-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rs0SG//7ggx8f9XT52MzXlynBa6Xeyc/rlvLtWhvEGAc5hU2wU6wipXqhT993yZG DuWf6gbJ63OnnaMhry10Vw== /in/edgar/work/20000912/0000069999-00-000015/0000069999-00-000015.txt : 20000922 0000069999-00-000015.hdr.sgml : 20000922 ACCESSION NUMBER: 0000069999-00-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000729 FILED AS OF DATE: 20000912 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL COMPUTER SYSTEMS INC CENTRAL INDEX KEY: 0000069999 STANDARD INDUSTRIAL CLASSIFICATION: [7374 ] IRS NUMBER: 410850527 STATE OF INCORPORATION: MN FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-03713 FILM NUMBER: 721044 BUSINESS ADDRESS: STREET 1: 11000 PRAIRIE LAKES DR CITY: MINNEAPOLIS STATE: MN ZIP: 55344 BUSINESS PHONE: 6128293000 MAIL ADDRESS: STREET 1: P O BOX 9365 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: July 29, 2000 Commission File Number: 0-3713 NATIONAL COMPUTER SYSTEMS, INC. - ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) Minnesota 41-0850527 - ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 11000 Prairie Lakes Drive Eden Prairie, Minnesota 55344 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (952)829-3000 Indicate by check mark whether the 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 and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date: The number of shares of common August 28, 2000, was 32,820,972. PART I. FINANCIAL INFORMATION Item 1. Financial Statements NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) For the periods ended July 29, 2000 and July 31, 1999 Second Quarter Year-to-date -------------------- -------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (In thousands, except per share amounts) REVENUES Services $154,801 $114,591 $287,958 $200,256 Product sales 49,897 53,073 91,103 93,225 -------- -------- -------- -------- Total revenues 204,698 167,664 379,061 293,481 COST OF REVENUES Cost of services 107,901 75,877 202,628 137,915 Cost of product sales 21,164 21,623 38,781 37,271 -------- -------- -------- -------- Gross profit 75,633 70,164 137,652 118,295 OPERATING EXPENSES Sales and marketing 17,731 18,969 35,002 35,541 Research and development 7,050 4,740 13,158 8,413 General and administrative 23,060 24,270 46,714 40,525 -------- -------- -------- -------- INCOME FROM OPERATIONS 27,792 22,185 42,778 33,816 Interest expense 412 266 530 428 Other expense, net (327) (41) 72 325 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 27,707 21,960 42,176 33,063 Income taxes 11,000 8,800 16,700 13,250 -------- -------- -------- -------- NET INCOME $ 16,707 $ 13,160 $ 25,476 $ 19,813 ======== ======== ======== ======== EARNINGS PER SHARE Basic $0.51 $0.42 $0.78 $0.63 Diluted 0.50 0.40 0.76 0.60 See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) July 29, January 29, 2000 2000 -------- ----------- (In thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 6,457 $ 26,592 Marketable securities 24,956 - Receivables 176,687 151,870 Inventories: Finished products 5,724 5,880 Scoring services and work in process 32,336 23,158 Raw materials and purchased parts 4,163 4,581 -------- -------- Total inventories 42,223 33,619 Prepaid expenses and other 9,955 9,932 -------- -------- TOTAL CURRENT ASSETS 260,278 222,013 PROPERTY, PLANT AND EQUIPMENT Land, buildings and improvements 72,658 67,928 Machinery and equipment 208,816 189,835 Accumulated depreciation (136,065) (125,654) -------- -------- Net property, plant and equipment 145,409 132,109 INTELLECTUAL PROPERTIES, NET Acquired and internally developed software products 8,611 9,371 Educational content and assessment instruments 22,109 23,306 -------- -------- Net intellectual properties 30,720 32,677 OTHER ASSETS, NET Goodwill 51,205 50,263 Other assets 12,334 12,818 -------- -------- Net other assets 63,539 63,081 -------- -------- TOTAL ASSETS $499,946 $449,880 ======== ======== See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) July 29, January 29, 2000 2000 --------- ----------- (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 302 $ 1,270 Accounts payable 27,880 38,546 Accrued expenses 82,777 73,163 Deferred income 54,088 51,785 Income taxes 14,028 6,570 -------- -------- TOTAL CURRENT LIABILITIES 179,075 171,334 LONG-TERM DEBT -- less current maturities 516 516 DEFERRED INCOME TAXES 1,094 1,642 COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY Preferred stock - - Common stock--issued and outstanding - 32,770 and 32,348 shares, respectively 983 970 Paid-in capital 28,092 22,596 Retained earnings 279,414 257,195 Accumulated other comprehensive income - Unrealized gain on marketable securities 15,354 - Foreign currency translation adjustment (3,639) (2,969) Deferred compensation (943) (1,404) -------- -------- TOTAL STOCKHOLDERS' EQUITY 319,261 276,388 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $499,946 $449,880 ======== ======== See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the six-month periods ended July 29, 2000 and July 31, 1999 July 29, July 31, 2000 1999 -------- -------- (In thousands) OPERATING ACTIVITIES Net income $ 25,476 $ 19,813 Depreciation and amortization 21,445 17,991 Deferred income taxes and other (470) (499) Changes in operating assets and liabilities: Accounts receivable (24,817) (5,087) Inventory and other current assets (8,627) (8,375) Accounts payable and accrued expenses 4,655 11,302 Deferred income 2,303 6,593 ------- ------- Net cash provided by operating activities 19,965 41,738 ------- ------- INVESTING ACTIVITIES Purchases of property, plant and equipment (25,964) (15,597) Purchases of business systems (4,431) (7,683) Acquisitions, net (5,734) (19,059) Other, net (404) 1,317 ------- ------- Net cash used in investing activities (36,533) (41,022) ------- ------- FINANCING ACTIVITIES Net increase in revolving credit borrowings - 5,000 Net repayment of other borrowings (568) (268) Issuance of common stock, net 256 1,084 Dividends paid (3,255) (3,163) ------- ------- Net cash provided (used) by financing activities (3,567) 2,653 ------- ------- Increase (decrease) in cash and cash equivalents (20,135) 3,369 CASH AND CASH EQUIVALENTS - beginning of period 26,592 16,310 ------- ------- CASH AND CASH EQUIVALENTS - end of period $ 6,457 $19,679 ======= ======= See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Note A - The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows for all periods presented have been made. The consolidated results of operations for the periods ended July 29, 2000 are not necessarily indicative of the operating results that may be expected for the entire fiscal year ending February 3, 2001. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in National Computer Systems, Inc. and Subsidiaries' Annual Report on Form 10-K for the year ended January 29, 2000. Note B - Earnings per share are calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." The following table is a reconciliation of the earnings numerator and the weighted-average shares denominator used in the calculations of basic and diluted earnings per share: Quarter Ended Year-to-date July 29, July 31, July 29, July 31, 2000 1999 2000 1999 -------- -------- ------- ------- Earnings: Net income for basic earnings per share $16,707 $13,160 $25,476 $19,813 Adjustments for dilutive securities: Interest expense on convertible debentures, net of tax - 43 5 84 ------- ------- ------- ------- Adjusted net income for diluted earnings per share $16,707 $13,203 $25,481 $19,897 ======= ======= ======= ======= Weighted Average Share: Basic average shares 32,611 31,714 32,483 31,597 Adjustments for dilutive securities: Employee stock options, net of tax proceeds 980 895 986 920 Contingent stock awards, net of tax proceeds 17 35 23 36 Convertible debentures - 383 5 387 ------- ------- ------- ------- Diluted average shares 33,608 33,027 33,497 32,940 ======= ======= ======= ======= Basic earnings per share $ 0.51 $ 0.42 $ 0.78 $ 0.63 ======= ======= ======= ======= Diluted earnings per share $ 0.50 $ 0.40 $ 0.76 $ 0.60 ======= ======= ======= ======= Note C - Marketable Securities: On January 29, 2000 the Company held a minority investment in a privately held company and carried the investment at cost of $350. During the first quarter, the shares of that company began trading on The Nasdaq Stock Market(R), and therefore, NCS has begun accounting for this marketable security under Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. In accordance with this Statement, the Company accounts for this investment as available for sale, and has recorded the asset at the current market value of $24,956, with the unrealized gain, net of tax, as a separate component of Stockholders' Equity. Under the terms of the initial public offering, the Company will not be able to sell the securities until September 1, 2000. Future fluctuations in value will be recorded in Stockholders' Equity until the time of sale. Note D - The Company has 10,000,000 shares of $.01 par value Preferred Stock authorized of which none is outstanding. 100,000,000 shares of $.03 par value Common Stock are authorized. Note E - The components of comprehensive income for the quarter and year-to-date ended July 29, 2000 and July 31, 1999 are as follows (in thousands): Second quarter Year-to-date 2000 1999 2000 1999 ------- ------- ------- ------- Net income $16,707 $13,160 $25,476 $19,813 Increase in market value of marketable securities, net of tax 4,088 - 15,354 - Foreign currency translation adjustments (102) 344 (672) 1,347 ------- ------- ------- ------- Comprehensive income $20,693 $13,504 $40,158 $21,160 ======= ======= ======= ======= Note F - In March 2000 the Company purchased the minority interest in its Australian joint venture for $5.7 million. The purchase price has been allocated principally to goodwill. Note G - On July 31, 2000 the Company announced that it had entered into a definitive agreement under which NCS would be acquired by Pearson plc (Pearson), a U.K.-based international media, publishing and education company. On August 7, 2000Pearson commenced a cash tender offer to purchase all of the outstanding shares of NCS common stock. Completion of the transaction was subject to customary conditions, including certain regulatory approvals. The tender period ended on September 7, 2000; 94.76% of the shares were validly tendered and not withdrawn. The articles of merger will be filed in accordance with the Agreement and Plan of Merger, dated July 30, 2000. Note H - The Company has five reportable business segments; the table below presents information by segment.
