plan or program governing death or disability maintained by MTS and
covering such Executive and this Agreement shall not apply. The
determination of disability and the amount and entitlement of benefits
shall be governed by the terms of such policy, plan or program. In the
event of the Executive's disability, the Executive's Date of
Termination shall be the date on which Executive has been unable, by
reason of physical or mental disability, to perform the services
required of him/her for his/her position, even with reasonable
accommodation, for the period of time indicated in MTS's group long
term disability plan (in which the Executive is a participant) during
which a participant must be disabled before benefits become payable. In
connection with Executive's termination due to disability, a qualified
physician must certify the disability and MTS shall at all times comply
with the Americans With Disabilities Act and any other applicable
disability discrimination law.
3. Resignation or Termination for Cause.
(a) The Executive may resign his/her employment or MTS may
terminate the Executive's employment for Cause, effective as
of the Date of Termination set forth in the Notice of
Termination. If Executive resigns or his/her employment is
terminated by MTS for Cause, MTS shall pay to Executive
his/her full base salary through the Date of Termination at
the rate in effect at the time of Notice of Termination is
given and MTS shall have no further obligation to Executive
under this Agreement.
(b) Termination by MTS of Executive's employment for "Cause" shall
mean termination as a result of:
(i) the conviction of the Executive by a court of
competent jurisdiction for felony criminal conduct;
or
(ii) willful misconduct by the Executive; or
(iii) violation by the Executive of any employment
agreement applicable to the Executive.
4. Termination Other Than for Cause. MTS may terminate Executive's
employment for a reason other than Cause, including pursuant to the
Executive Exemption on or after Executive's 65th birthday, effective as
of the Date of Termination set forth in the Notice of Termination. If
Executive's employment is terminated by MTS other than for Cause, death
or disability, Executive shall be entitled, subject to subparagraph
4(d)(v) and paragraph 9 of this Agreement, to the benefits described in
subparagraphs (a), (b) and (c) below and, if applicable, subparagraph
(d) below.
(a) Executive shall be paid a monthly Severance Payment equal to
the Executive's Monthly Gross Income, as defined in
subparagraph (i) below for 15 months. If Executive's
employment is terminated pursuant to the Executive Exemption
as
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Severance Agreement Page 3
described in subparagraph 4(d) hereunder, "12" shall be
substituted for 15 in the preceding sentence.
(i) For purposes of this Agreement, Monthly Gross Income
shall mean the sum of the following amounts, subject
to applicable federal and state withholding.
(A) 1/12 of the highest average base salary for
any 12- consecutive month period during the
36 calendar month period ending immediately
prior to the Date of Termination; plus
(B) 1/36 of the total Management Variable
Compensation earned during the 3 most recent
fiscal years ending immediately prior to the
Date of Termination; plus
(C) the product of the average percentage of MTS
profit sharing contributions to the MTS
Systems Corporation Profit Sharing
Retirement Plan and Trust (as a percent of
Compensation as defined in the Plan) for the
3 most recent Plan Years ending immediately
prior to the Date of Termination multiplied
by the sum of (i) and (ii) above.
(b) Following the Executive's Date of Termination and while
severance payments are being paid to the Executive or, if
earlier, until Executive is covered under other group plans,
MTS shall continue to pay the employer share of the
Executive's MTS group life and health insurance premiums. All
premium payments made on Executive's behalf following his/her
Date of Termination and Executive's continued participation in
the plans are contingent upon Executive making the appropriate
timely written elections to continue his/her group benefits
following his/her Date of Termination, said group benefits
continuing in effect for active MTS employees, Executive
continuing to be eligible under the terms of the plans and
applicable laws, and Executive's payment of the employee
portion of the premiums for such benefits. MTS will deduct
these amounts from its payments to the Executive. Benefits
otherwise receivable by Executive pursuant to this
subparagraph (b) shall be reduced or eliminated to the extent
comparable benefits are actually received by Executive during
such period from a source outside MTS, and any such benefits
actually received by Executive shall be reported to MTS.
Following the severance pay period, Executive shall be
entitled to continue any of said benefits which qualify as
group health and life insurance benefits for continuation
coverage under the Comprehensive Omnibus Budget Reconciliation
Act ("COBRA") or applicable state law and pursuant to the
terms of the plan.
(c) The Executive's rights under any existing Employee Stock
Option Agreement and any future such agreements, including
particularly his/her right to exercise his/her options
following his/her termination of employment, shall continue to
be fully effective hereunder. In addition, if the Executive's
termination of employment occurs pursuant to the Executive
Exemption on or after he/she has reached his/her 65th
birthday, the Executive shall continue to vest in any stock
options in which
<PAGE>
Severance Agreement Page 4
he/she is not fully vested, as though he/she were continuing
his/her employment with MTS as an active employee, subject at
all times to the exercise times and other terms and conditions
set forth in said Stock Option Agreements and to Executive's
signing the release agreement described in paragraph 9 herein.
(d) If Executive's termination of employment occurs pursuant to
the Executive Exemption on or after he/she has reached his/her
65th birthday, Executive shall be entitled to receive the lump
sum equivalent of the amount necessary to purchase a $44,000
pre-tax straight life annuity, said lump sum to be taken from
MTS contributions and earnings thereon to Executive's accounts
in MTS sponsored pension, profit sharing, and deferred
compensation plans, as applicable. If Executive is entitled to
less than that amount from the applicable MTS plans in which
he/she is a participant as of his/her Date of Termination,
then MTS shall make an additional contribution on Executive's
behalf to Executive's Deferral Account in the MTS Systems
Corporation Executive Deferred Compensation Plan, pursuant to
Section 3.4 of said Plan. The amount to which Executive is
entitled under subparagraph 4(a) of this Agreement shall be
reduced by MTS's Section 3.4 contribution to the MTS Systems
Corporation Executive Deferred Compensation Plan, as described
in subparagraph (v) below. Calculation of the Executive's
benefit shall be as follows:
(i) The benefits to which Executive is entitled, as of
his/her Date of Termination, under all MTS sponsored
pension, profit sharing and deferred compensation
plans shall be added together.
(ii) Amounts in said plans, as determined in accordance
with 29 Code of Federal Regulations ss. 1627.17,
attributable to Social Security, employee
contributions, contributions of prior employers, and
rollover contributions, shall be subtracted from the
subparagraph (i) amount and the resulting figure
shall be the "Qualified Retirement Benefit".
(iii) MTS shall determine the lump sum equivalent of the
amount necessary to purchase a straight life annuity
for Executive, effective as of his/her Date of
Termination, which would provide Executive with
$44,000 a year for life (the "ADEA Benefit"). MTS
shall retain a certified actuary to determine said
lump sum equivalent amount, using the applicable
mortality table and applicable interest rate under
Section 417(e) of the Internal Revenue Code and
Regulations issued thereunder.
(iv) If the Qualified Retirement Benefit exceeds the ADEA
Benefit, the Executive shall have the option (but is
not required) to receive the Qualified Retirement
Benefit in a lump sum, as provided under the
applicable plans, within 60 days following his/her
Date of Termination. The Executive may elect to
receive the Qualified Retirement Benefit in either a
lump sum or a series of periodic payments pursuant to
the terms of the applicable plans. The Executive may
also receive the payments and benefits set forth in
subparagraphs 4(a) and (b) of this Agreement provided
he/she executes the
<PAGE>
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,
<PAGE>
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.
<PAGE>
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
<PAGE>
Severance Agreement Page 8
this Agreement, the award of an arbitrator or equitable relief granted
by an arbitrator, the party seeking enforcement shall be entitled to
recover from the other party all costs of litigation including, but not
limited to, reasonable attorney's fees and court costs. The arbitration
proceedings and Award shall be maintained by both parties as strictly
confidential, except as otherwise required by court order and with
respect to the parties' attorneys and tax advisors, and, with respect
to MTS, members of its management, and, with respect to Executive,
his/her family.
12. Miscellaneous.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the parties. No waiver by
either party hereto at any time of any breach by the other
party to this Agreement of or compliance with, any other party
shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or similar time.
(b) No agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in
this Agreement.
(c) The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of
Minnesota.
(d) Any provision of this Agreement which conflicts with
applicable law shall be modified to the extent necessary to
ensure its enforceability. The invalidity or unenforceability
or any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
This Agreement supersedes any and all prior oral and written understandings and
agreements between the Executive and MTS, including specifically the Employment
Agreement between MTS and the Executive dated May 1, 1990 and attached as
Exhibit 2.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have
executed this Agreement as of the day and date first above written.
EXECUTIVE MTS SYSTEMS CORPORATION
/s/ Keith D. Zell By /s/ Donald M. Sullivan
--------------------------- ---------------------------------
Keith D. Zell
Its Chairman
--------------------------------
EXHIBIT 10.n
SEVERANCE AGREEMENT
AGREEMENT made as of this 24th day of March, 1998 by and between MTS Systems
Corporation, a Minnesota corporation ("MTS") and Mauro G. Togneri (the
"Executive").
WHEREAS, MTS considers the establishment and maintenance of a sound and vital
management and an orderly succession plan to be essential to protecting and
enhancing the best interests of MTS and its shareholders; and
WHEREAS, Executive has made and is expected to make, due to Executive's intimate
knowledge of the business and affairs of MTS, its policies, methods, personnel
and problems, a significant contribution to the profitability, growth and
financial strength of MTS; and
WHEREAS, Executive is willing to remain in the employ of MTS upon the
understanding that MTS will provide income security if the Executive's
employment is terminated under certain terms and conditions; and
WHEREAS, this Agreement is consistent with the requirements of the
executive/high policy-making exception to the Age Discrimination in Employment
Act, 29 U.S.C. Section 631(c)(1) (the "Executive Exemption"), benefits in
connection therewith are pursuant to pension, profit sharing and deferred
compensation plans as defined therein, and Executive, by virtue of his/her
duties and responsibilities on behalf of MTS, qualifies under said exception for
mandatory retirement on or after his/her 65th birthday; and
WHEREAS, MTS is providing Executive, simultaneously with this Agreement,
consideration in the form of a Change in Control Agreement, to provide
additional benefits to Executive in the event of a change in control;
NOW THEREFORE, in consideration of the foregoing and other respective covenants
and agreements of the parties herein contained, the parties hereto agree as
follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until the earlier of (a) the date on which the
Executive and MTS agree in writing to terminate this Agreement, or (b)
the Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If
a change in control occurs, as defined in that certain agreement
between the Executive and MTS of even date herewith (the "Change in
Control Agreement", attached as Exhibit 1), this Agreement shall be
superseded by the provisions of the Change in Control Agreement except
as provided in the following sentence. MTS's right under this Agreement
to terminate the Executive's employment pursuant to the Executive
Exemption shall not be superseded by the Change in Control Agreement
and the Executive shall be entitled to receive the benefits to which
he/she is entitled under subparagraph 4(d) hereunder if such
termination occurs.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Severance Agreement Page 8
party all costs of litigation including, but not limited to, reasonable
attorney's fees and court costs. The arbitration proceedings and Award
shall be maintained by both parties as strictly confidential, except as
otherwise required by court order and with respect to the parties'
attorneys and tax advisors, and, with respect to MTS, members of its
management, and, with respect to Executive, his/her family.
12. Miscellaneous.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the parties. No waiver by
either party hereto at any time of any breach by the other
party to this Agreement of or compliance with, any other party
shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or similar time.
(b) No agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in
this Agreement.
(c) The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of
Minnesota.
(d) Any provision of this Agreement which conflicts with
applicable law shall be modified to the extent necessary to
ensure its enforceability. The invalidity or unenforceability
or any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
This Agreement supersedes any and all prior oral and written understandings and
agreements between the Executive and MTS, including specifically the Employment
Agreement between MTS and the Executive dated April 1, 1991 and attached as
Exhibit 2.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have
executed this Agreement as of the day and date first above written.
EXECUTIVE MTS SYSTEMS CORPORATION
/s/ Mauro G. Togneri By /s/ Donald M. Sullivan
--------------------------- ---------------------------------
Mauro G. Togneri
Its Chairman
--------------------------------
EXHIBIT 10.r
SEVERANCE AGREEMENT
AGREEMENT made as of this 16th day of March, 1998 by and between MTS Systems
Corporation, a Minnesota corporation ("MTS") and Sidney W. Emery (the
"Executive").
WHEREAS, MTS desires to employ Executive as its President and Chief Executive
Officer is willing to become employed by MTS in such capacity; and
WHEREAS, Executive is expected to make a significant contribution to the
profitability, growth and financial strength of MTS; and
WHEREAS, MTS considers the establishment and maintenance of a sound and vital
management and an orderly succession plan to be essential to protecting and
enhancing the best interests of MTS and its shareholders; and
WHEREAS, this Agreement is consistent with the requirements of the
executive/high policy-making exception to the Age Discrimination in Employment
Act, 29 U.S.C. Section 631(c)(1) (the "Executive Exemption"), benefits in
connection therewith are pursuant to pension, profit sharing and deferred
compensation plans as defined therein, and Executive, by virtue of his/her
duties and responsibilities on behalf of MTS, qualifies under said exception for
mandatory retirement on or after his/her 65th birthday; and
WHEREAS, MTS is providing Executive, simultaneously with this Agreement,
consideration in the form of a Change in Control Agreement, to provide
additional benefits to Executive in the event of a change in control;
NOW THEREFORE, in consideration of the foregoing and other respective covenants
and agreements of the parties herein contained, the parties hereto agree as
follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until the earlier of (a) the date on which the
Executive and MTS agree in writing to terminate this Agreement, or (b)
the Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If
a change in control occurs, as defined in that certain agreement
between the Executive and MTS of even date herewith (the "Change in
Control Agreement", attached as Exhibit 1), this Agreement shall be
superseded by the provisions of the Change in Control Agreement except
as provided in the following sentence. MTS's right under this Agreement
to terminate the Executive's employment pursuant to the Executive
Exemption shall not be superseded by the Change in Control Agreement
and the Executive shall be entitled to receive the benefits to which
he/she is entitled under subparagraph 4(d) hereunder if such
termination occurs.
2. Termination by Reason of Death or Disability. In the event of the
Executive's death or disability during the Term of this Agreement,
Executive shall be entitled to such benefits
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Severance Agreement Page 2
provided under any policy, plan or program governing death or
disability maintained by MTS and covering such Executive and this
Agreement shall not apply. The determination of disability and the
amount and entitlement of benefits shall be governed by the terms of
such policy, plan or program. In the event of the Executive's
disability, the Executive's Date of Termination shall be the date on
which Executive has been unable, by reason of physical or mental
disability, to perform the services required of him/her for his/her
position, even with reasonable accommodation, for the period of time
indicated in MTS's group long term disability plan (in which the
Executive is a participant) during which a participant must be disabled
before benefits become payable. In connection with Executive's
termination due to disability, a qualified physician must certify the
disability and MTS shall at all times comply with the Americans With
Disabilities Act and any other applicable disability discrimination
law.
3. Resignation or Termination for Cause.
(a) The Executive may resign his/her employment or MTS may
terminate the Executive's employment for Cause, effective as
of the Date of Termination set forth in the Notice of
Termination. If Executive resigns or his/her employment is
terminated by MTS for Cause, MTS shall pay to Executive
his/her full base salary through the Date of Termination at
the rate in effect at the time of Notice of Termination is
given and MTS shall have no further obligation to Executive
under this Agreement.
(b) Termination by MTS of Executive's employment for "Cause" shall
mean termination as a result of:
(i) the conviction of the Executive by a court of
competent jurisdiction for felony criminal conduct;
or
(ii) willful misconduct by the Executive; or
(iii) violation by the Executive of any employment
agreement applicable to the Executive.
4. Termination Other Than for Cause. MTS may terminate Executive's
employment for a reason other than Cause, including pursuant to the
Executive Exemption on or after Executive's 65th birthday, effective as
of the Date of Termination set forth in the Notice of Termination. If
Executive's employment is terminated by MTS other than for Cause, death
or disability, Executive shall be entitled, subject to subparagraph
4(d)(v) and paragraph 9 of this Agreement, to the benefits described in
subparagraphs (a), (b) and (c) below and, if applicable, subparagraph
(d) below.
(a) Executive shall be paid a monthly Severance Payment equal to
the Executive's Monthly Gross Income, as defined in
subparagraph (i) below for 18 months. If Executive's
employment is terminated pursuant to the Executive Exemption
as described in subparagraph 4(d) hereunder, "12" shall be
substituted for 18 in the preceding sentence.
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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
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Severance Agreement Page 4
he/she is not fully vested, as though he/she were continuing
his/her employment with MTS as an active employee, subject at
all times to the exercise times and other terms and conditions
set forth in said Stock Option Agreements and to Executive's
signing the release agreement described in paragraph 9 herein.
