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EXHIBIT 10.2

 

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CHANGE IN CONTROL AGREEMENT
 
MTS Systems Corporation
14000 Technology Drive
Eden Prairie, MN  55344-2290
Telephone 952-937-4000
Fax 952-937-4515
 

 

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THIS CHANGE IN CONTROL AGREEMENT is made and entered into by and between MTS
Systems Corporation, a Minnesota corporation with its principal offices at 14000
Technology Drive, Eden Prairie, MN 55344 (the “Company”) and Jeffrey A. Graves
(the “Executive”), and shall be effective as of Executive’s first day of
employment with the Company (the “Effective Date”).

WHEREAS, the Company considers the establishment and maintenance of a sound and
vital management to be essential to protecting and enhancing the best interests
of the Company and its shareholders; and

WHEREAS, the Executive is expected to make, due to the Executive's future
intimate knowledge of the business and affairs of the Company, its policies,
methods, personnel, and problems, a significant contribution to the
profitability, growth, and financial strength of the Company; and

WHEREAS, the Company, 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 the Company and its shareholders; and

WHEREAS, it is in the best interests of the Company and its stockholders to
reinforce and encourage the continued attention and dedication of management
personnel, including the Executive, to their assigned duties without distraction
and to ensure the continued availability to the Company of the Executive in the
event of a Change in Control; and

WHEREAS, the Company intends that the Agreement be exempt from the requirements
applicable to nonqualified deferred compensation plans pursuant to Section 409A
of the Code and regulations promulgated thereunder, and this Agreement shall be
construed and administered in a manner that is consistent with and gives effect
to such intention.

THEREFORE, in consideration of the foregoing and other respective covenants and
agreements of the parties herein contained, the parties hereto agree as follows:
 
 
 

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Change in Control Agreement

1.            Term of Agreement.  This Agreement shall be effective from and
after the date hereof and shall continue in effect through December 31, 2012,
and shall automatically be extended for successive one-year periods thereafter
unless the Board of Directors of the Company (the “Board”) shall have approved,
and the Executive is notified in writing, prior to January 1, 2013 and each
January 1 thereafter, that the term of this Agreement shall not be extended or
further extended; provided, however, that if a Change in Control shall have
occurred during the original or any extended term of this Agreement, this
Agreement shall continue in effect for a period of 24 months from the date of
the occurrence of a Change in Control or, if  an event triggering the Company’s
severance payment obligations to the Executive under Section 4(d) has occurred
during such 24-month period, this Agreement shall continue in effect until the
benefits payable to the Executive hereunder have been paid in full. In the event
that more than one Change in Control shall occur during the original or any
extended term of this Agreement, the 24-month period shall follow the last
Change in Control.  This Agreement shall neither impose nor confer any further
rights or obligations on the Company or the Executive on the day after the end
of the term of this Agreement.  Expiration of the term of this Agreement of
itself and without subsequent action by the Company or the Executive shall not
end the employment relationship between the Company and the Executive.

2.            Change in Control.  No benefits shall be payable hereunder unless
there shall have been a Change in Control. For purposes of this Agreement, a
“Change in Control” of the Company shall mean a change in control which would be
required to be reported in response to Item 6(e) on Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), whether or not the Company is then subject to such reporting
requirement, including, without limitation, if:
 
(a)           Any “person” (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any subsidiary of the Company,
becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding securities; or

(b)           During any period of two consecutive years (not including any
period ending prior to the effective date of this Agreement), the Incumbent
Directors cease for any reason to constitute at least a majority of the Board of
Directors.  The term “Incumbent Directors” shall mean those individuals who are
members of the Board of Directors on the effective date of this Agreement and
any individual who subsequently becomes a member of the Board of Directors
(other than a director designated by a person who has entered into agreement
with the Company to effect a transaction contemplated by Section 2(c)) whose
election or nomination for election by the Company's shareholders was approved
by a vote of at least a majority of the then Incumbent Directors; or

