UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________
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COMMISSION FILE NUMBER 0-2382
MTS SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 612-937-4000 41-0908057
(STATE OR OTHER JURISDICTION OF (TELEPHONE NUMBER OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) REGISTRANT INCLUDING IDENTIFICATION NO.)
AREA CODE)
14000 TECHNOLOGY DRIVE, EDEN PRAIRIE, MINNESOTA 55344-9763
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK (PAR VALUE OF 25(CENT) PER SHARE)
INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
__X__ YES _____ NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. ( )
AS OF DECEMBER 1, 1999, 20,879,821 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING AND THE AGGREGATE MARKET VALUE OF SUCH COMMON STOCK (BASED UPON
THE AVERAGE OF THE HIGH AND LOW PRICES) HELD BY NON-AFFILIATES WAS $174,868,500.
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DOCUMENTS INCORPORATED BY REFERENCE
ANNUAL REPORT TO SHAREHOLDERS FOR FISCAL YEAR ENDED SEPTEMBER 30, 1999 - PARTS
I, II AND IV.
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS, STATEMENT DATED PRIOR TO
JANUARY 25, 2000 - PART III.
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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 segment, customers use the Company's
products and services in research, product development and quality control to
determine the mechanical properties and performance of materials, products and
structures. Many of the Company's products and services support the customers'
mechanical design automation processes. In the Factory Automation segment,
customers use the Company's measurement and control instrumentation to measure
process variables and to automate production processes.
CUSTOMERS AND PRODUCTS BY BUSINESS SEGMENT
The Company's operations are organized into two reportable business segments: 1)
Mechanical Testing and Simulation (MT&S), and 2) Factory Automation (FA). The
operational alignment of the segments allows the Company to maintain a strategic
focus on markets with different applications of the Company's technologies and
with different competitors.
Mechanical Testing and Simulation Reportable Segment: Customers in this segment
use MTS's systems and software for research, product development and quality
control in the design and manufacture of materials, products and structures.
Customer industries in this segment include:
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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.
MT&S sector accounted for 80% of revenue in 1999, 79% of revenue in 1998 and 81%
of revenue in 1997. It represents the oldest and is the principal market for the
Company's technology.
Factory Automation Reportable Segment: FA customers use MTS products in discrete
part manufacturing and chemical process industries. Products in this segment
include:
DISPLACEMENT POSITION AND LIQUID-LEVEL SENSORS BASED ON MAGNETOSTRICTIVE
TECHNOLOGY. Displacement sensors accurately measure position up to 25 feet. They
are used where accurate positioning and continuous control are critical, such as
in discrete (piece part) manufacturing machinery, mobile equipment, process
control elements and continuous measurement devices. Major applications include
injection molding machines, servo-hydraulic cylinders, presses of all types,
sawmills, logging and other mobile machinery and valve or flow control.
Displacement sensors are also used in high volume applications requiring low
cost position feedback. MTS builds a version of its technology in various
lengths and configurations, but at very high rates affording on-board low cost
solutions to industries such as automotive, appliance, medical, agricultural,
marine, aeronautic and other non-manufacturing markets.
Liquid level sensors accurately measure the level of liquids in tanks and other
vessels up to 60 feet. These sensors are marketed to control continuous
processes in chemical, pharmaceutical, bio-technology and other related markets.
The need for highly reliable accurate measurement of one or more fluid levels is
common in most of these applications. MTS markets liquid level sensors to both
end users, such as chemical producing companies, and to original equipment
manufacturers and private label companies who build level measurement or leak
detection into their control systems or as accessories for remote indication and
control devices.
SERVO MOTORS, AMPLIFIERS AND CONTROLLERS: Customers use high-performance
brushless servo motors and amplifiers for challenging factory automation
applications in a wide range of industries, including machine tools, fabrication
and packaging. Specialized plug-in amplifiers are used in light duty
applications such as the semiconductor and textile industries. The Company's
controllers are used for precise control of a wide variety of applications
ranging from simple applications requiring only one axis of control to
high-speed, complex operations requiring up to 28 axes of control. These
combined product lines address the need
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for high performance systems and are used primarily by original equipment
manufacturers and large end users.
TITANIUM PRODUCTS: The Company, through its wholly owned subsidiary, AeroMet
Corporation, has developed an innovative laser direct metal deposition process
for manufacturing titanium parts. The process uses a laser to fuse titanium
powder, layer upon layer, into solid structures. This computer driven process
significantly reduces the time required to produce large complex parts.
The FA sector accounted for 20% of revenue in 1999, 21% of revenue in 1998, and
19% of revenue in 1997.
COMMON TECHNOLOGIES
MTS' systems and products in all segments are constructed using employees'
application engineering know-how with common technology building block
components generally composed of measuring and actuation devices, electronic
controls and application software. Many of these components are proprietary and
are developed and manufactured within the Company.
MTS employees engineer or configure the components into products and systems to
match the application called for in the customer's order. Frequently,
special-purpose software is developed to meet a customer's unique requirements.
Such software often represents a significant part of the value added by the
Company. Services offered to system customers include on-site installation,
training of customer personnel, technical manuals and continuing maintenance.
Such services are often included in the contract amount charged for completed
systems, but these services may be purchased separately, during and after the
system warranty period.
Certain proprietary products, such as sensors, process controls, motors,
actuators and process software and firmware are sold as products to end users
and to other companies for incorporation into their systems, machines or
processes. All products and most systems are sold on fixed-price contracts.
Complex systems and applied research in the MT&S sector are in some cases
undertaken on "cost-plus-fixed-fee" contract basis.
1999 PRODUCT DEVELOPMENT HIGHLIGHTS
The Company funds new application and product development within its market
sectors. Highlights of product development undertaken or completed in 1999
include:
Mechanical Testing and Simulation Reportable Segment
* The Company introduced the Model 329 6 DOF Road Simulator. This is a new
six degree of freedom Road simulator to accurately reproduce all the
motions and forces that are introduced into a vehicle through the tire/road
interface. This system integrates MTS's new SWIFT Wheel force transducer
for more accurate laboratory life testing and to help correlate vehicle
models.
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* The Company introduced the RPC(TM)Pro software produCt. This software,
which runs natively on Microsoft NT(TM), is to be used on all advanced
vehicle durability testing simulators. This software incorporates newly
patented technologies into a state of the art software product, designed
for automotive engineers that need to improve the simulation testing
process.
* The Company introduced the Virtual Engine Simulator. Simulating engine
inputs into the vehicle drivetrain is the driving force behind MTS's new
Virtual Engine Simulator. By replacing the gasoline or diesel engine with a
MTS hydraulic motor and coupling this hydraulic motor through the vehicle's
drivetrain to a dynamometer, MTS can excite the vehicle drivetrain with
most engine signatures the customer wants to program. This system will be
used to evaluate the noise and vibration coming from the drivetrain.
* The Company introduced the Model 855 Multiaxial Wheel Fatigue Test System.
This is a new wheel fatigue test system designed to test the endurance of a
wheel assembly. The system simulates road conditions by applying realistic
radial and lateral loads and drive and brake torques. Application of drive
and brake torque are most important for studies of fastener loosening
phenomenon. Wheel testing has become more important to the auto
manufacturers with the proliferation of wheel design and material options.
* The Company introduced the Light Truck SWIFT product. This is a new, larger
configuration of the SWIFT wheel force transducer that was originally
introduced last year. The system's primary purpose is to collect force and
moment data in vehicle data acquisitions, and develop simulations in the
laboratory for light trucks and SUVs. This technology greatly simplifies
and compresses development cycles for new vehicles and associated products.
* The Company introduced the Alliance RT material test system. This tabletop
electromechanical system was designed for our customer's efficiency needs
while enhancing accuracy, precision and flexibility always built into our
systems.
* The Company introduced the Mini Bionix II test system, which provides a
stiffer, more robust load frame with a sturdier base and larger columns.
Customers will see enhanced test results from this redesigned frame.
Factory Automation Reportable Segment
* The Company developed new variations of its Magnetostrictive products,
based upon its modular technology, and the development occurred much more
rapidly than in the past. Past methods required engineering of entirely new
products to address new applications. Examples include custom pulse and
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analog outputs, intelligent analog communications and environmental
enclosures.
* The Company released a new family of linear motors to the market. These
motors are used in general factory automation and semi conductor
industries.
* The Company introduced several new Intelligent Sensors, a new Liquid Level
transmitter line designed for Biotechnology, Pharmaceutical and Chemical
industries, and an automotive sensor cartridge which is installed in a
current series of passenger vehicles.
CHARACTERISTICS OF SALES
The Company's systems and products are sold and delivered throughout the world
and its customer orders cover a broad spectrum of industries, government
agencies, institutions, applications and geographic locations. As such, MTS is
not dependent upon any single customer for its business.
MT&S systems range in price from less than $20,000 to over $20 million. Large,
individual, fixed-price orders, generally considered to be over $10 million,
although important to the Company's image and technical advancement, can produce
volatility in both backlog and quarterly operating results. The majority of the
orders received in any one year are based on fixed-price quotations and some
require extensive technical communication with potential customers prior to
receipt of an order. The current typical delivery time for a system ranges from
one to twelve months, depending upon the complexity of the system and the
availability of components in the Company's or suppliers' inventories. Larger
system contracts can run as long as three years and cost-plus-fixed-fee
contracts have run longer.
FA products are sold in quantity at unit prices ranging from $500 to $10,000.
Delivery varies from several days to several months.
Approximately 51% of revenue in fiscal 1999, 55% of revenue in fiscal 1998, and
49% of revenue in fiscal 1997 was from domestic customers. The balance of the
revenue, some of which was sold in currencies other than the U.S. dollar, was to
customers located outside the United States--mainly in Europe, Asia-Pacific,
Latin America and Canada. The Company's foreign operations and foreign revenues
may be affected by local political conditions, export licensing problems and/or
currency restrictions.
Sales Channels: MTS markets its products using a number of sales channels. The
Company sells its MT&S equipment through an employee sales network, independent
sales representatives and a direct mail (catalog) operation. Sales personnel are
generally graduate engineers or highly skilled technicians and are specially
trained to sell MT&S products and services. Employee salespersons are
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compensated with salary and sales incentives, and independent representatives
are paid a commission.
A list of major domestic and international offices for the Company's MT&S
reportable segment follows:
Domestic offices:
Akron Dayton Philadelphia
Austin Denver Raleigh
Baltimore Detroit Pittsburgh
Boston Huntsville San Diego
Chicago Los Angeles San Jose
Cincinnati Minneapolis Seattle
Dallas Washington, D.C.
International offices:
Beijing and other cities, Paris, France
Peoples Republic of China
Berlin and other cities, Seoul, South Korea
Germany Torino, Italy
Gothenburg, Sweden Stroud, United Kingdom
Hong Kong Nagoya and Tokyo, Japan
Singapore
In addition, MT&S works with sales and service representative organizations in
nearly all industrialized countries of the world and in the developing countries
of Latin America, Asia, Africa and the Middle East.
The Company offers a mail-order catalog of material testing components,
accessories and products. The catalog includes products of complementary vendors
and aims to reach a broad range of customers involved in mechanical testing and
simulation.
The FA segment sells its products through sales channels separate from the MT&S
segment. A network of employees, direct sales, external domestic distributors,
representatives and system houses market the products of these divisions.
International revenue currently accounts for 41% of this segment's volume.
Efforts continue to expand sales channels in international markets.
International Operations and Export Sales: The sections entitled Geographic
Analysis of New Orders and Business Segment Information on pages 17 and 28 of
the Company's 1999 Annual Report to Shareholders, which sections are
incorporated by reference herein, contain information regarding the Company's
operations by geographic area.
Export Licensing: The Company's foreign shipments in fiscal 1999, 1998, and 1997
included sales to Asia-Pacific, Europe and other regions that may require the
Company to obtain export permission from the U.S. government. The Company does
not undertake manufacturing on custom systems or projects until it is assured
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that permission will be granted. However, due to the extended time to process
and receive a license, design work is performed on some systems during the
licensing period. Changes in political relations between the U.S. and countries
requiring import licenses, as well as other factors, can adversely affect the
Company's ability to complete a sale should a previously issued license be
withdrawn. While political reform occurring internationally may relax export
controls, the U.S. government still maintains multilateral controls in agreement
with allies and unilateral controls based on U.S. initiatives and foreign policy
that may cause delays for certain shipments or the rejection of orders by the
Company.
BACKLOG
The Company's backlog, which it defines as firm orders remaining unfilled,
totaled $146.8 million at September 30, 1999, $187.2 million at September 30,
1998, and $190.8 million at September 30, 1997. The Company believes that
approximately $140.0 million of the backlog at September 30, 1999 will become
revenue during fiscal 2000. Delays may occur due to technical difficulties,
export licensing approval or the customer's preparation of the installation
site. Any such delay can affect the period when backlog is recognized as
revenue.
COMPETITION
In the MT&S segment, customers may choose to buy equipment from the Company or
from competitors, principally: Instron (U.S.-based), Interlachen (U.S.), AVL
(Austria), Zwick (Germany), Saganomiya and Shimadzu (Japan). There are also
smaller local competitors in most major countries.
In lieu of buying equipment from the Company or its competitors, customers may
contract with testing laboratories such as EG&G, Peabody, Wyle, or with
universities. Government laboratories also market testing services to the
public.
Finally, customers may choose to construct their own testing equipment from
commercially available components. Customers in the aerospace and automotive
industries and universities sometimes choose this approach, purchasing equipment
from companies such as Parker Hannifin, Moog and Mannesman (Germany).
In the FA segment, the Company competes directly with small to medium-sized
specialty suppliers and also with divisions of the large control system
companies such as Kollmorgen, Emerson Electric, Indramat (Germany) and Fanuc
(Japan).
MANUFACTURING AND ENGINEERING
The Company conducted a significant portion of its fiscal 1999 MT&S
manufacturing and engineering activities in Minneapolis. Certain engineering,
project management, final system assembly and quality testing may be done in
Berlin, Germany, and Tokyo, Japan. Electromechanical material testing systems
are assembled in the Raleigh, NC, facility and in the Paris, France facility.
The Company's MTS-DSP Technology subsidiary engineers and assembles dynamometer
control systems and provides related services from Ann Arbor. Manufacturing and
engineering activities for the FA reportable segment occur in
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Raleigh, NC, New Ulm, MN, Ludenscheid, Freiburg, and Stralsund, Germany, and at
the Company's majority-owned subsidiary in Nagoya, Japan.
PATENTS AND TRADEMARKS
The Company holds a number of patents, patent applications, licenses, trademarks
and copyrights which it considers, in the aggregate, to constitute a valuable
asset. The Company's system business is not dependent upon any single patent,
license, trademark or copyright.
RESEARCH AND DEVELOPMENT
The Company does not do basic research, but does fund significant product,
system and application developments. Costs of these development programs are
expensed as incurred, and amounted to $27.0, $24.3, and $19.8 million for fiscal
years 1999, 1998, and 1997 respectively. Additionally, the Company also
undertakes "first of their kind" high-technology, customer-funded contracts
which contain considerable technical pioneering. The combination of internally
sponsored product development and system or application innovation on customer
contracts approximates 10% of annual sales volume.
EMPLOYEES
MTS employed 2,436 persons as of September 30, 1999, including 420 employees in
Europe, 64 in Japan, 6 in China, 4 in Canada, 9 in Korea, 2 in Hong Kong, and 3
in Singapore.
None of the Company's U.S. employees are covered by a collective bargaining
agreement, and MTS has experienced no work stoppages at any location
SOURCES AND AVAILABILITY OF RAW MATERIALS AND COMPONENTS
A major portion of products and systems delivered to a customer may consist of
equipment and component parts purchased from vendors. The relationship which the
Company promotes with its vendors is partnership based with an emphasis on
continuous improvement. The Company is dependent upon certain computing hardware
and software devices and certain raw materials which have limited sources.
However, the Company has not experienced significant problems in procurement or
delivery of any essential materials, parts or components in the last several
years.
Due to the manner in which the Company sells the majority of its products, on a
fixed-price contract agreed upon at the time the order is obtained, wide
fluctuations up or down in cost of materials and components from order date to
delivery date, if not accurately forecast by the Company at an early date, can
change the expected profitability of any sale. The Company believes that such
fluctuations have not had a material effect on reported earnings, except as
affected by changes in foreign currency rates, which have been reported.
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ENVIRONMENTAL MATTERS
Management believes the Company's operations are in compliance with federal,
state and local provisions relating to the protection of the environment.
BUSINESS SYSTEMS DEVELOPMENT
The Company undertook the development and deployment of an enterprise-wide
financial and business operations software system in 1997. The company completed
the first phase of implementation in early 1999, with subsequent phases to
follow. This system is expected to improve business processing and to provide
software processing capability beyond the end of the century.
ITEM 2. PROPERTIES
Domestic Facilities:
The Company's corporate headquarters and main MT&S plant, occupying 420,000
square feet, is located on 56 acres of land in Eden Prairie, Minnesota, a suburb
of Minneapolis. The original plant was completed in 1967. Six additions, the
most recent completed in 1997, have expanded the plant to its present size.
Approximately 50% of the Eden Prairie facility is used for manufacturing and
assembly while the balance of the facility is used for office space. In 1998,
17,000 square feet of manufacturing space was leased in Chanhassen, Minnesota
under a five year operating lease expiring in 2003.
Electronic design and component assembly is conducted in a 57,000 square foot
facility in Chaska, Minnesota, approximately 10 miles west of the headquarters
in Eden Prairie. The building was completed in 1996. MTS has a five year
operating lease with provisions to extend, purchase or terminate at the end of
the lease period. The terms of the lease agreement do not require capitalization
of the asset and the related obligation.
MTS Automation occupies a 30,000 square foot plant in New Ulm, Minnesota (65
miles southwest of Minneapolis). The plant provides assembly operations and
office space. The facility was constructed in 1993 by the New Ulm Economic
Development Corporation and expanded in 1995. MTS has a seven-year operating
lease for the facility with provisions to extend the lease, purchase the
property, or terminate the lease. The terms of the lease agreement do not
require capitalization of the asset and the related obligation.
In addition, MTS Automation occupies 30,000 square feet in Horsham,
Pennsylvania, a suburb of Philadelphia. Plant and office space in two buildings
is leased under conventional operating lease terms.
MTS Sensors Division is located near the Research Triangle Park in Cary, North
Carolina, a suburb of Raleigh. A 40,000 square foot plant constructed in 1988
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provides manufacturing and office space. In 1992, 25,000 square feet was added
to the plant.
MTD Raleigh is located adjacent to the MTS Sensors Division site in Cary, North
Carolina. A 25,000 square foot plant, constructed in 1991, provides
manufacturing and office space.
MTS Noise and Vibration Division operates in two facilities. A 16,000 square
foot facility in Madison Heights, Michigan and a 13,000 square foot facility in
Milford, Ohio. Plant and office space in both facilities is leased under
conventional operating lease terms.
MTS-DSP Technology occupies 26,000 square feet in Ann Arbor, Michigan and 16,000
square feet in Fremont, California. Plant and office space, in both locations,
is leased under conventional operating lease terms. MTS-DSP Technology is
currently in the process of constructing a 57,000 square foot facility in Ann
Arbor to provide manufacturing and office space. The building is expected to be
complete by the end of December 1999.
The Company leases space in other U.S. cities for sales and service offices.
Neither the space nor the rental obligations is significant.
International Facilities:
MTS Systems GmbH is located in an 80,000 square foot facility in Berlin,
Germany. As of September 30, 1999 6,500 square feet has been leased to other
companies. The building is situated on land leased by MTS from the city
government. The lease expires in 2052.
MTS Systems (France) operates in a leased facility in Paris, France, of
approximately 38,000 square feet. Approximately 40% of this space is used for
manufacturing with the remainder used as offices. The current lease expires at
the end of fiscal 2000.
MTS Sensors Technologie operates in a leased facility in Ludenscheid, Germany on
approximately six acres of land. The manufacturing and office facilities were
expanded in 1999 and now occupy 35,000 square feet at this location.
Custom Servo Motors Antriebstechnik Verwaltungs GmbH operates in two leased
facilities in Germany, one in Freiburg, and a new facility in Stralsund. The
Freiburg facility totals about 7,000 square feet and the Stralsund location is
about 16,000 square feet. Approximately 100% of the Freiburg facility is used
for offices while 70% of the Stralsund facility is used for assembly with the
remainder used as offices.
The Company also leases office and general purpose space for its sales and
service subsidiaries in Stroud, United Kingdom; Torino, Italy; Seoul, South
Korea; Tokyo and Nagoya, Japan; Toronto, Canada; Sao Paulo, Brazil;
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Gothenburg, Sweden; Beijing and Shanghai, Peoples Republic of China; Singapore;
and Hong Kong. No manufacturing is conducted at these locations.
Expansion Opportunities:
Room remains at its Eden Prairie location for limited facility expansion. Also,
the sites in Cary, North Carolina could be expanded. Other suitable commercial
real property is available for purchase or lease in metropolitan areas where the
Company is presently located. The Company considers its current facilities
adequate to support its operations in 2000.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings were pending or threatened against the Company or
its subsidiaries as of September 30, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended September
30, 1999, for a vote by the shareholders.
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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 December
31, 1997 have been restated retroactively for the two-for-one stock split in the
form of a 100% stock dividend effective February 2, 1998.
Quarter Ended Low * High *
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December 31, 1997 $17.375 $20.00
March 31, 1998 $13.50 $19.00
June 30, 1998 $15.50 $19.25
September 30, 1998 $11.562 $17.75
December 31, 1998 $10.875 $15.438
March 31, 1999 $9.625 $14.375
June 30, 1999 $9.813 $13.25
September 30, 1999 $10.00 $14.625
* Source: The Nasdaq Stock Market, Inc. Summary of Activity Report
At December 1, 1999 there were 2,055 holders of record of the Company's $.25 par
value common stock. The Company estimates that there are an additional 2,200
beneficial shareholders whose stock is held by nominees or broker dealers.
The Company has a history of paying quarterly dividends and expects to continue
such payments in the future. During 1999, 1998 and 1997, the Company paid
dividends totaling $.24, $.24 and $.20 per share, per year, respectively, to
holders of its common stock.
Under the terms of the Company's credit agreements, certain covenants require
that tangible net worth, as defined, must exceed a defined minimum amount and
limit repurchases of its common stock to a defined maximum amount. As of
September 30, 1999, tangible net worth exceeded the minimum by $38.0 million and
the Company had $19.0 million available for repurchases of its common stock. The
Company has flexibility to declare and pay dividends in the future similar to
recent dividends.
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ITEM 6. SELECTED FINANCIAL DATA
A comprehensive summary of selected financial information is presented in the
"Six Year Financial Summary" on page 16 of the Company's 1999 Annual Report to
Shareholders. Data included in the summary is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 17 through 22 of the Company's 1999 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The required disclosures are included in Management's Discussion and Analysis of
Financial Condition and Results of Operations on page 19 and in Note 1 to the
Consolidated Financial Statements included in the Company's 1999 Annual Report
to Shareholders. This information is incorporated herein by reference.
FORWARD LOOKING STATEMENTS
Statements included or incorporated by reference in this Form 10-K (including
the 1999 Annual Report to Shareholders) and in the Company's press releases and
in oral statements made with the approval of an authorized executive officer,
which are not historical or current facts are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and are subject to certain risks and uncertainties that could
cause actual results to differ materially from historical results and those
presently anticipated or projected. The following important facts, among others,
could affect the Company's actual results in the future and could cause the
Company's actual financial performance to differ materially from that expressed
in any forward-looking statement:
(i) With regard to the Company's 1999 product developments, there are
no uncertainties known to the Company concerning the expected
results.
(ii) Possible significant volatility in both backlog and quarterly
operating results may result from large, individual, fixed price
orders, generally over $10 million, in connection with sales of
MT&S systems.
(iii) Export controls based on U.S. initiatives and foreign policy, as
well as import controls imposed by foreign governments, may
14
<PAGE>
cause delays for certain shipments or the rejection of orders by
the Company. Such delays could create material fluctuations in
quarterly results and could have a material adverse effect on
results of operations. Foreign revenues may also be affected by
local political conditions and/or currency restrictions.
(iv) Delays in realization of $146.8 million in backlog orders as of
September 30, 1999 (approximately $140.0 million of which are
anticipated to be recognized during fiscal 2000) may occur due to
technical difficulties, export licensing approval or the
customer's preparation of the installation site, any of which can
affect the quarterly or annual period when backlog is recognized
as revenue and could materially affect the results of any such
period.
(v) The Company experiences competition on a worldwide basis.
Customers may choose to purchase equipment from the Company or
from its competitors. For the MT&S reportable segment, customers
may also contract with testing laboratories or construct their own
testing equipment, purchasing commercially available components.
Factors which influence the customer's decision include price,
service and required level of technology.
(vi) The Company is exposed to market risk from changes in foreign
currency exchange rates, which can affect its results from
operations and financial condition. The Company regularly assesses
these risks and has practices to protect against the adverse
effects of these and other potential exposures. To manage the risk
arising from exposure to foreign currency changes, the Company,
when deemed appropriate, enters into forward contracts. The
Company is principally exposed to foreign currency movements
related to non-U.S. dollar denominated assets and uncertainty
related to future revenues that are denominated in foreign
currencies. The Company's most significant foreign currency
exposures relate to contracts in backlog and unbilled receivables
in the Japanese yen and the German mark, which are undelivered or
outstanding at the end of fiscal 1999. A 10 percent increase in
the levels of foreign currency exchange rates against the U.S.
dollar with all other variables held constant would result in a
decrease in future revenues and asset balances of approximately
$2.9 million. A 10 percent decrease in the levels of foreign
currency exchange rates against the U.S. dollar with all other
variables held constant would result in an increase to future
revenues and asset balances of approximately $3.5 million.
Further disclosures are included in Management's Discussion and
Analysis of Financial Condition and Results of Operations on page
19 and in Note 1 to the Consolidated Financial Statements included
in the Company's 1999 Annual Report to Shareholders. This
information is incorporated herein by reference.
15
<PAGE>
(vii) The Company's short-term borrowings carry interest rate risk that
is generally related to either LIBOR or the prime rate. The
Company has minimal earnings and cash flow exposure due to market
risks on its long-term debt obligations as a result of the
primarily fixed-rate nature of the debt.
(viii) Risks in connection with the Year 2000 issue, including risks of
anticipated Year 2000 compliance, greater-that-anticipated costs,
or risks of business interruptions due to inability of the
Company's vendors to comply.
The foregoing list is not exhaustive, and the Company disclaims any obligation
subsequently to or revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Report of Independent Public Accountants,
Quarterly Financial Information (unaudited), and Six Year Financial Summary
(unaudited) included in the Company's 1999 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Corporate Executive Officers of the Registrant on September 30, 1999 were:
Name and Age Position Officer Since
- ------------ -------- -------------
S. W. Emery, Jr. (53) Chairman, President and 1998
Chief Executive Officer
K. D. Zell (57) Executive Vice President 1979
D. E. Hoffman (52) Vice President and CFO 1999
W. G. Anderson (43) Vice President 1998
W. G. Beduhn (58) Vice President 1983
M. L. Carpenter (62) Vice President 1973
S. M. Cohoon (45) Vice President 1996
J. M. Egerdal (48) Vice President 1996
N. L. Quist (44) Vice President 1999
F. G. Troutman (56) Vice President 1999
M. G. Togneri (62) Vice President 1991
Officers serve at the discretion of and are elected annually by the board of
directors, and serve until their successors are elected. Business experience of
the Executive Officers for at least the last 5 years (consisting of positions
with the Company unless otherwise indicated) is as follows:
Officer Business Experience
------- -------------------
S. W. Emery, Jr. Chairman since January 1999. President and Chief
Executive Officer since March 17, 1998. Management
and executive positions with Honeywell, Inc. from
1985 to 1997. (Area Vice President Western and
Southern Europe from 1994 to 1997; Group Vice
President, Military Avionics Systems from 1989 to
1994; Vice President and General Manager, Space
Systems Division from 1988 to 1989; Vice President
Operations, Process Controls Division from 1985 to
1988.
K. D. Zell Executive Vice President since 1993. Vice
President of Materials Testing Division from 1988
to 1993. Vice President, Sales and Service from
1984 to 1988. Vice President, Product Group from
1979 to 1984.
17
<PAGE>
D. E. Hoffman Vice President and CFO since July 1999. Prior to
MTS, he was Vice President and CFO of MVE, Inc.
from 1998 to 1999, CFO for the Harmon Limited
Group of Apogee Enterprises, Inc. from 1994 to
1997, and he held various management positions
with ABB Ltd. from 1983 to 1994.
W. G. Anderson Vice President, MTS Automation Division, since
1998. President of Custom Servo Motors from 1992
to 1998.
W. G. Beduhn Vice President of Advanced Engineering Solutions
Division since 1991. Vice President of Technology
Development from 1983 to 1991. Division manager of
various marketing and operating divisions from
1977 to 1983.
M. L. Carpenter Vice President since 1973. Vice President and
Chief Financial Officer from 1991 to July 1999.
Vice President and Treasurer from 1973 to 1991.
S. M. Cohoon Vice President of Vehicles Dynamics Division since
1996. Prior to his employment at MTS he held
various engineering and management positions at
General Motors Corporation.
J. M. Egerdal Vice President, MTS Services and Support Division
since 1997; Vice President, North American Sales
from 1996 to 1997; Regional Sales and Service
Management from 1988 to 1996.
N. L. Quist Vice President, Materials Testing Division since
September 1999. Prior to her employment at MTS she
was Vice President, Marketing at Detector
Electronics Corp. from 1997 to 1999; Director,
Strategic Planning at Fisher-Rosemount from 1991
to 1997.
18
<PAGE>
F. G. Troutman Vice President, MTS DSP Division since March 1999.
Prior to his employment at MTS he was CEO of DSP
Technology, Inc. from 1989 to 1999.
M.G. Togneri Vice President of Sensors Division since 1998.
Vice President of Factory Automation sector from
1991 to 1997. Prior to his employment at MTS was
Vice President at Square D Corporation and General
Manager of Crisp Automation. Has extensive
experience in the industrial instrumentation and
control business in the U.S. and internationally.
(a) Information concerning the Company's Directors, including business
experience, can be found in the Company's Proxy Statement, a definitive
copy of which will be filed with the Securities and Exchange Commission
prior to January 25, 2000, and is incorporated herein by reference.
(b) There are no family relationships between and among directors or officers.
(c) Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated herein by reference from the
Company's Proxy Statement, a definitive copy of which will be filed with
the Securities and Exchange Commission prior to January 25, 2000, pursuant
to Regulation 14A under the Securities Exchange Act of 1934.
ITEM 11. EXECUTIVE COMPENSATION
See Item 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Items 11 and 12 is incorporated herein by reference
from the Company's Proxy Statement, a definitive copy of which will be filed
with the Securities and Exchange Commission prior to January 25, 2000, pursuant
to Regulation 14A under the Securities Exchange Act of 1934.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
19
<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:
Form 8-K filed on October 15, 1999 relating to the DSP Technology,
Inc. acquisition, is incorporated by reference herein.
(c) Exhibits:
2.a Agreement and Plan of Merger among MTS Systems Corporation,
Badger Merger Corp., and DSP Technology Inc., filed on Form
S-4 (File No. 333-77277) on April 28, 1999, is incorporated
by reference herein.
3.a Restated and amended Articles of Incorporation, adopted
January 30, 1996, incorporated by reference from exhibit 3.a
of Form 10-K for the fiscal year ended September 30, 1996.
3.b Restated Bylaws, reflecting amendments through May 26, 1998,
incorporated by reference from exhibit 3.b. of Form 10-K for
the fiscal year ended September 30, 1998.
10.a Management Variable Compensation Plan and Long Range
Incentive Plan for fiscal 1999, dated December 1, 1998.
10.b 1985 Employee Stock Option Incentive Plan, incorporated by
reference to exhibit 4(a) from Form S-8, File No. 2-99389.
10.c 1987 Stock Option Plan, as amended, incorporated by
reference from exhibit 10.c of Form 10-K for the fiscal year
ended September 30, 1996.
10.d 1990 Stock Option Plan, as amended, incorporated by
reference from exhibit 10.d of Form 10-K for the fiscal year
ended September 30, 1996.
20
<PAGE>
10.e 1994 Stock Plan, as amended, incorporated by reference from
exhibit 10.e of Form 10-K for the fiscal year ended
September 30, 1996.
10.f Severance Agreement, dated March 5, 1998 between the
Registrant and William G. Beduhn as amended, incorporated by
reference from exhibit 10.f of Form 10-K for the fiscal year
ended September 30, 1998.
10.g Severance Agreement, dated May 13, 1998 between the
Registrant and Marshall L. Carpenter as amended,
incorporated by reference from exhibit 10.g of Form 10-K for
the fiscal year ended September 30, 1998.
10.h Severance Agreement, dated December 3, 1990 between the
Registrant and Kenneth E. Floren, incorporated by reference
to exhibit 10.k of Form 10-K for the fiscal year ended
September 30, 1990.
10.i Severance Agreement, dated May 1, 1990 between the
Registrant and Werner Ongyert, incorporated by reference to
exhibit 10.m of Form 10-K for the fiscal year ended
September 30, 1990.
10.j Severance Agreement, dated September 22, 1999 between the
Registrant and Nancy L. Quist.
10.k Severance Agreement, dated July 28, 1999 between the
Registrant and David E. Hoffman.
10.l Severance Agreement, dated May 1, 1990 between the
Registrant and Richard S. White, incorporated by reference
to exhibit 10.q of Form 10-K for the fiscal year ended
September 30, 1990.
10.m Severance Agreement, dated March 27, 1998 between the
Registrant and Keith D. Zell, as amended, incorporated by
reference from exhibit 10.m of Form 10-K for the fiscal year
ended September 30, 1998.
10.n Severance Agreement, dated March 24, 1998 between the
Registrant and Mauro G. Togneri, as amended, incorporated by
reference from exhibit 10.n of Form 10-K for the fiscal year
ended September 30, 1998.
10.o 1992 Employee Stock Purchase Plan, incorporated by reference
to exhibit 4(a) from Form S-8, File No. 33-45386.
21
<PAGE>
10.p 1997 Stock Option Plan, as amended.
10.q Severance Agreement, dated March 18, 1998 between the
Registrant and Steven M. Cohoon as amended.
10.r Severance Agreement, dated March 16, 1998 between the
Registrant and Sidney W. Emery, incorporated by reference
from exhibit 10.r of Form 10-K for the fiscal year ended
September 30, 1998.
10.s Change in Control Agreement, dated March 16, 1998 between
the Registrant and Sidney W. Emery incorporated by reference
from exhibit 10.s of Form 10-K for the fiscal year ended
September 30, 1998.
10.t Change in Control Agreement, dated March 27, 1998 between
the Registrant and Keith D. Zell incorporated by reference
from exhibit 10.t of Form 10-K for the fiscal year ended
September 30, 1998.
10.u Change in Control Agreement, dated May 13, 1998 between the
Registrant and Marshall L. Carpenter incorporated by
reference from exhibit 10.u of Form 10-K for the fiscal year
ended September 30, 1998.
10.v Change in Control Agreement, dated March 24, 1998 between
the Registrant and Mauro G. Togneri incorporated by
reference from exhibit 10.v of Form 10-K for the fiscal year
ended September 30, 1998.
10.w Change in Control Agreement, dated March 13, 1998 between
the Registrant and William G. Beduhn incorporated by
reference from exhibit 10.w of Form 10-K for the fiscal year
ended September 30, 1998.
10.x Change in Control Agreement, dated September 22, 1999
between the Registrant and Nancy L. Quist.
10.y Change in Control Agreement, dated July 28, 1999 between the
Registrant and David E. Hoffman.
10.z Change in Control Agreement, dated March 18, 1999 between
the Registrant and Steven M. Cohoon.
10.aa Severance Agreement, dated March 13, 1998 between the
Registrant and William G. Anderson.
22
<PAGE>
10.ab Severance Agreement, dated March 14, 1998 between the
Registrant and James M. Egerdal.
10.ac Change in Control Agreement, dated March 13, 1998 between
the Registrant and William G. Anderson.
10.ad Change in Control Agreement, dated March 14, 1998 between
the Registrant and James M. Egerdal.
10.ae Employment Agreement, dated March 23, 1999 between the
Registrant and F. Gil Troutman.
13. Annual Report to Shareholders for the fiscal year ended
September 30, 1999.
21. Subsidiaries of the Company.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule.
(d) Financial Statement Schedules:
See accompanying Index to Financial Statements on page F-1.
23
<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/ Sidney W. Emery, Jr.
-----------------------------
Sidney W. Emery Jr.
Chairman, President and Chief
Executive Officer
By: /s/ David E. Hoffmann
-----------------------------
David E. Hoffman
Vice President and Chief Financial
Officer
Date: December 21, 1999
24
<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 21, 1999
Director
By: /s/ Jean Lou Chameau
-----------------------------
Jean Lou Chameau, December 21, 1999
Director
By: /s/ Bobby I. Griffin
-----------------------------
Bobby I. Griffin, December 21, 1999
Director
By: /s/ Russell A. Gullotti
-----------------------------
Russell A. Gullotti, December 21, 1999
Director
By: /s/ Brendan E. Hegarty
-----------------------------
Brendan E. Hegarty, December 21, 1999
Director
By: /s/ Thomas E. Holloran
-----------------------------
Thomas E. Holloran, December 21, 1999
Director
By: /s/ Linda Hall Whitman
-----------------------------
Linda Hall Whitman, December 21, 1999
Director
25
<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
1999 Annual Report to Shareholders, which are incorporated by reference in
accordance with Rule 12b-23 under the Securities Exchange Act of 1934 and
attached hereto.
Annual
Report 10-K
Page Page
---- ----
Quarterly Financial Information (Unaudited) 22 --
Consolidated Balance Sheets - September 30, 1999 23 --
and 1998
Consolidated Statements of Income and Shareholders'
Investment for the Years Ended September 30, 1999,
1998 and 1997 24 --
Consolidated Statements of Cash Flows for the
Years Ended September 30, 1999, 1998 and 1997 25 --
Notes to Consolidated Financial Statements 26 --
Report of Independent Public Accountants 36 --
F-1
<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 and Restructuring Reserves -- F-4
All schedules except the one listed above have
been omitted as not required, not applicable, or
the information required therein is contained in
the financial statements or the footnotes thereto.
F-2
<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 24, 1999. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
(page F-4) listed as a part of Item 14 in this Form 10-K is the responsibility
of the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
November 24, 1999
F-3
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
SCHEDULE II - SUMMARY OF CONSOLIDATED ALLOWANCES
FOR DOUBTFUL ACCOUNTS AND RESTRUCTURING RESERVES
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Balance Amounts Balance
Beginning Written-Off/ End of
of Year Provisions Payments Year
--------- ---------- ------------ -------
(expressed in thousands)
Allowance for Doubtful Accounts:
- --------------------------------
1999 $ 2,285 $ 679 $ (732) $ 2,232
1998 2,160 344 (219) 2,285
1997 1,792 549 (181) 2,160
Restructuring Reserves:
- -----------------------
1999 $ -- $ 5,711 $(2,480) $ 3,231
1998 -- -- -- --
1997 -- -- -- --
F-4
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- --- -----------
10.a Management Variable Compensation Plan and Long Range Incentive Plan
for fiscal 1999
10.j Severance Agreement, dated September 22, 1999
10.k Severance Agreement, dated July 28, 1999
10.p 1997 Stock Option Agreement, amended
10.q Severance Agreement, dated March 18, 1998, as amended.
10.x Change in Control Agreement, dated September 22, 1999
10.y Change in Control Agreement, dated July 28, 1999
10.z Change in Control Agreement, dated March 18, 1999
10.aa Severance Agreement, dated March 13, 1998
10.ab Severance Agreement, dated March 14, 1998
10.ac Change in Control Agreement, dated March 13, 1998
10.ad Change in Control Agreement, dated March 14, 1998
10.ae Employment Agreement, dated March 23, 1999
13. Annual Report to Shareholders for the fiscal year ended September 30,
1999
21. Subsidiaries of the Company
23. Consent of Independent Public Accountants
27. Financial Data Schedule
EXHIBIT 10.a
Approved by the HR Committee 12/1/98
Changes noted by strike-through or italic approved 1/25/99
MANAGEMENT VARIABLE COMPENSATION (MVC) PLAN
FISCAL `99
1. PURPOSE OF PLAN
To focus efforts on achievement of near term financial objectives
which are critical to the success of the Company; to reward
accomplishment at a level above competition when performance is
above that of comparable companies; to more closely couple total
compensation (salary plus variable) to the financial results of the
enterprise.
The Plan's payout is primarily related to achievement of annual
Corporate and Sector/Group/Division/Niche profit, resource
utilization, and growth objectives.