(d) If Executive's termination of employment occurs pursuant to
the Executive Exemption on or after he/she has reached his/her
65th birthday, Executive shall be entitled to receive the lump
sum equivalent of the amount necessary to purchase a $44,000
pre-tax straight life annuity, said lump sum to be taken from
MTS contributions and earnings thereon to Executive's accounts
in MTS sponsored pension, profit sharing, and deferred
compensation plans, as applicable. If Executive is entitled to
less than that amount from the applicable MTS plans in which
he/she is a participant as of his/her Date of Termination,
then MTS shall make an additional contribution on Executive's
behalf to Executive's Deferral Account in the MTS Systems
Corporation Executive Deferred Compensation Plan, pursuant to
Section 3.4 of said Plan. The amount to which Executive is
entitled under subparagraph 4(a) of this Agreement shall be
reduced by MTS's Section 3.4 contribution to the MTS Systems
Corporation Executive Deferred Compensation Plan, as described
in subparagraph (v) below. Calculation of the Executive's
benefit shall be as follows:
(i) The benefits to which Executive is entitled, as of
his/her Date of Termination, under all MTS sponsored
pension, profit sharing and deferred compensation
plans shall be added together.
(ii) Amounts in said plans, as determined in accordance
with 29 Code of Federal Regulations ss. 1627.17,
attributable to Social Security, employee
contributions, contributions of prior employers, and
rollover contributions, shall be subtracted from the
subparagraph (i) amount and the resulting figure
shall be the "Qualified Retirement Benefit".
(iii) MTS shall determine the lump sum equivalent of the
amount necessary to purchase a straight life annuity
for Executive, effective as of his/her Date of
Termination, which would provide Executive with
$44,000 a year for life (the "ADEA Benefit"). MTS
shall retain a certified actuary to determine said
lump sum equivalent amount, using the applicable
mortality table and applicable interest rate under
Section 417(e) of the Internal Revenue Code and
Regulations issued thereunder.
(iv) If the Qualified Retirement Benefit exceeds the ADEA
Benefit, the Executive shall have the option (but is
not required) to receive the Qualified Retirement
Benefit in a lump sum, as provided under the
applicable plans, within 60 days following his/her
Date of Termination. The Executive may elect to
receive the Qualified Retirement Benefit in either a
lump sum or a series of periodic payments pursuant to
the terms of the applicable plans. The Executive may
also receive the payments and benefits set forth in
subparagraphs 4(a) and (b) of this Agreement provided
he/she executes the
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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,
<PAGE>
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.
<PAGE>
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
<PAGE>
Severance Agreement Page 8
this Agreement, the award of an arbitrator or equitable relief granted
by an arbitrator, the party seeking enforcement shall be entitled to
recover from the other party all costs of litigation including, but not
limited to, reasonable attorney's fees and court costs. The arbitration
proceedings and Award shall be maintained by both parties as strictly
confidential, except as otherwise required by court order and with
respect to the parties' attorneys and tax advisors, and, with respect
to MTS, members of its management, and, with respect to Executive,
his/her family.
12. Miscellaneous.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the parties. No waiver by
either party hereto at any time of any breach by the other
party to this Agreement of or compliance with, any other party
shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or similar time.
(b) No agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in
this Agreement.
(c) The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of
Minnesota.
(d) Any provision of this Agreement which conflicts with
applicable law shall be modified to the extent necessary to
ensure its enforceability. The invalidity or unenforceability
or any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this
Agreement, which shall remain in frill force and effect.
This Agreement supersedes any and all prior oral and written understandings and
agreements between the Executive and MTS, provided however that the Change in
Control Agreement signed of even date herewith shall, if applicable, supersede
this Agreement, except as otherwise provided in Paragraph 1 of this Agreement.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have
executed this Agreement as of the day and date first above written.
EXECUTIVE MTS SYSTEMS CORPORATION
/s/ Sidney W. Emery By /s/ Donald M. Sullivan
--------------------------- ---------------------------------
Sidney W. Emery
Its Chairman
--------------------------------
EXHIBIT 10.s
CHANGE IN CONTROL AGREEMENT
AGREEMENT made as of this16th day of March, 1998 by and between MTS Systems
Corporation, a Minnesota corporation ("MTS") and Sidney W. Emery (the
"Executive").
WHEREAS, MTS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of MTS
and its shareholders; and
WHEREAS, the Executive has made and is expected to make, due to Executive's
intimate knowledge of the business and affairs of MTS, its policies, methods,
personnel and problems, a significant contribution to the profitability, growth
and financial strength of MTS; and
WHEREAS, MTS, as a publicly held corporation, recognizes that the possibility of
a Change in Control may exist and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of the Executive in the performance of the Executive's duties to the
detriment of MTS and its shareholders; and
WHEREAS, Executive is willing to remain in the employ of MTS upon the
understanding that MTS will provide income security if the Executive's
employment is terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of MTS and its stockholders to reinforce
and encourage the continued attention and dedication of management personnel,
including Executive, to their assigned duties without distraction and to ensure
the continued availability to MTS of the Executive in the event of a Change in
Control;
THEREFORE, in consideration of the foregoing and other respective covenants and
agreements of the parties herein contained, the parties hereto agree as follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until the earlier of (A) the date that any and
all benefits due to Executive under this Agreement upon the happening
of the events set forth herein have been paid and satisfied and all
obligations of MTS to the Executive have been performed or (B) the date
the Executive and MTS agree in writing to terminate this Agreement.
Notwithstanding the preceding sentence, if a Change in Control occurs,
this Agreement shall remain in effect for a period of 36 months from
the date of the occurrence of a Change in Control.
2. Change in Control. If a Change in Control shall have occurred during
the term of this Agreement, the provisions of this Agreement shall
become operative and MTS agrees to employ the Executive and to provide
the benefits stated in this Agreement.
(a) Change in Control, shall, for purposes of this Agreement,
means a change in control of MTS which would be required to be
reported in response to Item 1 of Form 8-K
<PAGE>
Change in Control Agreement Page 2
promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), whether or not MTS is then
subject to such reporting requirement, including, without
limitation, if:
(i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act, including any
affiliate or associate as defined in Rule 12(b)-2
under the Exchange Act of such person, other than
MTS, any trustee or other fiduciary holding
securities under an employee benefit plan of MTS, or
any corporation owned, directly or indirectly, by the
stockholders of MTS in substantially the same
proportions as their ownership of stock of MTS)
becomes a "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or
indirectly, of securities of MTS representing 35% or
more of the combined voting power of MTS's then
outstanding securities; or
(ii) the Board of Directors is comprised of fewer than 65%
of the individuals described in subsection (b) below;
or
(iii) the stockholders of MTS approve a definitive
agreement to merge or consolidate MTS with or into
another corporation or other enterprise in which the
holders of outstanding stock of MTS entitled to vote
in elections of directors immediately before such
merger or consolidation hold less than 80% of the
voting power of the survivor of such merger or
consolidation or its parent, or approve a plan of
liquidation; or
(iv) at least 60% of MTS's assets are sold and transferred
to another corporation or other enterprise that is
not a subsidiary, direct or indirect, or other
affiliate of MTS; or
(v) the Board of Directors of MTS determines, by a vote
of a majority of its entire membership, that a tender
offer statement by any person (as defined above)
indicates an intention on the part of such person to
acquire control of MTS.
(b) Board of Directors shall, for purposes of subsection (a),
mean:
(i) individuals who on the date hereof constituted the
Board of MTS, and
(ii) any new director who subsequently was elected or
nominated for election by a majority of the directors
who held such office immediately prior to a Change in
Control.
(c) Friendly Change in Control shall mean a Change in Control
which arises from a transaction or series of transactions
authorized, recommended or approved at the time by formal
action of the Board of Directors.
(d) Unfriendly Change in Control shall mean a Change in Control
that is not a "Friendly Change in Control" as defined above.
An Unfriendly Change in Control shall not thereafter become a
Friendly Change in Control.
3. Termination by Reason of Death or Disability. In the event of the
Executive's death or disability during the Term of this Agreement,
Executive shall be entitled to such benefits provided under any policy,
plan or program governing death or disability maintained by
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Change in Control Agreement Page 3
MTS and covering such Executive and this Agreement shall not apply. The
determination of disability and the amount and entitlement of benefits
shall be governed by the terms of such policy, plan or program. In the
event of the Executive's disability, the Executive's Date of
Termination shall be the date on which Executive has been unable, by
reason of physical or mental disability, to perform the services
required of him/her for his/her position, even with reasonable
accommodation, for the period of time indicated in MTS's group long
term disability plan (in which the Executive is a participant) during
which a participant must be disabled before benefits become payable. In
connection with Executive's termination due to disability, a qualified
physician must certify the disability and MTS shall at all times comply
with the Americans With Disabilities Act and any other applicable
disability discrimination law.
4. Termination for Cause.
(a) If Executive's employment with MTS shall be terminated by MTS
for Cause as defined below, MTS shall pay to Executive his/her
full base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given and MTS
shall have no further obligation to Executive under this
Agreement.
(b) Termination by MTS of Executive's employment for "Cause" shall
mean termination as a result of:
(i) the conviction of the Executive by a court of
competent jurisdiction for felony criminal conduct;
or
(ii) willful gross misconduct or gross negligence in the
performance of his/her duties by the Executive; or
(iii) material violation by the Executive of any employment
agreement applicable to the Executive.
5. Termination Following Friendly Change in Control.
a) If, after a Friendly Change in Control, Executive's employment
with MTS shall be terminated (A) by MTS other than for cause,
death or disability or (B) by Executive for Good Reason, then
Executive shall be entitled to the following benefits:
(i) Severance. MTS shall pay the Executive as a severance
payment (the "Severance Payment") an amount equal to
the product of 18 multiplied by the Executive's
Monthly Gross Income as defined below. The Severance
Payment shall be made in a single lump sum within 30
days after the Date of Termination, subject to all
applicable federal and state withholding.
For purposes of this Agreement, Monthly Gross Income
shall mean the sum of the following amounts:
(A) 1/12 of the highest average base salary for
any 12-consecutive month period during the
36 calendar month period ending immediately
prior to the Date of Termination (without
taking into account any reduction in such
base salary that would constitute Good
Reason); plus
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Change in Control Agreement Page 4
(B) the monthly average of the total Management
Variable Compensation (MVC) paid during the
lesser of the 3 most recent or the actual
number of fiscal years participating in the
MVC plan ending immediately prior to the
Date of Termination (without taking into
account any reduction or termination of such
variable compensation that would constitute
Good Reason); plus
(C) the product of the average percentage of MTS
profit sharing contributions to the MTS
Systems Corporation Profit Sharing
Retirement Plan and Trust (as a percent of
Compensation as defined in the Plan) for the
lesser of the 3 most recent or the actual
number of participating Plan Years ending
immediately prior to the Date of Termination
multiplied by the sum of (A) and (B) above.
(ii) Benefits. For 18 months following the Executive's
Date of Termination or, if earlier, until Executive
is covered under other group plans, MTS shall
continue to pay the employer share of the Executive's
MTS group life and health insurance premiums. All
premium payments made on Executive's behalf following
his/her Date of Termination and Executive's continued
participation in the plans are contingent upon
Executive making the appropriate timely written
elections to continue his/her group benefits
following his/her Date of Termination, said group
benefits continuing in effect for active MTS
employees, Executive continuing to be eligible under
the terms of the plans and applicable laws, and
Executive's payment of the employee portion of the
premiums for such benefits. Benefits otherwise
receivable by Executive pursuant to this subparagraph
(ii) shall be reduced or eliminated to the extent
comparable benefits are actually received by
Executive during such period from a source outside
MTS, and any such benefits actually received by
Executive shall be reported to MTS.
(b) Good Reason. Executive shall be entitled to terminate his/her
employment for Good Reason. For purposes of this Agreement,
"Good Reason" shall mean, without Executive's express written
consent, any of the following:
(i) the assignment to Executive of any duties
inconsistent with Executive's status or position with
MTS, or a substantial alteration in the nature or
status of Executive's responsibilities; or
(ii) a reduction by MTS in Executive's annual base salary
other than a reduction comparable to other senior
Executives of MTS in connection with a company-wide
cost reduction program; or
(iii) the relocation of MTS's principal executive offices
to a location more than fifty miles from Eden
Prairie, Minnesota or MTS requiring Executive to be
based anywhere other than MTS's principal executive
offices except for required travel on MTS's business
to an extent substantially consistent with
Executive's prior business travel obligations; or
<PAGE>
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
<PAGE>
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:
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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
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Change in Control Agreement Page 8
MTS the ability to contest the imposition of such excise tax;
provided, however, that the Executive will not be required to
afford MTS any right to contest the applicability of any such
excise tax to the extent that the Executive reasonably
determines that such contest is inconsistent with the overall
tax interests of the Executive.
MTS agrees to hold in confidence and not to disclose, without
the Executive's prior written consent, any information with
regard to the Executive's tax position which MTS obtains
pursuant to this subsection.
(b) Indemnification. MTS will indemnify the Executive (and his/her
legal representative or other successors) to the fullest
extent permitted (including payment of expenses in advance of
final disposition of the proceeding) by the laws of the State
of Minnesota, as in effect at the time of the subject act or
omission, or the Articles of Incorporation and By-Laws of MTS
as in effect at such time or on the date of this Agreement,
whichever affords or afforded greater protection to the
Executive; and the Executive shall be entitled to the
protection of any insurance policies MTS may elect to maintain
generally for the benefit of its directors and officers,
against all costs, charges and expenses whatsoever incurred or
sustained by the Executive or his/her legal representatives in
connection with any action, suit or proceeding to which he/she
(or his/her legal representative or other successors) may be
made a party by reason of his/her being or having been a
director, officer or employee of MTS or any of its
subsidiaries or his/her serving or having served any other
enterprise as a director, officer or employee at the request
of MTS, provided that MTS shall cause to be maintained in
effect for not less than six years from the date of a Change
in Control (to the extent available) policies of directors'
and officers' liability insurance of at least the same
coverage as those maintained by MTS on the date of this
Agreement and containing terms and conditions which are no
less advantageous than such policies.
10. Non-Competition and Confidentiality.
(a) Noncompetition. Except as provided in subsection (c) below,
Executive agrees that, as a condition of receiving benefits
under this Agreement, he/she will not render services directly
or indirectly to any competing organization, wherever located,
for a period of one year following the Date of Termination, in
connection with the design, implementation, development,
manufacture, marketing, sale, merchandising, leasing,
servicing or promotion of any "Conflicting Product" which as
used herein means any product, process, system or service of
any person, firm, corporation, organization other than MTS, in
existence or under development, which is the same as or
similar to or competes with, or has a usage allied to, a
product, process, system, or service produced, developed, or
used by MTS. Executive agrees that violation of this covenant
not to compete with MTS shall result in immediate cessation of
all benefits hereunder, other than insurance benefits, which
Executive may continue where permitted under federal and state
law at his/her own expense.
(b) Confidentiality. Executive further agrees and acknowledges
his/her existing obligation that at all times during and
subsequent to his/her employment with MTS, he/she will not
divulge or appropriate to his/her own use or the uses of
others any secret or confidential information or knowledge
pertaining to the business of MTS,
<PAGE>
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
<PAGE>
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
<PAGE>
employment) shall be resolved by final and binding arbitration to be
held in Minneapolis, Minnesota in accordance with the rules and
procedures of the American Arbitration Association. The parties shall
select a mutually acceptable single arbitrator to resolve the dispute
or if they fail or are unable to do so, each side shall within the
following ten business days select a single arbitrator and the two so
selected shall select a third arbitrator within the following ten
business days. The arbitrator shall have no power to award any punitive
or exemplary damages. The arbitrator may construe or interpret, but
shall not ignore or vary the terms of this Agreement, and shall be
bound by controlling law. The arbitration award or other resolution may
be entered as a judgment at the request of the prevailing party by any
court of competent jurisdiction in Minnesota or elsewhere.
15. Miscellaneous.
(a) Modification and Waiver. Except as otherwise specifically
provided in this Agreement, no provision of this Agreement may
be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed
by the parties. No waiver by either party hereto at any time
of any breach by the other party to this Agreement of, or
compliance with, any other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or
at any prior or similar time.
(b) Entire Agreement. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not
expressly set forth in this Agreement.
(c) Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of
the State of Minnesota.
(d) Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which
shall remain in full force and effect.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have
executed this Agreement as of the day and date first above written.
EXECUTIVE MTS SYSTEMS CORPORATION
/s/ Sidney W. Emery By /s/ Donald M. Sullivan
--------------------------- ---------------------------------
Sidney W. Emery
Its Chairman
--------------------------------
EXHIBIT 10.t
CHANGE IN CONTROL AGREEMENT
AGREEMENT made as of this 27th day of March 1998 by and between MTS Systems
Corporation, a Minnesota corporation ("MTS") and Keith D. Zell (the
"Executive").
WHEREAS, MTS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of MTS
and its shareholders; and
WHEREAS, the Executive has made and is expected to make, due to Executive's
intimate knowledge of the business and affairs of MTS, its policies, methods,
personnel and problems, a significant contribution to the profitability, growth
and financial strength of MTS; and
WHEREAS, MTS, as a publicly held corporation, recognizes that the possibility of
a Change in Control may exist and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of the Executive in the performance of the Executive's duties to the
detriment of MTS and its shareholders; and
WHEREAS, Executive is willing to remain in the employ of MTS upon the
understanding that MTS will provide income security if the Executive's
employment is terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of MTS and its stockholders to reinforce
and encourage the continued attention and dedication of management personnel,
including Executive, to their assigned duties without distraction and to ensure
the continued availability to MTS of the Executive in the event of a Change in
Control;
THEREFORE, in consideration of the foregoing and other respective covenants and
agreements of the parties herein contained, the parties hereto agree as follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until the earlier of (A) the date that any and
all benefits due to Executive under this Agreement upon the happening
of the events set forth herein have been paid and satisfied and all
obligations of MTS to the Executive have been performed or (B) the date
the Executive and MTS agree in writing to terminate this Agreement.