(c)           (i) The Company consummates a merger, consolidation, share
exchange, division or other reorganization of the Company with any corporation
or entity, other than an entity owned at least 80% by the Company, unless
immediately after such transaction, the shareholders of the Company immediately
prior to such transaction beneficially own, directly or indirectly 51% or more
of the combined voting power of resulting entity’s outstanding voting securities
as well as 51% or more of the Total Market Value of the resulting entity, or in
the case of a division, 51% or more of the combined voting power of the
outstanding voting securities of each entity resulting from the division as well
as 51% or more of the Total Market Value of each such entity, in each case in
substantially the same proportion as such shareholders owned shares of the
Company prior to such transaction; (ii) the shareholders of the Company approve
an agreement for the sale or disposition (in one transaction or a series of
transactions) of assets of the Company, the total consideration of which is
greater than 51% of the Total Market Value of the Company, or (iii) the Company
adopts a plan of complete liquidation or winding-up of the Company.  “Total
Market Value” shall mean the aggregate market value of the Company’s or the
resulting entity’s outstanding common stock (on a fully diluted basis) plus the
aggregate market value of the Company’s or the resulting entity’s other
outstanding equity securities as measured by the exchange rate of the
transaction or by such other method as the Board determines where there is not a
readily ascertainable exchange rate.
 
 
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Change in Control Agreement

3.           Termination Following Change in Control.  If a Change in Control
shall have occurred during the term of this Agreement, the Executive shall be
entitled to the benefits provided in subsection 4(d) unless such termination is
(A) because of the Executive's death or Retirement, (B) by the Company for Cause
or Disability, or (C) by the Executive other than for Good Reason. The Company
and the Executive shall take all steps necessary (including with regard to any
post-termination services by the Executive) to ensure that any termination
described in this Section 3 constitutes a Separation from Service as defined in
subsection 3(h).

(a)           Disability.  Termination by the Company or the Executive of the
Executive’s employment based on “Disability” may occur in the event the
Executive has incurred or is afflicted with any medically determinable physical
or mental impairment that can be expected to result in death or can be expected
to last for a continuous period of not less than 12 months, and as a result, has
become eligible for and begun receiving income replacement benefits under the
terms of the Company’s long-term disability plan or policy as may be in effect
from time to time.

(b)           Retirement. Termination of the Executive's employment based on
“Retirement” shall mean termination by the Executive on or after attaining age
sixty-five (65).

(c)           Cause. For purposes of this Agreement,  “Cause” shall mean:
 
 
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Change in Control Agreement

(i)           the willful and continued failure by the Executive (other than any
such failure resulting from (1) the Executive’s incapacity due to physical or
mental illness, (2) any such actual or anticipated failure after the issuance of
a Notice of Termination by the Executive for Good Reason or (3) the Company’s
active or passive obstruction of the performance of the Executive’s duties and
responsibilities) to perform substantially the duties and responsibilities of
the Executive’s position with the Company after a written demand for substantial
performance is delivered to the Executive by the Board, which demand
specifically identifies the manner in which the Board believes that the
Executive has not substantially performed the duties or responsibilities;

(ii)           the conviction of the Executive by a court of competent
jurisdiction for felony criminal conduct which, in the good faith opinion of the
Company, would impair the Executive’s ability to perform his or her duties or
impair the business reputation of the Company; or

(iii)           the willful engaging by the Executive in fraud or dishonesty
that is demonstrably and materially injurious to the Company, monetarily or
otherwise.

No act, or failure to act, on the Executive’s part shall be deemed “willful”
unless committed, or omitted by the Executive in bad faith and without
reasonable belief that the Executive’s act or failure to act was in the best
interest of the Company and the Executive shall have either failed to correct,
or failed to take all reasonable steps to correct, such act or failure to act
within sixty (60) days from the Executive’s receipt of written notice from the
Company demanding that the Executive take such action.  The Executive shall not
be terminated for Cause unless and until the Company shall have delivered to the
Executive a copy of a resolution duly adopted by the affirmative vote of not
less than three-quarters of the entire membership of the Board at a meeting of
the Board called and held for such purpose (after reasonable notice to the
Executive and an opportunity for the Executive, together with the Executive’s
counsel, to be heard before the Board), finding that, in the good faith opinion
of the Board, the Executive’s conduct was Cause and specifying the particulars
thereof in detail.