2. PLAN CONSTRUCTION
The attached chart provides an overview of the plan (See attachment
A). Details follow regarding each of the components of the plan.
3. ELIGIBILITY AND PARTICIPATION
o Corporate officers
o Unit vice presidents
o Market and functional unit managers
o Managers, technical supervisors and key marketing or technical
employees who meet certain minimum responsibilities for
profitability, financial/human resource acquisition and
allocation, balance sheet control, and/or market/technical
direction - positions defined as beginning at SAM 15 and TE 5,
or equivalent and above.
o This plan does not apply to the employees of the Aeromet
Corporation.
An employee must be in such a position by the December Board of
Directors meeting in order to be eligible for the fiscal year plan
beginning the preceding 1 October, unless otherwise authorized by
the CEO.
An officer may recommend that an employee, who is otherwise
eligible, not participate but such a recommendation must be
authorized by the CEO.
Participants are eligible for payout in proportion to the percentage
of the fiscal year the participant is responsible for the qualifying
position, unless otherwise authorized by the CEO.
Employees who transfer to a different officer's unit during the year
are paid according to the proportion of the year spent under each
plan.
Page 1
<PAGE>
Employees who work less than full time during a year (e.g., due to a
personal leave, but not due to illness) would earn a proportionately
reduced payout.
Unless authorized by the CEO, no payout will be made to employees
who work less than 1,000 hours in the fiscal year.
The participant must be on MTS' payroll at the end of the fiscal
year to qualify for a payout. Employees resigning or terminated
before the end, regardless of cause, are not eligible unless
otherwise authorized by the CEO
No employment contract is implied by participation in this Plan.
4. ESTABLISHMENT OF OBJECTIVES
a. The Board of Directors sets the 1999 Corporate Earnings
per Share (EPS), Corporate Return on Average Net Assets
(ROANA), and the corporate revenue growth objectives at
their December meeting.
b. ROANA and revenue objectives for Sector, Group and
Division heads will be approved by the Human Resource
Committee of the Board of Directors at the December
meeting. All other objectives must be finalized by
December 15.
ROANA, revenue, and other objectives for participants
below the direct reports to the CEO require one over one
approval levels to:
o Integrate objectives into Company operating plan
o Guard against conflicting objectives
o Help to assure consistency in degree of difficulty
The CEO has the final approval over all participants
other than himself.
5. CRITERIA FOR OBJECTIVES
5.a CORPORATE LONG RANGE PLANNING
The Corporate Profit and Growth Objectives are set by the Board
based on the current 3- year Long Range Plan (LRP) for the period
FY1999 through 2001. Growth rates are set against 1998 actual
results as the baseline. These are:
EPS: 20% compounded annual growth
ROANA: 21% average across the three years of the
plan
REVENUE: 15% compounded annual growth
For annual MVC purposes, EPS and revenue objectives are adjusted
annually as recommended by the CEO and approved by the Board of
Directors. All objectives include all transactions, acquisitions,
write-offs, sales of assets, etc. unless specifically excluded by
the Board in writing.
Page 2
<PAGE>
5.b CORPORATE '99 MVC
FUNDAMENTAL PHILOSOPHY IS THAT ACHIEVING THE FY99 PLAN WILL RESULT
IN 100% MVC PAYOUT.
For FY99 this translates to MVC corporate level objectives of:
EPS: $1.25
ROANA: 20%
REVENUE: $371M
5.c MVC IMPLEMENTATION
EPS (RULES):
EPS PAYOUT
--- ------
$1.15 0%
$1.25 100%
$1.30 200%
ROANA (GUIDELINES):
ROANA PAYOUT
----- ------
0.8X BASE 0%
BASE = PLAN 100%
1.2X BASE 200%
1.4X BASE 300%
GROWTH (GUIDELINES):
REVENUE
% INCREASE OVER
FY98 ACTUALS PAYOUT
------------ ------
8% 0%
BASE = PLAN 100%
15% 200%
5.d UNIT
Unit financial goals (ROANA & Revenue) are expressed as
Sector/Group/Division/Niche goals. Such goals are set as part of an
integrated plan for the overall corporation.
Approved Unit levels for FY 99 are:
Type
----
CORP Corporate
SECTOR SPS
GROUP Vehicles Dynamics
Page 3
<PAGE>
DIV AESD
DIV Automation
DIV MTD
DIV Sensors
NICHE NVH
NICHE Entertainment
Additional NICHES as approved by CEO
Other "Non-Financial" objectives are locally established, must be
stated in measurable terms and must not be activities (i.e. number
of sales calls or technical society presentations).
6. COMPETITIVE PAYOUT POTENTIAL
The competitive payout potential, expressed as a % of the midpoint
of the salary is shown below:
<TABLE>
<CAPTION>
POSITION COMPETITIVE PAYOUT POTENTIAL %
-------- ------------------------------
<S> <C> <C>
CEO E5 70%
Exec VP, MT&S E4 50%
Vice President E3 25-50, depending on revenue level (profit potential)
Vice President E2 25-50, depending on revenue level (profit potential)
Vice President (Unit) E1 15-45, depending on revenue level (profit potential)
Mkt Div P&L Mgrs SAM 17-21 15-35, depending on revenue level (profit potential)
All Other Mgmt SAM 18-21 10-25, depending on profit impact
SAM 15-17 6-20, depending on profit impact
T/E 5/5S - 9/9S 6-15, depending on profit impact
</TABLE>
7. OVERRANGING/MAXIMUM POTENTIAL PAYOUT
The objectives are set at challenging but realistic levels that are
used in the overall process of planning and resource allocation.
This is not meant to be a limit to our aspirations, and performance
above of those objectives should be rewarded as it is to the benefit
of all stakeholders in the enterprise.
Payout above the competitive payout potential is termed overranging.
Two MVC mixes are possible for participants based on position and
salary level.
FOR THE MTS EXECUTIVE MANAGEMENT TEAM
Corporate Earnings per share (EPS) at 30% with 200%
overranging.
Corporate, Sector, Group, Division ROANA at 50% with
300% overranging.
Revenue growth at 20% with 200% overranging.
Base payout potential: 30 + 50 + 20 = 100
Max payout potential: (30x2) + (50x3) + (20x2) = 250
FOR ALL OTHER POSITIONS
Page 4
<PAGE>
Corporate earnings per share (EPS) at 20% with 200%
overranging.
Corporate, Sector, Group, Division, or Niche(as
applicable) ROANA at 50% with 300% overranging.
Revenue growth at 20% with 200% overranging.
Other objectives at 10% with no overranging.
Base payout potential: 20 + 50 + 20 + 10 = 100
Max payout potential: (20x2) + (50x3) + (20x2) + (10x1)
= 240
8. RELATIONSHIP TO OTHER COMPENSATION PLANS
8.a "NON MANAGEMENT" VARIABLE COMPENSATION PLAN (VC)
Certain units may have a variable compensation plan for employees
who are not eligible for the MVC, sales commissions, or other
variable compensation plans. Payout in these VC Plans is linked
directly to payout on the unit's MVC profit objectives. These
non-management plans are subject to the approval of the unit vice
president, corporate Human Resources manager and CEO.
The following is an outline summary to which these VC plans must
adhere. They are included in this MVC Plan for reference only.
8.a(1) VC Competitive payout potential is 3% of the midpoint of the salary
range in which the employee is placed at the beginning of the fiscal
year.
8.a(2) VC payout will normally be based on the combination of the results
of the Corporation's earnings per share (EPS) and employee's unit
vice president's (in some cases the unit manager's) ROANA
objective(s) for the year. If the unit's vice president (manager)has
more than one such objective, the payout will be based on the
weighted average of the officer's objectives.
8.a(3) The entire 3% VC payout potential is eligible for overranging for
participating employees.
8.a(4) Eligibility and participation rules for VC will be the same as those
for MVC, where appropriate.
8.b RETIREMENT PLAN
The calculations for the Management Variable Compensation Plan (and
VC) are made after deductions for retirement plans.
Payout to a U.S. based participant in the Management Variable
Compensation Plan (and VC) is included in the calculation of the
Company's contribution to that employee's retirement plan.
9. PAYOUT
Payouts under this Plan along with VC are considered costs for the
calculation of actual performance against objectives.
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Payouts are audited by the manager of internal audit and approved by
the CFO. PAYOUTS FOR THE EXECUTIVE MANAGEMENT TEAM MUST BE APPROVED
BY THE CEO.
Payout will be made in cash within 90 days of the end of the fiscal
year, expected to be on or before December 31, 1999.
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MTS SYSTEMS CORPORATION
1999 LONG RANGE INCENTIVE PLAN
SECTION 1. General Purpose of Plan; Definitions.
The name of this plan is the MTS Systems Corporation 1999 Long Range Incentive
Plan (the "Plan"), adopted by the Board of Directors of MTS Systems Corporation
(the "Board") as of December 1, 1999 (the "Effective Date"). The purpose of the
Plan is to provide the Company's key employees, upon whom the responsibilities
of the successful administration and management of the Company rest, with a
means to acquire and maintain stock ownership, thereby strengthening their
commitment to the welfare of the Company and their desire to remain in its
employ.
A further purpose of the Plan is to provide such key employees with additional
incentive and reward opportunities designed to enhance the profitable growth of
the Company by granting them Performance Options as authorized in the MTS
Systems Corporation 1997 Stock Option Plan (the "Stock Option Plan").
For purposes of the Plan, the following terms shall be defined as set forth
below.
a. "Award" means a grant of Performance Options to a Participant
pursuant to Section 5. A "Full Award" means an Award granted
as of the Effective Date. A "Partial Award" means an Award
granted after the Effective Date. Each Participant shall
receive one or more Long Range Incentive Plan Agreements which
describe the amount and date of the Participant's grant.
b. "Cause" means a felony conviction of a Participant or the
failure of a Participant to contest prosecution for a felony,
willful misconduct, dishonesty or intentional violation of a
statute, rule or regulation, any of which, in the judgment of
the Company, is harmful to the business or reputation of the
Company.
c. "Committee" means the committee referred to in Section 2 which
is appointed by the Board to administer the Plan. The
Committee shall be the same Committee described in the Stock
Option Plan and shall consist of at least two Directors of the
Board, all of whom shall be outside, non-employee Directors
who shall serve at the pleasure of the Board. If, at any time,
no Committee shall be in office, then the functions of the
Committee shall be exercised by the Board.
d. "Company" means MTS Systems Corporation, a Minnesota
corporation, including its subsidiaries and any successor
corporation.
e. "Disability" means permanent and total disability as defined
in Internal Revenue Code Section 22(e)(3).
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f. "Fair Market Value" of Stock on any given date shall be
determined by the Committee as follows: (i) if the Stock is
listed for trading on one or more national securities
exchanges or is traded on the Nasdaq Stock Market, the last
reported sales price on the principal such exchange or the
Nasdaq Stock Market on the date in question, or if such Stock
shall not have been traded on such principal exchange on such
date, the last reported sales price on such principal exchange
or the Nasdaq Stock Market on the first day prior thereto on
which such Stock was so traded; or (ii) if the Stock is not
listed for trading on a national securities exchange or the
Nasdaq Stock Market but is traded in the over-the-counter
market, including the Nasdaq Small Cap Market, the closing bid
price for such Stock on the date in question, or if there is
no such bid price for such Stock on such date, the closing bid
price on the first day prior thereto on which such price
existed; or (iii) if neither (i) nor (ii) is applicable, by
any means determined to be fair and reasonable by the
Committee, which determination shall be final and binding on
all parties.
g. "Incentive Stock Option", "Option" or "Stock Option" means a
Performance Option granted to a Participant pursuant to
Section 5 which qualifies as an incentive stock option under
Section 422 of the Internal Revenue Code (the "Code"). If, for
any reason, a Performance Option ceases to qualify as an
Incentive Stock Option under Code Section 422, it shall
thereafter be treated as a nonqualified stock option.
h. "Option Price" means the Fair Market Value of a share of Stock
on the Valuation Date.
i. "Participant" means an employee of the Company who as of the
Effective Date or at any time between the Effective Date and
the Termination Date is selected to participate in the Plan
pursuant to Section 5.
j. "Performance Goals" means goals established by the Committee
as of the Effective Date to be achieved by the Company by the
Termination Date. The Committee has the discretion to modify
Performance Goals during the Term to reflect significant
unforeseen events.
k. "Performance Option" means an Award granted to a Participant
pursuant to Section 5 of the Plan, as authorized in the Stock
Option Plan. Any forfeited, canceled or terminated Performance
Options may be awarded by the Committee, in its sole
discretion, to new Participants as Partial Awards or they may
be distributable under the terms of the Stock Option Plan.
l. "Retirement" means a Participant's retirement from active
employment with the Company on or after age 65 or prior to age
65 with the written approval of the Committee for purposes of
the Participant's rights under this Plan.
m. "Stock" means Common Stock of the Company.
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n. "Target Management Variable Compensation" means, without
overranging, a bonus equal to a percentage of the midpoint of
the Participant's salary range as established in the 1999
Management Variable Compensation Plan, contingent upon
achievement of certain performance goals, for each of the
three Company fiscal years during the Term (1999, 2000 and
2001).
o. "Term" of the Plan means the three-year period between the
Effective Date and the Termination Date.
p. "Termination Date" means the last day of the Term.
q. "TMVC Credit" means an amount equal to thirty percent of a
Participant's Target Management Variable Compensation, if any,
without overranging, for each fiscal year during the Term or
that portion of the Term from the date of the Participant's
Award to the Termination Date. TMVC Credit shall be withheld
from the Participant's Management Variable Compensation Award
for each said fiscal year and used exclusively as a credit
towards the Option Price for vested Performance Option Stock
purchased by the Participant. Any TMVC Credit not used for
this purpose shall be forfeited. TMVC Credit shall not be
payable in cash or in any other form if the Participant's
Performance Options do not vest or, if vested, if they are
canceled, terminated or forfeited by the Company or not
exercised by the Participant.
TMVC Credit shall not accumulate interest.
r. "Valuation Date", for purposes of a Performance Option Award,
means the date of the Award or, if the Award date is not a
trading day, the first trading day thereafter. "Valuation
Date", for purposes of Performance Option exercise, means the
date on which the Participant provides the Company with
written notice of exercise of his vested Options or, if said
date is not a trading day, the first trading day thereafter.
SECTION 2. Administration.
a. Administration by Committee. The Committee shall administer
the Plan. A majority of the Committee shall constitute a
quorum. The acts of a majority of the members present at any
meeting at which a quorum is present or acts approved in
writing by a majority of the Committee shall be deemed acts of
the Committee.
Subject to the provisions of the Plan, the Committee shall have
exclusive power to
i. select the employees to participate in the Plan,
ii. determine the Awards to be made to each employee
selected,
iii. determine the time or times when Awards will be
made,
iv. determine Performance Goals to which the payment
of Company Cash Match of TMVC Credit may be
subject, and
v. prescribe the form or forms evidencing Awards.
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b. Committee to Make Rules and Interpret Plan. The Committee
shall have the authority, subject to the provisions of the
Plan and the Stock Option Plan, to establish, adopt, or revise
such rules and regulations and to make all such determinations
relating to the Plan as it may deem necessary or advisable for
the administration of the Plan. The Committee's interpretation
of the Plan or any Awards granted pursuant thereto and all
decisions and determinations by the Committee or its designee
with respect to the Plan shall be final, binding, and
conclusive on all parties unless otherwise determined by the
Board.
c. Committee Members Ineligible. No Participant shall be a member
of the Committee.
SECTION 3. Performance Option Awards Subject to the Plan.
The Committee may, from time to time, grant Awards to one or more employees
determined by it to be eligible for participation in the Plan, in accordance
with the provisions of Section 5, provided however that:
a. The aggregated number of shares of Stock made subject to
Awards may not exceed the number of shares permitted under the
Stock Option Plan.
b. Stock delivered to a Participant by the Company following
exercise of his vested Performance Options shall be authorized
and unissued Stock.
SECTION 4. Eligibility.
Officers and key employees of the Company (including officers and key employees
who are members of the Board but not the Committee) who are, in the opinion of
the Committee, principally responsible for the growth, development and financial
success of the Company, shall be granted Awards under the Plan.
Participation in the Plan for said designated employees shall be mandatory.
SECTION 5. Performance Options.
a. Grant of Performance Shares. The Committee may grant
Performance Options to Participants during the Term. In
connection with any such Award, TMVC Credit, if any, without
overranging, shall be withheld from the Participant's
Management Variable Compensation Award for each said fiscal
year during the Term and accounted for separately as a credit
towards the Option Price for vested Performance Option Stock
purchased by the Participant.
An Award of Performance Options as of the Effective Date (a
Full Award) shall consist of Incentive Stock Options equal to
five times the Participant's regular annual Incentive Stock
Option grant under the Stock Option Plan, as determined by the
Committee. Any Award hereunder shall (i) be in lieu of any
other regular annual stock option grant to which the
Participant would otherwise be entitled during the Term and
(ii) not affect the Participant's rights under the terms of
any other stock option awarded to him prior to his Performance
Option Award.
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An Award to any subsequent Participant after the Effective
Date shall be a Partial Award calculated according to the
following formula: the Full Award shall be multiplied by a
fraction with a denominator of 36 and a numerator equal to the
number of full months remaining in the Term, as defined in
subparagraph 1.o.i. The Committee, in its discretion, may
modify the number of Performance Options in any Award or the
Partial Award formula to the extent it deems such modification
to be in the best interests of the Company.
b. Value of Performance Options. All Performance Options will be
granted at an Option Price equal to the Stock's Fair Market
Value as of the date of the Award.
c. Term of Performance Options. The Option term shall be seven
years from the Effective Date for Full Awards or seven years
from date of Award grant for Partial Awards.
d. Vesting of Performance Options. Performance Options for any
Participant shall become 100% vested as of the earlier of the
following dates:
i. the three-year anniversary of the Effective Date,
or
ii. the date on which the Company experiences a change
in control, as defined in any change in control
agreement between the Company and the Participant,
or a merger or sale of assets, as provided in
Subsection 5(c) of the Stock Option Plan.
A Participant whose employment terminates due to death,
Retirement or Disability prior to vesting of his Performance
Options shall become partially vested effective as of the
earlier of the dates described in i. or ii. above. The
unvested Performance Options of such a Participant shall be
forfeited. The percentage of such a Participant's vesting
shall be 100% multiplied by a fraction the denominator of
which is 36 and the numerator of which is the number of the
Participant's fully completed months of service between the
Effective Date, or the date of the Participant's Award for a
Partial Award, and his termination date.
If a Participant's employment is terminated by the Participant
or the Company prior to vesting of his Performance Options
(other than due to death, Retirement or Disability), his
Performance Options shall be forfeited. All vesting rights, as
described in this Subsection 5.d., are subject to the terms
and conditions of the Plan and the Stock Option Plan.
e. Exercise of Performance Options. A Participant may exercise
his Performance Options upon vesting. In the event of a change
in control, a Participant shall have additional exercise
rights, as provided in subparagraph 5(c) of the Stock Option
Plan.
Any vested Performance Options which qualify as Incentive
Stock Options must be exercised within 90 days following a
Participant's termination of employment, or in the event of a
Participant's Disability, within one year of such event, or,
in the event of a Participant's death, within three years of
such event or, in all cases, if sooner, by the expiration date
of the term of the Option, as described in Subsection 5.c.
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With respect to vested Performance Options which do not
qualify as Incentive Stock Options, in the event of death or
Disability, a Participant (or his beneficiary or legal
representative) may exercise said Options until the three year
anniversary of said event or expiration of the term of the
Option, whichever occurs first. In the event of Retirement, a
Participant may exercise his Options until the expiration of
the Option term, as described in subsection 5.c. If a
Participant's employment is terminated for Cause, the
Participant's vested unexercised Performance Options shall
immediately terminate. If a Participant's employment
terminates for any other reason after his nonqualified
Performance Options have vested, he may exercise said Options
within 90 days after such termination or the term of the
Option, whichever is shorter.
Any Performance Option may be exercisable in full or for
different time periods as specified by the Committee pursuant
to the authority vested in it in Stock Option Plan Subsection
5(c), subject to the conditions set forth in Section 5 of the
Stock Option Plan.
f. Company Cash Match of TMVC Credit. The Company will pay cash
bonuses to Participants, based on the value of their TMVC
Credit, if Performance Goals are met, as described and subject
to the conditions set forth in this Subsection.
i. If the Company's Compounded Earnings ("CE") for
the Term are between 10% and 13% and its
Compounded Revenue ("CR") for the Term is between
8% and 10%, the Company will match Participants'
TMVC Credit at a proportional rate of between 1%
and 100%, as set forth in Exhibit A. There will be
no match unless both CE and CR achieve their
minimum 10% and 8% thresholds. If either CE or CR
exceeds its 13% or 10% maximum under this
subparagraph, the proportional match shall be
determined pursuant to Exhibit A.
ii. If CE for the Term is between 13% and 20% and CR
for the Term is between 10% and 15%, the Company
will match Participants' TMVC Credit at a
proportional rate of between 100% and 200%, as set
forth in Exhibit A. In no event will the Company's
match exceed 200% of Participants' TMVC Credit.
iii. The amount of Company match, if any, shall be
determined by the 90th day following the end of
the Term. Once determined, Company match amounts
shall be distributable to Participants in cash.
iv. The Company match for a partially vested
Participant whose employment is severed due to
Retirement, death or Disability prior to the
Termination Date shall equal the fraction
determined in Subsection 5.d. multiplied by the
amount of the cash bonus match which the
Participant would have received if he had been
100% vested. If a Participant's employment is
severed by the Participant or the Company prior to
the Termination Date (other than due to death,
Retirement or Disability), or if the Participant
resigns, is discharged for Cause or competes with
the Company after the Termination Date but prior
to the date of distribution of the cash bonus
match, the Participant shall not be entitled to
the cash bonus match described in this
subsection5.f.
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g. Payment for Performance Option Stock. The Participant's TMVC
Credit shall be divided by the number of his Performance
Options so that each Performance Option shall be credited with
an equal portion of TMVC Credit. When the Participant
exercises all or a portion of his Performance Options, each
such Option shall be credited with its proportional share of
TMVC Credit. The TMVC Credit assigned to unexercised
Performance Options shall be forfeited. The Participant shall
pay the difference between his TMVC Credit and the Option
Price for each share of Stock which he purchases pursuant to
his Performance Options.
h. Right of Repurchase and Forfeiture. The Company may repurchase
a Participant's Performance Option Stock and require
forfeiture of his unexercised vested Performance Options if
the Participant
i. at any time during or within two years following
termination of employment with the Company,
directly or indirectly competes with, or is
employed by or performs services in any capacity
for, a competitor of the Company, or
ii. is discharged for Cause.
Consistent with subsection 8(d) of the Stock Option Plan, the
repurchase price shall equal the then Fair Market Value of the
Stock for Participants whose Stock is subject to repurchase
pursuant to subsection 5.h.i. and, for Participants covered
under subsection 5.h.ii., the repurchase price shall equal the
Stock Option Price.
SECTION 6. General Provisions.
a. Government and Other Regulations. The Company's obligation to
make payment of Awards in Stock or otherwise is subject to all
applicable laws, rules, regulations and required governmental
agency approvals. The Company shall be under no obligation to
register under the Securities Act of 1933, as amended (the
"Act"), any of the Stock issued, delivered or paid in
settlement under the Plan. If said Stock may be exempt from
registration under the Act, the Company may restrict the
transfer of such Stock as it deems advisable to ensure the
availability of any such exemption.
b. Claim to Awards and Employment Rights. No Participant or other
person shall have any claim or right to be granted an Award
under the Plan. Neither the Plan nor any action taken
hereunder shall be construed as giving any employee any right
to be retained in the employ of the Company.
c. Unsecured Creditor. The rights of a Participant or any
beneficiary under the Plan shall be those of an unsecured
creditor.
d. Claims Procedures for Participants or Their Representatives.
Any claims for benefits under the Plan shall be submitted to a
Plan administrator appointed by the Committee. If a claim is
denied, the administrator shall provide written notice of the
denial within 90 days after submission of the claim which
shall include (i) the specific reasons for the denial, (ii)
specific references to the Plan provisions on which the denial
is based, (iii) any other information necessary for the
claimant to perfect the claim and an explanation of why such
material is necessary, and (iv) an explanation of the Plan's
appeal procedures. The 90-day claims review period may be
extended by the
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<PAGE>
administrator if such extension is necessary, in the sole
discretion of the administrator, to properly review the claim.
The appeal procedures are as follows: (A) a claimant may file
a notice of appeal of the denial of a claim with the
administrator within 90 days following his receipt of the
notice of denial, providing a written explanation as to why he
believes the denial to be inappropriate, with specific reasons
and references to Plan provisions; (B) the appeal will be
reviewed and a decision rendered as soon as possible but not
later than 90 days after receipt of the appeal notice, unless
an extension of time of up to 60 days is deemed appropriate by
the administrator to properly review the appeal; and (C) the
written decision on the appeal shall be provided to the
claimant, with specific references to the Plan provisions on
which the denial is based. If the decision is not furnished
within the time specified above, the claim shall be deemed to
be denied on appeal.
e. Beneficiaries. Any payment of an Award due under the Plan to a
deceased Participant shall be paid to the beneficiary
designated by the Participant on the Beneficiary Designation
Form attached as Exhibit B, which shall be filed with the
Committee. A Participant may change his designated beneficiary
at any time by completing a new Beneficiary Designation Form
and providing it to the Committee. The most recent Beneficiary
Designation Form shall be effective and all earlier
Beneficiary Designation Forms shall be automatically void. If
no such beneficiary has been designated or survives the
Participant, payment shall be made to the Participant's legal
representative. A beneficiary designation may be changed or
revoked by a Participant at any time provided the change or
revocation is filed with the Committee.
f. Nonassignability. No Award under the Plan shall be subject in
any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, execution,
attachment, garnishment or any other legal process and any
attempt to subject an Award to any of the foregoing shall be
void.
g. Repeal; Amendment. The Plan and any and all provisions of the
Plan may be repealed or amended by the affirmative vote of a
majority of the Board of Directors. No repeal or amendment of
the Plan shall operate to annul or modify any vested Award
under the Plan.
h. Construction. A pronoun or adjective in the masculine gender
includes the feminine gender, and the singular includes the
plural, unless the context clearly indicates otherwise.
i. Governing Law. The Plan shall be construed, administered and
enforced according to the laws of Minnesota and the United
States, as appropriate.
j. Tax Withholding. The Company shall have the right to deduct
from all Awards paid in cash taxes required by law and, in the
case of Stock, the Participant or other person receiving such
Stock may be required to pay to the Company the amount of any
such taxes which the Company is required to withhold with
respect to such Stock.
k. Authority. The Plan is adopted by the Board as of the
Effective Date pursuant to the MTS Systems Corporation 1997
Stock Option Plan, as amended. Any issue relating to Stock or
Stock Options not specifically addressed herein shall be
governed by the terms of the Stock Option Plan.
Page 14
EXHIBIT 10.j
SEVERANCE AGREEMENT
AGREEMENT made as of this 22nd day of September, 1999 by and between
MTS Systems Corporation, a Minnesota corporation ("MTS") and Nancy L. Quist (the
"Executive").
WHEREAS, MTS desires to employ Executive as its Chief Financial
Officer and Executive is willing to become employed by MTS in such capacity; and
WHEREAS, Executive is expected to make a significant contribution to
the profitability, growth and financial strength of MTS; and
WHEREAS, MTS considers the establishment and maintenance of a sound
and vital management and an orderly succession plan to be essential to
protecting and enhancing the best interests of MTS and its shareholders; and
WHEREAS, this Agreement is consistent with the requirements of the
executive/high policymaking exception to the Age Discrimination in Employment
Act, 29 U.S.C. Section 631(c)(1) (the "Executive Exemption"), benefits in
connection therewith are pursuant to pension, profit sharing and deferred
compensation plans as defined therein, and Executive, by virtue of his duties
and responsibilities on behalf of MTS, qualifies under said exception for
mandatory retirement on or after his 65th birthday; and
WHEREAS, MTS is providing Executive, simultaneously with this
Agreement, in addition to Executive's employment with MTS and the special
benefits associated therewith, additional consideration in the form of a Change
in Control Agreement, to provide additional benefits to Executive in the event
of a change in control;
NOW THEREFORE, in consideration of the foregoing and other
respective covenants and agreements of the parties herein contained, the parties
hereto agree as follows:
1. Term of Agreement. This Agreement shall commence on the date
hereof and shall continue in effect until the earlier of (a) the date on which
the Executive and MTS agree in writing to terminate this Agreement, or (b) the
Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If a change in
control occurs, as defined in that certain agreement between the Executive and
MTS of even date herewith (the "Change in Control Agreement", attached as
Exhibit 1), this Agreement shall be superseded by the provisions of the Change
in Control Agreement except as provided in the following sentence. MTS's right
under this Agreement to terminate the Executive's employment pursuant to the
Executive Exemption shall not be superceded by the Change in Control Agreement
and the Executive shall be entitled to receive the benefits to which he is
entitled under subparagraph 4(d) hereunder if such termination occurs.
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Sevarance Agreement
Page 2
2. Termination by Reason of Death or Disability. In the event of the
Executive's death or disability during the Term of this Agreement, Executive
shall be entitled to such benefits provided under any policy, plan or program
governing death or disability maintained by MTS and covering such Executive and
this Agreement shall not apply. The determination of disability and the amount
and entitlement of benefits shall be governed by the terms of such policy, plan
or program. In the event of the Executive's disability, the Executive's Date of
Termination shall be the date on which Executive has been unable, by reason of
physical or mental disability, to perform the services required of him for his
position, even with reasonable accommodation, for the period of time indicated
in MTS's group long term disability plan (in which the Executive is a
participant) during which a participant must be disabled before benefits become
payable. In connection with Executive's termination due to disability, a
qualified physician must certify the disability and MTS shall at all times
comply with the Americans With Disabilities Act and any other applicable
disability discrimination law.
3. Resignation or Termination for Cause.
(a) The Executive may resign his employment or MTS may
terminate the Executive's employment for Cause, effective as of the
Date of Termination set forth in the Notice of Termination. If
Executive resigns or his employment is terminated by MTS for Cause,
MTS shall pay to Executive his full base salary through the Date of
Termination at the rate in effect at the time of Notice of
Termination is given and MTS shall have no further obligation to
Executive under this Agreement.
(b) Termination by MTS of Executive's employment for
"Cause" shall mean termination as a result of:
(i) the conviction of the Executive
by a court of competent jurisdiction for felony
criminal conduct; or
(ii) willful misconduct by the
Executive; or
(iii) violation by the Executive of
any employment agreement applicable to the
Executive.
4. Termination Other Than for Cause. MTS may terminate Executive's
employment for a reason other than Cause, including pursuant to the Executive
Exemption on or after Executive's 65th birthday, effective as of the Date of
Termination set forth in the Notice of Termination. If Executive's employment is
terminated by MTS other than for Cause, death or disability, Executive shall be
entitled, subject to subparagraph 4(d)(v) and paragraph 9 of this Agreement, to
the benefits described in subparagraphs (a), (b) and (c) below and, if
applicable, subparagraph (d) below.
(a) Executive shall be paid a monthly Severance Payment
equal to the Executive's Monthly Gross Income, as defined in
subparagraph (i) below for 9 months. If Executive's employment is
terminated pursuant to the Executive
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Sevarance Agreement
Page 3
Exemption as described in subparagraph 4(d) hereunder, "12" shall be
substituted for "15" in the preceding sentence.
(i) For purposes of this Agreement, Monthly
Gross Income shall mean the sum of the following
amounts, subject to applicable federal and state
withholding.
(A) 1/12 of the highest average
base salary for any 12-consecutive month
period during the 36 calendar month period
ending immediately prior to the Date of
Termination; plus
(B) the monthly average of the
total Management Variable Compensation (MVC)
earned during the lesser of the 3 most
recent or the actual number of fiscal years
participating in the MVC plan ending
immediately prior to the Date of
Termination; plus
(C) the product of the average
percentage of MTS profit sharing
contributions to the MTS Systems Corporation
Profit Sharing Retirement Plan and Trust (as
a percent of Compensation as defined in the
Plan up to the federal limit) for the lesser
of the 3 most recent or the actual number of
participating Plan Years ending immediately
prior to the Date of Termination multiplied
by the sum of (A) and (B) above.
(b) Executive shall be entitled to continue any of said
benefits which qualify as group health and life insurance benefits
for continuation coverage under the Comprehensive Omnibus Budget
Reconciliation Act ("COBRA") or applicable state law and pursuant to
the terms of the plan. Following the Executive's Date of Termination
and while severance payments are being paid to the Executive or, if
earlier, until Executive is covered under other group plans, MTS
shall continue to pay the employer share of the Executive's MTS
group life and health insurance premiums. All premium payments made
on Executive's behalf following his Date of Termination and
Executive's continued participation in the plans are contingent upon
Executive making the appropriate timely written elections to
continue his group benefits following his Date of Termination, said
group benefits continuing in effect for active MTS employees,
Executive continuing to be eligible under the terms of the plans and
applicable laws, and Executive's payment of the employee portion of
the premiums for such benefits. Benefits otherwise receivable by
Executive pursuant to this subparagraph (b) shall be reduced or
eliminated to the extent comparable benefits are actually received
by Executive during such period from a source outside MTS, and any
such benefits actually received by Executive shall be reported to
MTS.
(c) The Executive's rights under any existing Employee
Stock Option Agreement and any future such agreements, including
particularly his vesting rights and his right to exercise his
options following his termination of employment, shall
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Sevarance Agreement
Page 4
continue to be fully effective hereunder. In addition, if the
Executive's termination of employment occurs pursuant to the
Executive Exemption on or after he has reached his 65th birthday,
the Executive shall continue to vest in any stock options in which
he is not fully vested, as though he were continuing his employment
with MTS as an active employee, subject at all times to the exercise
times and other terms and conditions set forth in said Stock Option
Agreements and to Executive's signing the release agreement
described in paragraph 9 herein.
(d) If Executive's termination of employment occurs
pursuant to the Executive Exemption on or after he has reached his
65th birthday, Executive shall be entitled to receive the lump sum
equivalent of the amount necessary to purchase a $44,000 pre-tax
straight life annuity, said lump sum to be taken from MTS
contributions and earnings thereon to Executive's accounts in MTS
sponsored pension, profit sharing, and deferred compensation plans,
as applicable. If Executive is entitled to less than that amount
from the applicable MTS plans in which he is a participant as of his
Date of Termination, then MTS shall make an additional contribution
on Executive's behalf to Executive's Deferral Account in the MTS
Systems Corporation Executive Deferred Compensation Plan, pursuant
to Section 3.4 of said Plan. The amount to which Executive is
entitled under subparagraph 4(a) of this Agreement shall be reduced
by MTS's Section 3.4 contribution to the MTS Systems Corporation
Executive Deferred Compensation Plan, as described in subparagraph
(v) below. Calculation of the Executive's benefit shall be as
follows:
(i) The benefits to which Executive is
entitled, as of his Date of Termination, under all MTS
sponsored pension, profit sharing and deferred
compensation plans shall be added together.
(ii) Amounts in said plans, as determined
in accordance with 29 Code of Federal Regulations ss.
1627.17, attributable to Social Security, employee
contributions, contributions of prior employers, and
rollover contributions, shall be subtracted from the
subparagraph (i) amount and the resulting figure shall
be the "Qualified Retirement Benefit".
(iii) MTS shall determine the lump sum
equivalent of the amount necessary to purchase a
straight life annuity for Executive, effective as of his
Date of Termination, which would provide Executive with
$44,000 a year for life (the "ADEA Benefit"). MTS shall
retain a certified actuary to determine said lump sum
equivalent amount, using the applicable mortality table
and applicable interest rate under Section 417(e) of the
Internal Revenue Code and Regulations issued thereunder.
(iv) If the Qualified Retirement Benefit
exceeds the ADEA Benefit, the Executive shall have the
option (but is not required) to receive the Qualified
Retirement Benefit in a lump sum, as provided under the
applicable plans, within 60 days following his Date of
Termination. The Executive may elect to receive the
Qualified Retirement Benefit in either a lump sum or a
series of periodic payments pursuant to the terms of the
applicable plans. The
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Executive may also receive the payments and benefits set
forth in subparagraphs 4(a) and (b) of this Agreement
provided he executes the release agreement required in
paragraph 9 of this Agreement. The benefits set forth in
subparagraph 4(c) shall at all times be available to the
Executive.
(v) If the Qualified Retirement Benefit is
less than the ADEA Benefit, MTS shall make a
contribution to Executive's Deferral Account in the MTS
Systems Corporation Executive Deferred Compensation
Plan, pursuant to Section 3.4 of said Plan, in an amount
equal to the difference between the Qualified Retirement
Benefit and the ADEA Benefit (the "Qualified Retirement
Benefit Supplement"). The Executive shall have the
option (but is not required) to receive the Qualified
Retirement Benefit and, if applicable, the Qualified
Retirement Benefit Supplement from said Plan within 60
days following his Date of Termination. The Executive
may elect to receive the Qualified Retirement Benefit
and, if applicable, the Qualified Retirement Benefit
Supplement, in either a lump sum or a series of periodic
payments pursuant to the terms of the applicable plans.
The payments to Executive described in subparagraph 4(a)
of this Agreement shall be reduced by the amount of
MTS's contribution to Executive's Deferral Account in
the MTS Systems Corporation Executive Deferred
Compensation Plan, pursuant to Section 3.4 of said Plan,
to create the Qualified Retirement Benefit Supplement.
All payments remaining in subparagraph 4(a) after this
reduction and the subparagraph 4(b) and (c) benefits
shall be paid to Executive in accordance with the terms
of those subparagraphs, provided Executive executes the
release agreement required in paragraph 9 of this
Agreement.
(vi) Executive's Qualified Retirement
Benefit and, if applicable, the Qualified Retirement
Benefit Supplement, shall be nonforfeitable and not
subject to reduction or elimination by MTS for any
reason.
5. No Mitigation. Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise; nor shall the amount of any payment or benefit provided for in
this Agreement be reduced by any compensation earned by Executive as the result
of employment by another employer or by retirement benefits after the Date of
Termination or otherwise except as specifically provided herein.
6. Non-Competition and Confidentiality.
(a) Executive agrees that, as a condition of receiving
benefits under this Agreement, he will not render services directly
or indirectly to any competing organization located in any market in
which MTS is doing business as of Executive's Date of Termination
for the period of time during which Executive is receiving benefits
under this Agreement or the Change in Control Agreement, in
connection with the design, implementation, development,
manufacture, marketing, sale, merchandising, leasing, servicing or
promotion of any "Conflicting Product" which as used herein means
any product, process, system or service of any person, firm,
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corporation, organization other than MTS, in existence or under
development, which is the same as or similar to or competes with, or
has a usage allied to, a product, process, system, or service
produced, developed, or used by MTS.
(b) Executive further agrees and acknowledges his
existing obligation that, at all times during and subsequent to his
employment with MTS, he will not divulge or appropriate to his own
use or the uses of others any secret or confidential information
pertaining to the business of MTS, or any of its subsidiaries,
obtained during his employment by MTS or any of its subsidiaries.
(c) If Executive violates his obligations under
subparagraphs (a) and (b) above, any remaining payments or benefits
otherwise due Executive pursuant to subparagraphs 4(a) and (b) of
this Agreement shall not be paid. This subparagraph (c) specifically
does not apply to the subparagraph 4(a) reduction amount equal to
the Qualified Retirement Benefit Supplement, as described in
subparagraph 4(d)(v).
7. Binding Agreement. This Agreement shall inure to the benefit of
and be enforceable by Executive's personal or legal representatives, heirs, and
designated beneficiaries. If Executive should die while any amount would still
be payable to Executive hereunder if the Executive had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's designated beneficiaries, or, if
there is no such designated beneficiary, to the Executive's estate.
8. Notice of Termination.
(a) Any purported termination of Executive's employment
by either Executive or MTS under this Agreement, except as otherwise
provided in paragraph 2 of this Agreement, shall be communicated by
written notice to the other party.
(b) For purposes of this Agreement, "Date of
Termination" shall mean the date specified in the written Notice of
Termination which shall not be less than 10 nor more than 60 days
from the date such Notice of Termination is given.
(c) Notice of Termination and all other communications
provided for in the Agreement shall be deemed to have been duly
given when delivered or mailed by United States registered or
certified mail, return receipt requested, postage pre-paid,
addressed to the last known residence address of the Executive or in
the case of MTS, to its principal office to the attention of each of
the then directors of MTS with a copy to its Secretary, or to such
other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of
address shall be effective only upon receipt.