Notwithstanding the preceding sentence, if a Change in Control occurs,
this Agreement shall remain in effect for a period of 36 months from
the date of the occurrence of a Change in Control.
2. Change in Control. If a Change in Control shall have occurred during
the term of this Agreement, the provisions of this Agreement shall
become operative and MTS agrees to employ the Executive and to provide
the benefits stated in this Agreement.
(a) Change in Control, shall, for purposes of this Agreement,
means a change in control of MTS which would be required to be
reported in response to Item 1 of Form 8-K
<PAGE>
Change in Control Agreement Page 2
promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), whether or not MTS is then
subject to such reporting requirement, including, without
limitation, if:
(i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act, including any
affiliate or associate as defined in Rule 12(b)-2
under the Exchange Act of such person, other than
MTS, any trustee or other fiduciary holding
securities under an employee benefit plan of MTS, or
any corporation owned, directly or indirectly, by the
stockholders of MTS in substantially the same
proportions as their ownership of stock of MTS)
becomes a "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or
indirectly, of securities of MTS representing 35% or
more of the combined voting power of MTS's then
outstanding securities; or
(ii) the Board of Directors is comprised of fewer than 65%
of the individuals described in subsection (b) below;
or
(iii) the stockholders of MTS approve a definitive
agreement to merge or consolidate MTS with or into
another corporation or other enterprise in which the
holders of outstanding stock of MTS entitled to vote
in elections of directors immediately before such
merger or consolidation hold less than 80% of the
voting power of the survivor of such merger or
consolidation or its parent, or approve a plan of
liquidation; or
(iv) at least 60% of MTS's assets are sold and transferred
to another corporation or other enterprise that is
not a subsidiary, direct or indirect, or other
affiliate of MTS; or
(v) the Board of Directors of MTS determines, by a vote
of a majority of its entire membership, that a tender
offer statement by any person (as defined above)
indicates an intention on the part of such person to
acquire control of MTS.
(b) Board of Directors shall, for purposes of subsection (a),
mean:
(i) individuals who on the date hereof constituted the
Board of MTS, and
(ii) any new director who subsequently was elected or
nominated for election by a majority of the directors
who held such office immediately prior to a Change in
Control.
(c) Friendly Change in Control shall mean a Change in Control
which arises from a transaction or series of transactions
authorized, recommended or approved at the time by formal
action of the Board of Directors.
(d) Unfriendly Change in Control shall mean a Change in Control
that is not a "Friendly Change in Control" as defined above.
An Unfriendly Change in Control shall not thereafter become a
Friendly Change in Control.
3. Termination by Reason of Death or Disability. In the event of the
Executive's death or disability during the Term of this Agreement,
Executive shall be entitled to such benefits provided under any policy,
plan or program governing death or disability maintained by
<PAGE>
Change in Control Agreement Page 3
MTS and covering such Executive and this Agreement shall not apply. The
determination of disability and the amount and entitlement of benefits
shall be governed by the terms of such policy, plan or program. In the
event of the Executive's disability, the Executive's Date of
Termination shall be the date on which Executive has been unable, by
reason of physical or mental disability, to perform the services
required of him/her for his/her position, even with reasonable
accommodation, for the period of time indicated in MTS's group long
term disability plan (in which the Executive is a participant) during
which a participant must be disabled before benefits become payable. In
connection with Executive's termination due to disability, a qualified
physician must certify the disability and MTS shall at all times comply
with the Americans With Disabilities Act and any other applicable
disability discrimination law.
4. Termination for Cause.
(a) If Executive's employment with MTS shall be terminated by MTS
for Cause as defined below, MTS shall pay to Executive his/her
full base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given and MTS
shall have no further obligation to Executive under this
Agreement.
(b) Termination by MTS of Executive's employment for "Cause" shall
mean termination as a result of:
(i) the conviction of the Executive by a court of
competent jurisdiction for felony criminal conduct;
or
(ii) willful gross misconduct or gross negligence in the
performance of his/her duties by the Executive; or
(iii) material violation by the Executive of any employment
agreement applicable to the Executive.
5. Termination Following Friendly Change in Control.
(a) If, after a Friendly Change in Control, Executive's employment
with MTS shall be terminated (A) by MTS other than for cause,
death or disability or (B) by Executive for Good Reason, then
Executive shall be entitled to the following benefits:
(i) Severance. MTS shall pay the Executive as a severance
payment (the "Severance Payment") an amount equal to
the product of 18 multiplied by the Executive's
Monthly Gross Income as defined below. The Severance
Payment shall be made in a single lump sun within 30
days after the Date of Termination, subject to all
applicable federal and state withholding.
For purposes of this Agreement, Monthly Gross Income
shall mean the sum of the following amounts:
(A) 1/12 of the highest average base salary for
any 12-consecutive month period during the
36 calendar month period ending immediately
prior to the Date of Termination (without
taking into account any reduction in such
base salary that would constitute Good
Reason); plus
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Change in Control Agreement Page 4
(B) 1/36 of the total variable compensation paid
during the 3 most recent fiscal years ending
immediately prior to the Date of Termination
(without taking into account any reduction
or termination of such variable compensation
that would constitute Good Reason); plus
(C) the product of the average percentage of MTS
profit sharing contributions to the MTS
Systems Corporation Profit Sharing
Retirement Plan and Trust (as a percent of
Compensation as defined in the Plan) for the
3 most recent Plan Years ending immediately
prior to the Date of Termination multiplied
by the sum of (A) and (B) above.
(ii) Benefits. For 18 months following the Executive's
Date of Termination or, if earlier, until Executive
is covered under other group plans, MTS shall
continue to pay the employer share of the Executive's
MTS group life and health insurance premiums. All
premium payments made on Executive's behalf following
his/her Date of Termination and Executive's continued
participation in the plans are contingent upon
Executive making the appropriate timely written
elections to continue his/her group benefits
following his/her Date of Termination, said group
benefits continuing in effect for active MTS
employees, Executive continuing to be eligible under
the terms of the plans and applicable laws, and
Executive's payment of the employee portion of the
premiums for such benefits. Benefits otherwise
receivable by Executive pursuant to this subparagraph
(ii) shall be reduced or eliminated to the extent
comparable benefits are actually received by
Executive during such period from a source outside
MTS, and any such benefits actually received by
Executive shall be reported to MTS.
(b) Good Reason. Executive shall be entitled to terminate his/her
employment for Good Reason. For purposes of this Agreement,
"Good Reason" shall mean, without Executive's express written
consent, any of the following:
(i) the assignment to Executive of any duties
inconsistent with Executive's status or position with
MTS, or a substantial alteration in the nature or
status of Executive's responsibilities; or
(ii) a reduction by MTS in Executive's annual base salary
other than a reduction comparable to other senior
Executives of MTS in connection with a company-wide
cost reduction program; or
(iii) the relocation of MTS's principal executive offices
to a location more than fifty miles from Eden
Prairie, Minnesota or MTS requiring Executive to be
based anywhere other than MTS's principal executive
offices except for required travel on MTS's business
to an extent substantially consistent with
Executive's prior business travel obligations; or
(iv) the failure by MTS to continue to provide Executive
with benefits at least as favorable to those enjoyed
by Executive under any of MTS's pension, life
insurance, medical, health and accident, disability,
deferred compensation, incentive awards, incentive
stock options, or savings plans in which Executive
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
Change in Control Agreement Page 11
Association. The parties shall select a mutually acceptable single
arbitrator to resolve the dispute or if they fail or are unable to do
so, each side shall within the following ten business days select a
single arbitrator and the two so selected shall select a third
arbitrator within the following ten business days. The arbitrator shall
have no power to award any punitive or exemplary damages. The
arbitrator may construe or interpret, but shall not ignore or vary the
terms of this Agreement, and shall be bound by controlling law. The
arbitration award or other resolution may be entered as a judgment at
the request of the prevailing party by any court of competent
jurisdiction in Minnesota or elsewhere.
15. Miscellaneous.
(a) Modification and Waiver. Except as otherwise specifically
provided in this Agreement, no provision of this Agreement may
be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed
by the parties. No waiver by either party hereto at any time
of any breach by the other party to this Agreement of, or
compliance with, any other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or
at any prior or similar time.
(b) Entire Agreement. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not
expressly set forth in this Agreement.
(c) Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of
the State of Minnesota.
(d) Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which
shall remain in full force and effect.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have
executed this Agreement as of the day and date first above written.
EXECUTIVE MTS SYSTEMS CORPORATION
/s/ Keith D. Zell By /s/ Donald M. Sullivan
--------------------------- ---------------------------------
Keith D. Zell
Its Chairman
--------------------------------
EXHIBIT 10.u
CHANGE IN CONTROL AGREEMENT
AGREEMENT made as of this13th day of May1998 by and between MTS Systems
Corporation, a Minnesota corporation ("MTS") and Marshall L. Carpenter (the
"Executive").
WHEREAS, MTS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of MTS
and its shareholders; and
WHEREAS, the Executive has made and is expected to make, due to Executive's
intimate knowledge of the business and affairs of MTS, its policies, methods,
personnel and problems, a significant contribution to the profitability, growth
and financial strength of MTS; and
WHEREAS, MTS, as a publicly held corporation, recognizes that the possibility of
a Change in Control may exist and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of the Executive in the performance of the Executive's duties to the
detriment of MTS and its shareholders; and
WHEREAS, Executive is willing to remain in the employ of MTS upon the
understanding that MTS will provide income security if the Executive's
employment is terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of MTS and its stockholders to reinforce
and encourage the continued attention and dedication of management personnel,
including Executive, to their assigned duties without distraction and to ensure
the continued availability to MTS of the Executive in the event of a Change in
Control;
THEREFORE, in consideration of the foregoing and other respective covenants and
agreements of the parties herein contained, the parties hereto agree as follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until the earlier of (A) the date that any and
all benefits due to Executive under this Agreement upon the happening
of the events set forth herein have been paid and satisfied and all
obligations of MTS to the Executive have been performed or (B) the date
the Executive and MTS agree in writing to terminate this Agreement.
Notwithstanding the preceding sentence, if a Change in Control occurs,
this Agreement shall remain in effect for a period of 36 months from
the date of the occurrence of a Change in Control.
2. Change in Control. If a Change in Control shall have occurred during
the term of this Agreement, the provisions of this Agreement shall
become operative and MTS agrees to employ the Executive and to provide
the benefits stated in this Agreement.
(a) Change in Control, shall, for purposes of this Agreement,
means a change in control of MTS which would be required to be
reported in response to Item 1 of Form 8-K
<PAGE>
Change in Control Agreement Page 2
promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), whether or not MTS is then
subject to such reporting requirement, including, without
limitation, if:
(i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act, including any
affiliate or associate as defined in Rule 12(b)-2
under the Exchange Act of such person, other than
MTS, any trustee or other fiduciary holding
securities under an employee benefit plan of MTS, or
any corporation owned, directly or indirectly, by the
stockholders of MTS in substantially the same
proportions as their ownership of stock of MTS)
becomes a "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or
indirectly, of securities of MTS representing 35% or
more of the combined voting power of MTS's then
outstanding securities; or
(ii) the Board of Directors is comprised of fewer than 65%
of the individuals described in subsection (b) below;
or
(iii) the stockholders of MTS approve a definitive
agreement to merge or consolidate MTS with or into
another corporation or other enterprise in which the
holders of outstanding stock of MTS entitled to vote
in elections of directors immediately before such
merger or consolidation hold less than 80% of the
voting power of the survivor of such merger or
consolidation or its parent, or approve a plan of
liquidation; or
(iv) at least 60% of MTS's assets are sold and transferred
to another corporation or other enterprise that is
not a subsidiary, direct or indirect, or other
affiliate of MTS; or
(v) the Board of Directors of MTS determines, by a vote
of a majority of its entire membership, that a tender
offer statement by any person (as defined above)
indicates an intention on the part of such person to
acquire control of MTS.
(b) Board of Directors shall, for purposes of subsection (a),
mean:
(i) individuals who on the date hereof constituted the
Board of MTS, and
(ii) any new director who subsequently was elected or
nominated for election by a majority of the directors
who held such office immediately prior to a Change in
Control.
(c) Friendly Change in Control shall mean a Change in Control
which arises from a transaction or series of transactions
authorized, recommended or approved at the time by formal
action of the Board of Directors.
(d) Unfriendly Change in Control shall mean a Change in Control
that is not a "Friendly Change in Control" as defined above.
An Unfriendly Change in Control shall not thereafter become a
Friendly Change in Control.
3. Termination by Reason of Death or Disability. In the event of the
Executive's death or disability during the Term of this Agreement,
Executive shall be entitled to such benefits provided under any policy,
plan or program governing death or disability maintained by
<PAGE>
Change in Control Agreement Page 3
MTS and covering such Executive and this Agreement shall not apply. The
determination of disability and the amount and entitlement of benefits
shall be governed by the terms of such policy, plan or program. In the
event of the Executive's disability, the Executive's Date of
Termination shall be the date on which Executive has been unable, by
reason of physical or mental disability, to perform the services
required of him/her for his/her position, even with reasonable
accommodation, for the period of time indicated in MTS's group long
term disability plan (in which the Executive is a participant) during
which a participant must be disabled before benefits become payable. In
connection with Executive's termination due to disability, a qualified
physician must certify the disability and MTS shall at all times comply
with the Americans With Disabilities Act and any other applicable
disability discrimination law.
4. Termination for Cause.
(a) If Executive's employment with MTS shall be terminated by MTS
for Cause as defined below, MTS shall pay to Executive his/her
full base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given and MTS
shall have no further obligation to Executive under this
Agreement.
(b) Termination by MTS of Executive's employment for "Cause" shall
mean termination as a result of:
(i) the conviction of the Executive by a court of
competent jurisdiction for felony criminal conduct;
or
(ii) willful gross misconduct or gross negligence in the
performance of his/her duties by the Executive; or
(iii) material violation by the Executive of any employment
agreement applicable to the Executive.
5. Termination Following Friendly Change in Control.
(a) If, after a Friendly Change in Control, Executive's employment
with MTS shall be terminated (A) by MTS other than for cause,
death or disability or (B) by Executive for Good Reason, then
Executive shall be entitled to the following benefits:
(i) Severance. MTS shall pay the Executive as a severance
payment (the "Severance Payment") an amount equal to
the product of 18 multiplied by the Executive's
Monthly Gross Income as defined below. The Severance
Payment shall be made in a single lump sun within 30
days after the Date of Termination, subject to all
applicable federal and state withholding.
For purposes of this Agreement, Monthly Gross Income
shall mean the sum of the following amounts:
(A) 1/12 of the highest average base salary for
any 12-consecutive month period during the
36 calendar month period ending immediately
prior to the Date of Termination (without
taking into account any reduction in such
base salary that would constitute Good
Reason); plus
<PAGE>
Change in Control Agreement Page 4
(B) 1/36 of the total variable compensation paid
during the 3 most recent fiscal years ending
immediately prior to the Date of Termination
(without taking into account any reduction
or termination of such variable compensation
that would constitute Good Reason); plus
(C) the product of the average percentage of MTS
profit sharing contributions to the MTS
Systems Corporation Profit Sharing
Retirement Plan and Trust (as a percent of
Compensation as defined in the Plan) for the
3 most recent Plan Years ending immediately
prior to the Date of Termination multiplied
by the sum of (A) and (B) above.
(ii) Benefits. For 18 months following the Executive's
Date of Termination or, if earlier, until Executive
is covered under other group plans, MTS shall
continue to pay the employer share of the Executive's
MTS group life and health insurance premiums. All
premium payments made on Executive's behalf following
his/her Date of Termination and Executive's continued
participation in the plans are contingent upon
Executive making the appropriate timely written
elections to continue his/her group benefits
following his/her Date of Termination, said group
benefits continuing in effect for active MTS
employees, Executive continuing to be eligible under
the terms of the plans and applicable laws, and
Executive's payment of the employee portion of the
premiums for such benefits. Benefits otherwise
receivable by Executive pursuant to this subparagraph
(ii) shall be reduced or eliminated to the extent
comparable benefits are actually received by
Executive during such period from a source outside
MTS, and any such benefits actually received by
Executive shall be reported to MTS.