(d)           Good Reason.  The Executive shall be entitled to terminate his or
her employment for Good Reason; provided, however, that no such termination
under this Section  3(d) shall be effective unless: (A) the Executive provides
written notice to the Chair of the Board of Directors of the Company of the
existence of a condition specified in paragraphs (i) through (v) below within 90
days of the initial existence of the condition; (B) the Company does not remedy
such condition within 30 days of the date of such notice; and (C) the Executive
terminates employment within 90 days following the last day of the remedial
period described above.  For purposes of this Agreement, “Good Reason” shall
mean, without the Executive's express written consent, any of the following:
 
 
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(i)           the assignment to the Executive of any duties inconsistent in any
respect with the Executive’s authority, duties or responsibilities with respect
to the Executive’s position immediately prior to the Change in Control, or any
action by the Company that results in a diminution in such authority, duties or
responsibilities (whether or not occurring solely as a result of the Company’s
ceasing to be a publicly traded entity);

(ii)           a material reduction in the Executive’s base compensation in
effect immediately prior to the Change in Control;

(iii)          a material reduction in the budget over which the Executive
retains authority;

(iv)          a material change in the geographic location at which the
Executive must perform services for the Company; and

iv)           Any material violation of this Agreement by the Company, including
but not limited to any purported termination of the Executive’s employment that
is not made pursuant to a Notice of Termination satisfying the requirements of
this Agreement.

For purposes of this Section 3(d), any good faith determination of Good Reason
made by the Executive shall be conclusive.  The Executive’s mental or physical
incapacity following the occurrence of an event described above in paragraphs
(i) through (v) shall not affect the Executive’s ability to terminate employment
for Good Reason and the Executive’s death following delivery of a Notice of
Termination for Good Reason shall not affect the Executive’s estate’s
entitlement to the payments and benefits provided hereunder upon a termination
of employment for Good Reason.

(e)           Notice of Termination.  Any purported termination of the
Executive's employment by the Company or by the Executive shall be communicated
by written Notice of Termination to the other party hereto in accordance with
Section 9.  For purposes of this Agreement, a “Notice of Termination” shall mean
a notice that 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 the Executive's employment.
 
 
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(f)           Date of Termination.  For purposes of this Agreement, “Date of
Termination” shall mean:

(i)           If the Executive's employment is terminated for Disability, 30
days after Notice of Termination is given (provided that the Executive shall
have been absent from full-time performance of duties for at least three (3)
months and shall not have returned to the full-time performance of the
Executive's duties during such 30 day period, in accordance with Section 3(a)
hereof);

(ii)           If the Executive's employment is terminated pursuant to
subsections (b) or (c) above or for any other reason (other than Disability),
the date specified in the Notice of Termination (which, in the case of a
termination pursuant to subsection (b) above shall not be less than 10 days, and
in the case of a termination pursuant to subsection (c) above shall not be less
than 10 nor more than 30 days, respectively, from the date such Notice of
Termination is given); and

(iii)          Notwithstanding anything contained herein to the contrary, the
date on which a Separation from Service takes place.

(g)           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.  Notwithstanding the pendency of any such dispute, the Company shall
continue to pay the Executive full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, base salary) and
continue the 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.  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.
 
 
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(h)           Separation from Service.  Separation from Service means the
Executive’s termination of employment (as defined in this subsection 3(h)) from
the Company and its Affiliates. A Executive incurs a termination of employment
that constitutes a Separation from Service if the Executive and the Compensation
Committee of the Board of Directors of the Company reasonably anticipate either
than the Executive will not perform any additional services after a certain date
for the Company and any Affiliate (the “Company Group”), or that the Executive’s
level of bona fide services for the Company Group will permanently decrease to
no more than 20% of the average level of bona fide services performed over the
immediately preceding 36-month period. The Executive does not incur a Separation
from Service if on military leave, sick leave, or other bona fide leave of
absence if such leave does not exceed a period of 6 months, or if longer, the
period for which a statute or contract provides the Executive with the right to
reemployment with the Company Group, provided that there is a reasonable
expectation that the Executive will return to perform further services. If an
Executive’s leave exceeds 6 months but the Executive is not entitled to
reemployment under a statute or contract, the Executive incurs a Separation from
Service on the next day following the expiration of 6 months. Where a leave of
absence is due to a Disability, the 6 month leave period described above shall
be 12 months unless the leave is earlier terminated. The service of the
Executive as a director of the board of any entity in the Company Group will not
be considered in determining whether the Executive has incurred a Separation
from Service as an employee of the Company Group. The Compensation Committee
will determine whether a Executive has incurred a Separation from Service based
on the facts and circumstances and in accordance with Treas. Reg.
§1.409A-1(h)(1)(ii). For purposes of this subsection 3(h), “Affiliate” means an
entity that would be considered with the Company a single employer under
Sections 414(b) and (c) and 1563(a) of the Code, except that 50% shall be
substituted for the 80% each place it appears in  Sections 414(b) and (c) and
1563(a) of the Code.