9. Release of Claims. Executive's right to the benefits and payments
described in subparagraphs 4(a), (b) and (c) of this Agreement, except as
otherwise provided in subparagraph 4(d)(v) hereof, is contingent upon
Executive's execution of a severance release agreement which shall be provided
to Executive by MTS with or following his Notice of
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Termination. The severance release agreement shall require a full release of all
claims which Executive may have against MTS or any MTS affiliate or individual
associated with MTS, to the extent permitted by and consistent with applicable
laws. Such release agreement shall prohibit Executive from recovering any amount
in connection with a charge or lawsuit filed against MTS or any MTS affiliate,
employee, shareholder, officer, director or other agent by Executive, EEOC or
any other agency or entity on Executive's behalf based upon any act occurring
prior to execution of said release agreement. The release agreement will be
available for Executive's review, consideration and execution at least 45 days
prior to his Date of Termination.
10. Injunctive Relief. Executive consents that, in the case of any
violation or threatened violation of paragraph 6 of this Agreement, MTS may
apply for and secure injunctive relief, temporary or provisional, in court,
without bond but upon due notice, pending final resolution on the merits
pursuant to arbitration as set forth in paragraph 11 hereof. No waiver of any
violation of this Agreement shall be implied from any failure by MTS to take
action under this paragraph.
11. Arbitration. Any and all claims or disputes between Executive
and MTS (including the validity, scope, and enforceability of this paragraph),
except as otherwise provided under paragraph 10 or prohibited under applicable
law, shall be submitted for arbitration and resolution to an arbitrator. No
demand for arbitration may be made after the date when the institution of legal
or equitable proceedings based on such claim or dispute would be barred by the
applicable statute of limitation. The arbitrator shall be selected by mutual
agreement of the parties. Unless otherwise provided for in this Agreement, the
Expedited Labor Arbitration Rules of the American Arbitration Association shall
apply. If the parties are unable to agree upon an arbitrator, any such dispute
shall be solely and finally settled by arbitration in accordance with the
Expedited Labor Arbitration Rules of the American Arbitration Association
("AAA"). The parties agree that no punitive damages shall be awarded hereunder.
The parties also agree that all awards, decisions and remedies in favor of a
winning party hereunder with respect to any issue shall be proportional to the
violation caused by the losing party with respect to that issue. All costs in
conducting the arbitration, including but not limited to the arbitration filing
fee, the arbitrator's fees and expenses, and the reasonable attorney's fees and
expenses of the prevailing party (including the attorney's fees and costs
incurred by the prevailing party in seeking or resisting temporary or
provisional court relief as set out in paragraph 10 above), shall be the
responsibility of the losing party. In the event there is more than one issue in
dispute and there is no one prevailing party with respect to all issues in
dispute, costs and attorney's fees shall be prorated by the arbitrator according
to the relative dollar value of each issue. The arbitrator's Award shall be
final and binding. In the event either party must resort to the judicial process
to enforce the provisions of this Agreement, the award of an arbitrator or
equitable relief granted by an arbitrator, the party seeking enforcement shall
be entitled to recover from the other party all costs of litigation including,
but not limited to, reasonable attorney's fees and court costs. The arbitration
proceedings and Award shall be maintained by both parties as strictly
confidential, except as otherwise required by court order and with respect to
the parties' attorneys and tax advisors, and, with respect to MTS, members of
its management, and, with respect to Executive, his family.
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Sevarance Agreement
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12. Miscellaneous.
(a) No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge
is agreed to in writing and signed by the parties. No waiver by
either party hereto at any time of any breach by the other party to
this Agreement of, or compliance with, any other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or similar time.
(b) No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this
Agreement.
(c) The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the
State of Minnesota.
(d) Any provision of this Agreement which conflicts with
applicable law shall be modified to the extent necessary to ensure
its enforceability. The invalidity or unenforceability or any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
This Agreement supersedes any and all prior oral and written
understandings and agreements between the Executive and MTS.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the
Executive have executed this Agreement as of the day and date first above
written.
EXECUTIVE: MTS SYSTEMS CORPORATION
/s/ Nancy Lee Quist By S. W. Emery, Jr.
- ------------------- -----------------
Nancy L. Quist
Its Chairman and CEO
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Severance Agreement
Page 1
Exhibit 10.k
SEVERANCE AGREEMENT
AGREEMENT made as of this 28th day of July, 1999 by and between MTS
Systems Corporation, a Minnesota corporation ("MTS") and David E. Hoffman (the
"Executive").
WHEREAS, MTS desires to employ Executive as its Chief Financial
Officer and Executive is willing to become employed by MTS in such capacity; and
WHEREAS, Executive is expected to make a significant contribution to
the profitability, growth and financial strength of MTS; and
WHEREAS, MTS considers the establishment and maintenance of a sound
and vital management and an orderly succession plan to be essential to
protecting and enhancing the best interests of MTS and its shareholders; and
WHEREAS, this Agreement is consistent with the requirements of the
executive/high policymaking exception to the Age Discrimination in Employment
Act, 29 U.S.C. Section 631(c)(1) (the "Executive Exemption"), benefits in
connection therewith are pursuant to pension, profit sharing and deferred
compensation plans as defined therein, and Executive, by virtue of his duties
and responsibilities on behalf of MTS, qualifies under said exception for
mandatory retirement on or after his 65th birthday; and
WHEREAS, MTS is providing Executive, simultaneously with this
Agreement, in addition to Executive's employment with MTS and the special
benefits associated therewith, additional consideration in the form of a Change
in Control Agreement, to provide additional benefits to Executive in the event
of a change in control;
NOW THEREFORE, in consideration of the foregoing and other
respective covenants and agreements of the parties herein contained, the parties
hereto agree as follows:
1. Term of Agreement. This Agreement shall commence on the date
hereof and shall continue in effect until the earlier of (a) the date on which
the Executive and MTS agree in writing to terminate this Agreement, or (b) the
Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If a change in
control occurs, as defined in that certain agreement between the Executive and
MTS of even date herewith (the "Change in Control Agreement", attached as
Exhibit 1), this Agreement shall be superseded by the provisions of the Change
in Control Agreement except as provided in the following sentence. MTS's
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Severance Agreement
Page 2
right under this Agreement to terminate the Executive's employment pursuant to
the Executive Exemption shall not be superceded by the Change in Control
Agreement and the Executive shall be entitled to receive the benefits to which
he is entitled under subparagraph 4(d) hereunder if such termination occurs.
2. Termination by Reason of Death or Disability. In the event of the
Executive's death or disability during the Term of this Agreement, Executive
shall be entitled to such benefits provided under any policy, plan or program
governing death or disability maintained by MTS and covering such Executive and
this Agreement shall not apply. The determination of disability and the amount
and entitlement of benefits shall be governed by the terms of such policy, plan
or program. In the event of the Executive's disability, the Executive's Date of
Termination shall be the date on which Executive has been unable, by reason of
physical or mental disability, to perform the services required of him for his
position, even with reasonable accommodation, for the period of time indicated
in MTS's group long term disability plan (in which the Executive is a
participant) during which a participant must be disabled before benefits become
payable. In connection with Executive's termination due to disability, a
qualified physician must certify the disability and MTS shall at all times
comply with the Americans With Disabilities Act and any other applicable
disability discrimination law.
3. Resignation or Termination for Cause.
(a) The Executive may resign his employment or MTS may
terminate the Executive's employment for Cause, effective as of the
Date of Termination set forth in the Notice of Termination. If
Executive resigns or his employment is terminated by MTS for Cause,
MTS shall pay to Executive his full base salary through the Date of
Termination at the rate in effect at the time of Notice of
Termination is given and MTS shall have no further obligation to
Executive under this Agreement.
(b) Termination by MTS of Executive's employment for
"Cause" shall mean termination as a result of:
(i) the conviction of the Executive by a
court of competent jurisdiction for felony criminal
conduct; or
(ii) willful misconduct by the Executive; or
(iii) violation by the Executive of any
employment agreement applicable to the Executive.
4. Termination Other Than for Cause. MTS may terminate Executive's
employment for a reason other than Cause, including pursuant to the Executive
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Severance Agreement
Page 3
Exemption on or after Executive's 65th birthday, effective as of the Date of
Termination set forth in the Notice of Termination. If Executive's employment is
terminated by MTS other than for Cause, death or disability, Executive shall be
entitled, subject to subparagraph 4(d)(v) and paragraph 9 of this Agreement, to
the benefits described in subparagraphs (a), (b) and (c) below and, if
applicable, subparagraph (d) below.
(a) Executive shall be paid a monthly Severance Payment
equal to the Executive's Monthly Gross Income, as defined in
subparagraph (i) below for 15 months. If Executive's employment is
terminated pursuant to the Executive Exemption as described in
subparagraph 4(d) hereunder, "12" shall be substituted for "15" in
the preceding sentence.
(i) For purposes of this Agreement, Monthly
Gross Income shall mean the sum of the following
amounts, subject to applicable federal and state
withholding.
(A) 1/12 of the highest average
base salary for any 12-consecutive month
period during the 36 calendar month period
ending immediately prior to the Date of
Termination; plus
(B) the monthly average of the
total Management Variable Compensation (MVC)
earned during the lesser of the 3 most
recent or the actual number of fiscal years
participating in the MVC plan ending
immediately prior to the Date of
Termination; plus
(C) the product of the average
percentage of MTS profit sharing
contributions to the MTS Systems Corporation
Profit Sharing Retirement Plan and Trust (as
a percent of Compensation as defined in the
Plan up to the federal limit) for the lesser
of the 3 most recent or the actual number of
participating Plan Years ending immediately
prior to the Date of Termination multiplied
by the sum of (A) and (B) above.
(b) Executive shall be entitled to continue any of said
benefits which qualify as group health and life insurance benefits
for continuation coverage under the Comprehensive Omnibus Budget
Reconciliation Act ("COBRA") or applicable state law and pursuant to
the terms of the plan. Following the Executive's Date of Termination
and while severance payments are being paid to the Executive or, if
earlier, until Executive is covered under other group plans, MTS
shall continue to pay the employer share of the Executive's MTS
group life and health insurance premiums. All premium payments made
on Executive's behalf following his Date of Termination and
Executive's continued participation in the plans are contingent upon
Executive making the appropriate timely written elections to
continue his group benefits following his Date
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Severance Agreement
Page 4
of Termination, said group benefits continuing in effect for active
MTS employees, Executive continuing to be eligible under the terms
of the plans and applicable laws, and Executive's payment of the
employee portion of the premiums for such benefits. Benefits
otherwise receivable by Executive pursuant to this subparagraph (b)
shall be reduced or eliminated to the extent comparable benefits are
actually received by Executive during such period from a source
outside MTS, and any such benefits actually received by Executive
shall be reported to MTS.
(c) The Executive's rights under any existing Employee
Stock Option Agreement and any future such agreements, including
particularly his vesting rights and his right to exercise his
options following his termination of employment, shall continue to
be fully effective hereunder. In addition, if the Executive's
termination of employment occurs pursuant to the Executive Exemption
on or after he has reached his 65th birthday, the Executive shall
continue to vest in any stock options in which he is not fully
vested, as though he were continuing his employment with MTS as an
active employee, subject at all times to the exercise times and
other terms and conditions set forth in said Stock Option Agreements
and to Executive's signing the release agreement described in
paragraph 9 herein.
(d) If Executive's termination of employment occurs
pursuant to the Executive Exemption on or after he has reached his
65th birthday, Executive shall be entitled to receive the lump sum
equivalent of the amount necessary to purchase a $44,000 pre-tax
straight life annuity, said lump sum to be taken from MTS
contributions and earnings thereon to Executive's accounts in MTS
sponsored pension, profit sharing, and deferred compensation plans,
as applicable. If Executive is entitled to less than that amount
from the applicable MTS plans in which he is a participant as of his
Date of Termination, then MTS shall make an additional contribution
on Executive's behalf to Executive's Deferral Account in the MTS
Systems Corporation Executive Deferred Compensation Plan, pursuant
to Section 3.4 of said Plan. The amount to which Executive is
entitled under subparagraph 4(a) of this Agreement shall be reduced
by MTS's Section 3.4 contribution to the MTS Systems Corporation
Executive Deferred Compensation Plan, as described in subparagraph
(v) below. Calculation of the Executive's benefit shall be as
follows:
(i) The benefits to which Executive is
entitled, as of his Date of Termination, under all MTS
sponsored pension, profit sharing and deferred
compensation plans shall be added together.
(ii) Amounts in said plans, as determined
in accordance with 29 Code of Federal Regulations ss.
1627.17, attributable to Social Security, employee
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Severance Agreement
Page 5
contributions, contributions of prior employers, and
rollover contributions, shall be subtracted from the
subparagraph (i) amount and the resulting figure shall
be the "Qualified Retirement Benefit".
(iii) MTS shall determine the lump sum
equivalent of the amount necessary to purchase a
straight life annuity for Executive, effective as of his
Date of Termination, which would provide Executive with
$44,000 a year for life (the "ADEA Benefit"). MTS shall
retain a certified actuary to determine said lump sum
equivalent amount, using the applicable mortality table
and applicable interest rate under Section 417(e) of the
Internal Revenue Code and Regulations issued thereunder.
(iv) If the Qualified Retirement Benefit
exceeds the ADEA Benefit, the Executive shall have the
option (but is not required) to receive the Qualified
Retirement Benefit in a lump sum, as provided under the
applicable plans, within 60 days following his Date of
Termination. The Executive may elect to receive the
Qualified Retirement Benefit in either a lump sum or a
series of periodic payments pursuant to the terms of the
applicable plans. The Executive may also receive the
payments and benefits set forth in subparagraphs 4(a)
and (b) of this Agreement provided he executes the
release agreement required in paragraph 9 of this
Agreement. The benefits set forth in subparagraph 4(c)
shall at all times be available to the Executive.
(v) If the Qualified Retirement Benefit is
less than the ADEA Benefit, MTS shall make a
contribution to Executive's Deferral Account in the MTS
Systems Corporation Executive Deferred Compensation
Plan, pursuant to Section 3.4 of said Plan, in an amount
equal to the difference between the Qualified Retirement
Benefit and the ADEA Benefit (the "Qualified Retirement
Benefit Supplement"). The Executive shall have the
option (but is not required) to receive the Qualified
Retirement Benefit and, if applicable, the Qualified
Retirement Benefit Supplement from said Plan within 60
days following his Date of Termination. The Executive
may elect to receive the Qualified Retirement Benefit
and, if applicable, the Qualified Retirement Benefit
Supplement, in either a lump sum or a series of periodic
payments pursuant to the terms of the applicable plans.
The payments to Executive described in subparagraph 4(a)
of this Agreement shall be reduced by the amount of
MTS's contribution to Executive's Deferral Account in
the MTS Systems Corporation Executive Deferred
Compensation Plan, pursuant to Section 3.4 of said Plan,
to create the Qualified Retirement Benefit Supplement.
All payments remaining in subparagraph 4(a) after this
reduction and the subparagraph 4(b) and (c) benefits
shall be paid to Executive in accordance with the terms
of those subparagraphs,
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Severance Agreement
Page 6
provided Executive executes the release agreement
required in paragraph 9 of this Agreement.
(vi) Executive's Qualified Retirement
Benefit and, if applicable, the Qualified Retirement
Benefit Supplement, shall be nonforfeitable and not
subject to reduction or elimination by MTS for any
reason.
5. No Mitigation. Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise; nor shall the amount of any payment or benefit provided for in
this Agreement be reduced by any compensation earned by Executive as the result
of employment by another employer or by retirement benefits after the Date of
Termination or otherwise except as specifically provided herein.
6. Non-Competition and Confidentiality.
(a) Executive agrees that, as a condition of receiving
benefits under this Agreement, he will not render services directly
or indirectly to any competing organization located in any market in
which MTS is doing business as of Executive's Date of Termination
for the period of time during which Executive is receiving benefits
under this Agreement or the Change in Control Agreement, in
connection with the design, implementation, development,
manufacture, marketing, sale, merchandising, leasing, servicing or
promotion of any "Conflicting Product" which as used herein means
any product, process, system or service of any person, firm,
corporation, organization other than MTS, in existence or under
development, which is the same as or similar to or competes with, or
has a usage allied to, a product, process, system, or service
produced, developed, or used by MTS.
(b) Executive further agrees and acknowledges his
existing obligation that, at all times during and subsequent to his
employment with MTS, he will not divulge or appropriate to his own
use or the uses of others any secret or confidential information
pertaining to the business of MTS, or any of its subsidiaries,
obtained during his employment by MTS or any of its subsidiaries.
(c) If Executive violates his obligations under
subparagraphs (a) and (b) above, any remaining payments or benefits
otherwise due Executive pursuant to subparagraphs 4(a) and (b) of
this Agreement shall not be paid. This subparagraph (c) specifically
does not apply to the subparagraph 4(a) reduction amount equal to
the Qualified Retirement Benefit Supplement, as described in
subparagraph 4(d)(v).
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Severance Agreement
Page 7
7. Binding Agreement. This Agreement shall inure to the benefit of
and be enforceable by Executive's personal or legal representatives, heirs, and
designated beneficiaries. If Executive should die while any amount would still
be payable to Executive hereunder if the Executive had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's designated beneficiaries, or, if
there is no such designated beneficiary, to the Executive's estate.
8. Notice of Termination.
(a) Any purported termination of Executive's employment
by either Executive or MTS under this Agreement, except as otherwise
provided in paragraph 2 of this Agreement, shall be communicated by
written notice to the other party.
(b) For purposes of this Agreement, "Date of
Termination" shall mean the date specified in the written Notice of
Termination which shall not be less than 10 nor more than 60 days
from the date such Notice of Termination is given.
(c) Notice of Termination and all other communications
provided for in the Agreement shall be deemed to have been duly
given when delivered or mailed by United States registered or
certified mail, return receipt requested, postage pre-paid,
addressed to the last known residence address of the Executive or in
the case of MTS, to its principal office to the attention of each of
the then directors of MTS with a copy to its Secretary, or to such
other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of
address shall be effective only upon receipt.
9. Release of Claims. Executive's right to the benefits and payments
described in subparagraphs 4(a), (b) and (c) of this Agreement, except as
otherwise provided in subparagraph 4(d)(v) hereof, is contingent upon
Executive's execution of a severance release agreement which shall be provided
to Executive by MTS with or following his Notice of Termination. The severance
release agreement shall require a full release of all claims which Executive may
have against MTS or any MTS affiliate or individual associated with MTS, to the
extent permitted by and consistent with applicable laws. Such release agreement
shall prohibit Executive from recovering any amount in connection with a charge
or lawsuit filed against MTS or any MTS affiliate, employee, shareholder,
officer, director or other agent by Executive, EEOC or any other agency or
entity on Executive's behalf based upon any act occurring prior to execution of
said release agreement. The release agreement will be available for Executive's
review, consideration and execution at least 45 days prior to his Date of
Termination.
10. Injunctive Relief. Executive consents that, in the case of any
violation or threatened violation of paragraph 6 of this Agreement, MTS may
apply for and secure injunctive relief, temporary or provisional, in court,
without bond but upon due notice, pending final
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Severance Agreement
Page 8
resolution on the merits pursuant to arbitration as set forth in paragraph 11
hereof. No waiver of any violation of this Agreement shall be implied from any
failure by MTS to take action under this paragraph.
11. Arbitration. Any and all claims or disputes between Executive
and MTS (including the validity, scope, and enforceability of this paragraph),
except as otherwise provided under paragraph 10 or prohibited under applicable
law, shall be submitted for arbitration and resolution to an arbitrator. No
demand for arbitration may be made after the date when the institution of legal
or equitable proceedings based on such claim or dispute would be barred by the
applicable statute of limitation. The arbitrator shall be selected by mutual
agreement of the parties. Unless otherwise provided for in this Agreement, the
Expedited Labor Arbitration Rules of the American Arbitration Association shall
apply. If the parties are unable to agree upon an arbitrator, any such dispute
shall be solely and finally settled by arbitration in accordance with the
Expedited Labor Arbitration Rules of the American Arbitration Association
("AAA"). The parties agree that no punitive damages shall be awarded hereunder.
The parties also agree that all awards, decisions and remedies in favor of a
winning party hereunder with respect to any issue shall be proportional to the
violation caused by the losing party with respect to that issue. All costs in
conducting the arbitration, including but not limited to the arbitration filing
fee, the arbitrator's fees and expenses, and the reasonable attorney's fees and
expenses of the prevailing party (including the attorney's fees and costs
incurred by the prevailing party in seeking or resisting temporary or
provisional court relief as set out in paragraph 10 above), shall be the
responsibility of the losing party. In the event there is more than one issue in
dispute and there is no one prevailing party with respect to all issues in
dispute, costs and attorney's fees shall be prorated by the arbitrator according
to the relative dollar value of each issue. The arbitrator's Award shall be
final and binding. In the event either party must resort to the judicial process
to enforce the provisions of this Agreement, the award of an arbitrator or
equitable relief granted by an arbitrator, the party seeking enforcement shall
be entitled to recover from the other party all costs of litigation including,
but not limited to, reasonable attorney's fees and court costs. The arbitration
proceedings and Award shall be maintained by both parties as strictly
confidential, except as otherwise required by court order and with respect to
the parties' attorneys and tax advisors, and, with respect to MTS, members of
its management, and, with respect to Executive, his family.
12. Miscellaneous.
(a) No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge
is agreed to in writing and signed by the parties. No waiver by
either party hereto at any time of any breach by the other party to
this Agreement of, or compliance with, any other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or similar time.
<PAGE>
Severance Agreement
Page 9
(b) No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this
Agreement.
(c) The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the
State of Minnesota.
(d) Any provision of this Agreement which conflicts with
applicable law shall be modified to the extent necessary to ensure
its enforceability. The invalidity or unenforceability or any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
This Agreement supersedes any and all prior oral and written
understandings and agreements between the Executive and MTS.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the
Executive have executed this Agreement as of the day and date first above
written.
EXECUTIVE: MTS SYSTEMS CORPORATION
/s/ David E. Hoffman By /s/ S. W. Emery, Jr.
- --------------------- ----------------------
David E. Hoffman
Its Chairman and CEO
-------------------------------------
[LOGO] MTS(R)
EXHIBIT 10.p
STOCK OPTION PLAN AMENDMENTS
APPROVED BY THE BOARD OF DIRECTORS
DECEMBER 3, 1997
WHEREAS, Section 7 of the 1997 Stock Option Plan provides that the
Board of Directors is authorized to amend the formula grant provision
set forth in Section 5(k) of the 1997 Stock Option Plan (the "Plan"),
NOW, THEREFORE, BE IT RESOLVED, that the Plan is hereby amended to
provide for a five year exercise period in connection with all future
grants to non-employee directors, and that such options continue to be
fully vested upon six months from the date of grant.
RESOLVED FURTHER, that all future options granted to non-employee
directors be issued pursuant to the 1997 Plan or subsequent plans as
determined appropriate by the Human Resources Committee.
RESOLVED FURTHER, that the Stock Option Agreements non-employee
directors receive upon grant of options be revised to provide for a
five year exercise period.
RESOLVED FINALLY, that any officer of the corporation be, and hereby
is, authorized to take action to effect the amendment of the Plan and
revision of the non-employee directors' Stock Option Agreements.
<PAGE>
STOCK OPTION PLAN AMENDMENTS
APPROVED BY THE BOARD OF DIRECTORS
DECEMBER 1, 1998
WHEREAS, the MTS Systems Corporation 1987, 1990, 1994 and 1997 Stock
Option Plans (the "Plans") limit an optionee's ability to exercise a
stock option upon termination of his or employment by reason of
Retirement (as that term is defined in the Plans) to the shorter of
three years from the date of such termination or the expiration of
the stated term of the option, it is
RESOLVED, that the appropriate provisions of the Plans be amended in
order to eliminate the three-year limitation period on the exercise
of options in order to allow an optionee who terminates his or her
employment by reason of Retirement to exercise his or her option
until the expiration of the stated term of the option, or such
shorter period as may be determined by the Committee at the time of
grant; provided, however, that the aforementioned amendment shall
apply only for those options granted by the Company from and after
the date hereof;
RESOLVED FURTHER, that the appropriate officers of the Company are
hereby authorized and directed to take any and all action necessary
or desirable in order to effectuate the foregoing resolution.
WHEREAS, the formula grant provision of the MTS Systems Corporation
1997 Stock Option Plan (the "1997 Plan") currently authorizes an
automatic grant of stock options to non-employee directors of up to
a maximum of 3,000 shares of Common Stock (the actual number of
which is determined by the Committee) upon their election or
re-election to the Board of Directors of the Company, it is
RESOLVED, that the automatic grant provision set forth in Section
5(k) of the 1997 Plan be amended in order to increase from 3,000
shares to 4,000 shares the maximum number of shares of Common Stock
available for annual stock option grants to non-employee directors;
RESOLVED FURTHER, that the appropriate officers of the Company are
hereby authorized and directed to take any and all action necessary
or desirable in order to effectuate the foregoing resolution.
2
<PAGE>
STOCK OPTION PLAN(S) AMENDMENTS
THE FOLLOWING RESOLUTIONS WERE APPROVED AT THE
AUGUST 17, 1999 HUMAN RESOURCES COMMITTEE MEETING
WHEREAS, the Human Resources Committee of the Board of Directors
deems it in the best interest of the Corporation to amend the Corporation's 1987
Stock Option Plan (the "1987 Plan"), the 1990 Stock Option Plan (the "1990
Plan"), the 1994 Stock Plan (the "1994 Plan") and the 1997 Stock Option Plan
(the "1997 Plan") to provide for accelerated vesting of all unvested stock
options upon the death of any optionee and to make consistent the exercise
periods for exercising stock options under such plans following the death of an
optionee;
NOW, THEREFORE, BE IT RESOLVED, that Section 10.2 of the 1987 Plan,
Section 10.2 of the 1990 Plan, Section 5(f) of the 1994 Plan and
Section 5(f) of the 1997 Plan be, and each of them hereby are,
amended in their entirety as follows (provided that the section
headings in Section 5(f) of the 1994 Plan and the 1997 Plan shall be
retained):
If an Optionee's employment by the Company and any
Subsidiary or Parent Corporation terminates by reason of
death, any Stock Option may thereafter be immediately
exercised, without regard to any vesting requirements or
periods previously established, by the legal
representative of the estate or by the legatee of the
Optionee under the will of the Optionee, for a period of
three (3) years from the date of such death or until the
expiration of the stated term of the Option, whichever
period is shorter. In the event of termination of
employment by reason of death, if an Incentive Stock
Option (ISO) is exercised after the expiration of the
exercise periods that apply for purposes of Section 422
of the Code, the Option will thereafter be treated as a
Non-Qualified Stock Option (NQO)
WHEREAS, the Human Resources Committee deems it in the best interest
of the Corporation to amend the 1994 Plan and the 1997 Plan to eliminate all
provisions which permit optionees to pay all or part of the option exercise
price by requesting that the Corporation withhold shares that would otherwise
have been issued pursuant to the exercised option (other than for payment of
statutory taxes due, which are authorized by Section 13(d) of the 1994 Plan and
Section 8(c) of the 1997 Plan);
NOW, THEREFORE, BE IT RESOLVED, that Section 5(d) of the 1994 Plan
shall be amended in its entirety as follows:
3
<PAGE>
(d) Method of Exercise. Stock Options may be exercised in whole or
in part at any time during the option period by giving written notice of
exercise to the Company specifying the number of shares to be purchased. Such
notice shall be accompanied by payment in full of the purchase price, either by
certified or bank check, or by any other form of legal consideration deemed
sufficient by the Committee and consistent with the Plan's purpose and
applicable law, including promissory notes or a properly executed exercise
notice together with irrevocable instructions to a broker acceptable to the
Company to promptly deliver to the Company the amount of sale or loan proceeds
to pay the exercise price. As determined by the Committee, in its sole
discretion, payment in full or in part may also be made in the form of
unrestricted Stock already owned by the optionee or in the case of the exercise
of a Non-Qualified Stock Option, Restricted Stock or Deferred Stock subject to
an award hereunder (based, in each case, on the Fair Market Value of the Stock
on the date immediately preceding the date the option is exercised, as
determined by the Committee); provided, however, that in the case of an
Incentive Stock Option, the right to make a payment in the form of already owned
shares may be authorized only at the time the option is granted, and provided
further that in the event payment is made in the form of shares of Restricted
Stock or a Deferred Stock award, the optionee will receive a portion of the
option shares in the form of, and in an amount equal to, the Restricted Stock or
Deferred Stock award tendered as payment by the optionee. No shares of Stock
shall be issued until full payment therefor has been made. An optionee shall
generally have the rights to dividends and other rights of a shareholder with
respect to shares subject to the option when the optionee has given written
notice of exercise and has paid in full for such shares.
4
<PAGE>
RESOLVED FURTHER, that Section 5(d) of the 1997 Plan shall be
amended in its entirety as follows:
(d) Method of Exercise. Stock Options may be exercised
in whole or in part at any time during the option period by giving
written notice of exercise to the Company specifying the number of
shares to be purchased. Such notice shall be accompanied by payment
in full of the purchase price, either by certified or bank check, or
by any other form of legal consideration deemed sufficient by the
Committee and consistent with the Plan's purpose and applicable law,
including promissory notes or a properly executed exercise notice
together with irrevocable instructions to a broker acceptable to the
Company to promptly deliver to the Company the amount of sale or
loan proceeds to pay the exercise price. As determined by the
Committee at the time of grant or exercise, in its sole discretion,
payment in full or in part may also be made in the form of
unrestricted Stock already owned by the optionee (which in the case
of Stock acquired upon exercise of an option have been owned for
more than six months on the date of surrender), provided, however,
that in the case of an Incentive Stock Option, the right to make a
payment in the form of already owned shares may be authorized only
at the time the option is granted. No shares of Stock shall be
issued until full payment therefor has been made. An optionee shall
generally have the rights to dividends and other rights of a
shareholder with respect to shares subject to the option when the
optionee has given written notice of exercise, has paid in full for
such shares, and, if requested, has given the representation
described in paragraph (a) of Section 8.
5
EXHIBIT 10.q
SEVERANCE AGREEMENT
AGREEMENT made as of this 18th day of March 1998 by and between MTS Systems
Corporation, a Minnesota corporation ("MTS") and Steven M. Cohoon (the
"Executive").
WHEREAS, MTS desires to employ Executive as its Vice President is willing to
become employed by MTS in such capacity; and
WHEREAS, Executive is expected to make a significant contribution to the
profitability, growth and financial strength of MTS; and
WHEREAS, MTS considers the establishment and maintenance of a sound and vital
management and an orderly succession plan to be essential to protecting and
enhancing the best interests of MTS and its shareholders; and
WHEREAS, this Agreement is consistent with the requirements of the
executive/high policy-making exception to the Age Discrimination in Employment
Act, 29 U.S.C. Section 631 (c)( 1) (the "Executive Exemption"), benefits in
connection therewith are pursuant to pension, profit sharing and deferred
compensation plans as defined therein, and Executive, by virtue of his/her
duties and responsibilities on behalf of MTS, qualifies under said exception for
mandatory retirement on or after his/her 65th birthday; and
WHEREAS, MTS is providing Executive, simultaneously with this Agreement,
consideration in the form of a Change in Control Agreement, to provide
additional benefits to Executive in the event of a change in control;
NOW THEREFORE, in consideration of the foregoing and other respective covenants
and agreements of the parties herein contained, the parties hereto agree as
follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until the earlier of (a) the date on which the
Executive and MTS agree in writing to terminate this Agreement, or (b)
the Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If
a change in control occurs, as defined in that certain agreement
between the Executive and MTS of even date herewith (the "Change in
Control Agreement", attached as Exhibit 1), this Agreement shall be
superseded by the provisions of the Change in Control Agreement except
as provided in the following sentence. MTS's right under this Agreement
to terminate the Executive's employment pursuant to the Executive
Exemption shall not be superseded by the Change in Control Agreement
and the Executive shall be entitled to receive the benefits to which
he/she is entitled under subparagraph 4(d) hereunder if such
termination occurs.
2. Termination by Reason of Death or Disability. In the event of the
Executive's death or disability during the Term of this Agreement,
Executive shall be entitled to such benefits provided under any policy,
plan or program governing death or disability maintained by MTS and
covering such Executive and this Agreement shall not apply. The
determination of disability and the amount and entitlement of benefits
shall be governed by the terms of such policy, plan or program. In the
event of the Executive's disability, the Executive's Date of
Termination shall be the date on which Executive has been unable, by
reason of
<PAGE>
Severance Agreement Page 2
physical or mental disability, to perform the services required of
him/her for his/her position, even with reasonable accommodation, for
the period of time indicated in MTS's group long term disability plan
(in which the Executive is a participant) during which a participant
must be disabled before benefits become payable. In connection with
Executive's termination due to disability, a qualified physician must
certify the disability and MTS shall at all times comply with the
Americans With Disabilities Act and any other applicable disability
discrimination law.
3. Resignation or Termination for Cause.
(a) The Executive may resign his/her employment or MTS may
terminate the Executive's employment for Cause, effective as
of the Date of Termination set forth in the Notice of
Termination. If Executive resigns or his/her employment is
terminated by MTS for Cause, MTS shall pay to Executive
his/her full base salary through the Date of Termination at
the rate in effect at the time of Notice of Termination is
given and MTS shall have no further obligation to Executive
under this Agreement.
(b) Termination by MTS of Executive's employment for "Cause" shall
mean termination as a result of:
(i) the conviction of the Executive by a court of
competent jurisdiction for felony criminal conduct;
or
(ii) willful misconduct by the Executive; or
(iii) violation by the Executive of any employment
agreement applicable to the Executive.
4. Termination Other Than for Cause. MTS may terminate Executive's
employment for a reason other than Cause, including pursuant to the
Executive Exemption on or after Executive's 65th birthday, effective as
of the Date of Termination set forth in the Notice of Termination. If
Executive's employment is terminated by MTS other than for Cause, death
or disability, Executive shall be entitled, subject to subparagraph
4(d)(v) and paragraph 9 of this Agreement, to the benefits described in
subparagraphs (a), (b) and (c) below and, if applicable, subparagraph
(d) below.
(a) Executive shall be paid a monthly Severance Payment equal to
the Executive's Monthly Gross Income, as defined in
subparagraph (i) below for 9 months.
(i) For purposes of this Agreement, Monthly Gross Income
shall mean the sum of the following amounts, subject
to applicable federal and state withholding.
(A) 1/12 of the highest average base salary for any
12- consecutive month period during the 36
calendar month period ending immediately prior
to the Date of Termination; plus
<PAGE>
Severance Agreement Page 3
(B) the monthly average of the total Management
Variable Compensation (MVC) earned during the
lesser of the 3 most recent or the actual number
of fiscal years participating in the MVC plan
ending immediately prior to the Date of
Termination; plus
(C) the product of the average percentage of MTS
profit sharing contributions to the MTS Systems
Corporation Profit Sharing Retirement Plan and
Trust (as a percent of Compensation as defined
in the Plan) for the lesser of the 3 most recent
or the actual number of participating Plan Years
ending immediately prior to the Date of
Termination multiplied by the sum of (A) and (B)
above.
(b) Following the Executive's Date of Termination and while
severance payments are being paid to the Executive or, if
earlier, until Executive is covered under other group plans,
MTS shall continue to pay the employer share of the
Executive's MTS group life and health insurance premiums. All
premium payments made on Executive's behalf following his/her
Date of Termination and Executive's continued participation in
the plans are contingent upon Executive making the appropriate
timely written elections to continue his/her group benefits
following his/her Date of Termination, said group benefits
continuing in effect for active MTS employees, Executive
continuing to be eligible under the terms of the plans and
applicable laws, and Executive's payment of the employee
portion of the premiums for such benefits. MTS will deduct
these amounts from its payments to the Executive. Benefits
otherwise receivable by Executive pursuant to this
subparagraph (b) shall be reduced or eliminated to the extent
comparable benefits are actually received by Executive during
such period from a source outside MTS, and any such benefits
actually received by Executive shall be reported to MTS.
Following the severance pay period, Executive shall be
entitled to continue any of said benefits which qualify as
group health and life insurance benefits for continuation
coverage under the Comprehensive Omnibus Budget Reconciliation
Act ("COBRA") or applicable state law and pursuant to the
terms of the plan.
(c) The Executive's rights under any existing Employee Stock
Option Agreement and any future such agreements, including
particularly his/her right to exercise his/her options
following his/her termination of employment, shall continue to
be fully effective hereunder. In addition, if the Executive's
termination of employment occurs pursuant to the Executive
Exemption on or after he/she has reached his/her 65th
birthday, the Executive shall continue to vest in any stock
options in which he/she is not fully vested, as though he/she
were continuing his/her employment with MTS as an active
employee, subject at all times to the exercise times and other
terms and conditions set forth in said Stock Option Agreements
and to Executive's signing the release agreement described in
paragraph 9 herein.
(d) If Executive's termination of employment occurs pursuant to
the Executive Exemption on or after he/she has reached his/her
65th birthday, Executive shall be entitled to receive the lump
sum equivalent of the amount necessary to purchase a
<PAGE>
Severance Agreement Page 4
$44,000 pre-tax straight life annuity, said lump sum to be
taken from MTS contributions and earnings thereon to
Executive's accounts in MTS sponsored pension, profit sharing,
and deferred compensation plans, as applicable. If Executive
is entitled to less than that amount from the applicable MTS
plans in which he/she is a participant as of his/her Date of
Termination, then MTS shall make an additional contribution on
Executive's behalf to Executive's Deferral Account in the MTS
Systems Corporation Executive Deferred Compensation Plan,
pursuant to Section 3.4 of said Plan. The amount to which
Executive is entitled under subparagraph 4(a) of this
Agreement shall be reduced by MTS's Section 3.4 contribution
to the MTS Systems Corporation Executive Deferred Compensation
Plan, as described in subparagraph (v) below. Calculation of
the Executive's benefit shall be as follows:
(i) The benefits to which Executive is entitled, as of
his/her Date of Termination, under all MTS sponsored
pension, profit sharing and deferred compensation
plans shall be added together.
(ii) Amounts in said plans, as determined in accordance
with 29 Code of Federal Regulations ss. 1627.17,
attributable to Social Security, employee
contributions, contributions of prior employers, and
rollover contributions, shall be subtracted from the
subparagraph (i) amount and the resulting figure shall
be the "Qualified Retirement Benefit".
(iii) MTS shall determine the lump sum equivalent of the
amount necessary to purchase a straight life annuity
for Executive, effective as of his/her Date of
Termination, which would provide Executive with
$44,000 a year for life (the "ADEA Benefit"). MTS
shall retain a certified actuary to determine said
lump sum equivalent amount, using the applicable
mortality table and applicable interest rate under
Section 417(e) of the Internal Revenue Code and
Regulations issued thereunder.
(iv) If the Qualified Retirement Benefit exceeds the ADEA
Benefit, the Executive shall have the option (but is
not required) to receive the Qualified Retirement
Benefit in a lump sum, as provided under the
applicable plans, within 60 days following his/her
Date of Termination. The Executive may elect to
receive the Qualified Retirement Benefit in either a
lump sum or a series of periodic payments pursuant to
the terms of the applicable plans. The Executive may
also receive the payments and benefits set forth in
subparagraphs 4(a) and (b) of this Agreement provided
he/she executes the release agreement required in
paragraph 9 of this Agreement. The benefits set forth
in subparagraph 4(c) shall at all times be available
to the Executive.
(v) If the Qualified Retirement Benefit is less than the
ADEA Benefit, MTS shall make a contribution to
Executive's Deferral Account in the MTS Systems
Corporation Executive Deferred Compensation Plan,
pursuant to Section 3.4 of said Plan, in an amount
equal to the difference between the Qualified
Retirement Benefit and the ADEA Benefit (the
"Qualified Retirement
<PAGE>
Severance Agreement Page 5
Benefit Supplement"). The Executive shall have the
option (but is not required) to receive the Qualified
Retirement Benefit and, if applicable, the Qualified
Retirement Benefit Supplement from said Plan within 60
days following his/her Date of Termination. The
Executive may elect to receive the Qualified
Retirement Benefit and, if applicable, the Qualified
Retirement Benefit Supplement, in either a lump sum or
a series of periodic payments pursuant to the terms of
the applicable plans. The payments to Executive
described in subparagraph 4(a) of this Agreement shall
be reduced by the amount of MTS's contribution to
Executive's Deferral Account in the MTS Systems
Corporation Executive Deferred Compensation Plan,
pursuant to Section 3.4 of said Plan, to create the
Qualified Retirement Benefit Supplement. All payments
remaining in subparagraph 4(a) after this reduction
and the subparagraph 4(b) and (c) benefits shall be
paid to Executive in accordance with the terms of
those subparagraphs, provided Executive executes the
release agreement required in paragraph 9 of this
Agreement.