(b) Good Reason. Executive shall be entitled to terminate his/her
employment for Good Reason. For purposes of this Agreement,
"Good Reason" shall mean, without Executive's express written
consent, any of the following:
(i) the assignment to Executive of any duties
inconsistent with Executive's status or position with
MTS, or a substantial alteration in the nature or
status of Executive's responsibilities; or
(ii) a reduction by MTS in Executive's annual base salary
other than a reduction comparable to other senior
Executives of MTS in connection with a company-wide
cost reduction program; or
(iii) the relocation of MTS's principal executive offices
to a location more than fifty miles from Eden
Prairie, Minnesota or MTS requiring Executive to be
based anywhere other than MTS's principal executive
offices except for required travel on MTS's business
to an extent substantially consistent with
Executive's prior business travel obligations; or
(iv) the failure by MTS to continue to provide Executive
with benefits at least as favorable to those enjoyed
by Executive under any of MTS's pension, life
insurance, medical, health and accident, disability,
deferred compensation, incentive awards, incentive
stock options, or savings plans in which Executive
<PAGE>
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
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Change in Control Agreement Page 6
premium payments made on Executive's behalf following
his/her Date of Termination and Executive's continued
participation in the plans are contingent upon
Executive making the appropriate timely written
elections to continue his/her group benefits
following his/her Date of Termination, said group
benefits continuing in effect for active MTS
employees, Executive continuing to be eligible under
the terms of the plans and applicable laws, and
Executive's payment of the employee portion of the
premiums for such benefits. Benefits otherwise
receivable by Executive pursuant to this subparagraph
(ii) shall be reduced or eliminated to the extent
comparable benefits are actually received by
Executive during such period from a source outside
MTS, and any such benefits actually received by
Executive shall be reported to MTS.
(b) If the Executive voluntarily terminates his employment other
than for Good Reason but more than 180 days after an
Unfriendly Change in Control, Executive shall be entitled to
the following benefits:
(i) Severance. MTS shall pay to Executive as a severance
payment (the "Severance Payment") an amount equal to
the product of 18 multiplied by the Executive's
monthly Gross Income as defined in Section 5(a)(i)
above. The Severance Payment shall be made in a
single lump sum within 30 days after the Date of
Termination, subject to all applicable federal and
state withholding.
(ii) Benefits. For 18 months following the Executive's
Date of Termination or, if earlier, until Executive
is covered under other group plans, MTS shall
continue to pay the employer share of the Executive's
MTS group life and health insurance premiums. All
premium payments made on Executive's behalf following
his Date of Termination and Executive's continued
participation in the plans are contingent upon
Executive making the appropriate timely written
elections to continue his/her group benefits
following his Date of Termination, said group
benefits continuing in effect for active MTS
employees, Executive continuing to be eligible under
the terms of the plans and applicable laws, and
Executive's payment of the employee portion of the
premiums for such benefits. Benefits otherwise
receivable by Executive pursuant to this subparagraph
(ii) shall be reduced or eliminated to the extent
comparable benefits are actually received by
Executive during such period from a source outside
MTS, and any such benefits actually received by
Executive shall be reported to MTS.
7. Additional Benefits. In addition to all other amounts payable and
benefits receivable to Executive upon termination of employment covered
under this Agreement, Executive shall be entitled to the following
benefits:
(a) Legal Fees. In the event of any termination of employment
under this Agreement, other than termination for Cause, MTS
shall pay to Executive all legal fees and expenses reasonably
incurred by Executive in contesting or disputing any such
termination or in seeking to obtain or enforce any right or
benefit provided by this Agreement.
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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.
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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.
<PAGE>
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
<PAGE>
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
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Change in Control Agreement Page 11
Association. The parties shall select a mutually acceptable single
arbitrator to resolve the dispute or if they fail or are unable to do
so, each side shall within the following ten business days select a
single arbitrator and the two so selected shall select a third
arbitrator within the following ten business days. The arbitrator shall
have no power to award any punitive or exemplary damages. The
arbitrator may construe or interpret, but shall not ignore or vary the
terms of this Agreement, and shall be bound by controlling law. The
arbitration award or other resolution may be entered as a judgment at
the request of the prevailing party by any court of competent
jurisdiction in Minnesota or elsewhere.
15. Miscellaneous.
(a) Modification and Waiver. Except as otherwise specifically
provided in this Agreement, no provision of this Agreement may
be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed
by the parties. No waiver by either party hereto at any time
of any breach by the other party to this Agreement of, or
compliance with, any other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or
at any prior or similar time.
(b) Entire Agreement. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not
expressly set forth in this Agreement.
(c) Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of
the State of Minnesota.
(d) Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which
shall remain in full force and effect.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have
executed this Agreement as of the day and date first above written.
EXECUTIVE MTS SYSTEMS CORPORATION
/s/ Marshall L. Carpenter By /s/ Donald M. Sullivan
--------------------------- ---------------------------------
Marshall L. Carpenter
Its Chairman
--------------------------------
EXHIBIT 10.v
CHANGE IN CONTROL AGREEMENT
AGREEMENT made as of this 24th day of March1998 by and between MTS Systems
Corporation, a Minnesota corporation ("MTS") and Mauro G. Togneri (the
"Executive").
WHEREAS, MTS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of MTS
and its shareholders; and
WHEREAS, the Executive has made and is expected to make, due to Executive's
intimate knowledge of the business and affairs of MTS, its policies, methods,
personnel and problems, a significant contribution to the profitability, growth
and financial strength of MTS; and
WHEREAS, MTS, as a publicly held corporation, recognizes that the possibility of
a Change in Control may exist and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of the Executive in the performance of the Executive's duties to the
detriment of MTS and its shareholders; and
WHEREAS, Executive is willing to remain in the employ of MTS upon the
understanding that MTS will provide income security if the Executive's
employment is terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of MTS and its stockholders to reinforce
and encourage the continued attention and dedication of management personnel,
including Executive, to their assigned duties without distraction and to ensure
the continued availability to MTS of the Executive in the event of a Change in
Control;
THEREFORE, in consideration of the foregoing and other respective covenants and
agreements of the parties herein contained, the parties hereto agree as follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until the earlier of (A) the date that any and
all benefits due to Executive under this Agreement upon the happening
of the events set forth herein have been paid and satisfied and all
obligations of MTS to the Executive have been performed or (B) the date
the Executive and MTS agree in writing to terminate this Agreement.
Notwithstanding the preceding sentence, if a Change in Control occurs,
this Agreement shall remain in effect for a period of 36 months from
the date of the occurrence of a Change in Control.
2. Change in Control. If a Change in Control shall have occurred during
the term of this Agreement, the provisions of this Agreement shall
become operative and MTS agrees to employ the Executive and to provide
the benefits stated in this Agreement.
(a) Change in Control, shall, for purposes of this Agreement,
means a change in control of MTS which would be required to be
reported in response to Item 1 of Form 8-K
<PAGE>
Change in Control Agreement Page 2
promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), whether or not MTS is then
subject to such reporting requirement, including, without
limitation, if:
(i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act, including any
affiliate or associate as defined in Rule 12(b)-2
under the Exchange Act of such person, other than
MTS, any trustee or other fiduciary holding
securities under an employee benefit plan of MTS, or
any corporation owned, directly or indirectly, by the
stockholders of MTS in substantially the same
proportions as their ownership of stock of MTS)
becomes a "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or
indirectly, of securities of MTS representing 35% or
more of the combined voting power of MTS's then
outstanding securities; or
(ii) the Board of Directors is comprised of fewer than 65%
of the individuals described in subsection (b) below;
or
(iii) the stockholders of MTS approve a definitive
agreement to merge or consolidate MTS with or into
another corporation or other enterprise in which the
holders of outstanding stock of MTS entitled to vote
in elections of directors immediately before such
merger or consolidation hold less than 80% of the
voting power of the survivor of such merger or
consolidation or its parent, or approve a plan of
liquidation; or
(iv) at least 60% of MTS's assets are sold and transferred
to another corporation or other enterprise that is
not a subsidiary, direct or indirect, or other
affiliate of MTS; or
(v) the Board of Directors of MTS determines, by a vote
of a majority of its entire membership, that a tender
offer statement by any person (as defined above)
indicates an intention on the part of such person to
acquire control of MTS.
(b) Board of Directors shall, for purposes of subsection (a),
mean:
(i) individuals who on the date hereof constituted the
Board of MTS, and
(ii) any new director who subsequently was elected or
nominated for election by a majority of the directors
who held such office immediately prior to a Change in
Control.
(c) Friendly Change in Control shall mean a Change in Control
which arises from a transaction or series of transactions
authorized, recommended or approved at the time by formal
action of the Board of Directors.
(d) Unfriendly Change in Control shall mean a Change in Control
that is not a "Friendly Change in Control" as defined above.
An Unfriendly Change in Control shall not thereafter become a
Friendly Change in Control.
3. Termination by Reason of Death or Disability. In the event of the
Executive's death or disability during the Term of this Agreement,
Executive shall be entitled to such benefits provided under any policy,
plan or program governing death or disability maintained by
<PAGE>
Change in Control Agreement Page 3
MTS and covering such Executive and this Agreement shall not apply. The
determination of disability and the amount and entitlement of benefits
shall be governed by the terms of such policy, plan or program. In the
event of the Executive's disability, the Executive's Date of
Termination shall be the date on which Executive has been unable, by
reason of physical or mental disability, to perform the services
required of him/her for his/her position, even with reasonable
accommodation, for the period of time indicated in MTS's group long
term disability plan (in which the Executive is a participant) during
which a participant must be disabled before benefits become payable. In
connection with Executive's termination due to disability, a qualified
physician must certify the disability and MTS shall at all times comply
with the Americans With Disabilities Act and any other applicable
disability discrimination law.
4. Termination for Cause.
(a) If Executive's employment with MTS shall be terminated by MTS
for Cause as defined below, MTS shall pay to Executive his/her
full base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given and MTS
shall have no further obligation to Executive under this
Agreement.
(b) Termination by MTS of Executive's employment for "Cause" shall
mean termination as a result of:
(i) the conviction of the Executive by a court of
competent jurisdiction for felony criminal conduct;
or
(ii) willful gross misconduct or gross negligence in the
performance of his/her duties by the Executive; or
(iii) material violation by the Executive of any employment
agreement applicable to the Executive.
5. Termination Following Friendly Change in Control.
(a) If, after a Friendly Change in Control, Executive's employment
with MTS shall be terminated (A) by MTS other than for cause,
death or disability or (B) by Executive for Good Reason, then
Executive shall be entitled to the following benefits:
(i) Severance. MTS shall pay the Executive as a severance
payment (the "Severance Payment") an amount equal to
the product of 18 multiplied by the Executive's
Monthly Gross Income as defined below. The Severance
Payment shall be made in a single lump sun within 30
days after the Date of Termination, subject to all
applicable federal and state withholding.
For purposes of this Agreement, Monthly Gross Income
shall mean the sum of the following amounts:
(A) 1/12 of the highest average base salary for
any 12-consecutive month period during the
36 calendar month period ending immediately
prior to the Date of Termination (without
taking into account any reduction in such
base salary that would constitute Good
Reason); plus
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Change in Control Agreement Page 4
(B) 1/36 of the total variable compensation paid
during the 3 most recent fiscal years ending
immediately prior to the Date of Termination
(without taking into account any reduction
or termination of such variable compensation
that would constitute Good Reason); plus
(C) the product of the average percentage of MTS
profit sharing contributions to the MTS
Systems Corporation Profit Sharing
Retirement Plan and Trust (as a percent of
Compensation as defined in the Plan) for the
3 most recent Plan Years ending immediately
prior to the Date of Termination multiplied
by the sum of (A) and (B) above.
(ii) Benefits. For 18 months following the Executive's
Date of Termination or, if earlier, until Executive
is covered under other group plans, MTS shall
continue to pay the employer share of the Executive's
MTS group life and health insurance premiums. All
premium payments made on Executive's behalf following
his/her Date of Termination and Executive's continued
participation in the plans are contingent upon
Executive making the appropriate timely written
elections to continue his/her group benefits
following his/her Date of Termination, said group
benefits continuing in effect for active MTS
employees, Executive continuing to be eligible under
the terms of the plans and applicable laws, and
Executive's payment of the employee portion of the
premiums for such benefits. Benefits otherwise
receivable by Executive pursuant to this subparagraph
(ii) shall be reduced or eliminated to the extent
comparable benefits are actually received by
Executive during such period from a source outside
MTS, and any such benefits actually received by
Executive shall be reported to MTS.
(b) Good Reason. Executive shall be entitled to terminate his/her
employment for Good Reason. For purposes of this Agreement,
"Good Reason" shall mean, without Executive's express written
consent, any of the following:
(i) the assignment to Executive of any duties
inconsistent with Executive's status or position with
MTS, or a substantial alteration in the nature or
status of Executive's responsibilities; or
(ii) a reduction by MTS in Executive's annual base salary
other than a reduction comparable to other senior
Executives of MTS in connection with a company-wide
cost reduction program; or
(iii) the relocation of MTS's principal executive offices
to a location more than fifty miles from Eden
Prairie, Minnesota or MTS requiring Executive to be
based anywhere other than MTS's principal executive
offices except for required travel on MTS's business
to an extent substantially consistent with
Executive's prior business travel obligations; or
(iv) the failure by MTS to continue to provide Executive
with benefits at least as favorable to those enjoyed
by Executive under any of MTS's pension, life
insurance, medical, health and accident, disability,
deferred compensation, incentive awards, incentive
stock options, or savings plans in which Executive
<PAGE>
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
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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.
<PAGE>
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.
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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.
<PAGE>
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
<PAGE>
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
<PAGE>
Change in Control Agreement Page 11
Association. The parties shall select a mutually acceptable single
arbitrator to resolve the dispute or if they fail or are unable to do
so, each side shall within the following ten business days select a
single arbitrator and the two so selected shall select a third
arbitrator within the following ten business days. The arbitrator shall
have no power to award any punitive or exemplary damages. The
arbitrator may construe or interpret, but shall not ignore or vary the
terms of this Agreement, and shall be bound by controlling law. The
arbitration award or other resolution may be entered as a judgment at
the request of the prevailing party by any court of competent
jurisdiction in Minnesota or elsewhere.
15. Miscellaneous.
(a) Modification and Waiver. Except as otherwise specifically
provided in this Agreement, no provision of this Agreement may
be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed
by the parties. No waiver by either party hereto at any time
of any breach by the other party to this Agreement of, or
compliance with, any other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or
at any prior or similar time.
(b) Entire Agreement. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not
expressly set forth in this Agreement.
(c) Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of
the State of Minnesota.
(d) Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which
shall remain in full force and effect.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have
executed this Agreement as of the day and date first above written.
EXECUTIVE MTS SYSTEMS CORPORATION
/s/ Mauro G. Togneri By /s/ Donald M. Sullivan
--------------------------- ---------------------------------
Mauro G. Togneri
Its Chairman
--------------------------------
EXHIBIT 10.w
CHANGE IN CONTROL AGREEMENT
AGREEMENT made as of this 13th day of March 1998 by and between MTS Systems
Corporation, a Minnesota corporation ("MTS") and William G. Beduhn (the
"Executive").
WHEREAS, MTS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of MTS
and its shareholders; and
WHEREAS, the Executive has made and is expected to make, due to Executive's
intimate knowledge of the business and affairs of MTS, its policies, methods,
personnel and problems, a significant contribution to the profitability, growth
and financial strength of MTS; and
WHEREAS, MTS, as a publicly held corporation, recognizes that the possibility of
a Change in Control may exist and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of the Executive in the performance of the Executive's duties to the
detriment of MTS and its shareholders; and
WHEREAS, Executive is willing to remain in the employ of MTS upon the
understanding that MTS will provide income security if the Executive's
employment is terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of MTS and its stockholders to reinforce
and encourage the continued attention and dedication of management personnel,
including Executive, to their assigned duties without distraction and to ensure
the continued availability to MTS of the Executive in the event of a Change in
Control;
THEREFORE, in consideration of the foregoing and other respective covenants and
agreements of the parties herein contained, the parties hereto agree as follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until the earlier of (A) the date that any and
all benefits due to Executive under this Agreement upon the happening
of the events set forth herein have been paid and satisfied and all
obligations of MTS to the Executive have been performed or (B) the date
the Executive and MTS agree in writing to terminate this Agreement.
Notwithstanding the preceding sentence, if a Change in Control occurs,
this Agreement shall remain in effect for a period of 36 months from
the date of the occurrence of a Change in Control.
2. Change in Control. If a Change in Control shall have occurred during
the term of this Agreement, the provisions of this Agreement shall
become operative and MTS agrees to employ the Executive and to provide
the benefits stated in this Agreement.
(a) Change in Control, shall, for purposes of this Agreement,
means a change in control of MTS which would be required to be
reported in response to Item 1 of Form 8-K
<PAGE>
Change in Control Agreement Page 2
promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), whether or not MTS is then
subject to such reporting requirement, including, without
limitation, if:
(i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act, including any
affiliate or associate as defined in Rule 12(b)-2
under the Exchange Act of such person, other than
MTS, any trustee or other fiduciary holding
securities under an employee benefit plan of MTS, or
any corporation owned, directly or indirectly, by the
stockholders of MTS in substantially the same
proportions as their ownership of stock of MTS)
becomes a "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or
indirectly, of securities of MTS representing 35% or
more of the combined voting power of MTS's then
outstanding securities; or
(ii) the Board of Directors is comprised of fewer than 65%
of the individuals described in subsection (b) below;
or
(iii) the stockholders of MTS approve a definitive
agreement to merge or consolidate MTS with or into
another corporation or other enterprise in which the
holders of outstanding stock of MTS entitled to vote
in elections of directors immediately before such
merger or consolidation hold less than 80% of the
voting power of the survivor of such merger or
consolidation or its parent, or approve a plan of
liquidation; or
(iv) at least 60% of MTS's assets are sold and transferred
to another corporation or other enterprise that is
not a subsidiary, direct or indirect, or other
affiliate of MTS; or
(v) the Board of Directors of MTS determines, by a vote
of a majority of its entire membership, that a tender
offer statement by any person (as defined above)
indicates an intention on the part of such person to
acquire control of MTS.