4.           Compensation Upon Termination or During Disability.  Following a
Change in Control of the Company, as defined in subsection 2(a), upon
termination of the Executive's employment or during a period of Disability, the
Executive shall be entitled to the following benefits:

(a)           During any period that the Executive fails to perform full-time
duties with the Company as a result of a Disability, the Company shall pay the
Executive, the Executive's base salary as in effect at the commencement of any
such period and the amount of any other form or type of compensation otherwise
payable for such period if the Executive were not so disabled, until such time
as the Executive is determined to be eligible for long term disability benefits
in accordance with the Company's insurance programs then in effect or the
Executive is terminated for Disability.”

(b)           If the Executive's employment shall be terminated by the Company
for Cause or by the Executive other than for Good Reason or Disability, the
Company shall pay to the Executive his or her full base salary through the Date
of Termination at the rate in effect at the time Notice of Termination is given
and the Company shall have no further obligation to the Executive under this
Agreement, except with respect to any benefits to which the Executive is
entitled under any Company pension or welfare benefit plan, insurance program or
as otherwise required by law.
 
 
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(c)           If the Executive's employment shall be terminated by the Company
or by the Executive for Disability or Retire­ment, or by reason of death, the
Company shall immediately commence payment to the Executive (or the Executive's
designated beneficiaries or estate, if no beneficiary is designated) of any and
all benefits to which the Executive is entitled under the Company's retirement
and insurance programs then in effect.

(d)           If the Executive's employment shall be terminated (A) by the
Company other than for Cause, Retirement, Disability or the Executive’s death or
(B) by the Executive for Good Reason, then the Executive shall be entitled to
the benefits provided below:

(i)           The Company shall pay the Executive, through the Date of
Termination, the Executive's base salary as in effect at the time the Notice of
Termination is given and any other form or type of compensation otherwise
payable for such period;

(ii)           In lieu of any further salary payments for periods subsequent to
the Date of Termination, the Company shall pay a severance payment (the
“Severance Payment”) equal to two times the Executive's Annual Compensation as
defined below. For purposes of this Section 4, “Annual Compensation” shall mean
the Executive’s annual salary (regardless of whether all or any portion of such
salary has been contributed to a deferred compensation plan), the average annual
Executive Variable Compensation (“EVC”) earned by the Executive during the three
(3) fiscal years immediately preceding the Date of Termination or, if less, the
actual number of fiscal years the Executive has participated in the EVC plan,
and any other type or form of compensation paid to the Executive by the Company
(or any corporation (an “Affiliate”) affiliated with the Company within the
meaning of Section 1504 of the Internal Revenue Code of 1986 as it may be
amended from time to time (the “Code”)) and included in the Executive’s gross
income for federal tax purposes during the 12-month period ending immediately
prior to the Date of Termination, but excluding: a) any amount actually paid to
the Executive as a cash payment of the target bonus (regardless of whether all
or any portion of such Company bonus was contributed to a deferred compensation
plan); b) compensation income recognized as a result of the exercise of stock
options or sale of the stock so acquired; and c) any payments actually or
constructively received from a plan or arrangement of deferred compensation
between Company and the Executive.  All of the items included in Annual
Compensation shall be those in effect on the Date of Termination and shall be
calculated without giving effect to any reduction in such compensation that
would constitute a breach of this Agreement. The Severance Payment shall be made
in a single lump sum within 30 days after the Date of Termination;
 