Assessments Education Data & Testing Software & NCS Collection Services Services Services Systems International Totals ----------- ----------- ---------- ---------- -------------- --------- Second Quarter Ended 7/29/00 Revenues $ 71,113 $40,987 $ 54,217 $21,661 $16,720 $204,698 Income from operations 16,863 3,989 8,023 4,258 2,137 35,270 Second Quarter Ended 7/31/99 Revenues $ 53,930 $44,481 $ 35,437 $21,823 $11,993 $167,664 Income from operations 15,084 5,758 4,818 5,771 1,037 32,468 Year-to-date through 7/29/00 Revenues $122,003 $73,294 $110,457 $41,950 $31,357 $379,061 Income from operations 25,463 3,260 19,167 9,288 3,204 60,382 Year-to-date 7/31/99 Revenues $ 85,857 $72,807 $ 69,234 $42,653 $22,930 $293,481 Income from operations 18,818 6,889 10,304 11,018 2,065 49,094 The difference between segment totals and the Company's consolidated totals for income from operations is central general and administrative expenses and non-operating expenses, which are not allocated to the segments.
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition National Computer Systems, Inc. (NCS or the Company)is a global information services company providing software, services, systems and Internet-based technologies for the collection, management and interpretation of data. The Company serves segments of the education, testing, assessment and complex data management markets. Recap of 2000 Second Quarter Results For the quarter ended July 29, 2000, total revenues increased by $37.0 million or 22.1% from the quarter ended July 31, 1999. Gross profit increased $5.5 million, or 7.8%, but decreased as a percent of revenue from 41.8% to 36.9%. Income from operations for the quarter increased $5.6 million or 25.3% over the prior year second quarter. Net income increased 27.0% over the quarter ended July 31, 1999, and diluted earnings per share increased 25.0% to $0.50 per share from $0.40 in the prior year second quarter. On a year-to-date basis, total revenues increased by $85.6 million or 29.2% over the same period in the prior year. As measured against the same period in the prior year, overall gross margin decreased 4.0% as a percent of revenue, and gross margin dollars increased $19.4 million or 16.4%. Income from operations year-to-date increased $9.0 million or 26.5% compared to the prior year. Net income increased 28.6%, and earnings per share (diluted) increased 26.7% to $0.76 per share from $0.60 in the prior year. Revenues By revenue category, Services revenue increased 35.1% (43.8% year-to-date) and Product sales decreased 6.0% (2.3% year-to-date). By reportable segment, revenues comparisons to the last year are as follows: Quarter Year-to-date Assessments and Testing Services +31.9% +42.1% Educational Software and Services - 7.9 - 0.7 NCS Services +53.0 +59.5 Data Collection Systems - 0.7 - 1.6 International +39.4 +36.8 For both the second quarter and year-to-date, increases in Assessments and Testing Services were the result of increased state educational tests and electronic testing. Educational Software and Services had increases in service revenue from software support and software product licensing, offset by lower revenue in network services and network related hardware. NCS Services revenues were higher due greatly to $18 million of revenue related to the U.S. Census project ($37 million year-to-date). Data Collection Systems revenues were relatively flat, year-on-year, in both documents and data collection hardware. International revenues increased as a result of the Argentine telecommunications project and increases in Australian educational testing. Cost of Revenues and Gross Margins For the quarter ended July 29, 2000, the Company's overall gross margin was 36.9%, compared to 41.8% in the earlier period. The decrease reflects the continued general change in revenue mix towards services, which has a lower gross margin percent and also some lower margins on certain state assessment contracts. On a quarter-to-quarter basis, the gross margin in service revenue decreased as a percentage of revenue, with declines in state assessments and government services, principally the impact of the Census project, offsetting slight percentage improvements in education software support and electronic testing. Product sales gross profit decreased slightly in several areas, including education software, where subscription based revenues are becoming a greater portion of the total product revenues. The same variances were seen in each category on a year-to-date basis. Operating