(b) Board of Directors shall, for purposes of subsection (a),
mean:
(i) individuals who on the date hereof constituted the
Board of MTS, and
(ii) any new director who subsequently was elected or
nominated for election by a majority of the directors
who held such office immediately prior to a Change in
Control.
(c) Friendly Change in Control shall mean a Change in Control
which arises from a transaction or series of transactions
authorized, recommended or approved at the time by formal
action of the Board of Directors.
(d) Unfriendly Change in Control shall mean a Change in Control
that is not a "Friendly Change in Control" as defined above.
An Unfriendly Change in Control shall not thereafter become a
Friendly Change in Control.
3. Termination by Reason of Death or Disability. In the event of the
Executive's death or disability during the Term of this Agreement,
Executive shall be entitled to such benefits provided under any policy,
plan or program governing death or disability maintained by
<PAGE>
Change in Control Agreement Page 3
MTS and covering such Executive and this Agreement shall not apply. The
determination of disability and the amount and entitlement of benefits
shall be governed by the terms of such policy, plan or program. In the
event of the Executive's disability, the Executive's Date of
Termination shall be the date on which Executive has been unable, by
reason of physical or mental disability, to perform the services
required of him/her for his/her position, even with reasonable
accommodation, for the period of time indicated in MTS's group long
term disability plan (in which the Executive is a participant) during
which a participant must be disabled before benefits become payable. In
connection with Executive's termination due to disability, a qualified
physician must certify the disability and MTS shall at all times comply
with the Americans With Disabilities Act and any other applicable
disability discrimination law.
4. Termination for Cause.
(a) If Executive's employment with MTS shall be terminated by MTS
for Cause as defined below, MTS shall pay to Executive his/her
full base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given and MTS
shall have no further obligation to Executive under this
Agreement.
(b) Termination by MTS of Executive's employment for "Cause" shall
mean termination as a result of:
(i) the conviction of the Executive by a court of
competent jurisdiction for felony criminal conduct;
or
(ii) willful gross misconduct or gross negligence in the
performance of his/her duties by the Executive; or
(iii) material violation by the Executive of any employment
agreement applicable to the Executive.
5. Termination Following Friendly Change in Control.
(a) If, after a Friendly Change in Control, Executive's employment
with MTS shall be terminated (A) by MTS other than for cause,
death or disability or (B) by Executive for Good Reason, then
Executive shall be entitled to the following benefits:
(i) Severance. MTS shall pay the Executive as a severance
payment (the "Severance Payment") an amount equal to
the product of 18 multiplied by the Executive's
Monthly Gross Income as defined below. The Severance
Payment shall be made in a single lump sun within 30
days after the Date of Termination, subject to all
applicable federal and state withholding.
For purposes of this Agreement, Monthly Gross Income
shall mean the sum of the following amounts:
(A) 1/12 of the highest average base salary for
any 12-consecutive month period during the
36 calendar month period ending immediately
prior to the Date of Termination (without
taking into account any reduction in such
base salary that would constitute Good
Reason); plus
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Change in Control Agreement Page 4
(B) 1/36 of the total variable compensation paid
during the 3 most recent fiscal years ending
immediately prior to the Date of Termination
(without taking into account any reduction
or termination of such variable compensation
that would constitute Good Reason); plus
(C) the product of the average percentage of MTS
profit sharing contributions to the MTS
Systems Corporation Profit Sharing
Retirement Plan and Trust (as a percent of
Compensation as defined in the Plan) for the
3 most recent Plan Years ending immediately
prior to the Date of Termination multiplied
by the sum of (A) and (B) above.
(ii) Benefits. For 18 months following the Executive's
Date of Termination or, if earlier, until Executive
is covered under other group plans, MTS shall
continue to pay the employer share of the Executive's
MTS group life and health insurance premiums. All
premium payments made on Executive's behalf following
his/her Date of Termination and Executive's continued
participation in the plans are contingent upon
Executive making the appropriate timely written
elections to continue his/her group benefits
following his/her Date of Termination, said group
benefits continuing in effect for active MTS
employees, Executive continuing to be eligible under
the terms of the plans and applicable laws, and
Executive's payment of the employee portion of the
premiums for such benefits. Benefits otherwise
receivable by Executive pursuant to this subparagraph
(ii) shall be reduced or eliminated to the extent
comparable benefits are actually received by
Executive during such period from a source outside
MTS, and any such benefits actually received by
Executive shall be reported to MTS.
(b) Good Reason. Executive shall be entitled to terminate his/her
employment for Good Reason. For purposes of this Agreement,
"Good Reason" shall mean, without Executive's express written
consent, any of the following:
(i) the assignment to Executive of any duties
inconsistent with Executive's status or position with
MTS, or a substantial alteration in the nature or
status of Executive's responsibilities; or
(ii) a reduction by MTS in Executive's annual base salary
other than a reduction comparable to other senior
Executives of MTS in connection with a company-wide
cost reduction program; or
(iii) the relocation of MTS's principal executive offices
to a location more than fifty miles from Eden
Prairie, Minnesota or MTS requiring Executive to be
based anywhere other than MTS's principal executive
offices except for required travel on MTS's business
to an extent substantially consistent with
Executive's prior business travel obligations; or
(iv) the failure by MTS to continue to provide Executive
with benefits at least as favorable to those enjoyed
by Executive under any of MTS's pension, life
insurance, medical, health and accident, disability,
deferred compensation, incentive awards, incentive
stock options, or savings plans in which Executive
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
Change in Control Agreement Page 11
Association. The parties shall select a mutually acceptable single
arbitrator to resolve the dispute or if they fail or are unable to do
so, each side shall within the following ten business days select a
single arbitrator and the two so selected shall select a third
arbitrator within the following ten business days. The arbitrator shall
have no power to award any punitive or exemplary damages. The
arbitrator may construe or interpret, but shall not ignore or vary the
terms of this Agreement, and shall be bound by controlling law. The
arbitration award or other resolution may be entered as a judgment at
the request of the prevailing party by any court of competent
jurisdiction in Minnesota or elsewhere.
15. Miscellaneous.
(a) Modification and Waiver. Except as otherwise specifically
provided in this Agreement, no provision of this Agreement may
be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed
by the parties. No waiver by either party hereto at any time
of any breach by the other party to this Agreement of, or
compliance with, any other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or
at any prior or similar time.
(b) Entire Agreement. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not
expressly set forth in this Agreement.
(c) Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of
the State of Minnesota.
(d) Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which
shall remain in full force and effect.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have
executed this Agreement as of the day and date first above written.
EXECUTIVE MTS SYSTEMS CORPORATION
/s/ William G. Beduhn By /s/ Donald M. Sullivan
--------------------------- ---------------------------------
William G. Beduhn
Its Chairman
--------------------------------
EXHIBIT 13
SIX YEAR FINANCIAL SUMMARY
- --------------------------------------------------------------------------------
(September 30)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBERS OF SHAREHOLDERS AND EMPLOYEES)
OPERATIONS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue $ 339,682 $ 303,480 $261,029 $ 234,131 $200,550 $ 189,499
United States revenue 182,505 143,913 128,593 125,659 101,747 92,153
International revenue 157,177 159,567 132,436 108,472 98,803 97,346
Gross profit 130,364 121,503 106,104 91,638 79,840 78,882
Income before income taxes 31,473 28,380(1) 20,006 14,031 12,629 14,937
Net income 20,766 18,209(1) 14,109 10,461 8,659 10,382
Net income per share, diluted basis 1.08 .96(1) .74 .58 .46 .57
Research and development expense 21,930 17,511 17,696 13,733 12,645 13,697
Net interest expense 1,948 1,125 1,123 2,424 1,860 1,207
Depreciation and amortization 9,715 8,557 7,820 7,217 6,214 5,648
FINANCIAL POSITION
- --------------------------------------------------------------------------------------------------------------------------------
Current assets $ 193,593 $ 152,805 $130,382 $ 131,589 $123,206 $ 123,445
Current liabilities 105,214 79,479 60,834 67,014 66,361 66,961
Current ratio 1.8:1 1.9:1 2.1:1 2.0:1 1.9:1 1.8:1
Net working capital 88,379 73,326 69,548 64,575 56,845 56,484
Property and equipment, net 67,737 50,419 48,090 48,490 47,368 37,254
Total assets 298,448 216,132 187,396 189,500 175,708 165,716
Interest bearing debt 74,682 12,865 11,836 22,965 23,851 33,299
Shareholders' investment 143,036 124,619 112,814 106,677 100,046 93,011
Shareholders' investment per share 7.70 6.82 6.15 5.80 5.48 5.12
OTHER STATISTICS AND RATIOS
- --------------------------------------------------------------------------------------------------------------------------------
Diluted shares outstanding(2) 19,252 18,956 19,106 18,180 18,672 18,288
Number of common shareholders of record 1,760(3) 1,575 1,523 1,395 1,394 1,400
Number of employees 2,272 1,981 1,725 1,612 1,557 1,447
New orders $ 332,998 $ 356,123 $282,753 $ 245,919 $195,260 $ 178,786
Backlog of orders $ 175,439 $ 175,841 $120,481 $ 98,757 $ 84,591 $ 88,731
Gross profit percent 38.4% 40.0% 40.6% 39.1% 39.8% 41.6%
Research and development costs
as a percent of net revenue 6.5% 5.8% 6.8% 5.9% 6.3% 7.2%
Net income as a percent of net revenue 6.1% 6.0%(1) 5.4% 4.5% 4.3% 5.5%
Effective tax rate 34% 36% 29% 25% 31% 30%
Interest bearing debt to shareholders'
investment percent 52% 10% 10% 22% 24% 36%
Return on average net assets(4) 20.9% 22.9%(1) 17.2% 12.9% 11.6% 16.3%
Return on beginning
shareholders' investment per share 15.8% 15.6%(1) 12.8% 10.5% 9.0% 11.9%
Cash dividends paid per share $ .24 $ .20 $ .16 $ .14 $ .14 $ .12
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) EXCLUDES AN AFTER-TAX GAIN OF $2,654,000 FROM THE SALE OF LAND IN MAY 1997,
WHICH IS EQUAL TO $.14 PER SHARE
(2) PRESENTED ON A WEIGHTED AVERAGE BASIS OF COMMON SHARES ASSUMING CONVERSION
OF POTENTIAL COMMON SHARES DURING EACH YEAR AFTER RETROACTIVE ADJUSTMENTS FOR
ISSUED SHARES, FOR STOCK SPLITS AND FOR REDUCTION OF SHARES FROM TREASURY STOCK
PURCHASES (IN THOUSANDS OF SHARES).
(3) ON DECEMBER 1, 1998, THERE WERE 1,760 COMMON SHAREHOLDERS OF RECORD, WITH
ANOTHER ESTIMATED 2,000 BENEFICIAL SHAREHOLDERS WHOSE STOCK IS HELD BY NOMINEES
OR BROKER DEALERS.
(4) (INCOME BEFORE INCOME TAXES PLUS NET INTEREST EXPENSE) DIVIDED BY (AVERAGE
QUARTERLY ASSETS MINUS NON-INTEREST BEARING LIABILITIES).
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
BACKLOG/NEW ORDERS
1998 1997 1996
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
New Orders:
North America* $ 179,779 $ 186,155 $ 139,725
International 153,219 169,968 143,028
- --------------------------------------------------------------------------------
Total $ 332,998 356,123 $ 282,753
- --------------------------------------------------------------------------------
Backlog $ 175,439 175,841 $ 120,481
================================================================================
*INCLUDES U.S. AND CANADA
1998 new orders of $333.0 million were down 6% from 1997 but represented a 18%
increase over 1996. 1997 orders included a $18.5 million contract for a large
crash simulation system and 1996 orders included a $23.3 million earthquake
simulator. There were no orders over $10 million in 1998.
In 1998, the Mechanical Test and Simulation sector (MT&S) new orders of $254.6
million decreased 13% from 1997 but represented a 9% increase over 1996. Orders
from the ground vehicle industry and for civil engineering applications were
particularly strong in 1997 and 1996 but declined in 1998 due to the Asian
situation and the Japan recession. Solid growth in our materials business and
specialty entertainment projects partially offset the loss of business in Asia
and Japan.
The Factory Automation sector (FA) new orders in 1998 of $78.4 million
increased 24% over the prior year (70% of the increase from the acquisition of
Performance Controls, Inc. [PCI]) and represented a 63% increase over 1996.
About 17% of the order growth in 1997 came from the acquisition of
Bregenhorn-Butow & Co., (BB & Co.). The European and Japanese markets for FA
products reflected solid growth in local currencies but were affected in
translation due to the strengthening dollar. Orders for industrial automation
applications (servo motors, amplifiers, and motion controllers) and industrial
sensors were affected, in 1998, by a soft domestic market.
North American orders decreased 3% in 1998, but increased 33%, in 1997, and 1%
in 1996. International orders decreased 10% in 1998 but increased 19% in 1997,
and 32% in 1996. See Geographic Analysis of New Orders (below) for the
percentage breakdown by geographic area. See Foreign Currencies Effects (page
19) for the impact on orders due to changing foreign currency rates.
The backlog of undelivered orders at September 30, 1998 amounted to $175.4
million, which was about flat with the prior year. The order backlog at the end
of 1997 had increased 46% from 1996 as a result of the record new orders
received in 1997. Approximately 10% of the orders in backlog have delivery
dates beyond fiscal 1999.
NET REVENUES
1998 1997 1996
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
United States $ 182,505 $143,913 $ 128,593
International 157,177 159,567 132,436
- --------------------------------------------------------------------------------
Total $ 339,682 $303,480 $ 261,029
================================================================================
Record 1998 net revenues of $339.7 million were up 12% from the prior year and
represented a 30% increase over 1996 revenues. For 1998, MT&S revenues of $265.6
million increased 10% from 1997 and represented a 25% increase over 1996
revenues. FA revenues in 1998 of $74.1 million increased 18% over the previous
year and represented a 53% increase over 1996 revenues (the PCI acquisition in
1998 represented 78% of the 1998 growth). For industry sector and geographic
information, see Note 2 of "Notes to Consolidated Financial Statements." See
Foreign Currencies Effects (page 19) for impact on revenues due to changing
foreign currency rates.
Revenues in the United States increased over the prior years: 27% in 1998, 12%
in 1997, and 2% in 1996. The domestic market, which was strong in 1997 for most
of the Company's business segments, softened somewhat for our FA sector and
certain niches of our MT&S sector in 1998.The domestic market was soft in 1996.
International revenues decreased 1% in 1998 and increased 20% in 1997, and 22%
in 1996. International revenues grew at a faster rate in 1997 and 1996
reflecting improved economic conditions which began late in 1995. In 1998, the
Asian economies and Japan were in a deep recession which caused the decline in
revenues between years. Europe continued to show recovery from its low point in
1995.
The MT&S sector revenue increases for 1998 and 1997 reflected positive
worldwide demand from our ground vehicle customers, solid growth in our
entertainment projects niche, a strong market for aftermarket sales of
accessories and services, and, in 1998, an improvement in market share for our
materials test business. Our civil engineering structural test business which
was strong in 1997 declined in 1998 due to the Asian situation.
The FA sector revenue increase for 1998 reflected good growth in demand from
European original equipment manufacturers for our sensor products and the PCI
acquisition. The demand for our servo motor, amplifier, and motion control
products was soft for most of 1998 but strengthened in the fourth quarter.
Selective price increases and decreases were implemented in all three years.
However, the overall impact of pricing changes did not have a material effect on
reported revenue volume.
GEOGRAPHIC ANALYSIS OF NEW ORDERS
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
North America 54% 52% 49% 57% 52%
- --------------------------------------------------------------------------------
Europe/Africa/Middle East 30 28 22 25 21
- --------------------------------------------------------------------------------
Asia Pacific/Japan 14 18 26 17 26
- --------------------------------------------------------------------------------
Latin America/Rest of the World 2 2 3 1 1
- --------------------------------------------------------------------------------
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GROSS PROFIT
1998 1997 1996
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Gross Profit $ 130,364 $ 121,503 $ 106,104
================================================================================
% of Net Revenue 38.4% 40.0% 40.6%
================================================================================
The gross profit percentage for 1998 decreased to 38.4% from 40.0% in 1997. The
decrease was principally caused by a higher revenue content of "specialty"
projects that are sold at a lower gross margin than in our core automotive and
material test business, and a high unfavorable overhead manufacturing variance
caused by increased expenses and lost direct labor due to training associated
with our new enterprise-wide financial and operating software system.
The small decrease in the gross profit percentage in 1997 compared to 1996
was due to higher continuing product engineering costs in the MT&S sector,
associated with enhancing current product offerings, and a material cost problem
at our FA plants in Germany.