 
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(iii)           For the 18-month period after the Date of Termination (the
“Benefit Continuation Period”), the Company shall arrange to provide, at its
sole expense, the Executive with life, disability, accident and health insurance
benefits substantially similar to those that the Executive is receiving or
entitled to receive immediately prior to the Notice of Termination.  The
Executive shall be responsible for the payment of his or her portion of the
premiums for such benefits at the same relative percentage of total premiums as
the Executive paid prior to the Date of Termination . Following the end of the
Benefit Continuation Period, the Executive shall be eligible for continued
health coverage as required by Code Section 4980B or other applicable law
(“COBRA Coverage”), as if the Executive’s employment with the Company had
terminated as of the end of the Benefit Continuation Period, and the Company
shall take such actions as are necessary to cause such COBRA Coverage not to be
offset by the provision of benefits under this paragraph (iii) and to cause the
period of COBRA Coverage to commence at the end of the Benefit Continuation
Period.    The cost of providing such benefits shall be in addition to (and
shall not reduce) the Severance Payment.  Benefits otherwise receivable by the
Executive pursuant to this paragraph (iii) shall be reduced to the extent
comparable benefits are actually received by the Executive during the Benefit
Continuation Period, and any such benefits actually received by Executive shall
be reported to the Company; and

(iv)           The Company shall also pay to the Executive all legal fees and
expenses incurred by the Executive as a result of such termination (including
all such fees and expenses, if any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any right or benefit provided by
this Agreement); provided that such payment for legal fees and expenses shall be
made not later than the last day of the calendar year following the year in
which the Executive incurred the fees and expenses and the Executive’s right to
such payment may not be liquidated or exchanged for any other benefit.

(e)           The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or otherwise,
nor shall the amount of any payment or benefit provided for in this Section 4
(except as expressly provided in Section 4(d)(iii)) 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.
 
 
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(f)           The Executive shall be entitled to receive all benefits payable to
the Executive under the Company pension and welfare benefit plans or any
successor of such plan and any other plan or agreement relating to retirement
benefits which shall be in addition to, and not reduced by, any other amounts
payable to the Executive under this Section 4.

(g)            The Executive shall be entitled to exercise all rights and to
receive all benefits accruing to the Executive under any and all Company stock
purchase and stock option plans or programs, or any successor to any such plans
or programs, which shall be in addition to, and not reduced by, any other
amounts payable to the Executive under this Section 4.

(h)           The Company will indemnify the Executive (and the Executive’s
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 the
Company 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 the Company 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
the Executive’s legal representatives in connection with any action, suit or
proceeding to which the Executive (or the Executive’s legal representative or
other successors) may be made a party by reason of the Executive’s being or
having been a director, officer or employee of the Company or any of its
subsidiaries or his or her serving or having served any other enterprise as a
director, officer or employee at the request of the Company, provided that the
Company 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 the Company on the date of this Agreement and containing terms and
conditions which are no less advantageous than such policies.

Notwithstanding anything herein to the contrary, if the Executive’s employment
is governed by a separate written employment agreement that provides benefits
upon a termination of employment, the aggregate of any payments or benefits
payable under such employment agreement shall offset and reduce the aggregate of
payments and benefits under this Agreement that do not constitute deferred
compensation under Section 409A of the Code.
 
 
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5.            Non-Compete and Confidentiality.
 
(a)           Noncompetition.  Except as provided in subsection (c) below, the
Executive agrees that, as a condition of receiving benefits under this
Agreement, the Executive 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 the
Company, 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 the Company.  The Executive agrees that
violation of this covenant not to compete with the Company shall result in
immediate cessation of all benefits hereunder, other than insurance benefits,
which the Executive may continue where permitted under federal and state law at
his or her own expense.

 (b)           Confidentiality.  The Executive further agrees and acknowledges
the Executive’s existing obligation that at all times during and subsequent to
his or her employment with MTS, the Executive will not divulge or appropriate to
the Executive’s 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 or 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 a Change in
Control which has not been approved by a majority of the Incumbent Directors in
office immediately prior to the Change in Control (an “Unfriendly Change in
Control”).  Furthermore, in such event, the Company waives any other restriction
on the Executive’s employment and consents unconditionally to any employment the
Executive may subsequently obtain.
 