Expenses Sales and marketing expenses decreased $1.2 million or 6.5% in the quarter ended July 29, 2000 over the prior year second quarter. As a percentage of revenues, second quarter sales and marketing expenses declined by 2.7 percentage points, due primarily to the relatively lower selling costs associated with services revenues. On a year-to-date basis, these expenses decreased 1.5%, and 2.9 percentage points as a percentage of revenue. Research and development costs increased $2.3 million, or 48.7%, in the quarter ended July 29, 2000 as compared to the prior year and increased 56.4% on a year-to-date basis. This increased spending was a result of higher investments in Internet-delivered products and services, primarily for the K-12 Education Software segment, as well as other product and service offerings. General and administrative expenses decreased by $1.2 million, or 5.0%, for the quarter ended July 29, 2000 from the prior year quarter. As a percentage of revenue, second quarter general and administrative expense decreased from 14.5% to 11.3%. On a year-to-date basis these expenses increased $6.2 million but decreased as a percent of revenues from 13.8% to 12.3%. The earlier year's quarter reflected higher employee benefit costs associated with a new vacation policy, as well as variable compensation costs reflecting favorable operating results. On a year-to-date basis, these expenses increased in the current year due to variable compensation accrued because of the Company's first quarter stock price appreciation, as well as increased information technology costs. Non-operating Expenses Interest expense and other expense, net, were insignificant for all periods presented. Provision for Income Taxes The effective income tax rate was 39.7% for the quarter ended July 29, 2000 (39.6% year-to-date), compared to 40.1% for the earlier periods. The higher rate in 1999 reflected non-deductible losses of a foreign operation which was sold in the fourth quarter of 1999. Liquidity and Capital Resources For the six-month period ended July 29, 2000, the Company generated $20.0 million of cash flow from operating activities as compared to $41.7 million in the same period of the prior year. This decrease on a year-to-date basis primarily reflects growth of state assessment receivables to be collected on business conducted in the current quarter. Cash was used principally to fund investments in property, plant and equipment of $26.0 million, which included the build-out of the Austin, Texas facility and nine professional scoring centers, as well as $4.4 million for business systems. The Company expects that its positive cash flows from operations will be adequate to fund its normal financing and investing activities in the remainder of the fiscal year. The statements which are not historical or current facts or are "goals" or "expectations" contained in this report constitute "forward-looking" statements, as defined in the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially. The Cautionary Statements filed by the Company as Exhibit 99 to the Annual Report on Form 10-K for the year ended January 29, 2000, are incorporated herein by reference, and stockholders and prospective investors are specifically referred to such Cautionary Statements for a discussion of factors which could affect the Company's operations and forward-looking statements contained herein. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 10.1 Agreement dated as of July 21, 2000, by and between NCS and Russell A. Gullotti. 27. Financial Data Schedule. (b) The following report on Form 8-K was filed during the three months ended July 29, 2000. Form 8-K dated June 22, 2000 Item 5. Press release dated June 20, 2000 announcing termination of plans to form a joint venture with the University of Cambridge Local Examination Syndicate. SIGNATURES Pursuant to the requirements 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. NATIONAL COMPUTER SYSTEMS, INC. /s/ Jeffrey W. Taylor --------------------------- Jeffrey W. Taylor Vice President and Chief Financial Officer Dated: September 12, 2000 FORM 10-Q NATIONAL COMPUTER SYSTEMS, INC. FOR THE QUARTERLY PERIOD ENDED JULY 29, 2000 EXHIBIT INDEX EXHIBIT 10.1 Agreement dated as of July 21, 2000, by and between NCS and Russell A. Gullotti. 