RESEARCH AND DEVELOPMENT EXPENSE
1998 1997 1996
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
R & D Expense $ 21,930 $ 17,511 $ 17,696
================================================================================
% of Net Revenue 6.5% 5.8% 6.8%
================================================================================
The Company provides funds for product, system and application developments
(R&D) in both the MT&S and FA sectors. The majority of the R&D expenditures in
all three years were for new systems and system components such as software,
controls and mechanical products; new measurement products; servo motors and
amplifiers; and accessories. 1998 product introductions included low-force
actuators, a family of quiet hydraulic pumps, wheel force transducers, a
microforce material testing system, and an array of bio-mechanical testing
products.
The R&D as a percentage of net revenue reflected above are representative of
the ratio range the Company normally commits to in its annual planning process.
A shift of some MT&S engineering personnel from R&D to continuing product
engineering caused the R&D expense and ratio reduction in 1997 versus 1996.
Accelerated development programs in both the MT&S and FA sectors and a shift
from customer funded development caused the higher percentages in 1998 and 1996.
The Company also undertakes "first of their kind" system level development
efforts as part of its custom projects sold to customers. The cost of these
efforts is reported as cost of revenue. The combination of internally funded R&D
and these customer funded system innovations typically approximates about 10% of
net revenue.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
1998 1997 1996
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Selling Expense $ 51,905 $ 52,229 $ 48,260
General &
Administrative Expense 23,254 20,898 17,260
- --------------------------------------------------------------------------------
Total $ 75,159 $ 73,127 $ 65,520
================================================================================
% of Net Revenue 22.1% 24.1% 25.1%
================================================================================
Selling and General & Administrative (SG&A) expenses for 1998 as a percentage of
net revenue was 2.0 percentage points lower than 1997 and 3.0 percentage points
lower than 1996. Full year spending for 1998 totaled $75.2 million, which
represented a $2.0 million (3%) increase over 1997 and a $9.7 million (15%)
increase over 1996.
All three years were similar in that cost control and alignment of existing
resources with markets having the greatest potential were heavily emphasized
during the annual planning process. New investments were made based on
evaluations as to how to serve our markets better or to support long-term
business strategies. Specific expenses in the selling category are variable,
such as commissions, and increased significantly in 1997 due to record new
orders. SG&A expenses of newly acquired companies represented $1.1 million of
the expense increase in 1998 and $1.9 million of the increase in 1997.
INCOME
1998 1997 1996
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
Income Before
Income Taxes $ 31,473 $32,712 $ 20,006
================================================================================
% of Net Revenue 9.3% 10.8% 7.7%
================================================================================
Net Income $ 20,766 $20,863 $ 14,109
================================================================================
% of Net Revenue 6.1% 6.9% 5.4%
================================================================================
Effective Tax Rate 34.0% 36.2% 29.5%
================================================================================
Return On Beginning
Shareholder's Investment
Per Share 15.8% 17.9% 12.8%
================================================================================
Basic Earnings Per Share $ 1.13 $ 1.15 $ .76
================================================================================
Diluted Earnings Per Share $ 1.08 $ 1.10 $ .74
================================================================================
Income before Income Taxes (pretax income) in 1998 increased $3.1 million or 11%
from 1997 (1997 pretax income excluding the $4.3 million land sale gain amounted
to $28.4 million or 9.4% of net revenue), and represented a $11.5 million or
57% increase over 1996. The improved pretax income percentage in both 1998 and
1997 compared to 1996 reflects revenue growth that was achieved with lower
operating expense ratios. The MT&S pretax income of $24.6 million, in 1998, was
slightly better than
18
<PAGE>
1997 pretax (excluding the $4.3 million land sale gain). FA pretax operating
income increased 64% to $6.9 million from 1997. FA pretax operating income had
decreased 9% in 1997 from 1996 which was primarily caused by integration costs
associated with the BB & Co. acquisition, higher development costs for new and
expanded uses of our industrial sensors products, and a material cost problem at
our plants in Germany. (See Note 2 of "Notes to Consolidated Financial
Statements").
Net income increased $2.6 million or 14% from 1997 (excluding the gain from
the sale of land which amounted to $2.7 million after taxes, or $.14 per diluted
share) and represented a $6.7 million or 47% increase over 1996.
The effective tax rate is influenced by the level of tax credits available
from the Company's Foreign Sales Corporation and qualified Research and
Development expense; and on the level of foreign sourced income which is taxed
at a higher rate than domestic sourced income. See Note 4 of "Notes to
Consolidated Financial Statements" for the reconciliation between the federal
statutory and effective income tax rates and other related tax information.
FOREIGN CURRENCIES EFFECTS
The Company is exposed to market risk from changes in foreign currency exchange
rates which can affect its results from operations and financial condition. To
minimize the risk, the Company manages exposure to changes in foreign currency
rates through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments, principally
forward exchange contracts. Foreign exchange contracts are used to hedge the
Company's overall exposure to exchange rate fluctuations, since the gains and
losses on these contracts offset losses and gains on the assets, liabilities,
and transactions being hedged.
Approximately 50% of the Company's revenue occurs outside of the United States
and about 65% (approximately 30% of the Company's net revenue) of these revenues
are denominated in currencies other than the U.S. dollar. As a result, a
strengthening of the U.S. dollar decreases translated foreign currency
denominated revenues and earnings. Conversely, weakening of the U.S. dollar has
the reverse impact on revenues and earnings. During 1998, 1997 and 1996, the
U.S. dollar was generally stronger against other major currencies. Gains and
losses attributed to translating the financial statements for all non-U.S.
subsidiaries and the gains and losses on forward exchange contracts used to
hedge these exposures, are included in other expense (income).
The total effect of foreign exchange rate fluctuations on translation of
orders, revenues, and net income plus transaction gains and losses reported in
other expense (income) is set forth in the following table:
1998 1997 1996
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Increase (Decrease)
from Translation:
Orders $ (10,838) $(13,150) $ (8,980)
Revenues (6,704) (8,852) (4,921)
Net Income (236) (237) (66)
================================================================================
Transaction Gain in
"Other Expense (Income)" $ 2,340 $ 1,266 $ 104
================================================================================
LIQUIDITY AND CAPITAL RESOURCES
1998 1997 1996
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
Total Interest
Bearing Debt $ 74,682 $ 12,865 $ 11,836
% of Total
Capitalization 34.3% 9.4% 9.5%
================================================================================
Shareholders'
Investment $ 143,036 $124,619 $ 112,814
================================================================================
Per Share $ 7.70 $ 6.82 $ 6.15
================================================================================
At September 30, 1998, the Company's capital structure was comprised of $29.4
million of current debt, $45.3 million of long-term debt and $143.0 million of
shareholders' investment. The ratio of total debt to total capitalization was
34.3% compared to 9.4% at September 30, 1997.
Total debt increased $61.8 million during 1998 to $74.7 million. This resulted
from a $23.8 million increase in notes payable to banks, and a $37.7 million
increase in long-term debt.
The increase in notes payable to banks principally financed an increase in the
Company's working capital needs in 1998. The long-term debt increased as a
result of the Company's $35 million private placement of long-term notes.
Proceeds of the private placement were used to fund acquisitions made by the
Company in 1998 and to fund the Company's investment in an enterprise-wide data
processing system.
In May 1998, the Company amended its multi-currency revolving credit facility
with its principal bank, increasing the commitment to $35 million, and extending
the commitment to September 2001. There was $20.8 million outstanding under this
facility at September 30, 1998. Additionally, the Company has an additional $35
million of uncommitted lines of credit, of which $8 million was outstanding at
year end.
Shareholders' investment increased $18.4 million in 1998 to $143.0 million.
The increase was primarily due to an increase in retained earnings of $20.8
million from current year net earnings and $3.2 million from the Company's
employee stock option and purchase plans. These increases were offset by $4.4
million of dividend payments and $1.2 million of treasury stock purchases.
The Company believes that the combination of present capital resources,
internally generated funds, and unused financing sources will be adequate to
finance on-going operations, allow for reinvestment in the business and
strategic acquisitions.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
CASH FLOWS
During 1998 operating activities used $5.0 million of cash, compared with $9.6
million that was generated in 1997 and $36.1 million in 1996. The decrease in
cash generated in 1998 was largely due to increased accounts receivable from
strong shipments in the fourth quarter. Major uses of cash included $29.0
million for acquisition of businesses, $24.1 million for additions to property
and equipment, and $4.4 million of dividend payments.
Capital expenditures for property and equipment additions totaled $24.1
million in 1998, $12.4 million in 1997, and $7.4 million in 1996. Significant
additions in 1998 were associated with an enterprise-wide financial and
operations software system.
Capital spending in 1999 is planned to be about $12 million. The Company
anticipates that 1999 capital expenditures will be financed primarily with funds
from operations.
DIVIDENDS
The Company's dividend policy is to maintain a payout ratio which allows
dividends to increase with the long-term growth of earnings per share, while
sustaining dividends in down years. The Company's dividend payout ratio target
is about 25 percent of earnings per share. The current quarterly dividend of 6
cents per share equates to 26 percent of the 1996 through 1998 average net
earnings per share.
SHARE REPURCHASE PLAN
In 1998, the Company repurchased 76,000 shares of common stock on the open
market for $1.2 million, at an average cost of $15.56 per share. The Company
repurchased 698,130 shares in 1997 for $7.6 million, at an average cost of
$10.91 per share. The Company's purpose for share repurchases is to offset the
dilutive effect of shares of common stock issued from the Company's stock option
and stock purchase plans, and for other corporate stock-based programs. During
the past two years, the Company issued 1,000,000 shares of its common stock from
these stock option and stock purchase plans.
In November 1996, the Company's Board of Directors authorized the repurchase
of 1,000,000 shares of common stock in the open market within the Securities and
Exchange Commission guidelines. At September 30,1998, 533,780 shares remained
available to be repurchased under this authorization.
The above share amounts have been adjusted for the Company's two-for-one stock
split in the form of a 100% stock dividend, effective February 2, 1998.
QUARTERLY STOCK ACTIVITY(1)
The Company's common shares trade on The Nasdaq Stock Market's National Market
under the symbol MTSC. The following table sets forth the high, low and volume
of shares traded (expressed in thousands) for the periods indicated:
1998 1997
- --------------------------------------------------------------------------------
SHARES SHARES
HIGH LOW TRADED HIGH LOW TRADED
- --------------------------------------------------------------------------------
1st Quarter 20 17 3/8 3049 10 3/4 9 5/8 1574
2nd Quarter 19 13 1/2 5298 11 5/16 9 3/4 1538
3rd Quarter 19 1/4 15 1/2 2379 15 1/4 10 1/4 4388
4th Quarter 17 3/4 11 9/16 1600 19 5/8 14 3/8 2196
- --------------------------------------------------------------------------------
(1) SOURCE: THE NASDAQ STOCK MARKET
THE ABOVE PRICES AND SHARE VOLUMES HAVE BEEN ADJUSTED FOR THE COMPANY'S
TWO-FOR-ONE STOCK SPLIT IN THE FORM OF A 100% STOCK DIVIDEND, EFFECTIVE FEBRUARY
2, 1998.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarter-to-quarter revenue and earnings comparisons do not necessarily reflect
changes in the demand for the Company's products or its operating efficiency.
Revenues and earnings in any quarter can be significantly affected by delivery
delays or acceleration of one or more high-value systems, not accounted for
using the percentage-of-completion accounting method. The use of the
percentage-of-completion revenue recognition method for large long-term projects
helps alleviate those fluctuations. (See Note 1 of "Notes to Consolidated
Financial Statements"). High-value, state-of-the-art custom orders can also
contain leading-edge applications of the Company's technology, which in some
cases have resulted in lower gross profit margins, albeit not necessarily low
marginal profit contribution. Product development in these state-of-the-art
custom orders is as essential to the Company's long term growth as is Company
funded research and development.
Quarterly earnings also vary based on the use of estimated, effective income
tax rates for providing federal, state, and foreign income taxes. See Note 4 of
"Notes to Consolidated Financial Statements" for more information on the
Company's income taxes.
EURO CONVERSION
On January 1, 1999, certain member countries of the European Economic and
Monetary Union (EMU) will adopt a common currency, the Euro. For a three-year
transition period, both the Euro and individual participants' currencies will
remain in use. The Company is upgrading systems, where necessary, to properly
handle the Euro. It is expected that the Company's European operations will
formally begin reporting in euro currency starting in October, 2000. However,
beginning January 1, 1999, the Company will be able to process euro transactions
in dealing with its customers. The costs of addressing the euro conversion are
not expected to have a material impact on the Company's financial condition or
operating results.
20
<PAGE>
- --------------------------------------------------------------------------------
YEAR 2000
The following is a Year 2000 Readiness Disclosure pursuant to the Year 2000
Information and Readiness Disclosure Act.
The Company is evaluating the potential impact of what is commonly referred to
as the Year 2000 issue, concerning the inability of certain computer-based
products and systems to operate correctly into and during the year 2000. If not
corrected, these products and systems could fail or create erroneous results.
Following preliminary work done in fiscal 1997, in early fiscal 1998 the Company
established a full-time Year 2000 central project office led by a senior
technical manager reporting directly to an executive. The project is being
executed solely by company personnel who use third party testing software where
appropriate.
The central project office has been working with each of the Company's twelve
producing sites to evaluate the following areas:
1. Site Infrastructure, Equipment and Vendors
* Business Information Systems
* End User Computing Systems
* Telecommunications Infrastructure
* Service Providers
* Material Suppliers
* Manufacturing and Metrology Equipment and Facilities
2. Products Manufactured at Site
Except for a noise and vibration product line acquired at the end of fiscal
1998 (which will be included in the project in 1999), all of the Company's
twelve producing sites had been audited by October 31, 1998 and the areas which
were not yet Year 2000 ready, or where questions remain as to readiness, were
identified and schedules set to become ready. A summary of the results of these
audits is presented below.
SITE INFRASTRUCTURE, EQUIPMENT AND VENDORS
The Company's major Business Information, End User Computing and Telecom Systems
have been identified at each site, and the vast majority of these systems that
have been tested are compliant. Each site has developed a plan for completion of
testing and remediation of critical systems. No projects have been accelerated
due to Year 2000 nor are Year 2000 efforts precluding other important efforts in
these areas.
The Company believes its greatest Year 2000 exposure lies with a limited
number of critical/sole source service providers and material suppliers. A
failure of these vendors to be able to operate up to and through the year 2000
could have a material adverse effect on the Company's business, financial
condition and operating results. The Company has sent surveys to such vendors
and has received responses from most of them about their Year 2000 readiness.
Where the Company does not have sufficient comfort that a critical vendor will
be ready, site management will obtain more detailed information and establish a
plan for working with the vendor to prevent an interruption of supply. During
fiscal 1999, the Company will develop contingency plans, where feasible, in
those cases where such interruption remains reasonably possible.
The Company's manufacturing and metrology equipment and facilities contain
embedded processors and code which have been inventoried and evaluated for Year
2000 readiness. A few instances require remediation.
The Company's target date is June 30, 1999 for the completion of testing and
remediation at each site. By the same date, the Company expects to complete
verification of readiness (or contingency plan) for each of its critical
vendors.
PRODUCTS MANUFACTURED AT SITE
The Company's FA Sector products contain few date sensitive computer and
embedded processors. The Company has completed an evaluation of the vast
majority of these products and will complete the balance in early fiscal 1999.
All of the products evaluated to date have been found to be year 2000 ready, in
some cases with stipulations, and the Company believes that will be the case
with the products yet to be evaluated.
The Company's MT&S products are by their nature computer intensive. The
Company has assessed the vast majority of the products in the sector and advised
its customers as to their Year 2000 readiness via its web site and written
communication. The balance of products will be assessed by March, 1999.
In those cases where MT&S's products were found to be non-compliant, less than
2%, or in the case of discontinued products that were not evaluated, the Company
is actively working with its customers to provide upgrades that are year 2000
ready. The Company considers this process to be business as usual in its MT&S
sector due to the rapid evolution in computer and software technology. The
Company does not expect the costs to be incurred or revenue to be lost in this
process, if any, to have a material impact on its financial condition or
operating results.
SUMMARY
The Company estimates that the costs directly related to its Year 2000 project
were $300,000 in fiscal 1998 and will be $800,000 in fiscal 1999. Such costs are
expensed as incurred.
This Readiness Disclosure is a Forward Looking statement as defined by the
Securities and Exchange Commission and the Company recognizes that, although not
expected, there are risks of project delays, costs incurred, vendor compliance,
and loss of business which are outside the direct control of the Company and/or
could prove to be material.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Selected quarterly financial information, for the three fiscal years ended
September 30, 1998, is presented below.