(vi) Executive's Qualified Retirement Benefit and, if
applicable, the Qualified Retirement Benefit
Supplement, shall be nonforfeitable and not subject to
reduction or elimination by MTS for any reason.
5. No Mitigation. Executive shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other
employment or otherwise; nor shall the amount of any payment or benefit
provided for in this Agreement be reduced by any compensation earned by
Executive as the result of employment by another employer or by
retirement benefits after the Date of Termination or otherwise except
as specifically provided herein.
6. Non-Competition and Confidentiality
(a) Executive agrees that, as a condition of receiving benefits
under this Agreement, he/she will not render services directly
or indirectly to any competing organization located in any
market in which MTS is doing business as of Executive's Date
of Termination for the period of time during which Executive
is receiving benefits under this Agreement or the Change in
Control Agreement, in connection with the design,
implementation, development, manufacture, marketing, sale,
merchandising, leasing, servicing or promotion of any
"Conflicting Product" which as used herein means any product,
process, system or service of any person, firm, corporation,
organization other than MTS, in existence or under
development, which is the same as or similar to or competes
with, or has a usage allied to, a product, process, system, or
service produced, developed, or used by MTS.
(b) Executive further agrees and acknowledges his/her existing
obligation that, at all times during and subsequent to his/her
employment with MTS, he/she will not divulge or appropriate to
his/her own use or the uses of others any
<PAGE>
Severance Agreement Page 5
secret or confidential information pertaining to the business
of MTS, or any of its subsidiaries, obtained during his/her
employment by MTS or any of its subsidiaries.
(c) If Executive violates his/her obligations under subparagraphs
(a) and (b) above, any remaining payments or benefits
otherwise due Executive pursuant to subparagraphs 4(a) and (b)
of this Agreement shall not be paid. This subparagraph (c)
specifically does not apply to the subparagraph 4(a) reduction
amount equal to the Qualified Retirement Benefit Supplement,
as described in subparagraph 4(d)(v).
7. Binding Agreement. This Agreement shall inure to the benefit of and be
enforceable by Executive's personal or legal representatives, heirs,
and designated beneficiaries. If Executive should die while any amount
would still be payable to Executive hereunder if the Executive had
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to the
Executive's designated beneficiaries, or, if there is no such
designated beneficiary, to the Executive's estate.
8. Notice of Termination.
(a) Any purported termination of Executive's employment by either
Executive or MTS under this Agreement, except as otherwise
provided in paragraph 2 of this Agreement, shall be
communicated by written notice to the other party.
(b) For purposes of this Agreement, "Date of Termination" shall
mean the date specified in the written Notice of Termination
which shall not be less than 10 nor more than 60 days from the
date such Notice of Termination is given.
(c) Notice of Termination and all other communications provided
for in the Agreement shall be deemed to have been duly given
when delivered or mailed by United States registered or
certified mail, return receipt requested, postage pre-paid,
addressed to the last known residence address of the Executive
or in the case of MTS, to its principal office to the
attention of each of the then directors of MTS with a copy to
its Secretary, or to such other address as either party may
have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective
only upon receipt.
9. Release of Claims. Executive's right to the benefits and payments
described in subparagraphs 4(a), (b) and (c) of this Agreement, except
as otherwise provided in subparagraph 4(d)(v) hereof, is contingent
upon Executive's execution of a severance release agreement which shall
be provided to Executive by MTS with or following his/her Notice of
Termination. The severance release agreement shall require a full
release of all claims which Executive may have against MTS or any MTS
affiliate or individual associated with MTS, to the extent permitted by
and consistent with applicable laws. Such release agreement shall
prohibit Executive
<PAGE>
Severance Agreement Page 7
from recovering any amount in connection with a charge or lawsuit filed
against MTS or any MTS affiliate, employee, shareholder, officer,
director or other agent by Executive, EEOC or any other agency or
entity on Executive's behalf based upon any act occurring prior to
execution of said release agreement. The release agreement will be
available for Executive's review, consideration and execution at least
45 days prior to his/her Date of Termination.
10. Injunctive Relief. Executive consents that, in the case of any
violation or threatened violation of paragraph 6 of this Agreement, MTS
may apply for and secure injunctive relief, temporary or provisional,
in court, without bond but upon due notice, pending final resolution on
the merits pursuant to arbitration as set forth in paragraph 11 hereof.
No waiver of any violation of this Agreement shall be implied from any
failure by MTS to take action under this paragraph.
11. Arbitration. Any and all claims or disputes between Executive and MTS
(including the validity, scope, and enforceability of this paragraph),
except as otherwise provided under paragraph 10 or prohibited under
applicable law, shall be submitted for arbitration and resolution to an
arbitrator. No demand for arbitration may be made after the date when
the institution of legal or equitable proceedings based on such claim
or dispute would be barred by the applicable statute of limitation. The
arbitrator shall be selected by mutual agreement of the parties. Unless
otherwise provided for in this Agreement, the Expedited Labor
Arbitration Rules of the American Arbitration Association shall apply.
If the parties are unable to agree upon an arbitrator, any such dispute
shall be solely and finally settled by arbitration in accordance with
the Expedited Labor Arbitration Rules of the American Arbitration
Association ("AAA"). The parties agree that no punitive damages shall
be awarded hereunder. The parties also agree that all awards, decisions
and remedies in favor of a winning party hereunder with respect to any
issue shall be proportional to the violation caused by the losing party
with respect to that issue. All costs in conducting the arbitration,
including but not limited to the arbitration filing fee, the
arbitrator's fees and expenses, and the reasonable attorney's fees and
expenses of the prevailing party (including the attorney's fees and
costs incurred by the prevailing party in seeking or resisting
temporary or provisional court relief as set out in paragraph 10
above), shall be the responsibility of the losing party. In the event
there is more than one issue in dispute and there is no one prevailing
party with respect to all issues in dispute, costs and attorney's fees
shall be prorated by the arbitrator according to the relative dollar
value of each issue. The arbitrator's Award shall be final and binding.
In the event either party must resort to the judicial process to
enforce the provisions of this Agreement, the award of an arbitrator or
equitable relief granted by an arbitrator, the party seeking
enforcement shall be entitled to recover from the other party all costs
of litigation including, but not limited to, reasonable attorney's fees
and court costs. The arbitration proceedings and Award shall be
maintained by both parties as strictly confidential, except as
otherwise required by court order and with respect to the parties'
attorneys and tax advisors, and, with respect to MTS, members of its
management, and, with respect to Executive, his/her family.
<PAGE>
Severance Agreement Page 8
12. Miscellaneous.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the parties. No waiver by
either party hereto at any time of any breach by the other
party to this Agreement of or compliance with, any other party
shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or similar time.
(b) No agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in
this Agreement.
(c) The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of
Minnesota.
(d) Any provision of this Agreement which conflicts with
applicable law shall be modified to the extent necessary to
ensure its enforceability. The invalidity or unenforceability
or any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this
Agreement, which shall remain in frill force and effect.
This Agreement supersedes any and all prior oral and written understandings and
agreements between the Executive and MTS, provided however that the Change in
Control Agreement signed of even date herewith shall, if applicable, supersede
this Agreement, except as otherwise provided in Paragraph 1 of this Agreement.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have
executed this Agreement as of the day and date first above written.
EXECUTIVE MTS SYSTEMS CORPORATION
/s/ Steven M. Cohoon By /s/ S. W. Emery, Jr.
-------------------- -----------------------
Steven M. Cohoon
Its Chairman and CEO
EXHIBIT 10.x
CHANGE IN CONTROL AGREEMENT
AGREEMENT made as of this 22nd day of September, 1999 by and between
MTS Systems Corporation, a Minnesota corporation ("MTS") and Nancy L. Quist (the
"Executive").
WHEREAS, MTS considers the establishment and maintenance of a sound
and vital management to be essential to protecting and enhancing the best
interests of MTS and its shareholders; and
WHEREAS, the Executive has made and is expected to make, due to
Executive's intimate knowledge of the business and affairs of MTS, its policies,
methods, personnel and problems, a significant contribution to the
profitability, growth and financial strength of MTS; and
WHEREAS, MTS, as a publicly held corporation, recognizes that the
possibility of a Change in Control may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of the Executive in the performance of the Executive's
duties to the detriment of MTS and its shareholders; and
WHEREAS, Executive is becoming employed by MTS upon the
understanding that MTS will provide income security if the Executive's
employment is terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of MTS and its stockholders to
reinforce and encourage the continued attention and dedication of management
personnel, including Executive, to their assigned duties without distraction and
to ensure the continued availability to MTS of the Executive in the event of a
Change in Control;
THEREFORE, in consideration of the foregoing and other respective
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. Term of Agreement. This Agreement shall commence on the date
hereof and shall continue in effect until the earlier of (A) the date that any
and all benefits due to Executive under this Agreement upon the happening of the
events set forth herein have been paid and satisfied and all obligations of MTS
to the Executive have been performed or (B) the date the Executive and MTS agree
in writing to terminate this Agreement. Notwithstanding the preceding sentence,
if a Change in Control occurs, this Agreement shall remain in effect for a
period of 36 months from the date of the occurrence of a Change in Control.
2. Change in Control. If a Change in Control shall have occurred
during the term of this Agreement, the provisions of this Agreement shall become
operative and MTS agrees to employ the Executive and to provide the benefits
stated in this Agreement.
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Change in Control Agreement
Page 2
(a) Change in Control, shall, for purposes of this
Agreement, means a change in control of MTS which would be required
to be reported in response to Item 1 of Form 8-K promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), whether or not MTS is then subject to such reporting
requirement, including, without limitation, if:
(i) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act, including
any affiliate or associate as defined in Rule 12(b)-2
under the Exchange Act of such person, other than MTS,
any trustee or other fiduciary holding securities under
an employee benefit plan of MTS, or any corporation
owned, directly or indirectly, by the stockholders of
MTS in substantially the same proportions as their
ownership of stock of MTS) becomes a "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of MTS
representing 35% or more of the combined voting power of
MTS' then outstanding securities; or
(ii) the Board of Directors is comprised of
fewer than 65% of the individuals described in
subsection (b) below; or
(iii) the stockholders of MTS approve a
definitive agreement to merge or consolidate MTS with or
into another corporation or other enterprise in which
the holders of outstanding stock of MTS entitled to vote
in elections of directors immediately before such merger
or consolidation hold less than 80% of the voting power
of the survivor of such merger or consolidation or its
parent, or approve a plan of liquidation; or
(iv) at least 60% of MTS' assets are sold
and transferred to another corporation or other
enterprise that is not a subsidiary, direct or indirect,
or other affiliate of MTS; or
(v) the Board of Directors of MTS
determines, by a vote of a majority of its entire
membership, that a tender offer statement by any person
(as defined above) indicates an intention on the part of
such person to acquire control of MTS.
(b) Board of Directors shall, for purposes of subsection
(a), mean:
(i) individuals who on the date hereof
constituted the Board of MTS, and
(ii) any new director who subsequently was
elected or nominated for election by a majority of the
directors who held such office immediately prior to a
Change in Control.
(c) Friendly Change in Control shall mean a Change in
Control which arises from a transaction or series of transactions
authorized, recommended or approved at the time by formal action of
the Board of Directors.
<PAGE>
Change in Control Agreement
Page 3
(d) Unfriendly Change in Control shall mean a Change in
Control that is not a "Friendly Change in Control" as defined above.
An Unfriendly Change in Control shall not thereafter become a
Friendly Change in Control.
3. Termination by Reason of Death or Disability. If Executive's
employment shall be terminated by MTS by reason of death or disability, MTS
shall immediately commence payment to the Executive (or Executive's designated
beneficiaries or estate, if no beneficiary is designated) of any and all
benefits to which the Executive is entitled under MTS retirement and insurance
programs them in effect. Except for such benefits, MTS shall have no further
obligations to Executive under this Agreement.
4. Termination for Cause.
(a) If Executive's employment with MTS shall be
terminated by MTS for Cause as defined below, MTS shall pay to
Executive his full base salary through the Date of Termination at
the rate in effect at the time Notice of Termination is given and
MTS shall have no further obligation to Executive under this
Agreement.
(b) Termination by MTS of Executive's employment for
"Cause" shall mean termination as a result of:
(i) the conviction of the Executive by a
court of competent jurisdiction for felony criminal
conduct; or
(ii) willful gross misconduct or gross
negligence in the performance of his duties by the
Executive; or
(iii) material violation by the Executive of
any employment agreement applicable to the Executive.
5. Termination Following Friendly Change in Control.
(a) If, after a Friendly Change in Control, Executive's
employment with MTS shall be terminated (1) by MTS other than for
cause, death or disability or (2) by Executive for Good Reason, then
Executive shall be entitled to the following benefits:
(i) Severance. MTS shall pay the Executive
as a severance payment (the "Severance Payment") an
amount equal to the product of 18 multiplied by the
Executive's Monthly Gross Income as defined below. The
Severance Payment shall be made in a single lump sum
within 30 days after the Date of Termination, subject to
all applicable federal and state withholding.
For purposes of this Agreement, Monthly Gross Income
shall mean the sum of the following amounts:
<PAGE>
Change in Control Agreement
Page 4
(A) 1/12 of the highest average
base salary for any 12-consecutive month
period during the 36 calendar month period
ending immediately prior to the Date of
Termination (without taking into account any
reduction in such base salary that would
constitute Good Reason); plus
(B) the monthly average of the
total Management Variable Compensation (MVC)
earned during the lesser of the 3 most
recent or the actual number of fiscal years
participating in the MVC plan ending
immediately prior to the Date of
Termination; plus
(C) the product of the average
percentage of MTS profit sharing
contributions to the MTS Systems Corporation
Profit Sharing Retirement Plan and Trust (as
a percent of Compensation as defined in the
Plan up to the federal limit) for the lesser
of the 3 most recent or the actual number of
participating Plan Years ending immediately
prior to the Date of Termination multiplied
by the sum of (A) and (B) above.
(ii) Benefits. For an 18-month period after
the Date of Termination, MTS shall continue to pay its
portion of Executive's life and health insurance
benefits which the Executive is receiving immediately
prior to the Notice of Termination. Executive shall be
responsible for payment of his portion of the premiums
for such benefits. The MTS portion and the Executive's
portion shall be the respective percentages of such
premiums paid immediately prior to the Date of
Termination. Benefits otherwise receivable by Executive
pursuant to this paragraph shall be reduced to the
extent comparable benefits are actually received by
Executive during this period, and any such benefits
actually received by Executive shall be reported to MTS.
At the expiration of said 18-month period, Executive
shall be entitled to continue any of said benefits which
qualify as group insurance benefits for continuation
coverage under the Comprehensive Omnibus Reconciliation
Act ("COBRA") or applicable state law.
(b) Good Reason. Executive shall be entitled to
terminate his employment for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean, without Executive's express
written consent, any of the following:
(i) the assignment to Executive of any
duties inconsistent with Executive's status or position
with MTS, or a substantial alteration in the nature or
status of Executive's responsibilities; or
(ii) a reduction by MTS in Executive's
annual base salary other than a reduction comparable to
other senior Executives of MTS in connection with a
company-wide cost reduction program; or
(iii) the relocation of MTS' principal
executive offices to a location more than fifty miles
from Eden Prairie, Minnesota or MTS requiring
<PAGE>
Change in Control Agreement
Page 5
Executive to be based anywhere other than MTS' principal
executive offices except for required travel on MTS'
business to an extent substantially consistent with
Executive's prior business travel obligations; or
(iv) the failure by MTS to continue to
provide Executive with benefits at least as favorable to
those enjoyed by Executive under any of MTS' pension,
life insurance, medical, health and accident,
disability, deferred compensation, incentive awards,
incentive stock options, or savings plans in which
Executive was participating at the time of the Change in
Control, the taking of any action by MTS which would
directly or indirectly materially reduce any of such
benefits or deprive Executive of any material fringe
benefit enjoyed by him at the time of the Change in
Control, or the failure by MTS to provide Executive with
the number of paid vacation days to which Executive is
entitled at the time of the Change in Control, provided,
however, that MTS may amend any such plan or programs as
long as such amendments do not reduce any benefits to
which Executive would be entitled upon termination; or
(v) the failure of MTS to obtain a
satisfactory agreement from any successor to assume and
agree to perform this Agreement, as contemplated in
Section 12; or
(vi) MTS requests Executive's resignation
from employment; or
(vii) any purported termination of
Executive's employment which is not made pursuant to a
Notice of Termination satisfying the requirements of
this Agreement; for purposes of this Agreement, no such
purported termination shall be effective; or
(viii) any material violation by MTS of this
Agreement.
(c) Voluntary Termination Deemed Good Reason.
Notwithstanding anything herein to the contrary, during the period
commencing on the 30th day following a Change in Control (whether
Friendly or Unfriendly) and ending on the 180th day following a
Change in Control, Executive may voluntarily terminate his
employment for any reason, and such termination shall be deemed
"Good Reason" for all purposes of this Agreement.
6. Termination - Unfriendly Change in Control.
(a) If, after an Unfriendly Change in Control,
Executive's employment with MTS is terminated (1) by MTS other than
for Cause, death or disability, or (2) by Executive for Good Reason,
the Executive shall be entitled to the following benefits:
(i) Severance. MTS shall pay the Executive
as a severance payment (the "Severance Payment") an
amount equal to the product of 36 multiplied by the
Executive's Monthly Gross Income as defined in Section
5(a)(i) above. The Severance Payment shall be made in a
single lump sum
<PAGE>
Change in Control Agreement
Page 6
within 30 days after the Date of Termination, subject to
all applicable federal and state withholding.
(ii) Benefits. For a 36-month period after
the Date of Termination, MTS shall continue to pay its
portion of Executive's life and health insurance
benefits which the Executive is receiving immediately
prior to the Notice of Termination. Executive shall be
responsible for payment of his portion of the premiums
for such benefits. The MTS portion and the Executive's
portion shall be the responsive percentages of such
premiums paid immediately prior to the Date of
Termination. Benefits otherwise receivable by Executive
pursuant to this paragraph shall be reduced to the
extent comparable benefits are actually received by
Executive shall be reported to MTS. At the expiration of
said 36-month period, Executive shall be entitled to
continue any of said benefits which qualify as group
insurance benefits for continuation coverage under the
Comprehensive Omnibus Budget Reconciliation Act
("COBRA") or applicable state law.
(b) If the Executive voluntarily terminates his
employment other than for Good Reason but more than 180 days after
an Unfriendly Change in Control, Executive shall be entitled to the
following benefits:
(i) Severance. MTS shall pay to Executive as
a severance payment (the "Severance Payment") an amount
equal to the product of 18 multiplied by the Executive's
monthly Gross Income as defined in Section 5(a)(i)
above. The Severance Payment shall be made in a single
lump sum within 30 days after the Date of Termination,
subject to all applicable federal and state withholding.
(ii) Benefits. For 18-month period after the
Date of Termination, MTS shall continue to pay its
portion of Executive's life and health insurance
benefits which the Executive is receiving immediately
prior to the Notice of Termination. Executive shall be
responsible for payment of his portion of the premiums
for such benefits. The MTS portion and the Executive's
portion shall be the respective percentages of such
premiums paid immediately prior to the Date of
Termination. Benefits otherwise receivable by Executive
pursuant to this paragraph shall be reduced to the
extent comparable benefits are actually received by
Executive during such period, and any such benefits
actually received by Executive shall be reported to MTS.
At the expiration of said 18-month period, Executive
shall be entitled to continue any of said benefits which
qualify as group insurance benefits for continuation
coverage under the Comprehensive Omnibus Budget
Reconciliation Act ("COBRA") or applicable state law.
7. Additional Benefits. In addition to all other amounts payable and
benefits receivable to Executive upon termination of employment covered under
this Agreement, Executive shall be entitled to the following benefits:
<PAGE>
Change in Control Agreement
Page 7
(a) Legal Fees. In the event of any termination of
employment under this Agreement, other than termination for Cause,
MTS shall pay to Executive all legal fees and expenses reasonably
incurred by Executive in contesting or disputing any such
termination or in seeking to obtain or enforce any right or benefit
provided by this Agreement.
(b) Retirement Plan. Executive shall, upon termination
of employment, be entitled to receive all benefits payable to the
Executive under the MTS Systems Corporation Profit Sharing
Retirement Plan and any other plan or agreement relating to
retirement benefits.
(c) Employee Stock Option Certificate. The Executive's
rights under any existing Employee Stock Option Agreement and any
future such agreements, including particularly his right to exercise
his option rights following his termination of employment, shall
continue to be fully effective hereunder.
8. No Mitigation. Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise, nor shall the amount of any payment or benefit provided for in
this Agreement be reduced by any compensation earned by Executive as the result
of employment by another employer or by retirement benefits after the Date of
Termination, or except as otherwise provided in this Agreement.
9. Potential Excise Tax; Indemnification
(a) Excise Tax. Should any payments hereunder or
contemplated hereby be subject to excise tax pursuant to Section
4999 of the Internal Revenue Code of 1986, as may be amended, or any
successor or similar provision thereto, or comparable state or local
tax laws, MTS shall pay to the Executive such additional
compensation as is necessary (after taking into account all federal,
state and local income taxes payable by the Executive as a result of
the receipt of such compensation) to place the Executive in the same
after-tax position he would have been in had no such excise tax (or
any interest or penalties thereon) been paid or incurred. MTS shall
pay such additional compensation upon the earlier of:
(i) the time at which MTS withholds such excise
tax from any payments to the Executive; or
(ii) 30 days after the Executive notifies MTS
that the Executive has paid such excise tax
pursuant to a tax return filed by the
Executive which takes the position that such
excise tax is due and payable in reliance on
a written opinion of the Executive's tax
counsel that it is more likely than not that
such excise tax is due and payable, or, if
later, the date the IRS notifies Executive
that such amount is due and payable.
Without limiting the obligation of MTS hereunder, the Executive
agrees, in the event the Executive makes any payment pursuant to the
preceding sentence, to negotiate
<PAGE>
Change in Control Agreement
Page 8
with MTS in good faith with respect to procedures reasonably
requested by MTS which would afford MTS the ability to contest the
imposition of such excise tax; provided, however, that the Executive
will not be required to afford MTS any right to contest the
applicability of any such excise tax to the extent that the
Executive reasonably determines that such contest is inconsistent
with the overall tax interests of the Executive.
MTS agrees to hold in confidence and not to disclose, without the
Executive's prior written consent, any information with regard to
the Executive's tax position which MTS obtains pursuant to this
subsection.
(b) Indemnification. MTS will indemnify the Executive
(and his legal representative or other successors) to the fullest
extent permitted (including payment of expenses in advance of final
disposition of the proceeding) by the laws of the State of
Minnesota, as in effect at the time of the subject act or omission,
or the Articles of Incorporation and By-Laws of MTS as in effect at
such time or on the date of this Agreement, whichever affords or
afforded greater protection to the Executive; and the Executive
shall be entitled to the protection of any insurance policies MTS
may elect to maintain generally for the benefit of its directors and
officers, against all costs, charges and expenses whatsoever
incurred or sustained by him or his legal representatives in
connection with any action, suit or proceeding to which he (or his
legal representative or other successors) may be made a party by
reason of his being or having been a director, officer or employee
of MTS or any of its subsidiaries or his serving or having served
any other enterprise as a director, officer or employee at the
request of MTS, provided that MTS shall cause to be maintained in
effect for not less than six years from the date of a Change in
Control (to the extent available) policies of directors' and
officers' liability insurance of at least the same coverage as those
maintained by MTS on the date of this Agreement and containing terms
and conditions which are no less advantageous than such policies.
10. Non-Competition and Confidentiality.
(a) Noncompetition. Except as provided in subsection (c)
below, Executive agrees that, as a condition of receiving benefits
under this Agreement, he will not render services directly or
indirectly to any competing organization, wherever located, for a
period of one year following the Date of Termination, in connection
with the design, implementation, development, manufacture,
marketing, sale, merchandising, leasing, servicing or promotion of
any "Conflicting Product" which as used herein means any product,
process, system or service of any person, firm, corporation,
organization other than MTS, in existence or under development,
which is the same as or similar to or competes with, or has a usage
allied to, a product, process, system, or service produced,
developed, or used by MTS. Executive agrees that violation of this
covenant not to compete with MTS shall result in immediate cessation
of all benefits hereunder, other than insurance benefits, which
Executive may continue where permitted under federal and state law
at his own expense.
<PAGE>
Change in Control Agreement
Page 9
(b) Confidentiality. Executive further agrees and
acknowledges his existing obligation that at all times during and
subsequent to his employment with MTS, he will not divulge or
appropriate to his own use or the uses of others any secret or
confidential information or knowledge pertaining to the business of
MTS, or any of its subsidiaries, obtained during his employment by
MTS or any of its subsidiaries.
(c) Waiver - Unfriendly Change in Control.
Notwithstanding anything herein to the contrary: the restriction on
competition under subsection (a) shall not apply if the Executive's
employment terminates following an Unfriendly Change in Control.
Furthermore, in such event, MTS waives any other restriction on
Executive's employment and consents unconditionally to any
employment Executive may subsequently obtain.
11. Funding of Payments. In order to assure the performance of MTS
or its successor of its obligations under this Agreement, MTS may deposit in a
so-called "rabbi" trust an amount equal to the maximum payment that will be due
the Executive under the terms hereof; provided, however, that MTS shall deposit
in trust the amount equal to the maximum payment due Executive immediately upon
an Unfriendly Change in Control. Under such written trust instrument, the
Trustee shall be instructed to pay to the Executive (or the Executive's legal
representative, as the case may be) the amount to which the Executive shall be
entitled under the terms hereof, and the balance, if any, of the trust not so
paid or reserved for payment shall be repaid to MTS. If MTS deposits funds in
trust, payment shall be made no later than the occurrence of a Change in
Control. The written instrument governing the trust shall be irrevocable from
and after such Change in Control and shall contain such provisions protective of
the Executive as are contained in similar trust agreements approved by the
Internal Revenue Service in published private letter rulings (provided that the
assets of the trust shall be reachable by creditors of MTS as required by such
rulings). The trustee shall be a national bank selected by MTS with the consent
of the Executive, with trust powers and whose principal officers are located in
the Minneapolis/St. Paul metropolitan area. The trustee shall invest the assets
of the trust in any readily marketable securities of U.S. corporations (other
than MTS, its successor, or any affiliate of MTS or its successor). If and to
the extent there are not amounts in trust sufficient to pay Executive under this
Agreement, MTS shall remain liable for any and all payments due to Executive.
12. Successors; Binding Agreement.
(a) Successors. MTS will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise)
to all or substantially all of the business and/or assets of MTS to
expressly assume and agree to perform this Agreement in the same
manner and to the same extent that MTS would be required to perform
it if no such succession had taken place. Failure of MTS to obtain
such assumption and agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle
Executive to compensation from MTS in the same amount and on the
same terms as he would be entitled hereunder if he terminated his
employment for Good Reason following a Change in Control, except
<PAGE>
Change in Control Agreement
Page 10
that for purposes of implementing the foregoing, the date on which
any such succession becomes effective shall be deemed the Date of
Termination.
(b) Binding Agreement. This Agreement shall inure to the
benefit of and be enforceable by Executive's personal or legal
representatives, successors, heirs, and designated beneficiaries. If
Executive should die while any amount would still be payable to
Executive hereunder if the Executive had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Executive's
designated beneficiaries or, if there is no such designated
beneficiary, to the Executive's estate.
13. Notice.
(a) Form and Delivery. All notices and other
communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by
United States registered or certified mail, return receipt
requested, postage prepaid, addressed to the last known residence
address of the Executive or in the case of MTS, to its principal
office to the attention of each of the then directors of MTS with a
copy to its Secretary, or to such other address as either party may
have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon
receipt.
(b) Notice of Termination. Any purported termination of
Executive's employment by MTS or by Executive shall be communicated
by written Notice of Termination to the other party hereto, which
shall indicate the specific termination provision in this Agreement
relied upon and shall set forth the facts and circumstances claimed
to provide a basis for termination of Executive's employment.
(c) Date of Termination. For purposes of this Agreement,
"Date of Termination" shall mean the date specified in the Notice of
Termination which shall not be less than 10 nor more than 30 days,
respectively, from the date such Notice of Termination is given.
(d) Dispute of Termination. If, within 10 days after any
Notice of Termination is given, the party receiving such Notice of
Termination notifies the other party that a dispute exists
concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual
written agreement of the parties, or by a final judgment, order or
decree of a court of competent jurisdiction (which is not appealable
or the time for appeal therefrom having expired and no appeal having
been perfected); provided, that the Date of Termination shall be
extended by a notice of dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of
such dispute with reasonable diligence in accordance with Section 14
below. Notwithstanding the pendency of any such dispute, MTS shall
continue to pay Executive full compensation in effect when the
notice giving rise to the dispute was given (including, but not
limited to, base salary) and continue Executive as a participant in
all compensation, benefit and insurance plans in which the Executive
was
<PAGE>
Change in Control Agreement
Page 11
participating when the notice giving rise to the dispute was given,
until the dispute is finally resolved in accordance with this
subsection or at the end of a period of 180 days, whichever first
occurs. Amounts paid under this subsection are in addition to all
other amounts due under this Agreement and shall not be offset
against or reduce any other amounts under this Agreement.
14. Arbitration. Any dispute arising under or in connection with
this Agreement (including without limitation, the making of this
Agreement or the Executive's termination of employment) shall be
resolved by final and binding arbitration to be held in Minneapolis,
Minnesota in accordance with the rules and procedures of the
American Arbitration Association. The parties shall select a
mutually acceptable single arbitrator to resolve the dispute or if
they fail or are unable to do so, each side shall within the
following ten business days select a single arbitrator and the two
so selected shall select a third arbitrator within the following ten
business days. The arbitrator shall have no power to award any
punitive or exemplary damages. The arbitrator may construe or
interpret, but shall not ignore or vary the terms of this Agreement,
and shall be bound by controlling law. The arbitration award or
other resolution may be entered as a judgment at the request of the
prevailing party by any court of competent jurisdiction in Minnesota
or elsewhere.
15. Miscellaneous.
(a) Modification and Waiver. Except as otherwise
specifically provided in this Agreement, no provision of this
Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed by the
parties. No waiver by either party hereto at any time of any breach
by the other party to this Agreement of, or compliance with, any
other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or similar
time.
(b) Entire Agreement. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not expressly
set forth in this Agreement.
(c) Governing Law. The validity, interpretation,
construction and performance of this Agreement shall be governed by
the laws of the State of Minnesota.
(d) Severability. The invalidity or unenforceability or
any provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the
Executive have executed this Agreement as of the day and date first above
written.
<PAGE>
Change in Control Agreement
Page 12
EXECUTIVE: MTS SYSTEMS CORPORATION
/s/ Nancy Lee Quist By /s/ S. W. Emery, Jr.
- ------------------- ----------------------
Nancy L. Quist
Its Chairman and CEO
---------------------------
EXHIBIT 10.y
CHANGE IN CONTROL AGREEMENT
AGREEMENT made as of this 28th day of July, 1999 by and between MTS
Systems Corporation, a Minnesota corporation ("MTS") and David E. Hoffman (the
"Executive").
WHEREAS, MTS considers the establishment and maintenance of a sound
and vital management to be essential to protecting and enhancing the best
interests of MTS and its shareholders; and
WHEREAS, the Executive has made and is expected to make, due to
Executive's intimate knowledge of the business and affairs of MTS, its policies,
methods, personnel and problems, a significant contribution to the
profitability, growth and financial strength of MTS; and
WHEREAS, MTS, as a publicly held corporation, recognizes that the
possibility of a Change in Control may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of the Executive in the performance of the Executive's
duties to the detriment of MTS and its shareholders; and
WHEREAS, Executive is becoming employed by MTS upon the
understanding that MTS will provide income security if the Executive's
employment is terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of MTS and its stockholders to
reinforce and encourage the continued attention and dedication of management
personnel, including Executive, to their assigned duties without distraction and
to ensure the continued availability to MTS of the Executive in the event of a
Change in Control;
THEREFORE, in consideration of the foregoing and other respective
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. Term of Agreement. This Agreement shall commence on the date
hereof and shall continue in effect until the earlier of (A) the date that any
and all benefits due to Executive under this Agreement upon the happening of the
events set forth herein have been paid and satisfied and all obligations of MTS
to the Executive have been performed or (B) the date the Executive and MTS agree
in writing to terminate this Agreement. Notwithstanding the preceding sentence,
if a Change in Control occurs, this Agreement shall remain in effect for a
period of 36 months from the date of the occurrence of a Change in Control.
2. Change in Control. If a Change in Control shall have occurred
during the term of this Agreement, the provisions of this Agreement shall become
operative and MTS agrees to employ the Executive and to provide the benefits
stated in this Agreement.
<PAGE>
(a) Change in Control, shall, for purposes of this
Agreement, means a change in control of MTS which would be required
to be reported in response to Item 1 of Form 8-K promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), whether or not MTS is then subject to such reporting
requirement, including, without limitation, if:
(i) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act, including
any affiliate or associate as defined in Rule 12(b)-2
under the Exchange Act of such person, other than MTS,
any trustee or other fiduciary holding securities under
an employee benefit plan of MTS, or any corporation
owned, directly or indirectly, by the stockholders of
MTS in substantially the same proportions as their
ownership of stock of MTS) becomes a "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of MTS
representing 35% or more of the combined voting power of
MTS' then outstanding securities; or
(ii) the Board of Directors is comprised of
fewer than 65% of the individuals described in
subsection (b) below; or
(iii) the stockholders of MTS approve a
definitive agreement to merge or consolidate MTS with or
into another corporation or other enterprise in which
the holders of outstanding stock of MTS entitled to vote
in elections of directors immediately before such merger
or consolidation hold less than 80% of the voting power
of the survivor of such merger or consolidation or its
parent, or approve a plan of liquidation; or
(iv) at least 60% of MTS' assets are sold
and transferred to another corporation or other
enterprise that is not a subsidiary, direct or indirect,
or other affiliate of MTS; or
(v) the Board of Directors of MTS
determines, by a vote of a majority of its entire
membership, that a tender offer statement by any person
(as defined above) indicates an intention on the part of
such person to acquire control of MTS.
(b) Board of Directors shall, for purposes of subsection
(a), mean:
(i) individuals who on the date hereof
constituted the Board of MTS, and
(ii) any new director who subsequently was
elected or nominated for election by a majority of the
directors who held such office immediately prior to a
Change in Control.
(c) Friendly Change in Control shall mean a Change in
Control which arises from a transaction or series of transactions
authorized, recommended or approved at the time by formal action of
the Board of Directors.
<PAGE>
(d) Unfriendly Change in Control shall mean a Change in
Control that is not a "Friendly Change in Control" as defined above.
An Unfriendly Change in Control shall not thereafter become a
Friendly Change in Control.
3. Termination by Reason of Death or Disability. If Executive's
employment shall be terminated by MTS by reason of death or disability, MTS
shall immediately commence payment to the Executive (or Executive's designated
beneficiaries or estate, if no beneficiary is designated) of any and all
benefits to which the Executive is entitled under MTS retirement and insurance
programs them in effect. Except for such benefits, MTS shall have no further
obligations to Executive under this Agreement.
4. Termination for Cause.
(a) If Executive's employment with MTS shall be
terminated by MTS for Cause as defined below, MTS shall pay to
Executive his full base salary through the Date of Termination at
the rate in effect at the time Notice of Termination is given and
MTS shall have no further obligation to Executive under this
Agreement.
(b) Termination by MTS of Executive's employment for
"Cause" shall mean termination as a result of:
(i) the conviction of the Executive by a
court of competent jurisdiction for felony criminal
conduct; or
(ii) willful gross misconduct or gross
negligence in the performance of his duties by the
Executive; or
(iii) material violation by the Executive of
any employment agreement applicable to the Executive.
5. Termination Following Friendly Change in Control.
(a) If, after a Friendly Change in Control, Executive's
employment with MTS shall be terminated (1) by MTS other than for
cause, death or disability or (2) by Executive for Good Reason, then
Executive shall be entitled to the following benefits:
(i) Severance. MTS shall pay the Executive
as a severance payment (the "Severance Payment") an
amount equal to the product of 18 multiplied by the
Executive's Monthly Gross Income as defined below. The
Severance Payment shall be made in a single lump sum
within 30 days after the Date of Termination, subject to
all applicable federal and state withholding.
For purposes of this Agreement, Monthly Gross Income
shall mean the sum of the following amounts:
(A) 1/12 of the highest average
base salary for any 12-consecutive month
period during the 36 calendar month period
ending immediately prior
<PAGE>
to the Date of Termination (without taking
into account any reduction in such base
salary that would constitute Good Reason);
plus
(B) the monthly average of the
total Management Variable Compensation (MVC)
earned during the lesser of the 3 most
recent or the actual number of fiscal years
participating in the MVC plan ending
immediately prior to the Date of
Termination; plus
(C) the product of the average
percentage of MTS profit sharing
contributions to the MTS Systems Corporation
Profit Sharing Retirement Plan and Trust (as
a percent of Compensation as defined in the
Plan up to the federal limit) for the lesser
of the 3 most recent or the actual number of
participating Plan Years ending immediately
prior to the Date of Termination multiplied
by the sum of (A) and (B) above.
(ii) Benefits. For an 18-month period after
the Date of Termination, MTS shall continue to pay its
portion of Executive's life and health insurance
benefits which the Executive is receiving immediately
prior to the Notice of Termination. Executive shall be
responsible for payment of his portion of the premiums
for such benefits. The MTS portion and the Executive's
portion shall be the respective percentages of such
premiums paid immediately prior to the Date of
Termination. Benefits otherwise receivable by Executive
pursuant to this paragraph shall be reduced to the
extent comparable benefits are actually received by
Executive during this period, and any such benefits
actually received by Executive shall be reported to MTS.
At the expiration of said 18-month period, Executive
shall be entitled to continue any of said benefits which
qualify as group insurance benefits for continuation
coverage under the Comprehensive Omnibus Reconciliation
Act ("COBRA") or applicable state law.
(b) Good Reason. Executive shall be entitled to
terminate his employment for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean, without Executive's express
written consent, any of the following:
(i) the assignment to Executive of any
duties inconsistent with Executive's status or position
with MTS, or a substantial alteration in the nature or
status of Executive's responsibilities; or
(ii) a reduction by MTS in Executive's
annual base salary other than a reduction comparable to
other senior Executives of MTS in connection with a
company-wide cost reduction program; or
(iii) the relocation of MTS' principal
executive offices to a location more than fifty miles
from Eden Prairie, Minnesota or MTS requiring Executive
to be based anywhere other than MTS' principal executive
offices except for required travel on MTS' business to
an extent substantially consistent with Executive's
prior business travel obligations; or
<PAGE>
(iv) the failure by MTS to continue to
provide Executive with benefits at least as favorable to
those enjoyed by Executive under any of MTS' pension,
life insurance, medical, health and accident,
disability, deferred compensation, incentive awards,
incentive stock options, or savings plans in which
Executive was participating at the time of the Change in
Control, the taking of any action by MTS which would
directly or indirectly materially reduce any of such
benefits or deprive Executive of any material fringe
benefit enjoyed by him at the time of the Change in
Control, or the failure by MTS to provide Executive with
the number of paid vacation days to which Executive is
entitled at the time of the Change in Control, provided,
however, that MTS may amend any such plan or programs as
long as such amendments do not reduce any benefits to
which Executive would be entitled upon termination; or
(v) the failure of MTS to obtain a
satisfactory agreement from any successor to assume and
agree to perform this Agreement, as contemplated in
Section 12; or
(vi) MTS requests Executive's resignation
from employment; or
(vii) any purported termination of
Executive's employment which is not made pursuant to a
Notice of Termination satisfying the requirements of
this Agreement; for purposes of this Agreement, no such
purported termination shall be effective; or
(viii) any material violation by MTS of this
Agreement.
(c) Voluntary Termination Deemed Good Reason.
Notwithstanding anything herein to the contrary, during the period
commencing on the 30th day following a Change in Control (whether
Friendly or Unfriendly) and ending on the 180th day following a
Change in Control, Executive may voluntarily terminate his
employment for any reason, and such termination shall be deemed
"Good Reason" for all purposes of this Agreement.
6. Termination - Unfriendly Change in Control.
(a) If, after an Unfriendly Change in Control,
Executive's employment with MTS is terminated (1) by MTS other than
for Cause, death or disability, or (2) by Executive for Good Reason,
the Executive shall be entitled to the following benefits:
(i) Severance. MTS shall pay the Executive
as a severance payment (the "Severance Payment") an
amount equal to the product of 36 multiplied by the
Executive's Monthly Gross Income as defined in Section
5(a)(i) above. The Severance Payment shall be made in a
single lump sum within 30 days after the Date of
Termination, subject to all applicable federal and state
withholding.