 
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6.            Limits on Payments and Benefits.  In the event that the vesting,
acceleration and payment of any equity awards or other compensation or benefits,
together with all other payments and the value of any benefit received or to be
received by the Executive would result in all or a portion of such payment being
subject to excise tax under Section 4999 of the Code, then the amounts due under
Section 4 that the Company shall pay to the Executive shall be either (A) the
full payment or (B) such lesser amount determined by the Company in accordance
with this Section 6 that would result in no portion of the payment being subject
to excise tax under Section 4999 of the Code (the “Excise Tax”), whichever of
the foregoing amounts, taking into account the applicable Federal, state, and
local employment taxes, income taxes, and the Excise Tax, results in the receipt
by the Executive, on an after-tax basis, of the greatest amount of the payment
notwithstanding that all or some portion of the payment may be taxable under
Section 4999 of the Code.  In the event the amounts due under Section 4 are
reduced, the amounts shall be reduced in the following order of priority: first,
with respect to any amount that does not constitute the “deferral of
compensation” under Section 409A of the Code and regulations promulgated
thereunder,  disregard the acceleration in the time of payment and then
disregard the acceleration of vesting as a result of a Change in Control and
second, with respect to any amount that constitutes the “deferral of
compensation” under Section 409A of the Code and regulations promulgated
thereunder, disregard the acceleration in the time of payment and then disregard
the acceleration of vesting as a result of a Change in Control first with
respect to Company funded amounts and then the Executive’s deferrals, in each
case only to the extent necessary to satisfy (B) above. All determinations
required to be made under this Section 14 shall be made by a nationally
recognized accounting firm that is the Company’s outside auditor immediately
prior to the event triggering the payments that are subject to the Excise Tax
(the “Accounting Firm”).  The Company shall cause the Accounting Firm to provide
detailed supporting calculations of its determinations to the Company and
Executive.  Notice must be given to the Accounting Firm within fifteen (15)
business days after an event entitling Executive to an amount due under this
Agreement.  All fees and expenses of the Accounting Firm shall be borne solely
by the Company.  The Accounting Firm’s determinations must be made with
substantial authority (within the meaning of Section 6662 of the Code).  For the
purposes of all calculations under Section 280G of the Code and the application
of this Section 6, all determination as to present value shall use 120 percent
of the applicable Federal rate (determined under Section 1274(d) of the Code)
compounded based on the nature of the payment, as in effect on the date of this
Agreement, but if not otherwise specified, the Company and Executive agree to
compound such rate on a semiannual basis.  The determination by the Accounting
Firm shall be final and binding on the Company and the Executive.

7.            Funding of Payments. In order to assure the performance of the
Company or its successor of its obligations under this Agreement, the Company
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
the Company 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 the
Company.  If the Company deposits funds in trust, payment shall be made no later
than the occurrence of the 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 the Company as required by such rulings).  The trustee shall be a
national bank selected by the Company 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 the Company, its
successor, or any affiliate of the Company or its successor). If and to the
extent there are not amounts in trust sufficient to pay Executive under this
Agreement, the Company shall remain liable for any and all payments due to
Executive.
 
 
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Change in Control Agreement
 
8.            Successors; Binding Agreement.

(a)           The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to 51% or more of the
­business and/or assets of the Company to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place.  Failure of the
Company to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Executive to the compensation and benefits from the Company in the same amount
and on the same terms as the Executive would be entitled hereunder if the
Executive terminated his or her 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)           This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, successors, 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.

9.            Notice.  For the purpose of this Agreement, notices and all 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
the Company, to its principal office to the attention of each of the then
directors of the Company 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.

10.           Non-application of Section 409A of the Code.   It is the intent of
the Company and the Executive that this Agreement satisfy those requirements of
Section 409A of the Code to constitute first a “short term deferral” and then a
“separation pay plan” to exempt the payments hereunder from the definition of a
“nonqualified deferred compensation plan” under Section  409A of the Code, and
the Agreement shall be so administered and interpreted in manner consistent
with, and that gives effect to, such intention. The Company shall have the
authority, without the consent of the Executive to amend such provision to
maintain to maximum extent practicable the intent that this Agreement remains
exempt from the requirements applicable to a “nonqualified deferred compensation
plan” under Section 409A of the Code and regulations and other guidance
promulgated thereunder.
 
 
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Change in Control Agreement

11.           Miscellaneous.  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 condition or provision of this Agreement to be performed by such other-party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or similar time.  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.  The validity, interpretation, construc­tion and performance of this
Agreement shall be governed by the laws of the State of Minnesota.

12.           Validity.  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, the undersigned officer, on behalf of MTS Systems
Corporation, and the Executive have hereunto set their hands as of the date
first above written.

 

 
MTS SYSTEMS CORPORATION
           
By
        David Anderson       Its
Chair, Board of Directors
                       
EXECUTIVE:
                 

 
 
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