<TABLE>
<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
- ----------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1998
Net revenue $73,938 $ 81,685 $ 85,826 $98,233 $ 339,682
Gross profit 30,239 31,612 32,278 36,235 130,364
Income before income taxes 6,712 7,523 7,751 9,487 31,473
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,312 $ 4,866 $ 5,087 $ 6,501 $ 20,766
- ----------------------------------------------------------------------------------------------------------------------------------
Net income per share(2)
Basic $ .24 $ .27 $ .27 $ .35 $ 1.13
Diluted .22 .26 .26 .34 1.08
- ----------------------------------------------------------------------------------------------------------------------------------
1997
Net revenue $66,841 $ 73,880 $ 74,153 $88,606 $ 303,480
Gross profit 27,091 30,359 29,481 34,572 121,503
Income before income taxes 4,683 7,060 10,947(1) 10,022 32,712(1)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,221 $ 4,642 $ 6,741(1) $ 6,259 $ 20,863(1)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income per share(2)
Basic $ .18 $ .26 $ .37(1) $ .34 $ 1.15(1)
Diluted .17 .25 .36(1) .32 1.10(1)
- ----------------------------------------------------------------------------------------------------------------------------------
1996
Net revenue $56,135 $ 67,082 $ 60,630 $77,182 $ 261,029
Gross profit 23,867 28,066 24,374 29,797 106,104
Income before income taxes 3,570 5,363 4,286 6,787 20,006
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,430 $ 3,632 $ 2,914 $ 5,133 $ 14,109
- ----------------------------------------------------------------------------------------------------------------------------------
Net income per share(2)
Basic $ .13 $ .20 $ .15 $ .28 $ .76
Diluted .13 .19 .15 .27 .74
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) INCLUDES $4.3 MILLION PRETAX GAIN ON LAND SALE EQUAL TO $.14 PER SHARE AFTER
TAXES.
(2) NET INCOME PER SHARE HAS BEEN RESTATED RETROACTIVELY FOR THE TWO-FOR-ONE
STOCK SPLIT EFFECTIVE FEBRUARY 2, 1998.
22
<PAGE>
CONSOLIDATED BALANCE SHEETS
(September 30)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,512 $ 10,285
Accounts receivable, net of allowance for doubtful accounts of $2,135 and $2,010 89,278 62,023
Unbilled contracts and retainage receivable 35,891 32,653
Inventories 53,675 43,591
Prepaid expenses 4,237 4,253
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 193,593 152,805
- --------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Land 2,437 2,453
Buildings and improvements 40,432 37,779
Machinery and equipment 88,626 68,071
Accumulated depreciation (63,758) (57,884)
- --------------------------------------------------------------------------------------------------------------------------------
Total property and equipment, net 67,737 50,419
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS 37,118 12,908
- --------------------------------------------------------------------------------------------------------------------------------
$ 298,448 $216,132
================================================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- --------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 28,243 $ 4,356
Current maturities of long-term debt 1,180 920
Accounts payable 19,406 17,771
Accrued compensation and benefits 26,919 25,487
Advance billings to customers 17,360 21,065
Other accrued liabilities 12,106 9,880
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 105,214 79,479
- --------------------------------------------------------------------------------------------------------------------------------
Deferred income taxes 4,939 4,445
Long-term debt 45,259 7,589
- --------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' INVESTMENT:
Common stock, 25(cent) par; 64,000,000 shares authorized:
18,579,481 and 9,135,766 shares issued and outstanding 4,645 2,284
Additional paid-in capital 3,322 1,438
Retained earnings 133,203 119,167
Cumulative translation adjustment 1,866 1,730
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' investment 143,036 124,619
- --------------------------------------------------------------------------------------------------------------------------------
$ 298,448 $216,132
================================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE BALANCE SHEETS.
23
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND SHAREHOLDERS' INVESTMENT
(For the Years Ended September 30)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
NET REVENUE $ 339,682 $ 303,480 $261,029
COST OF REVENUE 209,318 181,977 154,925
- --------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 130,364 121,503 106,104
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling 51,905 52,229 48,260
General and administrative 23,254 20,898 17,260
Research and development 21,930 17,511 17,696
- --------------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 33,275 30,865 22,888
- --------------------------------------------------------------------------------------------------------------------------------
Interest expense 2,327 1,531 1,524
Interest income (379) (406) (401)
Other expense (income), net (146) (2,972) 1,759
- --------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 31,473 32,712 20,006
PROVISION FOR INCOME TAXES 10,707 11,849 5,897
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 20,766 $ 20,863 $ 14,109
================================================================================================================================
NET INCOME PER SHARE
Basic $ 1.13 $ 1.15 $ .76
Diluted 1.08 1.10 .74
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHAREHOLDERS' INVESTMENT
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock
-------------------------- Additional Cumulative
Shares Paid-In Retained Translation
Issued Amount Capital Earnings Adjustment
- --------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1995 4,598,311 $1,150 $ 255 $100,443 $ 4,829
================================================================================================================================
Exercise of stock options 264,604 66 3,642 -- --
Translation adjustment -- -- -- -- (793)
Common stock purchased and retired (381,055) (95) (3,897) (3,904) --
Stock split, 2 for 1 4,691,658 1,172 -- (1,172) --
Net income -- -- -- 14,109 --
Cash dividends, 16 (cent) per share -- -- -- (2,991) --
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1996 9,173,518 2,293 -- 106,485 4,036
================================================================================================================================
Exercise of stock options 311,313 78 4,511 -- --
Translation adjustment -- -- -- (83) (2,306)
Common stock purchased and retired (349,065) (87) (3,073) (4,453) --
Net income -- -- -- 20,863 --
Cash dividends, 20 (cent) per share -- -- -- (3,645) --
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 9,135,766 2,284 1,438 119,167 1,730
================================================================================================================================
Exercise of stock options 300,091 75 3,086 -- --
Translation adjustment -- -- -- -- 136
Common stock purchased and retired (60,800) (15) (1,202) -- --
Stock Split, 2 for 1 9,204,424 2,301 -- (2,301) --
Net income -- -- -- 20,766 --
Cash dividends, 24 (cent) per share -- -- -- (4,429) --
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 18,579,481 $4,645 $ 3,322 $133,203 $ 1,866
================================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
24
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(For the Years Ended September 30)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 20,766 $ 20,863 $ 14,109
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 9,715 8,557 7,820
Deferred income taxes 319 (227) 740
Gain from sale of real estate -- (4,332) --
Changes in operating assets and liabilities, exclusive of aquisitions:
Accounts receivable, unbilled contracts and retainage receivable (27,974) (26,056) 13,362
Inventories (6,470) (6,954) (1,071)
Prepaid expenses 587 363 (2,380)
Advance billings to customers (3,736) 8,157 (455)
Other liabilities, net 1,802 9,197 3,969
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,991) 9,568 36,094
- --------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property and equipment additions (24,149) (12,374) (7,437)
Proceeds from sale of real estate -- 5,700 --
Acquisition of businesses, net of cash received (29,012) (5,947) --
Other assets (334) (223) (649)
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (53,495) (12,844) (8,086)
- --------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net borrowings under notes payable to banks 23,770 3,743 (10,386)
Proceeds from issuance of long-term debt 38,637 1,008 2,202
Repayments of long-term debt (1,152) (2,745) (2,169)
Cash dividends (4,429) (3,645) (2,991)
Proceeds from employee stock option and stock purchase plans 3,160 4,589 3,708
Payments to purchase and retire common stock (1,217) (7,613) (7,896)
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 58,769 (4,663) (17,532)
- --------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (56) (1,007) 19
- --------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 227 (8,946) 10,495
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,285 19,231 8,736
- --------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10,512 $ 10,285 $ 19,231
================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest $ 1,881 $ 1,531 $ 1,458
Income taxes 8,024 13,295 6,677
================================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION AND TRANSLATION
The consolidated financial statements include the accounts of MTS Systems
Corporation (the Company) and its wholly and majority owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
All balance sheet accounts of foreign subsidiaries are translated to U.S.
dollars at the current exchange rates as of the end of the fiscal year. Income
statement items are translated at average exchange rates during the year. The
resulting translation adjustment is recorded as a separate component of
shareholders' investment. Gains and losses from translation of foreign currency
denominated transactions and from foreign exchange hedge contracts are included
in "Other expense (income) net" in the Consolidated Statements of Income and
amounted to $2,340,000 in 1998, $1,266,000 in 1997 and $104,000 in 1996.
REVENUE RECOGNITION
Revenue is recognized upon shipment of equipment when the customer's order can
be manufactured, delivered, and installed in less than twelve months. Revenue on
contracts requiring longer delivery periods (long-term contracts) and other
customized orders that permit progress billings is recognized using the
percentage-of-completion method based on the cost incurred to date relative to
estimated total cost of the contract (cost-to-cost method). The cumulative
effects of revisions of estimated total contract costs and impact on revenues
are recorded in the period in which the facts become known. When a loss is
anticipated on a contract, the amount is provided currently.
LONG-TERM CONTRACTS
The Company enters into long-term contracts for customized equipment sold to its
customers. Under terms of such contracts, revenue recognized using the
percentage of completion method may not be invoiced until completion of
contractual milestones, upon shipment of the equipment, or upon installation and
acceptance by the customer. Unbilled amounts for these contracts appear in the
Consolidated Balance Sheets as Unbilled Contracts and Retainage Receivable.
Amounts unbilled or retained at September 30, 1998 are expected to be invoiced
during fiscal 1999.
Long-term contracts consider the duration of the manufacturing and collection
cycles at the time the contract is bid. Accordingly, Accounts receivable in the
accompanying Consolidated Balance Sheets approximate fair value.
WARRANTY OBLIGATIONS
The Company warrants its products against defects in materials and workmanship
under normal use and service, generally for one year. The Company maintains
reserves for warranty costs based upon its past experience with warranty
claims.
RESEARCH AND DEVELOPMENT
Research and product development costs associated with new products are charged
to operations as incurred.
CASH EQUIVALENTS
Cash equivalents represent short-term liquid investments which have original
maturities of three months or less and approximate fair value.
ACCOUNTS RECEIVABLE
The Company grants credit to customers, but generally does not require
collateral or other security from domestic customers. International receivables,
where deemed necessary, are supported by letters of credit from banking
institutions.
INVENTORIES
Inventories consist of material, labor and overhead and are stated at the lower
of cost or market, determined by the first-in, first-out method. Inventory
components as of September 30, were as follows:
1998 1997
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Customer projects in
various stages of
completion $ 10,750 $ 5,559
Components,
assemblies and parts 42,925 38,032
- --------------------------------------------------------------------------------
Total $ 53,675 $ 43,591
================================================================================
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions, replacements and
improvements are capitalized at cost, while maintenance and repairs are charged
to operations as incurred. Depreciation is provided over the following estimated
useful lives of the property:
Buildings and improvements: 10 to 40 years.
Machinery and equipment: 3 to 12 years.
Most major building and equipment purchases are depreciated on a
straight-line basis for financial reporting purposes and on an accelerated basis
for income tax purposes.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company periodically enters into forward exchange contracts principally to
hedge the eventual dollar cash flow of foreign currency denominated transactions
(primarily British Pound, German Deutschemark, French Franc, Swedish Krona,
Italian Lira, and Japanese Yen). Gains and losses on forward exchange contracts
entered into to hedge foreign currency denominated undelivered orders and net
exposed assets are included in "Other expense (income) net" in the Consolidated
Statements of Income.
26
<PAGE>
- --------------------------------------------------------------------------------
The Company's accounting policy for these contracts is based on the Company's
designation of foreign currency contracts as hedging transactions. The Company
does not use derivative financial instruments for speculative or trading
purposes. The criteria the Company uses for designating a contract as a hedge
include the contract's effectiveness in risk reduction and matching of contracts
to underlying transactions. On September 30, 1998, there were open hedge
contracts totaling $2,800,000 with an unrealized loss of $3,000. On September
30, 1997, there were no open hedge contracts.
OTHER ASSETS
Other assets consist principally of patents and excess cost over net assets
acquired (goodwill), net of accumulated amortization. The carrying value of
goodwill less accumulated amortization was $31,468,000 and $10,861,000 in 1998
and 1997, respectively. These assets are being amortized over various periods
ranging from 7 to 40 years.
The Company periodically evaluates whether events and circumstances have
occurred that may affect the estimated useful life of its goodwill and other
long-lived assets. If such events or circumstances were to indicate that the
carrying amount of these assets would not be recoverable, an impairment loss
would be recognized. No such impairment has been recognized for the year ended
September 30, 1998.
NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share" during the first quarter of fiscal 1998. As a result, all
prior periods presented have been restated to conform to the provisions of SFAS
No. 128, which requires the presentation of basic and diluted earnings per
share. Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
earnings per share includes the dilutive effect of potential common shares.
Weighted average common shares and per share computations have been restated
retroactively for the two-for-one stock split effective February 2, 1998.
1998 1997 1996
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
Weighted average
common shares
outstanding 18,441 18,207 18,669
Dilutive potential
common shares 811 749 437
- --------------------------------------------------------------------------------
Total dilutive
common shares 19,252 18,956 19,106
- --------------------------------------------------------------------------------
Basic net income
per share $ 1.13 $ 1.15 $ .76
Diluted net income
per share 1.08 1.10 .74
================================================================================
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make assumptions and estimates that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Ultimate results could differ from reported amounts based upon those assumptions
and estimates.
The Company undertakes significant technological innovation on some of its
Long-term Contracts. These contracts involve performance risk which may result
in delayed delivery of product and/or in revenue and gross profit variation from
difficulties in estimating the ultimate cost of such contracts.
FUTURE ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes requirements for disclosure of comprehensive
income and becomes effective beginning with the Company's first quarter ending
on December 31, 1998. Reclassification of earlier financial statements for
comparative purposes is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires reported segments to
be those used by management to disaggregate a company. The new standard becomes
effective for the Company's fiscal year ending September 30, 1999, and requires
that comparative information from earlier years be restated.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999.
The Company anticipates that the effect of adopting SFAS Nos. 130, 131 and 133
will not have a material impact on the Company's financial statements.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
- --------------------------------------------------------------------------------
2. INDUSTRY SECTOR AND GEOGRAPHIC INFORMATION:
Customers use the Company's hardware and software products and services to
improve product quality, stimulate innovation, and increase machine and worker
productivity. MTS sells these products and services in two markets--Mechanical
Testing and Simulation (MT&S) and Factory Automation (FA). MT&S customers use
the Company's products and services to determine how their products (materials,
vehicles, components, or structures) will perform under actual service
conditions. FA customers use the Company's instrumentation products to monitor
and automate industrial processes and equipment. Financial information by
sector follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
NET REVENUE
Mechanical Testing & Simulation $ 265,612 $ 240,706 $ 212,763
Factory Automation 74,070 62,774 48,266
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 339,682 $ 303,480 $ 261,029
- --------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES
Mechanical Testing & Simulation $ 24,558 $ 28,485(1) $ 15,299
Factory Automation 6,915 4,227 4,707
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 31,473 $ 32,712(1) $ 20,006
================================================================================================================================
IDENTIFIABLE ASSETS
Mechanical Testing & Simulation $ 268,829 $ 189,727 $ 165,110
Factory Automation 51,766 46,194 38,670
Eliminations between sectors (22,147) (19,789) (16,384)
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 298,448 $ 216,132 $ 187,396
================================================================================================================================
OTHER SECTOR DATA
Mechanical Testing & Simulation:
Capital expenditures $ 20,564 $ 10,614 $ 6,198
Depreciation 6,834 5,979 5,706
Amortization 371 379 380
- --------------------------------------------------------------------------------------------------------------------------------
Factory Automation:
Capital expenditures $ 3,959 $ 1,787 $ 1,803
Depreciation 1,674 1,532 1,216
Amortization 836 667 518
================================================================================================================================
</TABLE>
(1) INCLUDES $4.3 MILLION PRETAX GAIN ON LAND SALE EQUAL TO $.14 PER SHARE AFTER
TAXES.
28
<PAGE>
- --------------------------------------------------------------------------------
A geographic summary of the Company's operations and related year-end asset
information for the three years ended September 30, 1998 follows:
<TABLE>
<CAPTION>
International
----------------------------------------------------
United Elimi- Consoli-
States Far East Europe Other Nations Dated
- -------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS FOR THE YEAR
ENDED SEPTEMBER 30, 1998
Net revenue $182,505 $ 53,112 $ 85,181 $ 18,884 $ -- $339,682
Transfers between
geographic areas(1) 1,092 12,679 29,625 -- (43,396) --
- ------------------------------------------------------------------------------------------------------------------------------
Total $183,597 $ 65,791 $114,806 $ 18,884 $ (43,396) $339,682
==============================================================================================================================
Income before income taxes $ 16,469 $ 7,547 $ 2,783 $ 4,674 $ -- $ 31,473
==============================================================================================================================
OPERATIONS FOR THE YEAR
ENDED SEPTEMBER 30, 1997
Net revenue $143,913 $ 74,710 $ 66,905 $ 17,952 $ -- $303,480
Transfers between
geographic areas(1) 825 26,988 27,927 -- (55,740) --
- ------------------------------------------------------------------------------------------------------------------------------
Total $144,738 $101,698 $ 94,832 $ 17,952 $ (55,740) $303,480
==============================================================================================================================
Income (loss) before income taxes $ 17,327 $ 13,600 $ (1,481) $ 3,266 $ -- $ 32,712
==============================================================================================================================
OPERATIONS FOR THE YEAR
ENDED SEPTEMBER 30, 1996
Net revenue $128,593 $ 54,392 $ 63,023 $ 15,021 $ -- $261,029
Transfers between
geographic areas(1) 2,513 18,411 21,499 3 (42,426) --
- ------------------------------------------------------------------------------------------------------------------------------
Total $131,106 $ 72,803 $ 84,522 $ 15,024 $ (42,426) $261,029
==============================================================================================================================
Income before income taxes $ 10,690 $ 2,208 $ 3,876 $ 3,232 $ -- $ 20,006
==============================================================================================================================
IDENTIFIABLE ASSETS
AT SEPTEMBER 30
1998 $293,829 $ 10,026 $ 56,787 $ 306 $ (62,500) $298,448
1997 198,055 11,335 50,670 266 (44,194) 216,132
1996 174,507 12,060 42,098 175 (41,444) 187,396
==============================================================================================================================
</TABLE>
(1) TRANSFERS BETWEEN GEOGRAPHIC AREAS ARE MADE AT PRICES WHICH ALLOW
APPROPRIATE MARKUP TO THE MANUFACTURING OR SELLING UNIT.