(ii) Benefits. For a 36-month period after
the Date of Termination, MTS shall continue to pay its
portion of Executive's life and health insurance
benefits which the Executive is receiving immediately
prior to the Notice of Termination.
<PAGE>
Executive shall be responsible for payment of his
portion of the premiums for such benefits. The MTS
portion and the Executive's portion shall be the
responsive percentages of such premiums paid immediately
prior to the Date of Termination. Benefits otherwise
receivable by Executive pursuant to this paragraph shall
be reduced to the extent comparable benefits are
actually received by Executive shall be reported to MTS.
At the expiration of said 36-month period, Executive
shall be entitled to continue any of said benefits which
qualify as group insurance benefits for continuation
coverage under the Comprehensive Omnibus Budget
Reconciliation Act ("COBRA") or applicable state law.
(b) If the Executive voluntarily terminates his
employment other than for Good Reason but more than 180 days after
an Unfriendly Change in Control, Executive shall be entitled to the
following benefits:
(i) Severance. MTS shall pay to Executive as
a severance payment (the "Severance Payment") an amount
equal to the product of 18 multiplied by the Executive's
monthly Gross Income as defined in Section 5(a)(i)
above. The Severance Payment shall be made in a single
lump sum within 30 days after the Date of Termination,
subject to all applicable federal and state withholding.
(ii) Benefits. For 18-month period after the
Date of Termination, MTS shall continue to pay its
portion of Executive's life and health insurance
benefits which the Executive is receiving immediately
prior to the Notice of Termination. Executive shall be
responsible for payment of his portion of the premiums
for such benefits. The MTS portion and the Executive's
portion shall be the respective percentages of such
premiums paid immediately prior to the Date of
Termination. Benefits otherwise receivable by Executive
pursuant to this paragraph shall be reduced to the
extent comparable benefits are actually received by
Executive during such period, and any such benefits
actually received by Executive shall be reported to MTS.
At the expiration of said 18-month period, Executive
shall be entitled to continue any of said benefits which
qualify as group insurance benefits for continuation
coverage under the Comprehensive Omnibus Budget
Reconciliation Act ("COBRA") or applicable state law.
7. Additional Benefits. In addition to all other amounts payable and
benefits receivable to Executive upon termination of employment covered under
this Agreement, Executive shall be entitled to the following benefits:
(a) Legal Fees. In the event of any termination of
employment under this Agreement, other than termination for Cause,
MTS shall pay to Executive all legal fees and expenses reasonably
incurred by Executive in contesting or disputing any such
termination or in seeking to obtain or enforce any right or benefit
provided by this Agreement.
(b) Retirement Plan. Executive shall, upon termination
of employment, be entitled to receive all benefits payable to the
Executive under the MTS Systems Corporation Profit Sharing
Retirement Plan and any other plan or agreement relating to
retirement benefits.
<PAGE>
(c) Employee Stock Option Certificate. The Executive's
rights under any existing Employee Stock Option Agreement and any
future such agreements, including particularly his right to exercise
his option rights following his termination of employment, shall
continue to be fully effective hereunder.
8. No Mitigation. Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise, nor shall the amount of any payment or benefit provided for in
this Agreement be reduced by any compensation earned by Executive as the result
of employment by another employer or by retirement benefits after the Date of
Termination, or except as otherwise provided in this Agreement.
9. Potential Excise Tax; Indemnification
(a) Excise Tax. Should any payments hereunder or
contemplated hereby be subject to excise tax pursuant to Section
4999 of the Internal Revenue Code of 1986, as may be amended, or any
successor or similar provision thereto, or comparable state or local
tax laws, MTS shall pay to the Executive such additional
compensation as is necessary (after taking into account all federal,
state and local income taxes payable by the Executive as a result of
the receipt of such compensation) to place the Executive in the same
after-tax position he would have been in had no such excise tax (or
any interest or penalties thereon) been paid or incurred. MTS shall
pay such additional compensation upon the earlier of:
(i) the time at which MTS withholds such excise
tax from any payments to the Executive; or
(ii) 30 days after the Executive notifies MTS
that the Executive has paid such excise tax
pursuant to a tax return filed by the
Executive which takes the position that such
excise tax is due and payable in reliance on
a written opinion of the Executive's tax
counsel that it is more likely than not that
such excise tax is due and payable, or, if
later, the date the IRS notifies Executive
that such amount is due and payable.
Without limiting the obligation of MTS hereunder, the Executive
agrees, in the event the Executive makes any payment pursuant to the
preceding sentence, to negotiate with MTS in good faith with respect
to procedures reasonably requested by MTS which would afford MTS the
ability to contest the imposition of such excise tax; provided,
however, that the Executive will not be required to afford MTS any
right to contest the applicability of any such excise tax to the
extent that the Executive reasonably determines that such contest is
inconsistent with the overall tax interests of the Executive.
MTS agrees to hold in confidence and not to disclose, without the
Executive's prior written consent, any information with regard to
the Executive's tax position which MTS obtains pursuant to this
subsection.
(b) Indemnification. MTS will indemnify the Executive
(and his legal representative or other successors) to the fullest
extent permitted (including payment of
<PAGE>
expenses in advance of final disposition of the proceeding) by the
laws of the State of Minnesota, as in effect at the time of the
subject act or omission, or the Articles of Incorporation and
By-Laws of MTS as in effect at such time or on the date of this
Agreement, whichever affords or afforded greater protection to the
Executive; and the Executive shall be entitled to the protection of
any insurance policies MTS may elect to maintain generally for the
benefit of its directors and officers, against all costs, charges
and expenses whatsoever incurred or sustained by him or his legal
representatives in connection with any action, suit or proceeding to
which he (or his legal representative or other successors) may be
made a party by reason of his being or having been a director,
officer or employee of MTS or any of its subsidiaries or his serving
or having served any other enterprise as a director, officer or
employee at the request of MTS, provided that MTS shall cause to be
maintained in effect for not less than six years from the date of a
Change in Control (to the extent available) policies of directors'
and officers' liability insurance of at least the same coverage as
those maintained by MTS on the date of this Agreement and containing
terms and conditions which are no less advantageous than such
policies.
10. Non-Competition and Confidentiality.
(a) Noncompetition. Except as provided in subsection (c)
below, Executive agrees that, as a condition of receiving benefits
under this Agreement, he will not render services directly or
indirectly to any competing organization, wherever located, for a
period of one year following the Date of Termination, in connection
with the design, implementation, development, manufacture,
marketing, sale, merchandising, leasing, servicing or promotion of
any "Conflicting Product" which as used herein means any product,
process, system or service of any person, firm, corporation,
organization other than MTS, in existence or under development,
which is the same as or similar to or competes with, or has a usage
allied to, a product, process, system, or service produced,
developed, or used by MTS. Executive agrees that violation of this
covenant not to compete with MTS shall result in immediate cessation
of all benefits hereunder, other than insurance benefits, which
Executive may continue where permitted under federal and state law
at his own expense.
(b) Confidentiality. Executive further agrees and
acknowledges his existing obligation that at all times during and
subsequent to his employment with MTS, he will not divulge or
appropriate to his own use or the uses of others any secret or
confidential information or knowledge pertaining to the business of
MTS, or any of its subsidiaries, obtained during his employment by
MTS or any of its subsidiaries.
(c) Waiver - Unfriendly Change in Control.
Notwithstanding anything herein to the contrary: the restriction on
competition under subsection (a) shall not apply if the Executive's
employment terminates following an Unfriendly Change in Control.
Furthermore, in such event, MTS waives any other restriction on
Executive's employment and consents unconditionally to any
employment Executive may subsequently obtain.
11. Funding of Payments. In order to assure the performance of MTS
or its successor of its obligations under this Agreement, MTS may deposit in a
so-called "rabbi" trust an amount equal to the maximum payment that will be due
the Executive under the terms hereof; provided, however,
<PAGE>
that MTS shall deposit in trust the amount equal to the maximum payment due
Executive immediately upon an Unfriendly Change in Control. Under such written
trust instrument, the Trustee shall be instructed to pay to the Executive (or
the Executive's legal representative, as the case may be) the amount to which
the Executive shall be entitled under the terms hereof, and the balance, if any,
of the trust not so paid or reserved for payment shall be repaid to MTS. If MTS
deposits funds in trust, payment shall be made no later than the occurrence of a
Change in Control. The written instrument governing the trust shall be
irrevocable from and after such Change in Control and shall contain such
provisions protective of the Executive as are contained in similar trust
agreements approved by the Internal Revenue Service in published private letter
rulings (provided that the assets of the trust shall be reachable by creditors
of MTS as required by such rulings). The trustee shall be a national bank
selected by MTS with the consent of the Executive, with trust powers and whose
principal officers are located in the Minneapolis/St. Paul metropolitan area.
The trustee shall invest the assets of the trust in any readily marketable
securities of U.S. corporations (other than MTS, its successor, or any affiliate
of MTS or its successor). If and to the extent there are not amounts in trust
sufficient to pay Executive under this Agreement, MTS shall remain liable for
any and all payments due to Executive.
12. Successors; Binding Agreement.
(a) Successors. MTS will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise)
to all or substantially all of the business and/or assets of MTS to
expressly assume and agree to perform this Agreement in the same
manner and to the same extent that MTS would be required to perform
it if no such succession had taken place. Failure of MTS to obtain
such assumption and agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle
Executive to compensation from MTS in the same amount and on the
same terms as he would be entitled hereunder if he terminated his
employment for Good Reason following a Change in Control, except
that for purposes of implementing the foregoing, the date on which
any such succession becomes effective shall be deemed the Date of
Termination.
(b) Binding Agreement. This Agreement shall inure to the
benefit of and be enforceable by Executive's personal or legal
representatives, successors, heirs, and designated beneficiaries. If
Executive should die while any amount would still be payable to
Executive hereunder if the Executive had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Executive's
designated beneficiaries or, if there is no such designated
beneficiary, to the Executive's estate.
13. Notice.
(a) Form and Delivery. All notices and other
communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by
United States registered or certified mail, return receipt
requested, postage prepaid, addressed to the last known residence
address of the Executive or in the case of MTS, to its principal
office to the attention of each of the then directors of MTS with a
copy to its Secretary, or to such other address as either party may
have furnished to the
<PAGE>
other in writing in accordance herewith, except that notice of
change of address shall be effective only upon receipt.
(b) Notice of Termination. Any purported termination of
Executive's employment by MTS or by Executive shall be communicated
by written Notice of Termination to the other party hereto, which
shall indicate the specific termination provision in this Agreement
relied upon and shall set forth the facts and circumstances claimed
to provide a basis for termination of Executive's employment.
(c) Date of Termination. For purposes of this Agreement,
"Date of Termination" shall mean the date specified in the Notice of
Termination which shall not be less than 10 nor more than 30 days,
respectively, from the date such Notice of Termination is given.
(d) Dispute of Termination. If, within 10 days after any
Notice of Termination is given, the party receiving such Notice of
Termination notifies the other party that a dispute exists
concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual
written agreement of the parties, or by a final judgment, order or
decree of a court of competent jurisdiction (which is not appealable
or the time for appeal therefrom having expired and no appeal having
been perfected); provided, that the Date of Termination shall be
extended by a notice of dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of
such dispute with reasonable diligence in accordance with Section 14
below. Notwithstanding the pendency of any such dispute, MTS shall
continue to pay Executive full compensation in effect when the
notice giving rise to the dispute was given (including, but not
limited to, base salary) and continue Executive as a participant in
all compensation, benefit and insurance plans in which the Executive
was participating when the notice giving rise to the dispute was
given, until the dispute is finally resolved in accordance with this
subsection or at the end of a period of 180 days, whichever first
occurs. Amounts paid under this subsection are in addition to all
other amounts due under this Agreement and shall not be offset
against or reduce any other amounts under this Agreement.
14. Arbitration. Any dispute arising under or in connection with
this Agreement (including without limitation, the making of this Agreement or
the Executive's termination of employment) shall be resolved by final and
binding arbitration to be held in Minneapolis, Minnesota in accordance with the
rules and procedures of the American Arbitration Association. The parties shall
select a mutually acceptable single arbitrator to resolve the dispute or if they
fail or are unable to do so, each side shall within the following ten business
days select a single arbitrator and the two so selected shall select a third
arbitrator within the following ten business days. The arbitrator shall have no
power to award any punitive or exemplary damages. The arbitrator may construe or
interpret, but shall not ignore or vary the terms of this Agreement, and shall
be bound by controlling law. The arbitration award or other resolution may be
entered as a judgment at the request of the prevailing party by any court of
competent jurisdiction in Minnesota or elsewhere.
15. Miscellaneous.
<PAGE>
(a) Modification and Waiver. Except as otherwise
specifically provided in this Agreement, no provision of this
Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed by the
parties. No waiver by either party hereto at any time of any breach
by the other party to this Agreement of, or compliance with, any
other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or similar
time.
(b) Entire Agreement. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not expressly
set forth in this Agreement.
(c) Governing Law. The validity, interpretation,
construction and performance of this Agreement shall be governed by
the laws of the State of Minnesota.
(d) Severability. The invalidity or unenforceability or
any provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the
Executive have executed this Agreement as of the day and date first above
written.
EXECUTIVE: MTS SYSTEMS CORPORATION
/s/ David E. Hoffman By /s/ S. W. Emery, Jr.
- -------------------- ---------------------
David E. Hoffman
Its Chairman and CEO
---------------------
EXHIBIT 10.z
CHANGE IN CONTROL AGREEMENT
AGREEMENT made as of this 18th day of March 1998 by and between MTS Systems
Corporation, a Minnesota corporation ("MTS") and Steven M. Cohoon (the
"Executive").
WHEREAS, MTS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of MTS
and its shareholders; and
WHEREAS, the Executive has made and is expected to make, due to Executive's
intimate knowledge of the business and affairs of MTS, its policies, methods,
personnel and problems, a significant contribution to the profitability, growth
and financial strength of MTS; and
WHEREAS, MTS, as a publicly held corporation, recognizes that the possibility of
a Change in Control may exist and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of the Executive in the performance of the Executive's duties to the
detriment of MTS and its shareholders; and
WHEREAS, Executive is willing to remain in the employ of MTS upon the
understanding that MTS will provide income security if the Executive's
employment is terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of MTS and its stockholders to reinforce
and encourage the continued attention and dedication of management personnel,
including Executive, to their assigned duties without distraction and to ensure
the continued availability to MTS of the Executive in the event of a Change in
Control;
THEREFORE, in consideration of the foregoing and other respective covenants and
agreements of the parties herein contained, the parties hereto agree as follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until the earlier of (A) the date that any and
all benefits due to Executive under this Agreement upon the happening
of the events set forth herein have been paid and satisfied and all
obligations of MTS to the Executive have been performed or (B) the date
the Executive and MTS agree in writing to terminate this Agreement.
Notwithstanding the preceding sentence, if a Change in Control occurs,
this Agreement shall remain in effect for a period of 36 months from
the date of the occurrence of a Change in Control.
2. Change in Control. If a Change in Control shall have occurred during
the term of this Agreement, the provisions of this Agreement shall
become operative and MTS agrees to employ the Executive and to provide
the benefits stated in this Agreement.
(a) Change in Control, shall, for purposes of this Agreement,
means a change in control of MTS which would be required to be
reported in response to Item 1 of Form 8-K promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), whether or not MTS is then subject to such reporting
requirement, including, without limitation, if:
<PAGE>
Change in Control Agreement Page 2
(i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act, including any
affiliate or associate as defined in Rule 12(b)-2
under the Exchange Act of such person, other than
MTS, any trustee or other fiduciary holding
securities under an employee benefit plan of MTS, or
any corporation owned, directly or indirectly, by the
stockholders of MTS in substantially the same
proportions as their ownership of stock of MTS)
becomes a "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or
indirectly, of securities of MTS representing 35% or
more of the combined voting power of MTS's then
outstanding securities; or
(ii) the Board of Directors is comprised of fewer than 65%
of the individuals described in subsection (b) below;
or
(iii) the stockholders of MTS approve a definitive
agreement to merge or consolidate MTS with or into
another corporation or other enterprise in which the
holders of outstanding stock of MTS entitled to vote
in elections of directors immediately before such
merger or consolidation hold less than 80% of the
voting power of the survivor of such merger or
consolidation or its parent, or approve a plan of
liquidation; or
(iv) at least 60% of MTS's assets are sold and transferred
to another corporation or other enterprise that is
not a subsidiary, direct or indirect, or other
affiliate of MTS; or
(v) the Board of Directors of MTS determines, by a vote
of a majority of its entire membership, that a tender
offer statement by any person (as defined above)
indicates an intention on the part of such person to
acquire control of MTS.
(b) Board of Directors shall, for purposes of subsection (a),
mean:
(i) individuals who on the date hereof constituted the
Board of MTS, and
(ii) any new director who subsequently was elected or
nominated for election by a majority of the directors
who held such office immediately prior to a Change in
Control.
(c) Friendly Change in Control shall mean a Change in Control
which arises from a transaction or series of transactions
authorized, recommended or approved at the time by formal
action of the Board of Directors.
(d) Unfriendly Change in Control shall mean a Change in Control
that is not a "Friendly Change in Control" as defined above.
An Unfriendly Change in Control shall not thereafter become a
Friendly Change in Control.
3. Termination by Reason of Death or Disability. In the event of the
Executive's death or disability during the Term of this Agreement,
Executive shall be entitled to such benefits provided under any policy,
plan or program governing death or disability maintained by MTS and
covering such Executive and this Agreement shall not apply. The
determination of disability and the amount and entitlement of benefits
shall be governed by the terms of such policy, plan or program. In the
event of the Executive's disability, the Executive's
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Change in Control Agreement Page 3
Date of Termination shall be the date on which Executive has been
unable, by reason of physical or mental disability, to perform the
services required of him/her for his/her position, even with reasonable
accommodation, for the period of time indicated in MTS's group long
term disability plan (in which the Executive is a participant) during
which a participant must be disabled before benefits become payable. In
connection with Executive's termination due to disability, a qualified
physician must certify the disability and MTS shall at all times comply
with the Americans With Disabilities Act and any other applicable
disability discrimination law.
4. Termination for Cause.
(a) If Executive's employment with MTS shall be terminated by MTS
for Cause as defined below, MTS shall pay to Executive his/her
full base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given and MTS
shall have no further obligation to Executive under this
Agreement.
(b) Termination by MTS of Executive's employment for "Cause" shall
mean termination as a result of:
(i) the conviction of the Executive by a court of
competent jurisdiction for felony criminal conduct;
or
(ii) willful gross misconduct or gross negligence in the
performance of his/her duties by the Executive; or
(iii) material violation by the Executive of any employment
agreement applicable to the Executive.
5. Termination Following Friendly Change in Control.
(a) If, after a Friendly Change in Control, Executive's employment
with MTS shall be terminated (A) by MTS other than for cause,
death or disability or (B) by Executive for Good Reason, then
Executive shall be entitled to the following benefits:
(i) Severance. MTS shall pay the Executive as a severance
payment (the "Severance Payment") an amount equal to
the product of 18 multiplied by the Executive's
Monthly Gross Income as defined below. The Severance
Payment shall be made in a single lump sun within 30
days after the Date of Termination, subject to all
applicable federal and state withholding.
For purposes of this Agreement, Monthly Gross Income
shall mean the sum of the following amounts:
(A) 1/12 of the highest average base salary for
any 12-consecutive month period during the
36 calendar month period ending immediately
prior to the Date of Termination (without
taking into account any reduction in such
base salary that would constitute Good
Reason); plus
(B) the monthly average of the total Management
Variable Compensation (MVC) paid during the
lesser of the 3 most recent or the actual
number of fiscal years participating in the
MVC plan ending immediately prior
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Change in Control Agreement Page 4
to the Date of Termination (without taking
into account any reduction or termination of
such variable compensation that would
constitute Good Reason); plus
(C) the product of the average percentage of MTS
profit sharing contributions to the MTS
Systems Corporation Profit Sharing
Retirement Plan and Trust (as a percent of
Compensation as defined in the Plan) for the
lesser of the 3 most recent or the actual
number of participating Plan Years ending
immediately prior to the Date of Termination
multiplied by the sum of (A) and (B) above.
(ii) Benefits. For 18 months following the Executive's
Date of Termination or, if earlier, until Executive
is covered under other group plans, MTS shall
continue to pay the employer share of the Executive's
MTS group life and health insurance premiums. All
premium payments made on Executive's behalf following
his/her Date of Termination and Executive's continued
participation in the plans are contingent upon
Executive making the appropriate timely written
elections to continue his/her group benefits
following his/her Date of Termination, said group
benefits continuing in effect for active MTS
employees, Executive continuing to be eligible under
the terms of the plans and applicable laws, and
Executive's payment of the employee portion of the
premiums for such benefits. Benefits otherwise
receivable by Executive pursuant to this subparagraph
(ii) shall be reduced or eliminated to the extent
comparable benefits are actually received by
Executive during such period from a source outside
MTS, and any such benefits actually received by
Executive shall be reported to MTS.
(b) Good Reason. Executive shall be entitled to terminate his/her
employment for Good Reason. For purposes of this Agreement,
"Good Reason" shall mean, without Executive's express written
consent, any of the following:
(i) the assignment to Executive of any duties
inconsistent with Executive's status or position with
MTS, or a substantial alteration in the nature or
status of Executive's responsibilities; or
(ii) a reduction by MTS in Executive's annual base salary
other than a reduction comparable to other senior
Executives of MTS in connection with a company-wide
cost reduction program; or
(iii) the relocation of MTS's principal executive offices
to a location more than fifty miles from Eden
Prairie, Minnesota or MTS requiring Executive to be
based anywhere other than MTS's principal executive
offices except for required travel on MTS's business
to an extent substantially consistent with
Executive's prior business travel obligations; or
(iv) the failure by MTS to continue to provide Executive
with benefits at least as favorable to those enjoyed
by Executive under any of MTS's pension, life
insurance, medical, health and accident, disability,
deferred compensation, incentive awards, incentive
stock options, or savings plans in which Executive
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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
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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/ Steven M. Cohoon By /s/ S. W. Emery, Jr.
--------------------- ----------------------
Steven M. Cohoon Its Chairman and CEO
EXHIBIT 10.aa
SEVERANCE AGREEMENT
AGREEMENT made as of this 13th day of March, 1998 by and between MTS Systems
Corporation, a Minnesota corporation ("MTS") and William G. Anderson (the
"Executive").
WHEREAS, MTS desires to employ Executive as its President, Custom Servo Motors,
is willing to become employed by MTS in such capacity; and
WHEREAS, Executive is expected to make a significant contribution to the
profitability, growth and financial strength of MTS; and
WHEREAS, MTS considers the establishment and maintenance of a sound and vital
management and an orderly succession plan to be essential to protecting and
enhancing the best interests of MTS and its shareholders; and
WHEREAS, this Agreement is consistent with the requirements of the
executive/high policy-making exception to the Age Discrimination in Employment
Act, 29 U.S.C. Section 631 (c)( 1) (the "Executive Exemption"), benefits in
connection therewith are pursuant to pension, profit sharing and deferred
compensation plans as defined therein, and Executive, by virtue of his/her
duties and responsibilities on behalf of MTS, qualifies under said exception for
mandatory retirement on or after his/her 65th birthday; and
WHEREAS, MTS is providing Executive, simultaneously with this Agreement,
consideration in the form of a Change in Control Agreement, to provide
additional benefits to Executive in the event of a change in control;
NOW THEREFORE, in consideration of the foregoing and other respective covenants
and agreements of the parties herein contained, the parties hereto agree as
follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until the earlier of (a) the date on which the
Executive and MTS agree in writing to terminate this Agreement, or (b)
the Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If
a change in control occurs, as defined in that certain agreement
between the Executive and MTS of even date herewith (the "Change in
Control Agreement", attached as Exhibit 1), this Agreement shall be
superseded by the provisions of the Change in Control Agreement except
as provided in the following sentence. MTS's right under this Agreement
to terminate the Executive's employment pursuant to the Executive
Exemption shall not be superseded by the Change in Control Agreement
and the Executive shall be entitled to receive the benefits to which
he/she is entitled under subparagraph 4(d) hereunder if such
termination occurs.
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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 12 months.
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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 he/she is not fully vested, as though he/she
were continuing his/her employment
<PAGE>
Severance Agreement Page 4
with MTS as an active employee, subject at all times to the
exercise times and other terms and conditions set forth in
said Stock Option Agreements and to Executive's signing the
release agreement described in paragraph 9 herein.
(d) If Executive's termination of employment occurs pursuant to
the Executive Exemption on or after he/she has reached his/her
65th birthday, Executive shall be entitled to receive the lump
sum equivalent of the amount necessary to purchase a $44,000
pre-tax straight life annuity, said lump sum to be taken from
MTS contributions and earnings thereon to Executive's accounts
in MTS sponsored pension, profit sharing, and deferred
compensation plans, as applicable. If Executive is entitled to
less than that amount from the applicable MTS plans in which
he/she is a participant as of his/her Date of Termination,
then MTS shall make an additional contribution on Executive's
behalf to Executive's Deferral Account in the MTS Systems
Corporation Executive Deferred Compensation Plan, pursuant to
Section 3.4 of said Plan. The amount to which Executive is
entitled under subparagraph 4(a) of this Agreement shall be
reduced by MTS's Section 3.4 contribution to the MTS Systems
Corporation Executive Deferred Compensation Plan, as described
in subparagraph (v) below. Calculation of the Executive's
benefit shall be as follows:
(i) The benefits to which Executive is entitled, as of
his/her Date of Termination, under all MTS sponsored
pension, profit sharing and deferred compensation
plans shall be added together.
(ii) Amounts in said plans, as determined in accordance
with 29 Code of Federal Regulations ss. 1627.17,
attributable to Social Security, employee
contributions, contributions of prior employers, and
rollover contributions, shall be subtracted from the
subparagraph (i) amount and the resulting figure
shall be the "Qualified Retirement Benefit".
(iii) MTS shall determine the lump sum equivalent of the
amount necessary to purchase a straight life annuity
for Executive, effective as of his/her Date of
Termination, which would provide Executive with
$44,000 a year for life (the "ADEA Benefit"). MTS
shall retain a certified actuary to determine said
lump sum equivalent amount, using the applicable
mortality table and applicable interest rate under
Section 417(e) of the Internal Revenue Code and
Regulations issued thereunder.
(iv) If the Qualified Retirement Benefit exceeds the ADEA
Benefit, the Executive shall have the option (but is
not required) to receive the Qualified Retirement
Benefit in a lump sum, as provided under the
applicable plans, within 60 days following his/her
Date of Termination. The Executive may elect to
receive the Qualified Retirement Benefit in either a
lump sum or a series of periodic payments pursuant to
the terms of the applicable plans. The Executive may
also receive the payments and benefits set forth in
subparagraphs 4(a) and (b) of this Agreement provided
he/she executes the
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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/ William G. Anderson By /s/Donald M. Sullivan
----------------------- ------------------------------
William G. Anderson
Its CEO and Chairman
EXHIBIT 10.ab
SEVERANCE AGREEMENT
AGREEMENT made as of this 14th day of March, 1998 by and between MTS Systems
Corporation, a Minnesota corporation ("MTS") and James M. Egerdal (the
"Executive").
WHEREAS, MTS desires to employ Executive as its Vice President and Executive is
willing to become employed by MTS in such capacity; and
WHEREAS, Executive is expected to make a significant contribution to the
profitability, growth and financial strength of MTS; and
WHEREAS, MTS considers the establishment and maintenance of a sound and vital
management and an orderly succession plan to be essential to protecting and
enhancing the best interests of MTS and its shareholders; and
WHEREAS, this Agreement is consistent with the requirements of the
executive/high policy-making exception to the Age Discrimination in Employment
Act, 29 U.S.C. Section 631 (c)( 1) (the "Executive Exemption"), benefits in
connection therewith are pursuant to pension, profit sharing and deferred
compensation plans as defined therein, and Executive, by virtue of his/her
duties and responsibilities on behalf of MTS, qualifies under said exception for
mandatory retirement on or after his/her 65th birthday; and
WHEREAS, MTS is providing Executive, simultaneously with this Agreement,
consideration in the form of a Change in Control Agreement, to provide
additional benefits to Executive in the event of a change in control;
NOW THEREFORE, in consideration of the foregoing and other respective covenants
and agreements of the parties herein contained, the parties hereto agree as
follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until the earlier of (a) the date on which the
Executive and MTS agree in writing to terminate this Agreement, or (b)
the Date of Termination indicated in paragraph 2, 3, or 4 hereunder. If
a change in control occurs, as defined in that certain agreement
between the Executive and MTS of even date herewith (the "Change in
Control Agreement", attached as Exhibit 1), this Agreement shall be
superseded by the provisions of the Change in Control Agreement except
as provided in the following sentence. MTS's right under this Agreement
to terminate the Executive's employment pursuant to the Executive
Exemption shall not be superseded by the Change in Control Agreement
and the Executive shall be entitled to receive the benefits to which
he/she is entitled under subparagraph 4(d) hereunder if such
termination occurs.
<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 9 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 frill force and effect.
This Agreement supersedes any and all prior oral and written understandings and
agreements between the Executive and MTS, provided however that the Change in
Control Agreement signed of even date herewith shall, if applicable, supersede
this Agreement, except as otherwise provided in Paragraph 1 of this Agreement.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have
executed this Agreement as of the day and date first above written.
EXECUTIVE MTS SYSTEMS CORPORATION
/s/ James M. Egerdal By /s/ Donald M. Sullivan
-------------------------------- --------------------------------
James M. Egerdal
Its CEO and Chairman
-------------------------------
EXHIBIT 10.ac
CHANGE IN CONTROL AGREEMENT
AGREEMENT made as of this13th day of March, 1998 by and between MTS Systems
Corporation, a Minnesota corporation ("MTS") and William G. Anderson (the
"Executive").
WHEREAS, MTS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of MTS
and its shareholders; and
WHEREAS, the Executive has made and is expected to make, due to Executive's
intimate knowledge of the business and affairs of MTS, its policies, methods,
personnel and problems, a significant contribution to the profitability, growth
and financial strength of MTS; and
WHEREAS, MTS, as a publicly held corporation, recognizes that the possibility of
a Change in Control may exist and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of the Executive in the performance of the Executive's duties to the
detriment of MTS and its shareholders; and
WHEREAS, Executive is willing to remain in the employ of MTS upon the
understanding that MTS will provide income security if the Executive's
employment is terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of MTS and its stockholders to reinforce
and encourage the continued attention and dedication of management personnel,
including Executive, to their assigned duties without distraction and to ensure
the continued availability to MTS of the Executive in the event of a Change in
Control;
THEREFORE, in consideration of the foregoing and other respective covenants and
agreements of the parties herein contained, the parties hereto agree as follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until the earlier of (A) the date that any and
all benefits due to Executive under this Agreement upon the happening
of the events set forth herein have been paid and satisfied and all
obligations of MTS to the Executive have been performed or (B) the date
the Executive and MTS agree in writing to terminate this Agreement.
Notwithstanding the preceding sentence, if a Change in Control occurs,
this Agreement shall remain in effect for a period of 36 months from
the date of the occurrence of a Change in Control.
2. Change in Control. If a Change in Control shall have occurred during
the term of this Agreement, the provisions of this Agreement shall
become operative and MTS agrees to employ the Executive and to provide
the benefits stated in this Agreement.
<PAGE>
Change in Control Agreement Page 2
(a) Change in Control, shall, for purposes of this Agreement,
means a change in control of MTS which would be required to be
reported in response to Item 1 of Form 8-K promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), whether or not MTS is then subject to such reporting
requirement, including, without limitation, if:
(i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act, including any
affiliate or associate as defined in Rule 12(b)-2
under the Exchange Act of such person, other than
MTS, any trustee or other fiduciary holding
securities under an employee benefit plan of MTS, or
any corporation owned, directly or indirectly, by the
stockholders of MTS in substantially the same
proportions as their ownership of stock of MTS)
becomes a "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or
indirectly, of securities of MTS representing 35% or
more of the combined voting power of MTS's then
outstanding securities; or
(ii) the Board of Directors is comprised of fewer than 65%
of the individuals described in subsection (b) below;
or
(iii) the stockholders of MTS approve a definitive
agreement to merge or consolidate MTS with or into
another corporation or other enterprise in which the
holders of outstanding stock of MTS entitled to vote
in elections of directors immediately before such
merger or consolidation hold less than 80% of the
voting power of the survivor of such merger or
consolidation or its parent, or approve a plan of
liquidation; or
(iv) at least 60% of MTS's assets are sold and transferred
to another corporation or other enterprise that is
not a subsidiary, direct or indirect, or other
affiliate of MTS; or
(v) the Board of Directors of MTS determines, by a vote
of a majority of its entire membership, that a tender
offer statement by any person (as defined above)
indicates an intention on the part of such person to
acquire control of MTS.
(b) Board of Directors shall, for purposes of subsection (a),
mean:
(i) individuals who on the date hereof constituted the
Board of MTS, and
(ii) any new director who subsequently was elected or
nominated for election by a majority of the directors
who held such office immediately prior to a Change in
Control.
(c) Friendly Change in Control shall mean a Change in Control
which arises from a transaction or series of transactions
authorized, recommended or approved at the time by formal
action of the Board of Directors.
(d) Unfriendly Change in Control shall mean a Change in Control
that is not a "Friendly Change in Control" as defined above.
An Unfriendly Change in Control shall not thereafter become a
Friendly Change in Control.
<PAGE>
Change in Control Agreement Page 3
3. Termination by Reason of Death or Disability. In the event of the
Executive's death or disability during the Term of this Agreement,
Executive shall be entitled to such benefits provided under any policy,
plan or program governing death or disability maintained by MTS and
covering such Executive and this Agreement shall not apply. The
determination of disability and the amount and entitlement of benefits
shall be governed by the terms of such policy, plan or program. In the
event of the Executive's disability, the Executive's Date of
Termination shall be the date on which Executive has been unable, by
reason of physical or mental disability, to perform the services
required of him/her for his/her position, even with reasonable
accommodation, for the period of time indicated in MTS's group long
term disability plan (in which the Executive is a participant) during
which a participant must be disabled before benefits become payable. In
connection with Executive's termination due to disability, a qualified
physician must certify the disability and MTS shall at all times comply
with the Americans With Disabilities Act and any other applicable
disability discrimination law.
4. Termination for Cause.
(a) If Executive's employment with MTS shall be terminated by MTS
for Cause as defined below, MTS shall pay to Executive his/her
full base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given and MTS
shall have no further obligation to Executive under this
Agreement.
(b) Termination by MTS of Executive's employment for "Cause" shall
mean termination as a result of:
(i) the conviction of the Executive by a court of
competent jurisdiction for felony criminal conduct;
or
(ii) willful gross misconduct or gross negligence in the
performance of his/her duties by the Executive; or
(iii) material violation by the Executive of any employment
agreement applicable to the Executive.
5. Termination Following Friendly Change in Control.
a) If, after a Friendly Change in Control, Executive's employment
with MTS shall be terminated (A) by MTS other than for cause,
death or disability or (B) by Executive for Good Reason, then
Executive shall be entitled to the following benefits:
(i) Severance. MTS shall pay the Executive as a severance
payment (the "Severance Payment") an amount equal to
the product of 18 multiplied by the Executive's
Monthly Gross Income as defined below. The Severance
Payment shall be made in a single lump sum within 30
days after the Date of Termination, subject to all
applicable federal and state withholding.
For purposes of this Agreement, Monthly Gross Income
shall mean the sum of the following amounts:
(A) 1/12 of the highest average base salary for
any 12-consecutive month period during the
36 calendar month period ending immediately
prior to
<PAGE>
Change in Control Agreement Page 4
the Date of Termination (without taking into
account any reduction in such base salary
that would constitute Good Reason); plus
(B) the monthly average of the total Management
Variable Compensation (MVC) paid during the
lesser of the 3 most recent or the actual
number of fiscal years participating in the
MVC plan ending immediately prior to the
Date of Termination (without taking into
account any reduction or termination of such
variable compensation that would constitute
Good Reason); plus
(C) the product of the average percentage of MTS
profit sharing contributions to the MTS
Systems Corporation Profit Sharing
Retirement Plan and Trust (as a percent of
Compensation as defined in the Plan) for the
lesser of the 3 most recent or the actual
number of participating Plan Years ending
immediately prior to the Date of Termination
multiplied by the sum of (A) and (B) above.
(ii) Benefits. For 18 months following the Executive's
Date of Termination or, if earlier, until Executive
is covered under other group plans, MTS shall
continue to pay the employer share of the Executive's
MTS group life and health insurance premiums. All
premium payments made on Executive's behalf following
his/her Date of Termination and Executive's continued
participation in the plans are contingent upon
Executive making the appropriate timely written
elections to continue his/her group benefits
following his/her Date of Termination, said group
benefits continuing in effect for active MTS
employees, Executive continuing to be eligible under
the terms of the plans and applicable laws, and
Executive's payment of the employee portion of the
premiums for such benefits. Benefits otherwise
receivable by Executive pursuant to this subparagraph
(ii) shall be reduced or eliminated to the extent
comparable benefits are actually received by
Executive during such period from a source outside
MTS, and any such benefits actually received by
Executive shall be reported to MTS.
(b) Good Reason. Executive shall be entitled to terminate his/her
employment for Good Reason. For purposes of this Agreement,
"Good Reason" shall mean, without Executive's express written
consent, any of the following:
(i) the assignment to Executive of any duties
inconsistent with Executive's status or position with
MTS, or a substantial alteration in the nature or
status of Executive's responsibilities; or
(ii) a reduction by MTS in Executive's annual base salary
other than a reduction comparable to other senior
Executives of MTS in connection with a company-wide
cost reduction program; or
(iii) the relocation of MTS's principal executive offices
to a location more than fifty miles from Eden
Prairie, Minnesota or MTS requiring Executive to be
based anywhere other than the Executive's principal
office except for required
<PAGE>
Change in Control Agreement Page 5
travel on MTS business to an extent substantially
consistent with Executive's prior business travel
obligations; or
(iv) the failure by MTS to continue to provide Executive
with benefits at least as favorable to those enjoyed
by Executive under any of MTS's pension, life
insurance, medical, health and accident, disability,
deferred compensation, incentive awards, incentive
stock options, or savings plans in which Executive
was participating at the time of the Change in
Control, the taking of any action by MTS which would
directly or indirectly materially reduce any of such
benefits or deprive Executive of any material fringe
benefit enjoyed by Executive at the time of the
Change in Control, or the failure by MTS to provide
Executive with the number of paid vacation days to
which Executive is entitled at the time of the Change
in Control, provided, however, that MTS may amend any
such plan or programs as long as such amendments do
not reduce any benefits to which Executive would be
entitled upon termination; or
(v) the failure of MTS to obtain a satisfactory agreement
from any successor to assume and agree to perform
this Agreement, as contemplated in Section 12; or
(vi) MTS requests Executive's resignation from employment;
or
(vii) any purported termination of Executive's employment
which is not made pursuant to a Notice of Termination
satisfying the requirements of this Agreement; for
purposes of this Agreement, no such purported
termination shall be effective; or
(viii) any material violation by MTS of this Agreement.
(c) Voluntary Termination Deemed Good Reason. Notwithstanding
anything herein to the contrary, during the period commencing
on the 30th day following a Change in Control (whether
Friendly or Unfriendly) and ending on the 180th day following
a Change in Control, Executive may voluntarily terminate his
employment for any reason, and such termination shall be
deemed "Good Reason" for all purposes of this Agreement.
6. Termination - Unfriendly Change in Control.
(a) If, after an Unfriendly Change in Control, Executive's
employment with MTS is terminated (A) by MTS other than for
Cause, death or disability, or (B) by Executive for Good
Reason, the Executive shall be entitled to the following
benefits:
(i) Severance. MTS shall pay the Executive as a severance
payment (the "Severance Payment") an amount equal to
the product of 36 multiplied by the Executive's
Monthly Gross Income as defined in Section 5(a)(i)
above. The
<PAGE>
Change in Control Agreement Page 6
Severance Payment shall be made in a single lump sum
within 30 days after the Date of Termination, subject
to all applicable federal and state withholding.
(ii) Benefits. For 36 months following the Executive's
Date of Termination or, if earlier, until Executive
is covered under other group plans, MTS shall
continue to pay the employer share of the Executive's
MTS group life and health insurance premiums or, if
group continuation coverage is no longer available
for any reason other than the Executive's coverage
under other group plans, the full premiums under
other plans which MTS shall obtain for the
Executive's benefit and with the Executive's
approval. All MTS group plan premium payments made on
Executive's behalf following his/her Date of
Termination and Executive's continued participation
in the plans are contingent upon Executive making the
appropriate timely written elections to continue
his/her group benefits following his/her Date of
Termination, said group benefits continuing in effect
for active MTS employees, Executive continuing to be
eligible under the terms of the plans and applicable
laws, and Executive's payment of the employee portion
of the premiums for such benefits. Benefits otherwise
receivable by Executive pursuant to this subparagraph
(ii) shall be reduced or eliminated to the extent
comparable benefits are actually received by
Executive during such period from a source outside
MTS, and any such benefits actually received by
Executive shall be reported to MTS.