No individual country, other than the United States, exceeded 10% of
consolidated revenues on a recurrent annual basis.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
- --------------------------------------------------------------------------------
3. FINANCING:
Long-term debt as of September 30 follows:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
6.6% Notes, unsecured, due in July 2008 35,000 --
7.8% Mortgage, due in October 2015, collateralized by building 6,444 6,287
5.3% Note, unsecured, due in March 2003 1,264 --
6.0% Note, unsecured, due in May 2008 1,943 --
Other 1,788 2,222
- -----------------------------------------------------------------------------------------------------
TOTAL $ 46,439 $ 8,509
LESS CURRENT MATURITIES (1,180) (920)
- -----------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 45,259 $ 7,589
=====================================================================================================
</TABLE>
Aggregate annual maturities of long-term debt for the next five fiscal years are
as follows: 1999--$1,180,000; 2000--$1,174,000; 2001--$3,928,000;
2002--$6,888,000; 2003--$7,428,000 and $25,841,000 thereafter. The carrying
value of the Company's long-term debt at September 30, 1998, approximates the
fair value at current interest rates offered to the Company for debt with the
same remaining maturities.
The Company has credit agreements with two domestic banks totaling
$40,000,000. One credit agreement, for $5,000,000, permits the Company to issue
domestic and Euro-currency notes. The other credit agreement, for $35,000,000,
permits the Company to issue domestic notes, Euro-currency notes, and banker's
acceptances. As part of the same credit agreement, the bank has agreed to issue
term loans up to a maximum of $10,000,000 until March 30, 2002. This agreement
provides for repayment of these term loans through September 2005. The Company
compensates both banks with loan commitment fees for the unused portion of the
credit lines. The Company also has three uncommitted lines of credit with banks
that total $35,000,000, of which $8,000,000 is outstanding at September 30,
1998. In addition, the Company has standby letter-of-credit lines totaling
$30,000,000. At September 30, 1998, standby letters of credit outstanding
totaled $13,619,000.
Under the terms of its credit agreements, the Company has agreed, among other
matters, that (a) its defined cash flow or fixed charge coverage will exceed a
defined minimum level; (b) its interest bearing debt will not exceed a defined
percentage of total capital; (c) repurchases of its common stock will not exceed
a maximum amount. At September 30, 1998, net worth exceeded the defined minimum
amount by $24,808,000 and the Company had $16,346,000 available for repurchases
of its common stock. The Company was in compliance with the terms and covenants
of its credit agreements and its lines of credit at September 30, 1998.
Information on short-term borrowings for the years ended September 30 follows:
<TABLE>
<CAPTION>
1998 1997 1965
- -----------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Balance outstanding at September 30 $ 28,243 $ 4,356 $ 56
Average balance outstanding 23,498 11,903 3,282
Maximum balance outstanding 51,216 23,458 11,223
Year-end interest rate 5.9% 6.0% 7.0%
Weighted-average interest rate 6.1% 6.0% 6.9%
=========================================================================================
</TABLE>
30
<PAGE>
4. INCOME TAXES:
The provision for income taxes for the years ended September 30 consisted of:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Current payable (receivable):
Federal $ 5,966 $ 7,389 $ 3,717
State 898 835 499
Foreign 3,894 3,568 1,830
Deferred (52) 57 (149)
- ------------------------------------------------------------------------------------------------------------------------------
Total provision $ 10,706 $ 11,849 $ 5,897
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation from the Federal statutory income tax rate to the Company's
effective rate for the years ended September 30 follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35% 35% 35%
Tax benefit of Foreign Sales Corporation (2) (2) (5)
Foreign provision in excess of U.S. tax rate 3 3 2
State income taxes, net of Federal benefit 2 2 2
Research and development tax credits (2) (2) (3)
Other, net (2) -- (2)
- ------------------------------------------------------------------------------------------------------------------------------
Effective rate 34% 36% 29%
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
DEFERRED TAX ASSET:
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Accrued compensation and benefits $ 2,151 $1,703
Inventory reserves 2,309 2,088
Allowance for doubtful accounts 244 301
Other assets (11) (15)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSET $ 4,693 $4,077
==============================================================================================================================
DEFERRED TAX LIABILITY:
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Property and equipment $ 4,881 $4,445
- ------------------------------------------------------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $ 188 $ 368
==============================================================================================================================
</TABLE>
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
- --------------------------------------------------------------------------------
5. STOCK OPTIONS:
The Company has made certain stock-based awards to its officers, non-employee
directors, and key employees under various stock plans. Awards under these plans
can include incentive stock options (qualified), non-qualified stock options,
stock appreciation rights, restricted stock, deferred stock, and other
stock-based and non stock-based awards.
At September 30, 1998, the Company had awarded incentive stock options,
non-qualified stock options and restricted stock. These were granted at exercise
prices that are 100% of the fair-market value at the day of grant. Beginning one
year after grant, the options generally can be exercised proportionately each
year for periods of three, four, or six years, as defined in the respective
plans. Options currently expire no later than seven years from the grant date,
as defined.
Option holders may exercise options by delivering Company stock already owned,
cash, or a combination of stock and cash. The shares tendered in the exchange
are cancelled and, therefore, reduce shares issued. During 1998 and 1997, option
holders exchanged 22,335 and 77,266 shares, respectively, of the Company's stock
in payment of options exercised. (All share and share price data herein have
been restated retroactively for the two-for-one stock split, effective February
2, 1998.)
A summary of the status of the Company's stock option plans as of September 30,
1998, 1997, and 1996, and changes during the years ending on those dates
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
SHARES WAEP* SHARES WAEP* SHARES WAEP*
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,920 $ 8.35 1,964 $ 7.12 2,156 $ 6.11
- -------------------------------------------------------------------------------------------------------------------
Granted 545 $15.79 608 $10.72 642 $ 8.14
- -------------------------------------------------------------------------------------------------------------------
Exercised (295) $ 6.51 (616) $ 6.78 (788) $ 5.23
- -------------------------------------------------------------------------------------------------------------------
Forfeited (27) $10.40 (36) $ 7.87 (46) $ 6.37
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 2,143 $10.30 1,920 $ 8.35 1,964 $ 7.12
===================================================================================================================
Options exercisable at year-end 1,156 $ 8.19 894 $ 7.59 926 $ 6.77
===================================================================================================================
</TABLE>
SHARES IN THOUSANDS
*WEIGHTED-AVERAGE EXERCISE PRICE
The following table summarizes information concerning outstanding and
exercisable options as of September 30, 1998:
<TABLE>
<CAPTION>
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
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.78-7.88 340 3.1 $ 5.88 333 $ 5.85
- ----------------------------------------------------------------------------------------------------------------------------
$7.94-8.13 711 2.3 $ 8.06 539 $ 8.04
- ----------------------------------------------------------------------------------------------------------------------------
$9.69-14.63 683 3.5 $ 11.31 256 $ 10.70
- ----------------------------------------------------------------------------------------------------------------------------
$15.38-19.38 409 4.3 $ 16.19 28 $ 15.99
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL 2,143 3.20 $ 10.30 1,156 $ 8.19
============================================================================================================================
</TABLE>
SHARES IN THOUSANDS
*IN YEARS
These options will expire if not exercised at specific dates ranging from
January 1999 to August 2002. Prices for options exercised during the three-year
period ended September 30, 1998 ranged from $5.78 to $15.75.
In January 1992 the Company's shareholders authorized an Employee Stock
Purchase Plan (the Purchase Plan), whereby 1,000,000 shares of the Company's
common stock were reserved for sale to employees until April 2002. Participants
in the 1998 and 1997 phases, all at dates specified in the Purchase Plan, were
issued 105,240 shares in 1998, and 83,368 shares in 1997. During 1998,
participants subscribed to purchase 137,861 shares at 85% of market price for
issuance in 1999.
32
<PAGE>
- --------------------------------------------------------------------------------
PRO FORMA INFORMATION: The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting
for its employee stock options. Under this pronouncement, no compensation
expense is recognized in the Company's financial statements because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant. However, Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
requires the use of option valuation models to estimate compensation expense
from the granting of employee stock options and to present the pro forma effect
of such expense on reported net income and earnings per share.
SFAS No. 123 requires this information be determined as if the Company had
accounted for employee stock options granted in fiscal years beginning
subsequent to December 31, 1994 under the fair value method of that statement.
The fair value of options granted in 1998 and 1997 reported below has been
estimated at the date of grant using the Black-Scholes option valuation model
with the following weighted average assumptions:
1998 1997 1996
- --------------------------------------------------------------------------------
Expected life (in years) 2.0 2.1 2.1
Risk-free interest rate 4.2% 5.8% 5.8%
Volatility .40 .49 .50
Dividend yield 1.6% 1.2% 1.9%
- --------------------------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models required the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
traded options, and because change in the subjective input assumptions can
affect materially the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable measure of the fair value
of its options. The weighted average estimated fair value of employee stock
options granted during 1998 and 1997 was $4.39 and $10.54 per share,
respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share data):
1998 1997 1996
- --------------------------------------------------------------------------------
Pro forma net income $19,474 $20,020 $13,556
Pro forma earnings per share $ 1.01 $ 1.06 $ .71
- --------------------------------------------------------------------------------
The effects on pro forma disclosures of applying SFAS No. 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because SFAS No. 123 is applicable only to options granted in fiscal years
subsequent to December 31, 1994, the pro forma effect will not be fully
reflected until 2002.
6. EMPLOYEE BENEFIT PLANS:
The Company's profit sharing plan functions as a retirement program for most
U.S. and certain international employees. Employees who have completed 1,000
hours of service during the plan year are eligible to participate. The formula
for calculating the Company's contribution is approved annually by the Board of
Directors and is based primarily on operating results for the year, before
management variable compensation. The plan provides for a minimum contribution
of 4% of participant compensation, as defined, up to the social security taxable
wage base, and 8% of participant compensation in excess of the taxable wage base
up to the maximum profit sharing contribution allowed by federal law, so long as
the entire contribution calculation does not exceed pretax income. The
contributions were 4.4% of participant compensation in 1998 and 1997,
respectively, and 4.3% in 1996. The provisions for profit sharing were
$3,577,000 in 1998, $3,163,000 in 1997 and $2,338,000 in 1996, and are
distributed among the various operating expenses shown in the accompanying
Consolidated Statements of Income.
Prior to 1998, two of the Company's international subsidiaries had
noncontributory, unfunded retirement plans for eligible employees. These plans
provide benefits based on the employee's years of service and compensation
during the years immediately preceding retirement, early retirement,
termination, disability, or death, as defined in the respective plans. In 1998,
one of the plans was modified to provide for contributions based solely on
annual compensation levels.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
- --------------------------------------------------------------------------------
The expenses for these plans consist of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefit earned during the period $ 178 $ 327 $ 360
Interest cost on projected benefit obligation 218 269 261
Net amortization and deferral 11 29 5
- --------------------------------------------------------------------------------------------------------------------------------
NET PERIODIC PENSION COST $ 407 $ 625 $ 626
================================================================================================================================
</TABLE>
The status of the Company's benefit plans and the amounts recognized in the
consolidated financial statements are:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
ACTUARIAL PRESENT VALUE:
Accumulated benefit obligation:
Vested $ 3,778 $3,332
Nonvested 542 575
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 4,320 $3,907
================================================================================================================================
Projected benefit obligation 5,110 4,723
Unrecognized net gain 460 464
Unrecognized net liability being amortized (478) (528)
Adjustment required to recognize minimum liability 25 29
- --------------------------------------------------------------------------------------------------------------------------------
ACCRUED PENSION LIABILITY $ 5,117 $4,688
================================================================================================================================
Major assumptions at year-end are:
- --------------------------------------------------------------------------------------------------------------------------------
Discount rate 3.5 to 6.2% 3.5 to 6.5%
Rate of increase in future compensation levels 3.0% 3.0%
================================================================================================================================
</TABLE>
7. ACQUISITIONS:
In fiscal 1998 the Company acquired three entities, all accounted for by the
purchase method of accounting, with an aggregate purchase price of approximately
$29 million, net of cash acquired. The Company acquired all the outstanding
stock of Performance Controls, Inc., a manufacturer of high performance power
amplifiers for factory automation and magnetic resonance machine applications,
in an all cash transaction. The Company acquired the stock of Nano Instruments
Inc., a manufacturer of instrumented indentation systems for ultra-low force
nanoindentation testing surfaces and thin films, for cash and debt. In addition
to the stock purchase of Nano Instruments Inc., the Company purchased the rights
to a patent from the two principal shareholders of Nano Instruments, Inc. The
Company also acquired the assets and technology of SDRC's noise and vibration
test software business along with a major portion of SDRC's noise and vibration
consulting engineering services, in an all cash transaction.
The total purchase price exceeded the fair value of the net assets acquired by
approximately $23.2 million. This amount was recorded as goodwill and other
intangibles with useful lives between 7 and 20 years. The results of the
operations of the acquired companies are included in the Company's financial
statements for the periods in which they were owned.
In fiscal 1997 the Company acquired the stock of Bregenhorn-Butow & Co.,
Freiburg, Germany (name subsequently changed to Custom Servo Motors
Antriebstechnik GmbH & Co KG), a privately held supplier of low power,
electronic servo motors and drives, for cash and debt. The transaction was
accounted for by the purchase method of accounting.
The pro forma results for 1998 and 1997, assuming these acquisitions had been
made at the beginning of the year, would not be materially different from
reported results.
8. FIRST QUARTER FISCAL YEAR 1999 RESTRUCTURING CHARGE:
The Company has taken a series of actions to better align its organizational
structure with market elements, improve operational performance, and reduce
costs. These actions will result in a one-time charge in the first quarter of
fiscal year 1999 of approximately $2.1 million ($1.3 million after-tax, or $.07
per share). This charge relates principally to a workforce reduction and $.3
million for operational consolidations. Annualized pretax cost savings from
reducing the number of employees and contractors is estimated to be $5 million.
34
<PAGE>
REPORTS ON CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO MTS SYSTEMS CORPORATION:
We have audited the accompanying consolidated balance sheets of MTS Systems
Corporation (a Minnesota corporation) and Subsidiaries as of September 30, 1998
and 1997, and the related consolidated statements of income, shareholders'
investment and cash flows for each of the three years in the period ended
September 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MTS Systems Corporation and
Subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
November 20, 1998
REPORT OF MANAGEMENT
The management of MTS Systems Corporation is responsible for the integrity and
objectivity of the financial information presented in this report. The financial
statements have been prepared in accordance with generally accepted accounting
principles and include certain amounts based on management's best estimates
and judgment.
Management is also responsible for establishing and maintaining the Company's
accounting systems and related internal controls, which are designed to provide
reasonable assurance that assets are safeguarded, transactions are properly
recorded, and the policies and procedures are implemented by qualified
personnel.
The Audit Committee of the Board of Directors, which is comprised solely of
outside directors, meets regularly with management and its independent auditors
to review audit activities, internal controls, and other accounting, reporting,
and financial matters. This Committee also recommends independent auditors for
appointment by the full Board, subject to shareholder ratification.
The financial statements included in this annual report have been audited by
Arthur Andersen LLP, independent public accountants. We have been advised that
their audits were conducted in accordance with generally accepted auditing
standards and included such reviews of internal controls and tests of
transactions as they considered necessary in setting the scope of their audits.
Sidney W. Emery, Jr
President and Chief
Executive Officer
/s/ Sidney W. Emery, Jr
Marshall L. Carpenter
Vice President and
Chief Financial Officer
/s/ Marshall L. Carpenter
35
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
<PAGE>
MTS Automotive Sensors GmbH Germany
MTS Sensor Technology Verwaltungs GmbH and Co. KG Germany
MTS Systems Holding for Europe GmbH Germany
Customer Servo Motors Antriebstechnik Verwaltungs GmbH Germany
Custom Servo Motors Antriebstechnik GmbH & Co. KG Germany
MTS Systems GmbH Germany
AeroMet Corporation Minnesota, U.S.A
Performance Controls, Inc. Delaware, U.S.A.
Nano Instruments, Inc. Tennessee, U.S.A.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports incorporated by reference in this Form 10-K and into the previously
filed Registration Statements on Form S-8 (Registration Nos. 333-28661, 2-99389,
33-21699, 33-35288, and 33-45386) and Form S-3 (Registration No. 33-60485).
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
December 18, 1998
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