(b) If the Executive voluntarily terminates his employment other
than for Good Reason but more than 180 days after an
Unfriendly Change in Control, Executive shall be entitled to
the following benefits:
(i) Severance. MTS shall pay to Executive as a severance
payment (the "Severance Payment") an amount equal to
the product of 18 multiplied by the Executive's
monthly Gross Income as defined in Section 5(a)(i)
above. The Severance Payment shall be made in a
single lump sum within 30 days after the Date of
Termination, subject to all applicable federal and
state withholding.
(ii) Benefits. For 18 months following the Executive's
Date of Termination or, if earlier, until Executive
is covered under other group plans, MTS shall
continue to pay the employer share of the Executive's
MTS group life and health insurance premiums. All
premium payments made on Executive's behalf following
his Date of Termination and Executive's continued
participation in the plans are contingent upon
Executive making the appropriate timely written
elections to continue his/her group benefits
following his Date of Termination, said group
benefits continuing in effect for active MTS
employees, Executive continuing to be eligible under
the terms of the plans and applicable laws, and
Executive's payment of the employee portion of the
premiums for such benefits. Benefits otherwise
receivable by Executive pursuant to this subparagraph
(ii) shall be reduced or eliminated to the extent
comparable benefits are actually received by
Executive during such
<PAGE>
Change in Control Agreement Page 7
period from a source outside MTS, and any such
benefits actually received by Executive shall be
reported td MTS.
7. Additional Benefits. In addition to all other amounts payable and
benefits receivable to Executive upon termination of employment covered
under this Agreement, Executive shall be entitled to the following
benefits:
(a) Legal Fees. In the event of any termination of employment
under this Agreement, other than termination for Cause, MTS
shall pay to Executive all legal fees and expenses reasonably
incurred by Executive in contesting or disputing any such
termination or in seeking to obtain or enforce any right or
benefit provided by this Agreement.
(b) Retirement Plan. Executive shall, upon termination of
employment, be entitled to receive all benefits payable to the
Executive under the MTS Systems Corporation Profit Sharing
Retirement Plan and any other plan or agreement relating to
retirement benefits.
(c) Employee Stock Option Certificate. The Executive's rights
under any existing Employee Stock Option Agreement and any
future such agreements, including particularly his/her right
to exercise his/her option rights following his termination of
employment, shall continue to be fully effective hereunder.
8. No Mitigation. Executive shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment or benefit
provided for in this Agreement be reduced by any compensation earned by
Executive as the result of employment by another employer or by
retirement benefits after the Date of Termination, or except as
otherwise provided in this Agreement.
9. Potential Excise Tax Indemnification
(a) Excise Tax. Should any payments hereunder or contemplated
hereby be subject to excise tax pursuant to Section 4999 of
the Internal Revenue Code of 1986, as may be amended, or any
successor or similar provision thereto, or comparable state or
local tax laws, MTS shall pay to the Executive such additional
compensation as is necessary (after taking into account all
federal, state and local income taxes payable by the Executive
as a result of the receipt of such compensation) to place the
Executive in the same after-tax position he/she would have
been in had no such excise tax (or any interest or penalties
thereon) been paid or incurred. MTS shall pay such additional
compensation upon the earlier of
(i) the time at which MTS withholds such excise tax from
any payments to the Executive; or
(ii) 30 days after the Executive notifies MTS that the
Executive has paid such excise tax pursuant to a tax
return filed by the Executive which takes the
position that such excise tax is due and payable in
reliance on a written opinion of the Executive's tax
counsel that it is more likely than not that such
excise tax is due and payable, or, if later, the date
the IRS notifies Executive that such amount is due
and payable.
<PAGE>
Change in Control Agreement Page 8
Without limiting the obligation of MTS hereunder, the
Executive agrees, in the event the Executive makes any payment
pursuant to the preceding sentence, to negotiate with MTS in
good faith with respect to procedures reasonably requested by
MTS which would afford MTS the ability to contest the
imposition of such excise tax; provided, however, that the
Executive will not be required to afford MTS any right to
contest the applicability of any such excise tax to the extent
that the Executive reasonably determines that such contest is
inconsistent with the overall tax interests of the Executive.
MTS agrees to hold in confidence and not to disclose, without
the Executive's prior written consent, any information with
regard to the Executive's tax position which MTS obtains
pursuant to this subsection.
(b) Indemnification. MTS will indemnify the Executive (and his/her
legal representative or other successors) to the fullest
extent permitted (including payment of expenses in advance of
final disposition of the proceeding) by the laws of the State
of Minnesota, as in effect at the time of the subject act or
omission, or the Articles of Incorporation and By-Laws of MTS
as in effect at such time or on the date of this Agreement,
whichever affords or afforded greater protection to the
Executive; and the Executive shall be entitled to the
protection of any insurance policies MTS may elect to maintain
generally for the benefit of its directors and officers,
against all costs, charges and expenses whatsoever incurred or
sustained by the Executive or his/her legal representatives in
connection with any action, suit or proceeding to which he/she
(or his/her legal representative or other successors) may be
made a party by reason of his/her being or having been a
director, officer or employee of MTS or any of its
subsidiaries or his/her serving or having served any other
enterprise as a director, officer or employee at the request
of MTS, provided that MTS shall cause to be maintained in
effect for not less than six years from the date of a Change
in Control (to the extent available) policies of directors'
and officers' liability insurance of at least the same
coverage as those maintained by MTS on the date of this
Agreement and containing terms and conditions which are no
less advantageous than such policies.
10. Non-Competition and Confidentiality.
(a) Noncompetition. Except as provided in subsection (c) below,
Executive agrees that, as a condition of receiving benefits
under this Agreement, he/she will not render services directly
or indirectly to any competing organization, wherever located,
for a period of one year following the Date of Termination, in
connection with the design, implementation, development,
manufacture, marketing, sale, merchandising, leasing,
servicing or promotion of any "Conflicting Product" which as
used herein means any product, process, system or service of
any person, firm, corporation, organization other than MTS, in
existence or under development, which is the same as or
similar to or competes with, or has a usage allied to, a
product, process, system, or service produced, developed, or
used by MTS. Executive agrees that violation of this covenant
not to compete with MTS shall result in immediate cessation of
all benefits hereunder, other than insurance benefits, which
Executive may continue where permitted under federal and state
law at his/her own expense.
<PAGE>
Change in Control Agreement Page 9
(b) Confidentiality. Executive further agrees and acknowledges
his/her existing obligation that at all times during and
subsequent to his/her employment with MTS, he/she will not
divulge or appropriate to his/her own use or the uses of
others any secret or confidential information or knowledge
pertaining to the business of MTS, or any of its subsidiaries,
obtained during his/her employment by MTS or any of its
subsidiaries.
(c) Waiver - Unfriendly Change in Control. Notwithstanding
anything herein to the contrary: the restriction on
competition under subsection (a) shall not apply if the
Executive's employment terminates following an Unfriendly
Change in Control. Furthermore, in such event, MTS waives any
other restriction on Executive's employment and consents
unconditionally to any employment Executive may subsequently
obtain.
11. Funding of Payments. In order to assure the performance of MTS or its
successor of its obligations under this Agreement, MTS may deposit in a
so-called "rabbi" trust an amount equal to the maximum payment that
will be due the Executive under the terms hereof provided, however,
that MTS shall deposit in trust the amount equal to the maximum payment
due Executive immediately upon an Unfriendly Change in Control. Under
such written trust instrument, the Trustee shall be instructed to pay
to the Executive (or the Executive's legal representative, as the case
may be) the amount to which the Executive shall be entitled under the
terms hereof and the balance, if any, of the trust not so paid or
reserved for payment shall be repaid to MTS. If MTS deposits funds in
trust, payment shall be made no later than the occurrence of a Change
in Control. The written instrument governing the trust shall be
irrevocable from and after such Change in Control and shall contain
such provisions protective of the Executive as are contained in similar
trust agreements approved by the Internal Revenue Service in published
private letter rulings (provided that the assets of the trust shall be
reachable by creditors of MTS as required by such rulings). The trustee
shall be a national bank selected by MTS with the consent of the
Executive, with trust powers and whose principal officers are located
in the Minneapolis/ St. Paul metropolitan area. The trustee shall
invest the assets of the trust in any readily marketable securities of
U.S. corporations (other than MTS, its successor, or any affiliate of
MTS or its successor). If and to the extent there are not amounts in
trust sufficient to pay Executive under this Agreement, MTS shall
remain liable for any and all payments due to Executive.
12. Successors; Binding Agreement.
(a) Successors. MTS will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of MTS
to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that MTS would be required
to perform it if no such succession had taken place. Failure
of MTS to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this
Agreement and shall entitle Executive to compensation from MTS
in the same amount and on the same terms as he would be
entitled hereunder if he terminated his employment for Good
Reason following a Change in Control, except that for purposes
of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of
Termination.
<PAGE>
Change in Control Agreement Page 10
(b) Binding Agreement. This Agreement shall inure to the benefit
of and be enforceable by Executive's personal or legal
representatives, successors, heirs, and designated
beneficiaries. If Executive should die while any amount would
still be payable to Executive hereunder if the Executive had
continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this
Agreement to the Executive's designated beneficiaries or, if
there is no such designated beneficiary, to the Executive's
estate.
13. Notice.
(a) Form and Delivery. All notices and other communications
provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by
United States registered or certified mail, return receipt
requested, postage prepaid, addressed to the last known
residence address of the Executive or in the case of MTS, to
its principal office to the attention of each of the then
directors of MTS with a copy to its Secretary, or to such
other address as either party may have furnished to the other
in writing in accordance herewith, except that notice of
change of address shall be effective only upon receipt.
(b) Notice of Termination. Any purported termination of
Executive's employment by MTS or by Executive shall be
communicated by written Notice of Termination to the other
party hereto, which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth
the facts and circumstances claimed to provide a basis for
termination of Executive's employment.
(c) Date of Termination. For purposes of this Agreement, "Date of
Termination" shall mean the date specified in the Notice of
Termination which shall not be less than 10 nor more than 30
days, respectively, from the date such Notice of Termination
is given.
(d) Dispute of Termination. If, within 10 days after any Notice of
Termination is given, the party receiving such Notice of
Termination notifies the other party that a dispute exists
concerning the termination, the Date of Termination shall be
the date on which the dispute is finally determined, either by
mutual written agreement of the parties, or by a final
judgment, order or decree of a court of competent jurisdiction
(which is not appealable or the time for appeal therefrom
having expired and no appeal having been perfected); provided,
that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the
party giving such notice pursues the resolution of such
dispute with reasonable diligence in accordance with Section
14 below. Notwithstanding the pendency of any such dispute,
MTS shall continue to pay Executive full compensation in
effect when the notice giving rise to the dispute was given
(including, but not limited to, base salary) and continue
Executive as a participant in all compensation, benefit and
insurance plans in which the Executive was participating when
the notice giving rise to the dispute was given, until the
dispute is finally resolved in accordance with this subsection
or at the end of a period of 180 days, whichever first occurs.
Amounts paid under this subsection are in addition to all
other amounts due under
<PAGE>
Change in Control Agreement Page 11
this Agreement and shall not be offset against or reduce any
other amounts under this Agreement.
14. Arbitration. Any dispute arising under or in connection with this
Agreement (including without limitation, the making of this Agreement
or the Executive's termination of employment) shall be resolved by
final and binding arbitration to be held in Minneapolis, Minnesota in
accordance with the rules and procedures of the American Arbitration
Association. The parties shall select a mutually acceptable single
arbitrator to resolve the dispute or if they fail or are unable to do
so, each side shall within the following ten business days select a
single arbitrator and the two so selected shall select a third
arbitrator within the following ten business days. The arbitrator shall
have no power to award any punitive or exemplary damages. The
arbitrator may construe or interpret, but shall not ignore or vary the
terms of this Agreement, and shall be bound by controlling law. The
arbitration award or other resolution may be entered as a judgment at
the request of the prevailing party by any court of competent
jurisdiction in Minnesota or elsewhere.
15. Miscellaneous.
(a) Modification and Waiver. Except as otherwise specifically
provided in this Agreement, no provision of this Agreement may
be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed
by the parties. No waiver by either party hereto at any time
of any breach by the other party to this Agreement of, or
compliance with, any other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or
at any prior or similar time.
(b) Entire Agreement. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not
expressly set forth in this Agreement.
(c) Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of
the State of Minnesota.
(d) Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which
shall remain in full force and effect.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have
executed this Agreement as of the day and date first above written.
EXECUTIVE MTS SYSTEMS CORPORATION
/s/ William G. Anderson By /s/ Donald M. Sullivan
------------------------ ----------------------
William G. Anderson Its CEO and Chairman
-----------------
EXHIBIT 10.ad
CHANGE IN CONTROL AGREEMENT
AGREEMENT made as of this14th day of March 1998 by and between MTS Systems
Corporation, a Minnesota corporation ("MTS") and James M. Egerdal (the
"Executive").
WHEREAS, MTS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of MTS
and its shareholders; and
WHEREAS, the Executive has made and is expected to make, due to Executive's
intimate knowledge of the business and affairs of MTS, its policies, methods,
personnel and problems, a significant contribution to the profitability, growth
and financial strength of MTS; and
WHEREAS, MTS, as a publicly held corporation, recognizes that the possibility of
a Change in Control may exist and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of the Executive in the performance of the Executive's duties to the
detriment of MTS and its shareholders; and
WHEREAS, Executive is willing to remain in the employ of MTS upon the
understanding that MTS will provide income security if the Executive's
employment is terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of MTS and its stockholders to reinforce
and encourage the continued attention and dedication of management personnel,
including Executive, to their assigned duties without distraction and to ensure
the continued availability to MTS of the Executive in the event of a Change in
Control;
THEREFORE, in consideration of the foregoing and other respective covenants and
agreements of the parties herein contained, the parties hereto agree as follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until the earlier of (A) the date that any and
all benefits due to Executive under this Agreement upon the happening
of the events set forth herein have been paid and satisfied and all
obligations of MTS to the Executive have been performed or (B) the date
the Executive and MTS agree in writing to terminate this Agreement.
Notwithstanding the preceding sentence, if a Change in Control occurs,
this Agreement shall remain in effect for a period of 36 months from
the date of the occurrence of a Change in Control.
2. Change in Control. If a Change in Control shall have occurred during
the term of this Agreement, the provisions of this Agreement shall
become operative and MTS agrees to employ the Executive and to provide
the benefits stated in this Agreement.
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Change in Control Agreement Page 2
(a) Change in Control, shall, for purposes of this Agreement,
means a change in control of MTS which would be required to be
reported in response to Item 1 of Form 8-K promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), whether or not MTS is then subject to such reporting
requirement, including, without limitation, if:
(i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act, including any
affiliate or associate as defined in Rule 12(b)-2
under the Exchange Act of such person, other than
MTS, any trustee or other fiduciary holding
securities under an employee benefit plan of MTS, or
any corporation owned, directly or indirectly, by the
stockholders of MTS in substantially the same
proportions as their ownership of stock of MTS)
becomes a "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or
indirectly, of securities of MTS representing 35% or
more of the combined voting power of MTS's then
outstanding securities; or
(ii) the Board of Directors is comprised of fewer than 65%
of the individuals described in subsection (b) below;
or
(iii) the stockholders of MTS approve a definitive
agreement to merge or consolidate MTS with or into
another corporation or other enterprise in which the
holders of outstanding stock of MTS entitled to vote
in elections of directors immediately before such
merger or consolidation hold less than 80% of the
voting power of the survivor of such merger or
consolidation or its parent, or approve a plan of
liquidation; or
(iv) at least 60% of MTS's assets are sold and transferred
to another corporation or other enterprise that is
not a subsidiary, direct or indirect, or other
affiliate of MTS; or
(v) the Board of Directors of MTS determines, by a vote
of a majority of its entire membership, that a tender
offer statement by any person (as defined above)
indicates an intention on the part of such person to
acquire control of MTS.
(b) Board of Directors shall, for purposes of subsection (a),
mean:
(i) individuals who on the date hereof constituted the
Board of MTS, and
(ii) any new director who subsequently was elected or
nominated for election by a majority of the directors
who held such office immediately prior to a Change in
Control.
(c) Friendly Change in Control shall mean a Change in Control
which arises from a transaction or series of transactions
authorized, recommended or approved at the time by formal
action of the Board of Directors.
(d) Unfriendly Change in Control shall mean a Change in Control
that is not a "Friendly Change in Control" as defined above.
An Unfriendly Change in Control shall not thereafter become a
Friendly Change in Control.
<PAGE>
Change in Control Agreement Page 3
3. Termination by Reason of Death or Disability. In the event of the
Executive's death or disability during the Term of this Agreement,
Executive shall be entitled to such benefits provided under any policy,
plan or program governing death or disability maintained by MTS and
covering such Executive and this Agreement shall not apply. The
determination of disability and the amount and entitlement of benefits
shall be governed by the terms of such policy, plan or program. In the
event of the Executive's disability, the Executive's Date of
Termination shall be the date on which Executive has been unable, by
reason of physical or mental disability, to perform the services
required of him/her for his/her position, even with reasonable
accommodation, for the period of time indicated in MTS's group long
term disability plan (in which the Executive is a participant) during
which a participant must be disabled before benefits become payable. In
connection with Executive's termination due to disability, a qualified
physician must certify the disability and MTS shall at all times comply
with the Americans With Disabilities Act and any other applicable
disability discrimination law.
4. Termination for Cause.
(a) If Executive's employment with MTS shall be terminated by MTS
for Cause as defined below, MTS shall pay to Executive his/her
full base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given and MTS
shall have no further obligation to Executive under this
Agreement.
(b) Termination by MTS of Executive's employment for "Cause" shall
mean termination as a result of:
(i) the conviction of the Executive by a court of
competent jurisdiction for felony criminal conduct;
or
(ii) willful gross misconduct or gross negligence in the
performance of his/her duties by the Executive; or
(iii) material violation by the Executive of any employment
agreement applicable to the Executive.
5. Termination Following Friendly Change in Control.
a) If, after a Friendly Change in Control, Executive's employment
with MTS shall be terminated (A) by MTS other than for cause,
death or disability or (B) by Executive for Good Reason, then
Executive shall be entitled to the following benefits:
(i) Severance. MTS shall pay the Executive as a severance
payment (the "Severance Payment") an amount equal to
the product of 18 multiplied by the Executive's
Monthly Gross Income as defined below. The Severance
Payment shall be made in a single lump sun within 30
days after the Date of Termination, subject to all
applicable federal and state withholding.
For purposes of this Agreement, Monthly Gross Income
shall mean the sum of the following amounts:
(A) 1/12 of the highest average base salary for
any 12-consecutive month period during the
36 calendar month period ending immediately
prior to
<PAGE>
Change in Control Agreement Page 4
the Date of Termination (without taking into
account any reduction in such base salary
that would constitute Good Reason); plus
(B) 1/36 of the total variable compensation paid
during the 3 most recent fiscal years ending
immediately prior to the Date of Termination
(without taking into account any reduction
or termination of such variable compensation
that would constitute Good Reason); plus
(C) the product of the average percentage of MTS
profit sharing contributions to the MTS
Systems Corporation Profit Sharing
Retirement Plan and Trust (as a percent of
Compensation as defined in the Plan) for the
3 most recent Plan Years ending immediately
prior to the Date of Termination multiplied
by the sum of (A) and (B) above.
(ii) Benefits. For 18 months following the Executive's
Date of Termination or, if earlier, until Executive
is covered under other group plans, MTS shall
continue to pay the employer share of the Executive's
MTS group life and health insurance premiums. All
premium payments made on Executive's behalf following
his/her Date of Termination and Executive's continued
participation in the plans are contingent upon
Executive making the appropriate timely written
elections to continue his/her group benefits
following his/her Date of Termination, said group
benefits continuing in effect for active MTS
employees, Executive continuing to be eligible under
the terms of the plans and applicable laws, and
Executive's payment of the employee portion of the
premiums for such benefits. Benefits otherwise
receivable by Executive pursuant to this subparagraph
(ii) shall be reduced or eliminated to the extent
comparable benefits are actually received by
Executive during such period from a source outside
MTS, and any such benefits actually received by
Executive shall be reported to MTS.
(b) Good Reason. Executive shall be entitled to terminate his/her
employment for Good Reason. For purposes of this Agreement,
"Good Reason" shall mean, without Executive's express written
consent, any of the following:
(i) the assignment to Executive of any duties
inconsistent with Executive's status or position with
MTS, or a substantial alteration in the nature or
status of Executive's responsibilities; or
(ii) a reduction by MTS in Executive's annual base salary
other than a reduction comparable to other senior
Executives of MTS in connection with a company-wide
cost reduction program; or
(iii) the relocation of MTS's principal executive offices
to a location more than fifty miles from Eden
Prairie, Minnesota or MTS requiring Executive to be
based anywhere other than MTS's principal executive
offices except for required travel on MTS's business
to an extent substantially consistent with
Executive's prior business travel obligations; or
<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:
<PAGE>
Change in Control Agreement Page 7
(a) Legal Fees. In the event of any termination of employment
under this Agreement, other than termination for Cause, MTS
shall pay to Executive all legal fees and expenses reasonably
incurred by Executive in contesting or disputing any such
termination or in seeking to obtain or enforce any right or
benefit provided by this Agreement.
(b) Retirement Plan. Executive shall, upon termination of
employment, be entitled to receive all benefits payable to the
Executive under the MTS Systems Corporation Profit Sharing
Retirement Plan and any other plan or agreement relating to
retirement benefits.
(c) Employee Stock Option Certificate. The Executive's rights
under any existing Employee Stock Option Agreement and any
future such agreements, including particularly his/her right
to exercise his/her option rights following his termination of
employment, shall continue to be fully effective hereunder.
8. No Mitigation. Executive shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment or benefit
provided for in this Agreement be reduced by any compensation earned by
Executive as the result of employment by another employer or by
retirement benefits after the Date of Termination, or except as
otherwise provided in this Agreement.
9. Potential Excise Tax Indemnification
(a) Excise Tax. Should any payments hereunder or contemplated
hereby be subject to excise tax pursuant to Section 4999 of
the Internal Revenue Code of 1986, as may be amended, or any
successor or similar provision thereto, or comparable state or
local tax laws, MTS shall pay to the Executive such additional
compensation as is necessary (after taking into account all
federal, state and local income taxes payable by the Executive
as a result of the receipt of such compensation) to place the
Executive in the same after-tax position he/she would have
been in had no such excise tax (or any interest or penalties
thereon) been paid or incurred. MTS shall pay such additional
compensation upon the earlier of
(i) the time at which MTS withholds such excise tax from
any payments to the Executive; or
(ii) 30 days after the Executive notifies MTS that the
Executive has paid such excise tax pursuant to a tax
return filed by the Executive which takes the
position that such excise tax is due and payable in
reliance on a written opinion of the Executive's tax
counsel that it is more likely than not that such
excise tax is due and payable, or, if later, the date
the IRS notifies Executive that such amount is due
and payable.
Without limiting the obligation of MTS hereunder, the
Executive agrees, in the event the Executive makes any payment
pursuant to the preceding sentence, to negotiate with MTS in
good faith with respect to procedures reasonably requested by
MTS which would afford MTS the ability to contest the
imposition of such excise tax; provided, however, that the
Executive will not be required to afford
<PAGE>
Change in Control Agreement Page 8
MTS any right to contest the applicability of any such excise
tax to the extent that the Executive reasonably determines
that such contest is inconsistent with the overall tax
interests of the Executive.
MTS agrees to hold in confidence and not to disclose, without
the Executive's prior written consent, any information with
regard to the Executive's tax position which MTS obtains
pursuant to this subsection.
(b) Indemnification. MTS will indemnify the Executive (and his/her
legal representative or other successors) to the fullest
extent permitted (including payment of expenses in advance of
final disposition of the proceeding) by the laws of the State
of Minnesota, as in effect at the time of the subject act or
omission, or the Articles of Incorporation and By-Laws of MTS
as in effect at such time or on the date of this Agreement,
whichever affords or afforded greater protection to the
Executive; and the Executive shall be entitled to the
protection of any insurance policies MTS may elect to maintain
generally for the benefit of its directors and officers,
against all costs, charges and expenses whatsoever incurred or
sustained by the Executive or his/her legal representatives in
connection with any action, suit or proceeding to which he/she
(or his/her legal representative or other successors) may be
made a party by reason of his/her being or having been a
director, officer or employee of MTS or any of its
subsidiaries or his/her serving or having served any other
enterprise as a director, officer or employee at the request
of MTS, provided that MTS shall cause to be maintained in
effect for not less than six years from the date of a Change
in Control (to the extent available) policies of directors'
and officers' liability insurance of at least the same
coverage as those maintained by MTS on the date of this
Agreement and containing terms and conditions which are no
less advantageous than such policies.
10. Non-Competition and Confidentiality.
(a) Noncompetition. Except as provided in subsection (c) below,
Executive agrees that, as a condition of receiving benefits
under this Agreement, he/she will not render services directly
or indirectly to any competing organization, wherever located,
for a period of one year following the Date of Termination, in
connection with the design, implementation, development,
manufacture, marketing, sale, merchandising, leasing,
servicing or promotion of any "Conflicting Product" which as
used herein means any product, process, system or service of
any person, firm, corporation, organization other than MTS, in
existence or under development, which is the same as or
similar to or competes with, or has a usage allied to, a
product, process, system, or service produced, developed, or
used by MTS. Executive agrees that violation of this covenant
not to compete with MTS shall result in immediate cessation of
all benefits hereunder, other than insurance benefits, which
Executive may continue where permitted under federal and state
law at his/her own expense.
(b) Confidentiality. Executive further agrees and acknowledges
his/her existing obligation that at all times during and
subsequent to his/her employment with MTS, he/she will not
divulge or appropriate to his/her own use or the uses of
others any secret or confidential information or knowledge
pertaining to the business of MTS,
<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
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Change in Control Agreement Page 11
employment) shall be resolved by final and binding arbitration to be
held in Minneapolis, Minnesota in accordance with the rules and
procedures of the American Arbitration Association. The parties shall
select a mutually acceptable single arbitrator to resolve the dispute
or if they fail or are unable to do so, each side shall within the
following ten business days select a single arbitrator and the two so
selected shall select a third arbitrator within the following ten
business days. The arbitrator shall have no power to award any punitive
or exemplary damages. The arbitrator may construe or interpret, but
shall not ignore or vary the terms of this Agreement, and shall be
bound by controlling law. The arbitration award or other resolution may
be entered as a judgment at the request of the prevailing party by any
court of competent jurisdiction in Minnesota or elsewhere.
15. Miscellaneous.
(a) Modification and Waiver. Except as otherwise specifically
provided in this Agreement, no provision of this Agreement may
be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed
by the parties. No waiver by either party hereto at any time
of any breach by the other party to this Agreement of, or
compliance with, any other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or
at any prior or similar time.
(b) Entire Agreement. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not
expressly set forth in this Agreement.
(c) Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of
the State of Minnesota.
(d) Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which
shall remain in full force and effect.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have
executed this Agreement as of the day and date first above written.
EXECUTIVE MTS SYSTEMS CORPORATION
/s/ James M. Egerdal By /s/ Donald M. Sullivan
--------------------- -------------------------
James M. Egerdal Its CEO and Chairman
EXHIBIT 10.ae
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of this
23th day March, 1999, by and between MTS Systems Corporation, a Minnesota
corporation ("MTS") and Frank (Gil) Troutman (the "Executive").
WHEREAS, MTS has entered into the Agreement and Plan of Merger (the
"Merger Agreement") of even date hereof with DSP Technology Inc. ("DSP")
pursuant to which a wholly-owned subsidiary of MTS will merge with and into DSP.
WHEREAS, the Executive has been employed as the President of DSP and
has unique expertise, skill, knowledge and know-how with respect to the
business, management and operation of DSP which have contributed substantially
to the profitability, growth and financial strength of DSP;
WHEREAS, MTS desires to retain and secure the services of the
Executive and employ the Executive as its Vice President from and after the
Effective Time (as defined in the Merger Agreement)(the "Effective Time")
subject to the terms and conditions of this Agreement;
WHEREAS, the Executive is willing to become employed by MTS in such
capacity from and after the Effective Time and on the terms and conditions set
forth in this Agreement;
WHEREAS, this Agreement and the obligations of the Executive
hereunder serve as a material inducement for and as an express condition of the
consummation by MTS of the transactions set forth in and contemplated by the
Merger Agreement;
WHEREAS, the Executive is expected to make a significant
contribution to the profitability, growth and financial strength of DSP and MTS;
and
WHEREAS, the Executive agrees, in consideration of his employment
with MTS and the consideration furnished by MTS to the Executive under this
Agreement and the Merger Agreement, to recognize and honor his obligations to
MTS under this Agreement from and after the Effective Time;
NOW THEREFORE, in consideration of the foregoing and other
respective covenants and agreements of the parties herein contained, the parties
hereto agree as follows:
1. Term of Agreement. The term of this Agreement shall be for a
period of thirty-six (36) months from the Effective Time, unless sooner
terminated as hereinafter provided. The Agreement shall thereafter continue in
effect from year to year unless altered or terminated as hereinafter provided in
paragraphs 6, 7 or 8.
2. Cancellation of Former Employment Contracts. The Executive hereby
covenants that any and all contracts, whether written or oral, between the
Executive and DSP will be
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canceled or terminated in their entirety as of the Effective Time and are
superseded in their entirety by this Agreement as of the Effective Time. This
shall be performed by the execution of a separate agreement between the
Executive and DSP in the form attached hereto as Exhibit A.
3. Duties. The Executive agrees, unless otherwise specifically
authorized by MTS, to devote his full business time and effort to his duties as
set forth in his job description for the profit, benefit and advantage of the
business of DSP and MTS. It is acknowledged and agreed that the services to be
rendered by the Executive to DSP and MTS hereunder shall be rendered in Ann
Arbor, MI.
4. Compensation. MTS agrees to provide the Executive with the
following compensation during the term of this Agreement:
(a) Salary: The Executive will be provided a base salary of
Sixteen Thousand Six Hundred and Sixty Six Dollars and Sixty Six Cents
($16,666.66) per month (the "Base Salary"), payable bi-weekly. Base salary will
be reviewed annually, with the first review to coincide with the review of other
MTS executives following the close of fiscal year 1999, but in no event later
than one (1) year after the start date, provided that the Executive's salary may
not be decreased. Any pay increase made prior to the completion of the
Executive's first twelve months as an employee shall be prorated from the date
of such increase to the end of that year.
(b) Bonus: The Executive will be eligible for MTS's Management
Variable Compensation Bonus (the "Bonus") at a rate of twenty percent (20%) of
midpoint for D-2 in the MTS salary level structure in accordance with the MTS
Management Variable Compensation Plan (or at a comparable level under any
successor plan or an equivalent bonus if the bonus plan is discontinued),
provided that target goals for the determination of any bonus award will be
mutually agreed in advance between the Executive and MTS. Nine thousand two
hundred and fifty ($9,250) of the Bonus is guaranteed for fiscal year 1999 and
shall be paid in a lump sum no later than December 31, 1999. No Bonus is
guaranteed after fiscal year 1999.
(c) Automobile: MTS will provide the Executive with an
automobile subject to and in accordance with MTS's Executive Plan.
(d) 401(k) Plan: The Executive will be entitled to participate
in MTS's 401(k) Plan to the extent allowed by MTS's 401(k) Plan eligibility
requirements.
(e) Retirement Plan: The Executive will be entitled to take
part in MTS's Profit Sharing Retirement Plan to the extent allowed by that
Plan's eligibility requirements.
(f) Stock Options: The Executive will be granted as of the
Effective Time an option (the "Option") to purchase 10,000 shares of MTS common
stock awarded and priced at fair market value as of the Effective Time. In
January of the year 2000, the Executive will be eligible to participate in the
MTS Stock Option Plan (the "Stock Plan") then in effect. From and after that
date and subject to the approval of such grant by the Human Resources Committee
pursuant to the terms of the Stock Plan, the Executive will be granted each year
at the same time
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as options are granted to other executives at MTS, an Option to purchase at
least 5,500 shares of MTS common stock, to the extent available under such Stock
Plan. All Options shall vest annually in equal installments over three (3) years
from the date of grant and are subject to all of the terms and conditions of the
Stock Plan. All shares subject to the Option shall vest immediately in the event
of involuntary termination of employment (as that term is defined in the Stock
Plan). This accelerated vesting provision shall not, however, apply in the event
of termination for Cause.
(g) Benefit Plans and Programs. In addition to any other
compensation to be paid the Executive under this paragraph 4 of the Agreement,
the Executive will be entitled to participate in and receive benefits under any
other benefit plans or programs (including group health, disability and life
insurance programs) or additional compensation, retirement or remuneration plans
or programs of MTS as adopted from time to time by MTS of the type and in an
amount comparable to that provided to other executive employees of MTS in
similar positions. MTS is not, however, obligated to adopt or continue any
benefit plans or programs set forth in this paragraph 4 during the term of this
Agreement, and Employees' participation in any of the plans or programs of MTS
will be subject to the provisions, limitations and rules applicable to such
plans or programs.
(h) Expenses. MTS will pay or reimburse the Executive for all
reasonable expenses incurred in connection with the performance of his duties
under this Agreement, provided that such expenses are properly accounted for and
in accordance with the policies of MTS.
(i) Change in Control. As soon as practicable after the
Effective Time, MTS and the Executive shall enter into a change in
control/severance agreement in the form then available to executive officers at
MTS generally.
5. Insurance. In addition to and without any limitation of
Executive's rights under any health, disability, life or other insurance plan or
policy under which Employee participates pursuant to paragraph 4(g), the
Executive agrees that MTS may, from time to time, apply for and take out in its
own expense life, health, disability, accident or other insurance upon the
Executive that MTS may deem necessary or advisable to protect its interests
hereunder; and the Executive agrees to submit to any medical or other
examination necessary for such purposes and to assist and cooperate with MTS in
preparing such insurance; and the Executive agrees that he shall have no right,
title, or interest in or to such insurance or any proceeds which may emanate
therefrom.
6. Termination by Reason of Death or Disability. In the event of the
Executive's death or disability during the term of this Agreement, the Executive
shall be entitled to such benefits provided under any policy, plan or program
governing death or disability maintained by MTS and covering the Executive
described in paragraph 4(g) above. The determination of disability and the
amount and entitlement of benefits shall be governed by the terms of such
policy, plan or program. In the event of the Executive's disability, the
Executive's Date of Termination shall be the date on which the Executive has
been unable, by reason of physical or mental disability, to perform the services
required of him for his position, even with reasonable
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accommodation, for the period of time indicated in MTS's group long-term
disability plan (in which the Executive is a participant) during which a
participant must be disabled before benefits become payable. In connection with
the Executive's termination due to disability, a qualified physician must
certify the disability and MTS shall at all times comply with the Americans With
Disabilities Act and any other applicable disability discrimination law.
7. Resignation or Termination for Cause.
(a) The Executive may resign his employment or MTS may
terminate the Executive's employment for Cause, effective as of the Date of
Termination set forth in the Notice of Termination (as defined in paragraph 13
hereof). If the Executive resigns or his employment is terminated by MTS for
Cause, MTS shall pay to the Executive the Base Salary and any Bonus with respect
to which all conditions giving rise to payment have been met (including, but not
limited to, the bonus guaranteed under paragraph 4(b) of this Agreement), but
which remains unpaid through the Date of Termination at the rate in effect at
the time of Notice of Termination is given and MTS shall have no further
obligation to the Executive under this Agreement, except to the extent provided
by law.
(b) Termination by MTS of the Executive's employment for
"Cause" shall mean termination as a result of:
(i) the conviction of the Executive by a court of
competent jurisdiction of any felony criminal conduct; or
(ii) the conviction of the Executive by a court of
competent jurisdiction of a misdemeanor involving the misappropriation or
improper use of the assets of MTS or DSP; or
(iii) the habitual neglect by the Executive of his
duties to MTS or DSP under this Agreement or his failure to correct material
performance deficiencies after being given written notice of the deficiencies
and thirty (30) days to correct them; or
(iv) the material violation by the Executive of any
existing or future policies of MTS after being given written notice of such
violation and thirty (30) days to remedy such violation, to the extent such
violation can be remedied; or
(v) the engagement by the Executive in conduct
substantially detrimental to the business, reputation or goodwill of MTS or DSP
after being given written notice of such conduct and thirty (30) days to remedy
such conduct, to the extent such conduct can be remedied; or
(vi) the violation by the Executive of any material
provision of this Agreement including, without limitation, paragraphs 10 and 11
of this Agreement or any other written agreement applicable to the Executive.
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8. Termination Other Than for Cause. MTS may terminate the
Executive's employment for a reason other than Cause, including pursuant to the
Executive Exemption as defined in the Age Discrimination in Employment Act, 29
U.S.C. Section 631(c)(1) on or after the Executive's 65th birthday, effective as
of the Date of Termination set forth in the Notice of Termination.
If the Executive's employment is terminated by MTS other than for:
(X) death; (Y) disability; or (Z) Cause at any time during the first thirty-six
(36) months of this Agreement, the Executive shall be entitled, subject to
subparagraph 10(e) and paragraph 14 of this Agreement, to payment of the sum of
his Base Salary, as outlined in subparagraph 4(a) of this Agreement, and,
subject to the modification in the next sentence, an amount equal to 1/24 of the
Bonus earned during the two (2) most recent fiscal years ending immediately
prior the Date of Termination per month, payable bi-weekly from the Date of
Termination to the end of the first thirty-six (36) months that the Agreement is
in place, and for a period of nine (9) months from the Date of Termination, the
benefits in subparagraphs 8(b), (c) and, if applicable, (d) below; provided,
however, that if less than nine (9) months remain to the first thirty-six (36)
month period, after payment of the benefits set forth above for the remainder of
the 36 month period, the benefits described in subparagraphs 8(a), (b) and (c)
and, if applicable, subparagraph (d) below shall be paid for a period of months
equal to nine (9) minus the number of months which had remained of the first
thirty-six (36) month period. If the Executive's employment is terminated under
the preceding sentence during the fiscal year ending September 30, 2000, the
amount under the preceding sentence shall be 1/12 of the Bonus earned during the
fiscal year ending September 30, 1999, and if the Executive's employment is
terminated under the preceding sentence during the fiscal year ending September
30, 1999, the amount under the preceding sentence shall be 1/12 of the Bonus
that would have been earned for the fiscal year ending September 30, 1999 based
on actual achievement of the established targets; provided that, following the
determination of such amount, the Executive shall be paid a lump sum equal to
the number of months between the Date of Termination and the determination of
the Bonus multiplied by such amount. In addition, to the extent not previously
paid, the amount of the guaranteed bonus under subparagraph 4(b) shall be paid.
If the Executive's employment is terminated by MTS other than for:
(X) death; (Y) disability; or (Z) Cause at any time after the first thirty-six
(36) months of this Agreement, the Executive shall be entitled, subject to
subparagraph 10(e) and paragraph 14 of this Agreement, to the benefits described
in subparagraphs 8(a), (b) and (c) below and, if applicable, subparagraph 8(d)
below.
(a) The Executive shall be paid a monthly Severance Payment
equal to the Executive's Monthly Gross Income, as defined in subparagraphs
(i)-(iii) below for a period of nine (9) months. For purposes of this Agreement,
Monthly Gross Income shall mean the sum of the following amounts, subject to
applicable federal and state withholding.
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(i) 1/12 of the highest average monthly base salary of
the Executive for any twelve (12) consecutive month period during the twenty
four (24) calendar month period ending immediately prior to the Date of
Termination; plus
(ii) 1/24 of the Bonus earned during the two (2) most
recent fiscal years ending immediately prior the Date of Termination; plus
(iii) the product of the average percentage of MTS
profit sharing contributions to the MTS Systems Corporation Profit Sharing
Retirement Plan and Trust (as a percent of Compensation as defined in the Plan)
for the two (2) most recent Plan Years ending immediately prior to the Date of
Termination multiplied by the sum of (i) and (ii) above.
(b) Following the Executive's Date of Termination, the
Executive shall be entitled to continuation coverage of any benefits which
qualify as group health and life insurance benefits under the Consolidated
Omnibus Budget Reconciliation Act ("COBRA") or applicable state law and pursuant
to the terms of the plan(s). Following the Executive's Date of Termination and
while severance payments are being paid to the Executive or, if earlier, until
the Executive is covered under other group plans, MTS shall pay the employer
share of the Executive's MTS group life and health insurance premiums under
COBRA. All premium payments made on the Executive's behalf following his Date of
Termination and the Executive's continued participation in the plans are
contingent upon the Executive making the appropriate timely written elections to
continue his group benefits following his Date of Termination, said group
benefits continuing in effect for active MTS employees, the Executive continuing
to be eligible under the terms of the plans and applicable laws, and the
Executive's payment of the employee portion of the premiums for such benefits.
Executive shall send to MTS payment of the employee portion of the premiums for
such benefits in accordance with the terms of the plans and applicable laws.
Benefits otherwise receivable by the Executive pursuant to this subparagraph (b)
shall be reduced or eliminated to the extent comparable benefits are actually
received by the Executive during such period from a source outside MTS, and any
such benefits actually received by the Executive shall be reported to MTS.
(c) Following the severance pay period, the Executive shall be
entitled to continuation coverage of any of said benefits which qualify as group
health and life insurance benefits for the remaining period under COBRA or
applicable state law and pursuant to the terms of the plan(s).
(d) The Executive's rights under any existing Employee Stock
Option Agreement and any future such agreements, including particularly the
right to exercise his options following his termination of employment, shall
continue to be fully effective hereunder. In addition, if the Executive's
termination of employment occurs pursuant to the Executive Exemption on or after
he has reached his 65th birthday, the Executive shall continue to vest in any
stock options in which he is not fully vested, as though he were continuing his
employment with MTS as an active employee, subject at all times to the exercise
times and other terms and
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conditions set forth in said Stock Option Agreements and to the Executive's
signing the release agreement described in paragraph 14 herein.
9. No Mitigation. The Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise; nor shall the amount of any payment or benefit provided
for in this Agreement be reduced by any compensation earned by the Executive as
the result of employment by another employer or by retirement benefits after the
Date of Termination or otherwise except as specifically provided herein.
10. Non-Competition; Confidentiality and Trade Secrets.
(a) MTS and the Executive acknowledge that (i) the business of
MTS and DSP is highly competitive; (ii) the essence of such business consists of
confidential information and trade secrets; (iii) the Executive has and, in the
course of his employment, will acquire the information described in subparagraph
10(c) and that MTS and DSP would be adversely affected if such information
subsequently, and in the event of the termination of the Executive's employment,
is used for the purposes of competing with MTS or DSP; and (iv) the Executive
has received and, in the future will receive, substantial consideration for the
covenants and obligations contained in paragraphs 10 and 11 of this Agreement
(including, without limitation, the consideration received under this Agreement
and the Merger Agreement).
(b) The Executive agrees that from and after the date hereof
for the term of employment and, for the greater of the period under which the
Executive receives benefits under paragraph 8(a) above or a period of twelve
(12) months from the Date of Termination of the Executive's employment
hereunder, he will not, without the express written permission of MTS, directly
or indirectly (i) own, manage, operate, control, lend money to, endorse the
obligations of, be a creditor of, or participate or be connected as an officer,
director, 5% or more stockholder of a publicly-held company or securityholder of
a closely-held company, employee, partner, member, consultant or otherwise
render services to any enterprise or individual (x) located in any state or
country in which MTS or DSP is doing business as of the Executive's Date of
Termination (or any state or country for which MTS or DSP has developed a
marketing plan for its products or services even if such a plan is not yet in
effect), and (y) engaged in the business of developing, processing,
manufacturing or marketing products, technologies, processes, systems or
services that have been developed or provided by DSP or MTS in the automotive
powertrain design and testing sector or any other sector in which the Executive
had any responsibility and/or actively participated in as of his Date of
Termination; (ii) interfere with or attempt to interfere with the relationship
of MTS or DSP with any of their current customers, distributors or suppliers and
any potential customers, distributors or suppliers identified in any marketing
plan developed with the direct assistance of the Executive in the automotive
powertrain design and testing sector or any other sector in which the Executive
had any responsibility or actively participated in as of his Date of
Termination; or (iii) solicit himself or on behalf of any individual or entity
competing with MTS or DSP (as defined in subsection (i)), any person who is an
employee of MTS or DSP to become an employee of his or any such person. The
written permission of MTS contemplated
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by this subparagraph (b) hereof, shall not be unreasonably withheld for such
business or product areas that are in competition with MTS; provided, that the
activities contemplated by the Executive are not regarded by MTS as an actual or
potential threat to MTS's existing business or any potential business identified
in any marketing plan developed with the direct assistance of the Executive.
(c) The Executive acknowledges that he has acquired and will
acquire information and knowledge respecting the intimate and confidential
affairs of MTS and DSP including, without limitation, confidential information
and trade secrets with respect to DSP's and MTS's products, services, designs,
practices, processes, techniques, sales or distribution methods or other
confidential information pertaining to the business or financial affairs of MTS
and DSP, which may or may not be patentable, which have been, are being, or will
be developed by MTS and DSP at considerable time and expense, and which could be
unfairly utilized in competition with MTS and DSP (the "Confidential
Information"). The Executive agrees and acknowledges his existing obligation
that, at all times during and subsequent to his employment with MTS, he will
not, without the written consent of MTS, disclose to any person or entity, other
than an employee of MTS or DSP to whom disclosure is reasonably necessary in
connection with the performance by the Executive of his duties, or appropriate
to his own use or the uses of others any of the Confidential Information.
(d) Upon termination of employment, the Executive agrees to
deliver to MTS all materials that include the Confidential Information, such as
customer list, product formulations, instruction sheets, drawings, manuals,
letters, notes, notebooks, books, reports and copies thereof, and all other
materials of a confidential nature which belong to or relate to the business of
MTS or DSP.
(e) If the Executive violates his obligations under
subparagraphs (a), (b), (c) and (d) above, or if the provisions of this section
10 are held to be substantially unenforceable against the Executive, any
remaining payments or benefits otherwise due the Executive pursuant to paragraph
8 of this Agreement shall not be paid.
11. Improvements and Inventions.
(a) The Executive shall promptly and fully disclose to MTS,
any and all ideas, improvements, discoveries and inventions, whether or not they
are believed to be patentable (all of which are hereinafter referred to as
"Inventions"), which the Executive conceives or first actually reduces to
practice, either solely or jointly with others, during the period of Employee's
employment or within one (1) year after termination of employment and which
relate to the business now or hereafter carried on or presently part of the
business plan of MTS or which results from any work performed by the Executive
for MTS. If, subsequent to the Executive's termination, except for Cause, the
Executive desires to use these Inventions, he may request written permission
from MTS. The written permission of MTS to use these Inventions shall not be
unreasonably withheld for such business or product areas that are not in
competition with MTS; provided, that the activities contemplated by the
Executive are not regarded by MTS as an actual or potential threat to its
existing or future business.
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(b) All such Inventions shall be the sole and exclusive
property of MTS, and during the term of his employment and thereafter, whenever
requested to do so by the MTS, the Employee shall execute and assign any and all
applications, assignments and other instruments which MTS shall deem necessary
or convenient in order to apply for and obtain Letters Patent of the United
States and/or of any foreign countries for such Inventions and in order to
assign and convey to MTS or its nominee the sole and exclusive right, title and
interest in and to such Inventions, and the Executive will render aid and
assistance in any interference or litigation pertaining thereto, all expenses
reasonably incurred by the Executive at the request of MTS shall be borne by
MTS.
(c) Minnesota Statute Section 181.78 provides that the
Agreement does not apply, and written notification is hereby given to the
Executive that this Agreement does not apply, to an Invention for which no
equipment, supplies, facility or trade secret information of the Company was
used and which was developed entirely on the Executive's own time, and (1) which
does not relate (a) directly to the business of the MTS or DSP, or (b) to MTS's
or DSP's actual or demonstrably anticipated research or development, or (2)
which does not result from any work performed by the Executive for MTS or DSP.
12. Binding Agreement. This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal or legal representatives, heirs,
and designated beneficiaries. If the Executive should die while any amount would
still be payable to the Executive hereunder if the Executive had continued to
live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Executive's designated
beneficiaries, or, if there is no such designated beneficiary, to the
Executive's estate.
13. Notice of Termination.
(a) Any purported termination of the Executive's employment by
either the Executive or MTS under this Agreement shall be communicated by
written notice to the other party.
(b) For purposes of this Agreement, "Date of Termination"
shall mean the date specified in the written Notice of Termination which shall
not be less than ten (10) nor more than sixty (60) days from the date such
Notice of Termination is given.
(c) Notice of Termination and all other communications
provided for in the Agreement shall be deemed to have been duly given when
delivered or mailed by United States registered or certified mail, return
receipt requested, postage pre-paid, addressed to the last known residence
address of the Executive or in the case of MTS, to its principal office to the
attention of the Chief Executive Officer of MTS with a copy to its Secretary, or
to such other address as either party may have furnished to the other in writing
in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
14. Release of Claims. The Executive's right to the benefits and
payments described in paragraph 8 of this Agreement, except as otherwise
provided in subparagraph 10(e) hereof, is
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subject to and contingent upon the Executive's execution of a severance release
agreement which shall be provided to Executive by MTS with or following his
Notice of Termination. The severance release agreement shall require a full
release of all claims which the Executive may have against MTS, DSP or any
affiliate or individual associated with MTS or DSP, to the extent that the
claims released are related to this Agreement or the Executive's employment
relationship with MTS or DSP and permitted by and consistent with applicable
laws. Such release agreement shall prohibit the Executive from recovering any
amount in connection with a charge or lawsuit filed against MTS or DSP or any
MTS affiliate, employee, shareholder, officer, director or other agent by the
Executive, EEOC or any other agency or entity on the Executive's behalf based
upon any act occurring prior to execution of said release agreement. The release
agreement will be available for the Executive's review, consideration and
execution at least forty-five (45) days prior to his Date of Termination.
15. Injunctive Relief. The Executive acknowledges that a breach by
the Executive of any of the terms of paragraphs 10 or 11 of this Agreement will
render irreparable harm to MTS and DSP. Accordingly, the Executive agrees that,
in the case of any violation or threatened violation of paragraphs 10 or 11 of
this Agreement, MTS or DSP may, in addition to any and all other avenues of
relief available, apply for and secure injunctive relief, temporary or
provisional, in court, without bond but upon due notice, pending final
resolution on the merits pursuant to arbitration as set forth in paragraph 16
hereof. No waiver of any violation of this Agreement shall be implied from any
failure by MTS or DSP to take action under this paragraph.
16. Arbitration. Any and all claims or disputes between the
Executive and MTS (including the making, validity, scope, and enforceability of
this Agreement), except as otherwise provided under paragraph 15 or prohibited
under applicable law, shall be submitted for arbitration and resolution to an
arbitrator. No demand for arbitration may be made after the date when the
institution of legal or equitable proceedings based on such claim or dispute
would be barred by the applicable statute of limitation. The arbitrator shall be
selected by mutual agreement of the parties. Unless otherwise provided for in
this Agreement, the Expedited Labor Arbitration Rules of the American
Arbitration Association shall apply. If the parties are unable to agree upon an
arbitrator, any such dispute shall be solely and finally settled by arbitration
in accordance with the Expedited Labor Arbitration Rules of the American
Arbitration Association ("AAA"). The parties agree that no punitive damages
shall be awarded hereunder. All costs in conducting the arbitration, including
but not limited to the arbitration filing fee, the arbitrator's fees and
expenses, and the reasonable attorneys' fees and expenses of the prevailing
party (including the attorneys' fees and costs incurred by the prevailing party
in seeking or resisting temporary or provisional court relief as set out in
paragraph 15 above), shall be the responsibility of the losing party. In the
event there is more than one issue in dispute and there is no one prevailing
party with respect to all issues in dispute, costs and attorneys' fees shall be
prorated by the arbitrator according to the relative dollar value of each issue.
The arbitrators' Award shall be final and binding. In the event either party
must resort to the judicial process to enforce the provisions of this Agreement,
the award of an arbitrator or equitable relief granted by an arbitrator, the
party seeking enforcement shall be entitled to recover from the other party all
costs of litigation including, but not limited to, reasonable attorneys' fees
and court costs. The
10
<PAGE>
arbitration proceedings and Award shall be maintained by both parties as
strictly confidential, except as otherwise required by court order and with
respect to the parties' attorneys and tax advisors, and, with respect to MTS,
members of its management, and, with respect to the Executive, his family. The
parties agree that any such arbitration shall take place in Minneapolis or St.
Paul, Minnesota and the Executive waives any argument that venue in such locale
is inconvenient.
17. Miscellaneous.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by the parties. No waiver by either party hereto at any time of any
breach by the other party to this Agreement of, or compliance with, any other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or similar time.
(b) No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement.
(c) The parties acknowledge that the principal place of
business of MTS is located in the State of Minnesota, that this Agreement has
been entered into in the State of Minnesota and they wish legal certainty and
predictability as to the terms of their undertaking. Accordingly, the parties
agree that the validity, interpretation, construction and performance of this
Agreement shall be governed by the internal laws (not the laws of conflicts) of
the State of Minnesota.
(d) The Executive represents warrants and covenants that his
principal place of full time employment is Ann Arbor, Michigan.
(e) The Executive acknowledges that the provisions contained
in this Agreement, including the covenants contained in paragraphs 10 and 11 of
this Agreement, are fair and reasonable. Nonetheless, the parties agree that if
a court or other tribunal finds any of provision of this Agreement to be invalid
in whole or in part under the laws of any state, such finding shall not
invalidate the covenants, nor the Agreement in its entirety, but rather the
covenants shall be construed and/or blue-lined, reformed or rewritten by the
court or tribunal as if the most restrictive covenants permissible under
applicable law were contained herein.
(f) This Agreement shall be binding on the parties' successors
and assigns, and all covenants and agreements hereunder shall inure to the
benefit of and be enforceable by or against each party's successors or assigns.
(g) This Agreement supersedes any and all prior oral and
written understandings and agreements between the Executive and MTS.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the
Executive have
11
<PAGE>
executed this Agreement as of the day and date first above written.
EXECUTIVE MTS SYSTEMS CORPORATION
/s/ Frank Troutman By /s/ S. W. Emery Jr.
- -------------------------------- --------------------------------
Frank (Gil) Troutman
Its Chairman and CEO
-------------------------------
12
<PAGE>
EXHIBIT A
Termination and Cancellation of
Retention Agreement and Other Agreements
THIS AGREEMENT is made and entered into by and between Frank (Gil)
Troutman ("Executive") and DSP Technologies, Inc. ("DSP") and shall be effective
as set forth below.
WHEREAS, the Executive has entered into certain agreements with DSP
with respect to his employment; and
WHEREAS, DSP has entered into the Agreement and Plan of Merger (the
"Merger Agreement") dated March 22, 1999 with MTS Systems Corporation ("MTS");
THEREFORE, in consideration for the employment agreement between MTS
and the Executive dated as of March 22, 1999 and other good and valuable
consideration, the receipt of which is hereby acknowledged, the Executive and
DSP agree as follows:
1. Pursuant to the authority to amend granted under ss. 16 of the
Retention Agreement entered into as of January 18, 1999 between the Executive
and DSP, the Retention Agreement is hereby terminated, canceled and of no force
and effect, and the Executive hereby waives any and all rights under that
agreement effective as of the Effective Time.
2. Except as set forth in section 3 below, any and all other
agreements between the Executive and DSP are hereby terminated, cancelled and of
no force and effect, and the Executive hereby waives any and all rights under
those agreements effective as of the Effective Time, provided that nothing
herein shall impair the Executive's right to receive Merger Consideration under
the Merger Agreement for outstanding options for DSP common stock held by the
Executive as of the Effective Time.
3. The Relocation Agreement dated as of March 5, 1998 between the
Executive and DSP shall remain in full force and effect, and any loan amount
outstanding as of the Effective Time shall be repaid in accordance with the
provisions of the Relocation Agreement.
IN WITNESS WHEREOF, MTS, through its authorized officer, and the Executive have
executed this Agreement as of the day and date first above written.
EXECUTIVE DSP TECHNOLOGIES, INC.
/s/ Frank G. Troutman By /s/ Larry D. Moulton
- ---------------------- ----------------------
Frank (Gil) Troutman
Its General Manager
----------------------
13
EXHIBIT 13
SIX YEAR FINANCIAL SUMMARY
(September 30)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBERS OF SHAREHOLDERS AND EMPLOYEES)
OPERATIONS(5)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue $390,542 $362,163 $323,424 $278,170 $247,793 $212,215
United States revenue 200,556 200,490 156,877 140,249 136,862 111,312
International revenue 189,986 161,673 166,547 137,921 110,931 100,903
Gross profit 151,171 142,227 132,073 116,047 99,923 86,684
Income before income taxes 18,770 33,448 29,986(1) 21,813 15,244 13,804
Net income 12,445 21,539 19,237(1) 15,170 11,105 9,394
Net income per share, diluted basis .59 1.01 .92(1) .72 .55 .45
Research and development expense 26,966 24,348 19,798 19,776 15,471 13,873
Net interest expense 4,597 1,948 1,125 1,123 2,424 1,860
Depreciation and amortization 14,424 10,880 9,608 8,673 7,912 6,745
FINANCIAL POSITION(5)
- -----------------------------------------------------------------------------------------------------------------------
Current assets $223,651 $204,311 $162,814 $137,584 $138,159 $129,042
Current liabilities 104,713 110,223 83,413 63,465 69,312 68,692
Current ratio 2.1:1 1.9:1 2.0:1 2.2:1 2.0:1 1.9:1
Net working capital 118,938 94,088 79,401 74,119 68,847 60,350
Property and equipment, net 73,633 69,942 51,790 49,476 49,465 48,241
Total assets 333,347 313,022 229,075 197,679 198,320 183,767
Interest bearing debt 71,637 74,682 12,865 11,836 22,965 23,851
Shareholders' investment 162,859 152,689 133,524 120,578 113,311 105,886
Shareholders' investment per share 7.80 7.39 6.56 5.90 5.54 5.20
OTHER STATISTICS AND RATIOS(5)
- -----------------------------------------------------------------------------------------------------------------------
Diluted shares outstanding(2) 21,184 21,330 20,945 21,184 20,258 20,750
Number of common shareholders of record 2,055 1,760 1,575 1,523 1,395 1,394
Number of employees 2,436 2,424 2,125 1,866 1,729 1,654
New orders $350,190 $352,282 $380,870 $302,824 $261,487 $209,405
Backlog of orders $146,833 $187,185 $190,784 $130,621 $105,967 $ 89,896
Gross profit percent 38.7% 39.3% 40.8% 41.7% 40.3% 40.8%
Research and development costs
as a percent of net revenue 6.9% 6.7% 6.1% 7.1% 6.2% 6.5%
Net income as a percent of net revenue 3.2% 5.9% 5.9%(1) 5.5% 4.5% 4.4%
Effective tax rate 34% 36% 36% 31% 27% 32%
Interest bearing debt to shareholders'
investment percent 44% 49% 10% 10% 20% 23%
Return on average net assets(4) 10.7% 20.9% 22.7% 17.6% 13.2% 12.0%
Return on beginning
shareholders' investment per share 8.0% 15.4% 15.6%(1) 13.0% 10.6% 9.3%
Cash dividends paid per share $ .24 $ .24 $ .20 $ .16 $ .14 $ .14
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes an after-tax gain of $2,654,000 from the sale of land in May 1997,
which is equal to $.13 per share
(2) Presented on a weighted average basis of common shares assuming conversion
of potential common shares during each year after retroactive adjustments for
issued shares, for stock splits and for reduction of shares from treasury stock
purchases (in thousands of shares).
(3) On December 1, 1999, there were 2,055 common shareholders of record, with
another estimated 2,200 beneficial shareholders whose stock is held by nominees
or broker dealers.
(4) (Income before income taxes plus net interest expense) divided by (average
quarterly assets minus non-interest bearing liabilities).
(5) All amounts have been restated to reflect the acquisition of DSPTechnology,
Inc., accounted for under pooling-of-interests.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All amounts have been restated to reflect the acquisition of DSP Technology,
Inc., accounted for under pooling-of-interests.
BACKLOG/NEW ORDERS
1999 1998 1997
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
New Orders:
North America* $196,367 $195,206 $202,241
International 153,823 157,076 178,629
- --------------------------------------------------------------------------------
Total $350,190 $352,282 $380,870
- --------------------------------------------------------------------------------
Backlog $146,833 $187,185 $190,784
================================================================================
*INCLUDES U.S. AND CANADA
1999 new orders of $350.2 million were down .6% from 1998 and 1998 new orders
were down 8% from 1997. 1997 new orders represented a 26% increase over 1996.
1997 orders included a $18.5 million contract for a large crash simulation
system. There were no orders over $10 million in 1999 or 1998.
In 1999, the Mechanical Testing and Simulation segment (MT&S) new orders of
$277.4 million increased $3.6 million over 1998 but represented a 13% decrease
from 1997. Orders from the ground vehicle industry and for civil engineering
applications were particularly strong in 1997 but declined in both 1999 and 1998
due to the Asian situation and the lingering Japan recession. Europe, in both
1999 and 1998, was a growth area for Vehicle Testing Systems but did not offset
the decline in business in Asia and Japan.
The Factory Automation segment (FA) new orders in 1999 of $72.8 million
decreased $5.7 million from the prior year but represented a 15% increase over
1997. The European and Japanese markets for FA products reflected solid growth
in 1999. Orders for industrial automation applications (servo motors,
amplifiers, and motion controllers) and industrial sensors were affected, in
both 1999 and 1998, by a soft North American market.
Total North American orders for the Company in 1999 were up slightly from
1998 but remained below the record order level achieved in 1997. Inter national
orders decreased $3.3 million from 1998 reflecting continued softness from Asia.
See Geographic Analysis of New Orders (below) for the percentage breakdown by
geographic area. See Foreign Currencies Effects (page 19) for the impact on
orders due to changing foreign currency rates.
The backlog of undelivered orders at September 30, 1999 amounted to $146.8
million, down $40.4 million from the prior year. The order backlog of $190.8
million at the end of 1997 had increased 46% from 1996 as a result of the record
new orders received in 1997 which included the large crash simulation system
mentioned above and a strong Asia order rate. Approximately 5% of the orders in
the 1999 backlog have delivery dates beyond fiscal 2000.
NET REVENUE
1999 1998 1997
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
United States $200,556 $200,490 $156,877
International 189,986 161,673 166,547
- --------------------------------------------------------------------------------
Total $390,542 $362,163 $323,424
================================================================================
Record 1999 net revenue of $390.5 million was up 8% from the prior year and
represented a 21% increase over 1997 revenue. For 1999, MT&S revenue of $313.7
million increased 9% from 1998 and represented a 20% increase over 1997 revenue.
FA revenue in 1999 of $76.8 million increased $2.4 million from the previous
year and represented a 22.4% increase over 1997 revenue (the PCI acquisition in
1998 represented 74% of the 1998 growth). For industry segment and geographic
information, see Note 2 of "Notes to Consolidated Financial Statements." See
Foreign Currencies Effects (page 19) for impact on revenues due to changing
foreign currency rates.
Net revenue in the United States was flat with the prior year but was 28%
higher than 1997. International revenue increased 18% in 1999 but decreased $4.9
million in 1998 from 1997. International revenue grew at a faster rate in 1997
reflecting improved economic conditions which began late in 1995. In 1998, the
Asian economies and Japan were in a deep recession which caused the decline in
revenues between years. Europe continued to reflect growth in all three years.
The MT&S segment year over year revenue increases reflected positive
worldwide demand from our ground vehicle customers, solid growth in our
entertainment projects niche from orders booked in 1998, and a strong market for
aftermarket sales of accessories and services. Our civil engineering structural
test business which was strong in 1997 declined in 1998 and 1999 due to the
Asian situation.
The FA sector revenue was up $2.4 million or 3.3% from 1998 reflecting a
continuing strong European demand. Both 1999 and 1998 were solid growth years in
Europe reflecting strong demand from European original equipment manufacturers
for our sensor products. The North American demand for our servo motor,
amplifier, and motion control products declined in 1999.
Selective price changes were implemented in all three years. However, the
overall impact of pricing changes did not have a material effect on reported
revenue volume.
GEOGRAPHIC ANALYSIS OF NEW ORDERS
1999 1998 1997
- --------------------------------------------------------------------------------
North America 56% 55% 53%
- --------------------------------------------------------------------------------
Europe/Africa/Middle East 30 29 27
- --------------------------------------------------------------------------------
Asia Pacific/Japan 13 14 18
- --------------------------------------------------------------------------------
Latin America/Rest of the World 1 2 2
================================================================================
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GROSS PROFIT
1999 1998 1997
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Gross Profit $151,171 $142,227 $132,073
================================================================================
% of Net Revenue 38.7% 39.3% 40.8%
================================================================================
The gross profit percentage for 1999 decreased to 38.7% from 39.3% in 1998. This
decline in the gross profit percentage was caused by higher than expected costs
to complete certain custom entertainment projects, an inventory charge for
realigning certain products, and lost productivity early in the year related to
the implementation of our new enterprise-wide software system.
The decrease in the gross profit percentage in 1998 compared to 1997 was
principally caused by a higher revenue content of "specialty" projects that are
sold at a lower gross margin than in our core automotive and material test
business, and a high unfavorable overhead manufacturing variance caused by
increased expenses and lost direct labor due to training associated with our new
enterprise-wide financial and operating software system.
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES
1999 1998 1997
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Selling Expense $61,490 $56,479 $54,610
General &
Administrative Expense 30,038 27,833 26,402
- --------------------------------------------------------------------------------
Total $91,528 $84,312 $81,012
================================================================================
% of Net Revenue 23.4% 23.3% 25.1%
================================================================================
Selling, General and Administrative (SG&A) expenses for 1999 as a percentage of
net revenue was .1 percentage point higher than 1998 but 1.7 percentage points
lower than 1997. Full year spending for 1999 totaled $91.5 million, which
represented a $7.2 million (8.5%) increase over 1998 and a $10.5 million (13%)
increase over 1997.
All three years were similar in that cost control and alignment of existing
resources with markets having the greatest potential were heavily emphasized.
New investments were made based on evaluations as to how to serve our markets
better or to support long-term business strategies. Specific expenses in the
selling category are variable, such as commissions, which increased
significantly in 1997 due to record new orders. SG&A expenses of newly acquired
companies, including goodwill amortization, represented $2.7 million of the
expense increase in 1999 and $1.5 million of the increase in 1998.
RESEARCH AND DEVELOPMENT EXPENSE
1999 1998 1997
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
R & D Expense $26,966 $24,348 $19,798
================================================================================
% of Net Revenue 6.9% 6.7% 6.1%
================================================================================
The Company provides funds for product, system and application developments
(R&D) in both the MT&S and FA segments. The majority of the R&D expenditures in
all three years were for new systems and system components such as software,
controls and mechanical products; new measurement products; servo motors and
amplifiers; and accessories. 1999 product introductions included road and
virtual engine simulation systems, wheel force transducer, wheel fatigue testing
system, material test systems and several new intelligent sensors.
The R&D as a percentage of net revenue reflected above are representative of
the ratio range the Company normally commits to in its annual planning process.
Accelerated development programs in both the MT&S and FAsegments and a shift
from customer funded development caused the higher percentage in 1998 as
compared to 1997. The Company also undertakes "first of kind" system level
development efforts as part of its custom projects sold to customers. The cost
of these efforts is reported as cost of revenue. The combination of internally
funded R&D and these customer funded system innovations typically approximates
about 10% of net revenue.
INCOME
1999 1998 1997
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
Income Before
Income Taxes $18,770 $33,448 $34,318
================================================================================
% of Net Revenue 4.8% 9.2% 10.6%
================================================================================
Net Income $12,445 $21,539 $21,891
================================================================================
% of Net Revenue 3.2% 5.9% 6.8%
================================================================================
Effective Tax Rate 33.7% 35.6% 36.2%
================================================================================
Return On Beginning
Shareholder's Investment
Per Share 8.0% 15.4% 15.6%
================================================================================
Basic Earnings Per Share $ .60 $ 1.05 $ 1.08
================================================================================
Diluted Earnings Per Share $ .59 $ 1.01 $ 1.05
================================================================================
Income before Income Taxes (pretax income) in 1999 decreased $14.7 million from
1998. 1999 pretax income included $5.7 million for restructuring (see Note 8 of
"Notes to Consolidated Financial Statements") and $1.4 million for acquisition
expenses (see Note 7 of "Notes to Consolidated Financial Statements"). Also,
leading to a decline in the 1999 pretax income was higher interest expense
related to higher debt outstanding for the entire 1999 fiscal year relative to
the debt carried in fiscal 1998
18
<PAGE>
and a change in other expense (income) principally related to a currency
transaction loss of $375 recognized in 1999 as compared to a gain of $2,340 in
1998. Pretax income was also affected by higher costs on certain custom
entertainment projects, an inventory charge for realignment of certain products,
and lost productivity related to the implementation of our new enterprise-wide
software system.
Pretax income in 1998 increased $3.4 million or 11.3% from 1997 (1997 pretax
income excluding the $4.3 million land sale gain amounted to $30.0 million or
9.3% of net revenue). The improved pretax in both 1998 and 1997 reflects revenue
growth that was achieved with lower operating expense ratios.
The MT&S 1999 operating income, before restructuring and acquisition
charges, of $22.3 million was $2.7 million lower than 1998. FA1999 operating
income, before restructuring, of $10.4 million increased $1.8 million from 1998
reflecting a strong European demand offset by an operating loss associated with
the startup of our laser direct metal deposition process for manufacturing
titanium parts (see Note 2 of "Notes to Consolidated Financial Statements").
Net income in 1999 decreased $9.1 million from 1998 to $12.4 million or $.59
per diluted share (includes $.18 for restructuring and $.04 for acquisition
charges). Net income in 1998 increased $2.3 million or 12% from 1997 (excluding
the gain from the sale of land which amounted to $2.7 million after taxes, or
$.13 per diluted share).
The effective tax rate is influenced by the level of tax credits available
from the Company's Foreign Sales Corporation and qualified Research and
Development expense; and on the level of foreign sourced income which is taxed
at a higher rate than domestic sourced income. See Note 4 of "Notes to
Consolidated Financial Statements" for the reconcilia tion between the federal
statutory and effective income tax rates and other related tax information.
FOREIGN CURRENCIES EFFECTS
The Company is exposed to market risk from changes in foreign currency exchange
rates, which can affect its results from operations and financial condition. To
minimize the risk, the Company manages exposure to changes in foreign currency
rates through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments, principally
forward exchange contracts. Foreign exchange contracts are used to hedge the
Company's overall exposure to exchange rate fluctuations, since the gains and
losses on these contracts offset losses and gains on the assets, liabilities,
and transactions being hedged.
Approximately 50% of the Company's revenue occurs outside of the United
States and about 65% (approximately 30% of the Company's net revenue) of these
revenues are denominated in currencies other than the U.S. dollar. As a result,
a strengthening of the U.S. dollar decreases translated foreign currency
denominated revenues and earnings. Conversely, weakening of the U.S. dollar has
the reverse impact on revenues and earnings. During 1998, 1997 and 1996, the
U.S. dollar was generally stronger against other major currencies. In 1999, the
dollar slightly strengthened against European currencies but weakened against
the Yen. Gains and losses attributed to translating the financial statements for
all non-U.S. subsidiaries and the gains and losses on forward exchange contracts
used to hedge these exposures, are included in other expense (income).
The total effect of foreign exchange rate fluctuations on translation of
orders, net revenue, and net income plus transaction gains and losses reported
in other expense (income) is set forth in the following table:
1999 1998 1997
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Increase (Decrease)
from Translation:
New orders $ 4,961 $(10,838) $(13,150)
Net revenue 3,313 (6,704) (8,852)
Net income 60 (236) (237)
- --------------------------------------------------------------------------------
Transaction Gain (Loss) in
"Other Expense (Income)" $ (375) $ 2,340 $ 1,266
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
1999 1998 1997
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
Total Interest
Bearing Debt $ 71,637 $ 74,682 $ 12,865
% of Total
Capitalization 30.5% 32.8% 8.8%
- --------------------------------------------------------------------------------
Shareholders'
Investment $162,859 $152,689 $133,524
- --------------------------------------------------------------------------------
Per Share $ 7.80 $ 7.39 $ 6.56
- --------------------------------------------------------------------------------
At September 30, 1999, the Company's capital structure was comprised of $11.4
million of current debt, $60.2 million of long-term debt and $162.9 million of
shareholders' investment. The ratio of total debt to total capitalization was
30.5% compared to 32.8% at September 30, 1998.
Total debt decreased $3.1 million during 1999 to $71.6 million. This
resulted from a $18.2 million decrease in notes payable to banks offset by a
$15.1 million increase in long-term debt.
In May 1998, the Company amended its multi-currency revolving credit
facility with its principal bank, increasing the commitment to $35 million, and
extending the commitment to September 2001. There was $9.3 million outstanding
under this facility at September 30, 1999. Additionally, the Company has an
additional $35 million of uncommitted lines of credit, of which none was
outstanding at year end.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Shareholders' investment increased $10.2 million in 1999 to $162.9 million.
The increase was primarily due to an increase in retained earnings of $12.4
million from current year net earnings and $2.5 million from the Company's
employee stock option and purchase plans. These increases were offset by $4.6
million of dividend payments and $.1 million of treasury stock purchases.
The Company believes that the combination of present capital resources,
internally generated funds, and unused financing sources will be adequate to
finance on-going operations, allow for reinvestment in the business and
strategic acquisitions.
CASH FLOWS
During 1999 operating activities generated $26.7 million of cash, compared with
$3.1 million that was used in 1998 and $11.7 million that was generated in 1997.
The increase in cash generated in 1999 was largely due to lower increases in
accounts receivable and inventory over 1998 and 1997. Major uses of cash
included $16.0 million for additions to property and equipment and $4.6 million
of dividend payments.
Capital expenditures for property and equipment additions totaled $16.0
million in 1999, $25.5 million in 1998, and $13.0 million in 1997. Significant
additions in 1998 were associated with an enterprise-wide financial and
operations software system.
Capital spending in 2000 is planned to be about $18 million. The Company
anticipates that 2000 capital expenditures will be financed primarily with funds
from operations.
DIVIDENDS
The Company's dividend policy is to maintain a payout ratio, which allows
dividends to increase with the long-term growth of earnings per share, while
sustaining dividends in down years. The Company's dividend payout ratio target
is about 25 percent of earnings per share. The current quarterly dividend of 6
cents per share equates to 27 percent of the 1997 through 1999 average net
earnings per share.
SHARE REPURCHASE PLAN
In 1999, the Company repurchased 8,292 shares of common stock on the open market
for $.1 million, at an average cost of $11.36 per share. The Company repurchased
76,000 shares in 1998 for $1.2 million, at an average cost of $15.56 per share.
The Company's purpose for share repurchases is to offset the dilutive effect of
shares of common stock issued from the Company's stock option and stock purchase
plans, and for other corporate stock-based programs. During the past two years,
the Company issued 600,000 shares of its common stock from these stock option
and stock purchase plans.
In November 1996, the Company's Board of Directors authorized the repurchase
of 1,000,000 shares of common stock in the open market within the Securities and
Exchange Commission guidelines. At September 30,1999, 525,488 shares remained
available to be repurchased under this authorization.
The above share amounts have been adjusted for the Company's two-for-one
stock split in the form of a 100% stock dividend, effective February 2, 1998.
QUARTERLY STOCK ACTIVITY(1)
The Company's common shares trade on The Nasdaq Stock Market's National Market
under the symbol MTSC. The following table sets forth the high, low and volume
of shares traded (expressed in thousands) for the periods indicated:
1999 1998
- --------------------------------------------------------------------------------
SHARES SHARES
HIGH LOW TRADED HIGH LOW TRADED
- --------------------------------------------------------------------------------
1st Quarter 15 7/16 10 7/8 2,631 20 17 3/8 3,049
2nd Quarter 14 3/8 9 5/8 2,486 19 13 1/2 5,298
3rd Quarter 13 1/4 9 13/16 2,379 19 1/4 15 1/2 2,379
4th Quarter 14 5/8 10 3,259 17 3/4 11 9/16 1,600
================================================================================
(1) SOURCE: THE NASDAQ STOCK MARKET
THE ABOVE PRICES AND SHARE VOLUMES HAVE BEEN ADJUSTED FOR THE COMPANY'S
TWO-FOR-ONE STOCK SPLIT IN THE FORM OF A 100% STOCK DIVIDEND, EFFECTIVE FEBRUARY
2, 1998.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarter-to-quarter revenue and earnings comparisons do not necessarily reflect
changes in the demand for the Company's products or its operating efficiency.
Revenues and earnings in any quarter can be significantly affected by delivery
delays or acceleration of one or more high-value systems, not accounted for
using the percentage-of-completion accounting method. The use of the
percentage-of-completion revenue recognition method for large long-term projects
helps alleviate those fluctuations. (See Note 1 of "Notes to Consolidated
Financial Statements"). High-value, state-of-the-art custom orders can also
contain leading-edge applications of the Company's technology, which in some
cases have resulted in lower gross profit margins, albeit not necessarily low
marginal profit contribution. Product development in these state-of-the-art
custom orders is as essential to the Company's long term growth as is Company
funded research and development.
Quarterly earnings also vary based on the use of estimated, effective income
tax rates for providing federal, state, and foreign income taxes. See Note 4 of
"Notes to Consolidated Financial State ments" for more information on the
Company's income taxes.
EURO CONVERSION
On January 1, 1999, certain member countries of the European Economic and
Monetary Union (EMU) adopted a common currency, the Euro. For a three-year
transition period, both the Euro and individual participants' currencies will
remain in use. The Company is upgrading systems, where necessary, to properly
handle the Euro. It is expected that the Company's European operations will
formally begin reporting in euro currency starting in October, 2001. How ever,
beginning January 1, 1999, the Company began processing euro transactions with
its customers. The costs of addressing the euro conversion are not expected to
have a material impact on the Company's financial condition or operating
results.
20
<PAGE>
YEAR 2000
The following is a Year 2000 Readiness Disclosure pursuant to the Year 2000
Information and Readiness Disclosure Act. The Company continues to evaluate the
potential impact of what is commonly referred to as the Year 2000 issue,
concerning the inability of certain computer-based products and systems to
operate correctly into and during the year 2000. If not corrected, these
products and systems could fail or create erroneous results. Following
preliminary work done in fiscal 1997, in early 1998 the Company established a
full-time Year 2000 central project office led by a senior technical manager
reporting directly to an executive.
The central project office worked with each of the Company's twelve
producing sites to evaluate the following areas:
1. Site Infrastructure, Equipment and Vendors
* Business Information Systems
* End User Computing Systems
* Telecommunications Infrastructure
* Service Providers
* Material Suppliers
* Manufacturing and Metrology Equipment and Facilities
2. Products Manufactured at Site
A summary of the results of these audits is presented below.
SITE INFRASTRUCTURE, EQUIPMENT AND VENDORS
The Company's major Business Information, End User Computing and Telecom
Systems have been identified at each site. The vast majority of these systems
were tested and found to be compliant. Each site developed a plan for completion
of testing and remediation of critical systems.
The Company believes its greatest Year 2000 exposure lies with a limited
number of critical/sole source service providers and material suppliers. A
failure of these vendors to be able to operate up to and through the year 2000
could have a material adverse effect on the Company's business, financial
condition and operating results. The Company has sent surveys to such vendors
and has received responses about their Year 2000 readiness. Where the Company
does not have sufficient comfort that a critical vendor will be ready, site
management has obtained more detailed information and during the first quarter
of fiscal 1999 began to develop contingency plans, where feasible, in those
cases where such interruption remains reasonably possible.
The Company's manufacturing and metrology equipment and facilities contain
embedded processors and code which have been inventoried and evaluated for Year
2000 readiness. A few instances required remediation.
The Company completed testing and where necessary remediation of the above
items by June 30, 1999 as scheduled. The Company will continue to monitor events
and information relevant to Year 2000 issues so that additional action can be
taken where necessary.
PRODUCTS MANUFACTURED AT SITE
The Company's Factory Automation products contain few date sensitive computer
and embedded processors. The Company has completed an evaluation of these
products. All of the products evaluated have been found to be Year 2000 ready,
in some cases with stipulations.
The Company's MT&S products are by their nature computer intensive. The
Company has evaluated these products and advised its customers as to their Year
2000 readiness via its web site and written communication. In those cases where
MT&S's products were found to be non-compliant, less than 2%, or in the case of
discontinued products that were not evaluated, the Company is working with its
customers to provide upgrades that are Year 2000 ready.
SUMMARY
The Company estimates that the costs directly related to its Year 2000 project
were $400,000 in fiscal 1999 and $300,000 in fiscal 1998. Total costs remaining
are expected to be immaterial. Such costs are expensed as incurred.
This Readiness Disclosure is a Forward Looking statement as defined by the
Securities and Exchange Commission and the Company recognizes that, although not
expected, there are risks of project delays, costs incurred, vendor compliance,
and loss of business which are outside the direct control of the Company and/or
could prove to be material.
21
<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, 1999, 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>
1999
Net revenue $ 96,142 $ 93,262 $ 95,363 $ 105,775 $ 390,542
Gross profit 38,064 36,775 37,818 38,514 151,171
Income before income taxes 5,722 4,666 8,269 113 18,770
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 3,726 $ 3,146 $ 5,293 $ 280 $ 12,445
- ----------------------------------------------------------------------------------------------------------------------
Net income per share
Basic $ .18 $ .15 $ .25 $ .01 $ .60
Diluted .18 .15 .25 .01 .59
- ----------------------------------------------------------------------------------------------------------------------
1998
Net revenue $ 80,338 $ 87,160 $ 91,899 $ 102,766 $ 362,163
Gross profit 33,753 34,560 35,691 38,223 142,227
Income before income taxes 7,937 8,009 8,521 8,981 33,448
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 5,192 $ 4,921 $ 5,667 $ 5,759 $ 21,539
- ----------------------------------------------------------------------------------------------------------------------
Net income per share(2)
Basic $ .25 $ .24 $ .28 $ .28 $ 1.05
Diluted .24 .23 .27 .27 1.01
- ----------------------------------------------------------------------------------------------------------------------
1997
Net revenue $ 71,755 $ 78,374 $ 79,268 $ 94,027 $ 323,424
Gross profit 30,002 32,445 32,476 37,150 132,073
Income before income taxes 5,377 6,548 12,173(1) 10,220 34,318(1)
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 3,775 $ 4,055 $ 7,928(1) $ 6,133 $ 21,891(1)
- ----------------------------------------------------------------------------------------------------------------------
Net income per share(2)
Basic $ .19 $ .20 $ .39(1) $ .30 $ 1.08(1)
Diluted .18 .19 .38(1) .29 1.05(1)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) INCLUDES $4.3 MILLION PRETAX GAIN ON LAND SALE EQUAL TO $.13 PER SHARE AFTER
TAXES.
(2) NET INCOME PER SHARE HAS BEEN RESTATED RETROACTIVELY FOR THE TWO-FOR-ONE
STOCK SPLIT EFFECTIVE FEBRUARY 2, 1998.
22
<PAGE>
CONSOLIDATED BALANCE SHEETS
(September 30)
<TABLE>
<CAPTION>
ASSETS 1999 1998
- ----------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 18,083 $ 12,589
Accounts receivable, net of allowance for doubtful accounts of $2,232 and $2,285 102,011 93,313
Unbilled contracts and retainage receivable 38,628 35,891
Inventories 56,948 57,982
Prepaid expenses 7,981 4,536
- ----------------------------------------------------------------------------------------------------------------
Total current assets 223,651 204,311
- ----------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Land 3,247 3,202
Buildings and improvements 42,332 40,702
Machinery and equipment 101,140 93,726
Accumulated depreciation (73,086) (67,688)
- ----------------------------------------------------------------------------------------------------------------
Total property and equipment, net 73,633 69,942
- ----------------------------------------------------------------------------------------------------------------
OTHER ASSETS 36,063 38,769
- ----------------------------------------------------------------------------------------------------------------
$ 333,347 $ 313,022
================================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT 1999 1998
- ----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 10,071 $ 28,243
Current maturities of long-term debt 1,308 1,180
Accounts payable 21,062 20,274
Accrued compensation and benefits 28,662 26,919
Advance billings to customers 25,943 17,360
Other accrued liabilities 17,667 16,247
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 104,713 110,223
- ----------------------------------------------------------------------------------------------------------------
Deferred income taxes 5,517 4,851
Long-term debt 60,258 45,259
- ----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
SHAREHOLDERS' INVESTMENT:
Common stock, .25 par; 64,000,000 shares authorized:
20,883,639 and 20,657,186 shares issued and outstanding 5,221 5,164
Additional paid-in capital 8,122 5,818
Retained earnings 147,615 139,782
Accumulated other comprehensive income 1,901 1,925
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' investment 162,859 152,689
- ----------------------------------------------------------------------------------------------------------------
$ 333,347 $ 313,022
================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE CONSOLIDATED BALANCE SHEETS.
23
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND SHAREHOLDERS' INVESTMENT
(For the Years Ended September 30)
<TABLE>
<CAPTION>
INCOME 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
NET REVENUE $ 390,542 $ 362,163 $ 323,424
COST OF REVENUE 239,371 219,936 191,351
- ------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 151,171 142,227 132,073
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling 61,490 56,479 54,610
General and administrative 30,038 27,833 26,402
Research and development 26,966 24,348 19,798
Restructuring 5,711 -- --
Acquisition 1,391 -- --
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 25,575 33,567 31,263
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense 5,067 2,327 1,531
Interest income (470) (379) (406)
Other expense (income), net 2,208 (1,829) (4,180)
- ------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 18,770 33,448 34,318
PROVISION FOR INCOME TAXES 6,325 11,909 12,427
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 12,445 $ 21,539 $ 21,891
==============================================================================================================================
NET INCOME PER SHARE
Basic $ .60 $ 1.05 $ 1.08
Diluted .59 1.01 1.05
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
Common Stock
-------------------- Additional Accumulated Other Total
Shares Paid-In Retained Comprehensive Shareholders'
Issued Amount Capital Earnings Income (Loss) Investment
- -------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1996 11,251,223 $2,812 $ 2,468 $111,262 $ 4,036 $ 120,578
===============================================================================================================================
Comprehensive income:
Net income 21,891
Foreign currency translation (82) (2,300)
Total Comprehensive income 19,509
Exercise of stock options 311,313 78 4,617 4,695
Common stock purchased and retired (349,065) (87) (3,073) (4,453) (7,613)
Cash dividends, .20 per share (3,645) (3,645)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 11,213,471 2,803 4,012 124,973 1,736 133,524
===============================================================================================================================
Comprehensive income:
Net income
Foreign currency translation 189
Total Comprehensive income 21,728
Stock split 2 for 1 9,204,424 2,301 (2,301)
Exercise of stock options 300,091 75 3,405 3,480
Common stock purchased and retired (60,800) (15) (1,599) (1,614)
Cash dividends, .24 per share (4,429) (4,429)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 20,657,186 5,164 5,818 139,782 1,925 152,689
===============================================================================================================================
Comprehensive income:
Net income 12,445
Foreign currency translation 36
Unrealized loss on investment, net of tax (60)
Total Comprehensive income 12,421
Exercise of stock options 234,745 59 2,396 2,455
Common stock purchased and retired (8,292) (2) (92) (94)
Cash dividends, .24 per share (4,612) (4,612)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 20,883,639 $5,221 $ 8,122 $147,615 $ 1,901 $162,859
===============================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
24
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(For the Years Ended September 30)
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 12,445 $ 21,539 $ 21,891
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 14,424 10,880 9,608
Deferred income taxes 889 127 (11)
Gain from sale of real estate -- -- (4,332)
Changes in operating assets and liabilities, exclusive of acquisitions:
Accounts receivable, unbilled contracts and retainage receivable (11,285) (27,765) (26,645)
Inventories 373 (7,644) (7,655)
Prepaid expenses (3,493) 647 221
Advance billings to customers 8,711 (2,874) 8,949
Other liabilities, net 4,676 2,015 9,708
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 26,740 (3,075) 11,734
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property and equipment additions (15,990) (25,545) (12,963)
Proceeds from sale of real estate -- -- 5,700
Acquisition of businesses, net of cash received (1,036) (29,012) (5,947)
Other assets (132) (1,026) (537)
- --------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (17,158) (55,583) (13,747)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net borrowings under notes payable to banks (18,168) 23,770 3,743
Proceeds from issuance of long-term debt 16,837 38,637 1,008
Repayments of long-term debt (924) (1,152) (2,745)
Cash dividends (4,612) (4,429) (3,645)
Proceeds from employee stock option and stock purchase plans 2,455 3,480 4,695
Payments to purchase and retire common stock (94) (1,614) (7,613)
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (4,506) 58,692 (4,557)
- --------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 418 (3) (1,001)
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,494 31 (7,571)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,589 12,558 20,129
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,083 $ 12,589 $ 12,558
====================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest $ 4,291 $ 1,881 $ 1,531
Income taxes 6,731 8,756 13,523
====================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL 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 a loss of $(375,000) in 1999, a gain of $2,340,000 in 1998 and a
gain of $1,266,000 in 1997.
REVENUE RECOGNITION
Revenue is recognized upon shipment of equipment when the customer's order can
be manufactured, delivered, and installed in generally less than a year. Revenue
on contracts requiring longer delivery periods (long-term contracts) and other
customized orders that permit progress billings is recognized using the
percentage-of-completion method based on the cost incurred to date relative to
estimated total cost of the contract (cost-to-cost method). The cumulative
effects of revisions of estimated total contract costs and impact on revenues
are recorded in the period in which the facts become known. When a loss is
anticipated on a contract, the amount is provided currently.
LONG-TERM CONTRACTS
The Company enters into long-term contracts for customized equipment sold to its
customers. Under terms of such contracts, revenue recognized using the
percentage of completion method may not be invoiced until completion of
contractual milestones, upon shipment of the equipment, or upon installation and
acceptance by the customer. Un billed amounts for these contracts appear in the
Consolidated Balance Sheets as Unbilled Contracts and Retainage Receiv able.
Amounts unbilled or retained at September 30, 1999 are expected to be invoiced
during fiscal 2000.
Long-term contracts consider the duration of the manufacturing and
collection cycles at the time the contract is bid. Accordingly, accounts
receivable in the accompanying Consolidated Balance Sheets approximate fair
value.
WARRANTY OBLIGATIONS
The Company warrants its products against defects in materials and workmanship
under normal use and service, generally for one year. The Company maintains
reserves for warranty costs based upon its past experience with war ranty
claims.
RESEARCH AND DEVELOPMENT
Research and product development costs associated with new products are charged
to operations as incurred.
CASH EQUIVALENTS
Cash equivalents represent short-term liquid investments which have original
maturities of three months or less and are recorded at cost, which approximates
fair value.
ACCOUNTS RECEIVABLE
The Company grants credit to customers, but generally does not require
collateral or other security from domestic customers. International receivables,
where deemed necessary, are supported by letters of credit from banking
institutions.
INVENTORIES
Inventories consist of material, labor and overhead and are stated at the lower
of cost or market, determined by the first-in, first-out method. Inventory
components as of September 30, were as follows:
1999 1998
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Customer projects in
various stages of
completion $ 3,625 $12,701
Components,
assemblies and parts 53,323 45,281
- --------------------------------------------------------------------------------
Total $56,948 $57,982
================================================================================
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions, replacements and
improvements are capitalized at cost, while main tenance and repairs are charged
to operations as incurred. Depreciation is provided over the following estimated
useful lives of the property:
Buildings and improvements: 10 to 40 years.
Machinery and equipment: 3 to 12 years.
Most major building and equipment purchases are de preciated on a
straight-line basis for financial reporting purposes and on an accelerated basis
for income tax purposes.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company periodically enters into forward exchange contracts principally to
hedge the eventual dollar cash flow of foreign currency denominated transactions
(primarily British Pound, German Deutschemark, French Franc, Swedish Krona,
Italian Lira, and Japanese Yen). Gains and losses on forward exchange contracts
entered into to hedge foreign currency denominated undelivered orders and net
exposed assets are included in "Other expense (income) net" in the Consolidated
Statements of Income, when the underlying transaction is closed.
The Company`s accounting policy for these contracts is based on the
Company`s designation of foreign currency contracts as hedging transactions. The
Company does not use derivative financial instruments for speculative or trading
purposes. The criteria the Company uses for design ating a contract as a hedge
include the contract`s effective ness in risk reduction and matching of
contracts to underlying transactions. On September 30, 1999, there were open
hedge contracts totaling $7,300,000 with an unrealized loss of $202,000. On
September 30, 1998, there were open hedge contracts totaling $2,800,000 with an
unrealized loss of $3,000.
26
<PAGE>
OTHER ASSETS
Other assets consist principally of patents and excess cost over net assets
acquired (goodwill), net of accumulated amortization. The carrying value of
goodwill less accumulated amortization was $27.5 million and $31.6 million in
1999 and 1998, respectively. These assets are being amortized on a straight
basis over various periods ranging from 7 to 40 years. Amortization expense was
$3.3 million in 1999, $1.5 million in 1998 and $1.0 million in 1997.
The Company periodically evaluates whether events and circumstances have
occurred that may affect the estimated useful life of its goodwill and other
long-lived assets. If such events or circumstances were to indicate that the
carrying amount of these assets would not be recoverable, an impairment loss
would be recognized. No such impairment has occurred which would require
recognition during the year ended September 30, 1999.
PENSIONS AND OTHER POSTRETIREMENT BENEFIT PLANS
Effective September 30, 1999, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The provisions of
SFAS No. 132 revise employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of these plans. It standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable.
NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share" during the first quarter of fiscal 1998. As a result, all
prior periods presented have been restated to conform to the provisions of SFAS
No. 128, which requires the presentation of basic and diluted earnings per
share. Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
earnings per share includes the dilutive effect of potential common shares.
Weighted average common shares and per share computations have been restated
retroactively for the two-for-one stock split effective February 2, 1998.
1999 1998 1997
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
Weighted average
common shares
outstanding 20,763 20,519 20,285
Dilutive potential
common shares 421 811 660
- --------------------------------------------------------------------------------
Total dilutive
common shares 21,184 21,330 20,945
- --------------------------------------------------------------------------------
Basic net income
per share $ .60 $ 1.05 $ 1.08
Diluted net income
per share .59 1.01 1.05
================================================================================
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income" during fiscal 1999. This statement establishes
rules for the reporting of comprehensive income and its components.
Comprehensive income consists of net income, foreign currency translation
adjustments and unrealized loss on investment and is presented in the
accompanying Consolidated Statement of Shareholders' Investment. The adoption of
SFAS No. 130 had no impact on total shareholders' investment. Prior year
financial statements have been reclassified to conform to the SFAS No. 130
requirements.
RECLASSIFICATIONS
Certain amounts included in the consolidated financial statements have been
reclassified in prior years to conform with the 1999 financial statement
presentation. These amounts had no effect on previously reported shareholder's
investment or net income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make assumptions and estimates that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Ultimate results could differ from reported amounts based upon those assumptions
and estimates.
The Company undertakes significant technological innovation on some of its
long-term contracts. These contracts involve performance risk which may result
in delayed delivery of product and/or in revenue and gross profit variation from
difficulties in estimating the ultimate cost of such contracts.
FUTURE ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000.
The Company anticipates that the effect of adopting SFAS No. 133 will not
have a material impact on the Company's financial statements.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. BUSINESS SEGMENT INFORMATION:
In 1999, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments on an Enterprise and Related Information".
SFAS No. 131 supersedes SFAS No. 14 replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas
and major customers. The adoption of SFAS No. 131 did not affect results of
operations or financial condition but did affect the disclosure of segment
information.
The Company evaluated its business activities that are regularly reviewed by
the Chief Executive Officer for which discrete financial information is
available. As a result of this evaluation, the Company has determined that it
has five operating segments: Vehicle Testing Systems, Material Testing Systems,
Advanced Systems, Automation and Sensors. The Vehicle Testing Systems business
manufactures and markets systems for vehicle and component manufacturers to aid
in the acceleration of design development work and decrease the cost to
manufacture their products. The Material Testing Systems business manufacturers
and markets systems to aid their customers in product development and quality
control through material and product characterization. The Advanced Systems
business provides highly customized systems for principally simulation and
manufacturing. The Automation business manufactures and markets products for
high performance industrial machine applications in a wide range of industries.
The Sensor business manufactures and markets displacement and liquid level
sensors used in various applications to monitor and automate industrial
processes. The economic characteristics, nature of products and services,
production processes, type or class of customer, method of distribution and
regulatory environments are similar for the Vehicle Testing Systems, Material
Testing Systems and Advanced Systems business segments. As a result of these
similarities, these segments have been aggregated into one reportable segment
called Mechanical Testing and Simulation (MT&S) for financial statement
purposes. Also, the economic characteristics, nature of products and services,
production processes, type or class of customer, method of distribution and
regulatory environments are similar for the Automation and Sensor business
segments. As a result, these segments have been aggregated into one reportable
segment called Factory Automation.
The accounting policies of the business segments are the same as those
described in Note 1. In evaluating the segment performance, management focuses
on income from operations. This measurement excludes special charges (e.g.
restructuring charges, acquisition expenses, etc.), interest expense, interest
income, income tax expense and other non-operating income or expense. Corporate
expenses are allocated to segments primarily on the basis of revenue. This
allocation includes expenses for various support functions such as human
resources, information technology and finance. Financial information by
reportable segment follows:
28
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
NET REVENUE BY SEGMENT
Mechanical Testing & Simulation $ 313,685 $ 287,761 $ 260,650
Factory Automation 76,857 74,402 62,774
- ---------------------------------------------------------------------------------------------------------
Total $ 390,542 $ 362,163 $ 323,424
- ---------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS BY SEGMENT
Mechanical Testing & Simulation
Before restructuring and acquisition $ 22,289 $ 25,011 $ 25,219
Restructuring (5,510) -- --
Acquisition (1,391) -- --
- ---------------------------------------------------------------------------------------------------------
Total $ 15,388 $ 25,011 $ 25,219
- ---------------------------------------------------------------------------------------------------------
Factory Automation
Before restructuring and acquisition 10,388 8,556 6,044
Restructuring (201) -- --
- ---------------------------------------------------------------------------------------------------------
Total $ 10,187 $ 8,556 $ 6,044
- ---------------------------------------------------------------------------------------------------------
Total Income from Operations $ 25,575 $ 33,567 $ 31,263
- ---------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS BY SEGMENT
Mechanical Testing & Simulation $ 272,491 $ 255,816 $ 190,456
Factory Automation 60,856 57,206 38,619
- ---------------------------------------------------------------------------------------------------------
Total Assets $ 333,347 $ 313,022 $ 229,075
=========================================================================================================
OTHER SEGMENT DATA
Mechanical Testing & Simulation:
Capital expenditures $ 13,822 $ 21,251 $ 11,203
Depreciation and Amortization 11,028 8,333 7,409
- ---------------------------------------------------------------------------------------------------------
Factory Automation:
Capital expenditures $ 2,168 $ 4,668 $ 1,787
Depreciation and Amortization 3,396 2,547 2,199
- ---------------------------------------------------------------------------------------------------------
</TABLE>
A geographic summary of the Company's operations and asset information as of
and for the years ended September 30, were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
TOTAL NET REVENUE
United States $ 200,556 $ 200,490 $ 156,877
Germany 47,172 37,643 31,778
Other Europe 69,185 51,495 38,826
Far East 56,897 53,652 77,851
Other 16,732 18,883 18,092
- ---------------------------------------------------------------------------------------------------------
Total $ 390,542 $ 362,163 $ 323,424
- ---------------------------------------------------------------------------------------------------------
TOTAL LONG-LIVED ASSETS
United States $ 232,177 $ 227,816 $ 153,707
Germany 42,913 39,882 36,648
Other Europe 38,799 30,626 22,228
Far East 18,882 14,242 16,226
Other 576 456 266
- ---------------------------------------------------------------------------------------------------------
Total $ 333,347 $ 313,022 $ 229,075
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Net revenue by geographic location is based on net revenue generated from each
country's operations. No individual country, other than the United States and
Germany, exceeded 10% of consolidated net revenue on a recurrent annual basis.
The Company did not have sales to any individual customer greater than 10% of
total net revenue in 1999, 1998 and 1997.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. FINANCING:
Long-term debt as of September 30 was as follows:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Variable Rate Note, due May 2015, collateralized by building $ 1,837 $ --
6.6% Notes, unsecured, due in July 2008 35,000 35,000
5.4% Mortgage, due in October 2015, collateralized by building 5,742 6,444
5.3% Note, unsecured, due in March 2003 1,503 1,264
6.0% Note, unsecured, due in May 2008 1,943 1,943
7.5% Note, unsecured, due in July 2009 15,000 --
Other 541 1,788
- --------------------------------------------------------------------------------------------
TOTAL $ 61,566 $ 46,439
LESS CURRENT MATURITIES (1,308) (1,180)
- --------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 60,258 $ 45,259
============================================================================================
</TABLE>
Aggregate annual maturities of long-term debt for the next five fiscal years are
as follows: 2000--$1,308,000; 2001--$5,599,000; 2002--$5,494,000;
2003--$7,152,000; 2004--$7,384,000 and $34,629,000 thereafter. The carrying
value of the Company's long-term debt at September 30, 1999, approximates the
fair value at current interest rates offered to the Company for debt with the
same remaining maturities.
The Company has credit agreements with two domestic banks totaling
$40,000,000. One credit agreement, for $5,000,000, permits the Company to issue
domestic and Euro-currency notes. The other credit agreement, for $35,000,000,
permits the Company to issue domestic notes, Euro-currency notes, and banker's
acceptances. As part of the same credit agreement, the bank has agreed to issue
term loans up to a maximum of $10,000,000 until March 30, 2002. This agreement
provides for repayment of these term loans through September 2005. The Company
compensates both banks with loan commitment fees for the unused portion of the
credit lines. The Company also has three uncommitted lines of credit with banks
that total $35,000,000. In addition, the Company has standby letter-of-credit
lines totaling $30,000,000. At September 30, 1999, standby letters of credit
outstanding totaled $13,382,000.
Under the terms of its credit agreements, the Company has agreed, among
other matters, that (a) its defined cash flow or fixed charge coverage will
exceed a defined minimum level; (b) its interest bearing debt will not exceed a
defined percentage of total capital; (c) repurchases of its common stock will
not exceed a maximum amount. At September 30, 1999, net worth exceeded the
defined minimum amount by $38,000,000 and the Company had $18,959,000 available
for repurchases of its common stock. The Company was in compliance with the
terms and covenants of its credit agreements and its lines of credit at
September 30, 1999.
Information on short-term borrowings for the years ended September 30 were
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Balance outstanding at September 30 $ 10,071 $ 28,243 $ 4,356
Average balance outstanding 24,903 23,498 11,903
Maximum balance outstanding 34,700 51,216 23,458
Year-end interest rate 6.0% 5.9% 6.0%
Weighted-average interest rate 5.7% 6.1% 6.0%
============================================================================================
</TABLE>
30
<PAGE>
4. INCOME TAXES:
The provision for income taxes for the years ended September 30 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Current payable (receivable):
Federal $ 2,239 $ 6,911 $ 7,801
State 432 1,129 953
Foreign 2,773 4,104 3,658
Deferred 881 (235) 15
- ------------------------------------------------------------------------------------------
Total provision $ 6,325 $ 11,909 $ 12,427
- ------------------------------------------------------------------------------------------
</TABLE>
A reconciliation from the Federal statutory income tax rate to the Company's
effective rate for the years ended September 30 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35% 35% 35%
Tax benefit of Foreign Sales Corporation (3) (2) (2)
Foreign provision in excess of U.S. tax rate 4 3 3
State income taxes, net of Federal benefit 2 2 2
Research and development tax credits (5) (2) (2)
Other, net 1 -- --
- ------------------------------------------------------------------------------------------
Effective rate 34% 36% 36%
- ------------------------------------------------------------------------------------------
</TABLE>
DEFERRED TAX ASSET:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Accrued compensation and benefits $ 1,017 $ 2,151
Inventory reserves 2,398 2,309
Allowance for doubtful accounts 194 244
Other assets (1,276) (11)
- ------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSET $ 2,333 $ 4,693
==========================================================================================
DEFERRED TAX LIABILITY:
1999 1998
- ------------------------------------------------------------------------------------------
Property and equipment $ 5,517 $ 4,851
- ------------------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $ 3,184 $ 158
==========================================================================================
</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, 1999, the Company had awarded incentive stock options and
non-qualified stock options. These were granted at exercise prices that are 100%
of the fair-market value at the day of grant. Beginning one year after grant,
the options generally can be exercised proportionately each year for periods of
three, four, or six years, as defined in the respective plans. Options currently
expire no later than seven years from the grant date, as defined.
Option holders may exercise options by delivering Company stock already
owned, cash, or a combination of stock and cash. The shares tendered in the
exchange are cancelled and, therefore, reduce shares issued. During 1999 and
1998, option holders exchanged 25,029 and 22,335 shares, respectively, of the
Company's stock in payment of options exercised. All share and share price data
herein have been restated retroactively for the two-for-one stock split,
effective February 2, 1998.
A summary of the status of the Company's stock option plans as of
September 30, 1999, 1998, and 1997, and changes during the years ended were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
SHARES WAEP* SHARES WAEP* SHARES WAEP*
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,143 $10.30 1,920 $ 8.35 1,964 $ 7.12
- -----------------------------------------------------------------------------------------------------------------
Granted 880 $12.95 545 $15.79 608 $10.72
- -----------------------------------------------------------------------------------------------------------------
Exercised (138) $ 7.25 (295) $ 6.51 (616) $ 6.78
- -----------------------------------------------------------------------------------------------------------------
Forfeited (69) $13.38 (27) $10.40 (36) $ 7.87
- -----------------------------------------------------------------------------------------------------------------
Outstanding at end of year 2,816 $11.21 2,143 $10.30 1,920 $ 8.35
=================================================================================================================
Options exercisable at year-end 1,566 $ 9.46 1,156 $ 8.19 894 $ 7.59
=================================================================================================================
</TABLE>
SHARES IN THOUSANDS
*WEIGHTED-AVERAGE EXERCISE PRICE
The following table summarizes information concerning outstanding and
exercisable options as of September 30, 1999:
<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>
$5.78-8.13 921 1.6 $ 7.40 921 $ 7.40
- -----------------------------------------------------------------------------------------------------------------
$9.69-13.00 650 3.0 $10.80 410 $10.64
- -----------------------------------------------------------------------------------------------------------------
$13.13-13.13 735 5.4 $13.13 36 $13.13
- -----------------------------------------------------------------------------------------------------------------
$14.63-19.38 510 3.4 $15.82 199 $15.86
- -----------------------------------------------------------------------------------------------------------------
TOTAL 2,816 3.2 $11.21 1,566 $ 9.46
=================================================================================================================
</TABLE>
SHARES IN THOUSANDS
*IN YEARS
These options will expire if not exercised at specific dates ranging from
January 2000 to September 2006. Prices for options exercised during the
three-year period ended September 30, 1999 ranged from $5.78 to $15.75. Total
options available for future grant as of September 30, 1999 were 370,162.
In January 1992 the Company's shareholders authorized an Employee Stock
Purchase Plan (the Purchase Plan), whereby 1,000,000 shares of the Company's
common stock were reserved for sale to employees until April 2002. Participants
in the 1999 and 1998 phases, all at dates specified in the Purchase Plan, were
issued 121,810 shares in 1999 and 105,240 shares in 1998. During 1999,
participants subscribed to purchase 147,869 shares at 85% of market price for
issuance in 2000.
32
<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, as reported below, has been estimated at the
date of grant using the Black-Scholes option valuation model with the following
weighted average assumptions:
1999 1998 1997
- --------------------------------------------------------------------------------
Expected life (in years) 2.7 2.0 2.1
Risk-free interest rate 5.8% 4.2% 5.8%
Volatility .49 .40 .49
Dividend yield 2.3% 1.6% 1.2%
================================================================================
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models required the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
traded options, and because change in the subjective input assumptions can
affect materially the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable measure of the fair value
of its options. The weighted average estimated fair value of employee stock
options granted during 1999 and 1998 was $4.47 and $4.39 per share,
respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share data):
1999 1998 1997
- --------------------------------------------------------------------------------
Pro forma net income $10,553 $20,247 $21,048
Pro forma earnings per
share, basic $ .51 $ .99 $ 1.04
Pro forma earnings per
share, diluted $ .50 $ .95 $ 1.01
================================================================================
The effects on pro forma disclosures of applying SFAS No. 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because SFAS No. 123 is applicable only to options granted in fiscal years
subsequent to December 31, 1994, the pro forma effect will not be fully
reflected until 2002.
6. EMPLOYEE BENEFIT PLANS:
The Company offers a 401(K) Pay Conversion Plan for all of its U.S. employees.
Employees can supplement their retirement income by participating in this
voluntary pre-tax savings plan by designating a percentage of their gross
income, subject to limitations imposed by federal law. The Company will match
$.50 per each dollar of the first 3% that employees contribute capped at $500
per fiscal year. Employees are automatically vested. The matching contributions
under the 401(K) plan were $730,000 in 1999, $557,000 in 1998 and $483,000 in
1997.
The Company's profit sharing plan functions as a retirement program for most
U.S. and certain international employees. Employees who have completed 1,000
hours of service during the plan year are eligible to participate. The formula
for calculating the Company's contribution is approved annually by the Board of
Directors and is based primarily on operating results for the year, before
management variable compensation. The plan provides for a minimum contribution
of 4% of participant compensation, as defined, up to the social security taxable
wage base, and 8% of participant compensation in excess of the taxable wage base
up to the maximum profit sharing contribution allowed by federal law, so long as
the entire contribution calculation does not exceed pretax income. The
contributions were 4.3% of participant compensation in 1999 and 4.4% in 1998 and
1997, respectively. The provisions for profit sharing were $3,883,000 in 1999,
$3,577,000 in 1998 and $3,163,000 in 1997, and are distributed among the various
operating expenses shown in the accompanying Consolidated Statements of Income.
Prior to 1998, two of the Company's international subsidiaries had
noncontributory, unfunded retirement plans for eligible employees. These plans
provide benefits based on the employee's years of service and compensation
during the years immediately preceding retirement, early retirement,
termination, disability, or death, as defined in the respective plans. In 1998,
one of the plans was modified to provide for contributions based solely on
annual compensation levels.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The expenses for these plans consist of the following components:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefit earned during the period $ 209 $ 178 $ 327
Interest cost on projected benefit obligation 249 218 269
Net amortization and deferral 17 11 29
- -------------------------------------------------------------------------------------------------
NET PERIODIC PENSION COST $ 475 $ 407 $ 625
=================================================================================================
</TABLE>
The change in benefit obligation and plan assets consisted of the following for
the years ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Change in benefit obligation:
Projected benefit obligation, beginning of year $ 5,110 $ 4,723
Service cost 173 188
Interest cost 212 216
Translation difference 80 (20)
Actuarial (gain)loss 332 8
Benefits paid (30) (5)
- -------------------------------------------------------------------------------------------------
PROJECTED BENEFIT OBLIGATION, END OF YEAR $ 5,877 $ 5,110
=================================================================================================
Change in plan assets:
Fair value of plan assets, beginning of year $ -- $ --
Actual return on plan assets -- --
Employer contributions 30 5
Benefits paid (30) (5)
- -------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS, END OF YEAR $ -- $ --
=================================================================================================
</TABLE>
The funded status of the Company`s benefit plans and the amounts recognized in
the consolidated financial statements are:
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Funded status (5,877) (5,110)
Unrecognized net gain (88) (460)
Unrecognized net liability being amortized 536 478
Adjustment required to recognize minimum liability (33) (25)
- -------------------------------------------------------------------------------------------------
ACCRUED PENSION LIABILITY $ (5,462) $ (5,117)
=================================================================================================
Major assumptions at year-end are:
Discount rate 3.5 to 6.0% 3.5 to 6.2%
Rate of increase in future compensation levels 3.0% 3.0%
=================================================================================================
</TABLE>
7. ACQUISITIONS:
On May 28, 1999, the Company completed a merger with DSP Technology, Inc. (DSP),
an enterprise that is active in automotive engine development market segments.
Under the terms of the agreement, the Company initially issued 2,076,913 shares
of common stock and subsequently issued an additional 792 shares of common stock
in exchange for all of the outstanding shares and vested stock options of DSPs'
common stock. In connection with the acquisition, the Company incurred
approximately $1.4 million of acquisition related costs which were charged to
operations in the third quarter of fiscal year 1999. The acquisition was
accounted for as a pooling-of-interests. Accordingly, all periods included in
these historical consolidated financial statements have been restated to give
effect to the merger. The following are the results of operations for the
separate companies for the years ended September 30:
1999 1998 1997
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Net Revenue:
MTS $362,708 $339,682 $303,480
DSP 27,834 22,481 19,944
- --------------------------------------------------------------------------------
COMBINED NET REVENUE $390,542 $362,163 $323,424
- --------------------------------------------------------------------------------
Income before income taxes (note A):
MTS $ 18,445 $ 31,473 $ 32,712
DSP 325 1,975 1,606
- --------------------------------------------------------------------------------
COMBINED INCOME BEFORE
INCOME TAXES $ 18,770 $ 33,448 $ 34,318
- --------------------------------------------------------------------------------
NOTE A: 1999 AMOUNTS INCLUDE $0.3 MILLION AND $1.1 MILLION IN ACQUISITION
RELATED COST FOR THE COMPANY AND DSP RESPECTIVELY.
No significant adjustments were made to the prior years financial statements
of either the Company or DSP.
34
<PAGE>
On September 29, 1999 the Company acquired the exclusive license for the
PowerBlok product line technology, related inventory and fixed assets, and trade
names from Semipower, Inc. The transaction was accounted for by the purchase
method of accounting.
In fiscal 1998 the Company acquired three entities, all accounted for by the
purchase method of accounting, with an aggregate purchase price of approximately
$29 million, net of cash acquired. The Company acquired all the outstanding
stock of Performance Controls, Inc., a manufacturer of high performance power
amplifiers for factory auto mation and magnetic resonance machine applications,
in an all cash transaction. The Company acquired the stock of Nano Instruments
Inc., a manufacturer of instrumented indentation systems for ultra-low force
nanoindentation testing surfaces and thin films, for cash and debt. In addition
to the stock purchase of Nano Instruments Inc., the Company purchased the rights
to a patent from the two principal shareholders of Nano Instruments, Inc. The
Company also acquired the assets and technology of SDRC's noise and vibration
test software business along with a major portion of SDRC's noise and vibration
consulting engineering services, in an all cash transaction.
The total purchase price exceeded the fair value of the net assets acquired
by approximately $23.2 million. This amount was recorded as goodwill and other
intangibles with useful lives between 7 and 20 years. The results of the
operations of the acquired companies are included in the Company's financial
statements for the periods in which they were owned.
In fiscal 1997 the Company acquired the stock of Bregenhorn-Butow & Co.,
Freiburg, Germany (name subsequently changed to Custom Servo Motors
Antriebstechnik GmbH & Co KG), a privately held supplier of low power,
electronic servo motors and drives, for cash and debt. The transaction was
accounted for by the purchase method of accounting.
The pro forma results, exclusive of the DSP merger, for 1999, 1998 and 1997,
assuming these acquisitions had been made at the beginning of the year, would
not be materially different from reported results.
8. RESTRUCTURING AND OTHER CHARGES:
The Company has taken a series of actions to better align its organizational
structure with market elements, improve operational performance and reduce
costs. These actions resulted in a restructuring charge during the first quarter
of fiscal year 1999 of $2.1 million ($1.4 million after tax, or $.07 per share).
This charge related principally to employee severance costs of $1.8 million and
$0.3 million for other costs.
In the first quarter of fiscal year 1999, DSP Technology, Inc. (see note 7)
announced its strategic decision to relocate its corporate headquarters and
consolidate its Transportation Group operations in Ann Arbor, Michigan from
Freemont, California. This decision resulted in a restructuring charge of $0.5
million ($0.3 million after tax or $.01 cents per share). This charge relates to
employee severance cost of $0.3 million and $0.2 million in idle facility and
wind down costs. As of September 30, 1999, $.1 million of the restructuring
charge remains to be paid.
In the fourth quarter of fiscal 1999, the Company identified actions
necessary to rationalize certain of its business capacity. These actions
resulted in a total restructuring charge during the fourth quarter of fiscal
1999 of $3.1 million ($2.1 million after tax, or $.10 per share). This charge
relates to employee severance costs of $2.8 million and $0.3 million of other
costs. In conjunction with the rationalization of business capacity, the Company
took an additional charge to cost of sales of $0.9 million related to inventory
write-downs. No amounts recorded in the fourth quarter have been paid.
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION: The Company is a party to various claims, legal actions and
complaints arising in the ordinary course of business. It is the opinion of
management that the final resolution of these matters will not have a material
adverse effect on the financial position or results of operation of the Company.
LEASES: The Company has noncancelable operating lease commitments for equipment
and facilities that expire on various dates through 2005. Minimum annual rental
commitments at September 30, 1999 for the fiscal years 2000 through 2004 and
thereafter are $3,647, $2,644, $1,626, $1,225, $980 and $302. Total lease
expense was $4,197 in 1999, $3,118 in 1998 and $2,693 in 1997.
35
<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, 1999
and 1998, and the related consolidated statements of income, shareholders`
investment and cash flows for each of the three years in the period ended
September 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MTS Systems Corporation and
Subsidiaries as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
November 24, 1999
REPORT OF MANAGEMENT
The management of MTS Systems Corporation is responsible for the integrity and
objectivity of the financial information presented in this report. The financial
statements have been prepared in accordance with generally accepted accounting
principles and include certain amounts based on management's best estimates and
judgment.
Management is also responsible for establishing and maintaining the
Company's accounting systems and related internal controls, which are designed
to provide reasonable assurance that assets are safeguarded, transactions are
properly recorded, and the policies and procedures are implemented by qualified
personnel.
The Audit Committee of the Board of Directors, which is comprised solely of
outside directors, meets regularly with management and its independent auditors
to review audit activities, internal controls, and other accounting, reporting,
and financial matters. This Committee also recommends independent auditors for
appointment by the full Board, subject to shareholder ratification.
The financial statements included in this annual report have been audited by
Arthur Andersen LLP, independent public accountants. We have been advised that
their audits were conducted in accordance with generally accepted auditing
standards and included such reviews of internal controls and tests of
transactions as they considered necessary in setting the scope of their audits.
Sidney W. Emery, Jr
Chairman and Chief Executive Officer
/s/ Sidney W. Emery, Jr
David E. Hoffman
Vice President and
Chief Financial Officer
/s/ David E. Hoffman
36
EXHIBIT 21
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
OF THE COMPANY
Incorporation
Name Jurisdiction
MTS Systems (Hong Kong) Inc. Minnesota, U.S.A.
MTS Testing Systems (Canada) Ltd. Canada
MTS Systems GmbH (Berlin) Germany
MTS Sensor Technologie GmbH and Co. KG Germany
MTS Systems France
MTS Holdings France, SARL France
MTS (Japan) Ltd. Japan
MTS Sensor Technology K.K. Japan
MTS Systems Limited (London) United Kingdom
MTS Systems SRL (Italy) Italy
MTS International, Ltd. West Indies
MTS Systems Norden AB Sweden
MTS Systems do Brasil, Ltda. Brazil
MTS Systems (China) Inc. Minnesota, U.S.A.
Custom Servo Motors, Inc. Minnesota, U.S.A.
MTS Korea, Inc. Republic of Korea
MTS-PowerTek, Inc. Michigan, U.S.A.
MTS Systems (Singapore) Pte Ltd Singapore
MTS Services Ltd Japan
MTS Automotive Sensors GmbH Germany
MTS Sensor Technology Verwaltungs GmbH and Co. KG Germany
MTS Systems Holding for Europe GmbH Germany
Customer Servo Motors Antriebstechnik Verwaltungs GmbH Germany
Custom Servo Motors Antriebstechnik GmbH & Co. KG Germany
MTS Systems GmbH Germany
AeroMet Corporation Minnesota, U.S.A
DSP Technology, Inc. Delaware, U.S.A
Nano Instruments, Inc. Tennessee, U.S.A.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our reports dated November 24, 1999 included in
the Company's previously filed Registration Statements on Form S-8 (Registration
Nos. 333-28661, 2-99389, 33-21699, 33-35288, and 33-45386) and Form S-3
(Registration No. 33-60485).
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota, December 21, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 18,083
<SECURITIES> 0
<RECEIVABLES> 142,871
<ALLOWANCES> 2,232
<INVENTORY> 56,948
<CURRENT-ASSETS> 223,651
<PP&E> 146,719
<DEPRECIATION> 73,086
<TOTAL-ASSETS> 333,347
<CURRENT-LIABILITIES> 104,713
<BONDS> 61,566
0
0
<COMMON> 5,221
<OTHER-SE> 157,638
<TOTAL-LIABILITY-AND-EQUITY> 333,347
<SALES> 390,542
<TOTAL-REVENUES> 390,542
<CGS> 239,371
<TOTAL-COSTS> 371,772
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,067
<INCOME-PRETAX> 18,770
<INCOME-TAX> 6,325
<INCOME-CONTINUING> 18,770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,445
<EPS-BASIC> .60
<EPS-DILUTED> .59
</TABLE>