27 Financial Data Schedule. EX-10 2 0002.txt EXHIBIT 10.1 Exhibit 10.1 AGREEMENT Agreement, made and entered into as of July 21, 2000, by and between Russell A. Gullotti, an individual resident of Bloomington, Minnesota ("Gullotti"), and National Computer Systems, Inc., a Minnesota corporation ("NCS" or the "Company"). WHEREAS, Gullotti has rendered valuable executive services for NCS as NCS' President and Chief Executive Officer and as Chairman of its Board of Directors; and WHEREAS, Gullotti desires to resign as President, Chief Executive Officer and Chairman of the Board of the Company on June 1, 2001 or such earlier date as his successor to such positions is appointed; and WHEREAS, Gullotti wishes to retire as a regular full-time employee of NCS on June 1, 2001; and WHEREAS, Gullotti and NCS desire to enter into this agreement to confirm their agreements regarding Gullotti's retirement from employment with NCS and the other matters set forth in this agreement. NOW, THEREFORE, in consideration of the premises, the respective covenants and commitments set forth in this agreement, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Gullotti and NCS agree as follows: 1. Retirement; Pre-Retirement Status. (a) Effective as of June 1, 2001 (the "Retirement Date"), Gullotti will retire as a regular full-time employee of NCS. As of the Retirement Date, Gullotti will resign as President, Chief Executive Officer and Chairman of the Board of Directors of NCS (unless Gullotti has relinquished such positions on an earlier date in accordance with section 1(b) below). (b) From the date of this agreement through the Retirement Date (the "Pre-Retirement Period"), Gullotti shall continue to be employed by NCS on a regular full-time basis. In the event that Gullotti's successor as President and Chief Executive Officer is hired and begins employment with NCS as of a date prior to the Retirement Date, Gullotti (i) agrees to relinquish the titles and responsibilities of President and Chief Executive Officer of NCS as of such date and (ii) at the request of the Board of Directors of NCS, will also relinquish the title and responsibilities of Chairman of the Board of Directors as of or after such date. (c) During the Pre-Retirement Period, Gullotti (i) shall be entitled to receive the same compensation, perquisites and other benefits as he would have received had he remained President, Chief Executive Officer and Chairman of the Board of Directors of NCS until the end of such period and (ii) subject to the terms of this agreement, shall be entitled to continue to participate in all employee equity plans that are currently being made available to him. (d) In its discretion and in extraordinary circumstances relating to the Company's business, operations or stock price, the Board of Directors may (but shall not be obligated to) increase the compensation and benefits payable to Gullotti provided for in section 1(c) above. (e) If a Change in Control (as defined below) occurs prior to the Retirement Date, section 1 shall be inapplicable, and, subject to section 8, the compensation and benefits to be provided to Gullotti by the Company following the Change in Control shall be determined as provided in the Amended and Restated Severance Agreement dated December 8, 1998 (the "Severance Agreement") between NCS and Gullotti. As used herein, the term "Change in Control" shall have the meaning set forth in the Severance Agreement. 2. Retirement Pay and Benefits. (a) In consideration of valuable services rendered by Gullotti during his tenure with NCS, NCS shall make retirement payments to Gullotti of Seven Thousand Five Hundred Dollars ($7,500) per month during the period from the Retirement Date through June 1, 2007 or the date of his death, if earlier (the "Retirement Period"). (b) During the Retirement Period, NCS will provide Gullotti and his spouse with medical and hospitalization benefits that are comparable to the benefits then being provided by NCS to active regular full-time executive employees, which benefits may change from time to time. Such medical and hospital benefits will be provided in accordance with the following terms: (i) All medical and hospitalization benefits for Gullotti and his spouse under this agreement shall terminate on June 1, 2007; provided, however, that this clause (ii) shall not be construed to shorten the maximum period that continuation coverage is required to be provided by the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA"); (ii) NCS may, at its option and at its expense, elect to acquire separate medical and hospitalization insurance policies from third party providers or establish other means to satisfy its commitment to provide Gullotti and his spouse with medical and hospitalization benefits under this section 2(b); and (iii) The full "premium" expense and cost associated with the provision of the medical and hospitalization benefits to Gullotti and his spouse pursuant to this agreement (not including any cost of continuation coverage under COBRA) shall be paid by Gullotti or his spouse (whether those benefits are provided under existing employee benefit plans, individual insurance policies or otherwise). (c) Except as otherwise set forth in this agreement and subject to section 2(d), during the Retirement Period, Gullotti will not receive any employee benefits or perquisites unless such benefits become generally available to other eligible retirees who retire on or after June 1, 2001. (d) Before or during the Retirement Period, Gullotti, in lieu of the benefits provided to him under sections 2(a) and (b), may elect to receive such retirement benefits as may be provided generally to similarly situated retirees. (e) If a Change in Control occurs prior to the Retirement Date, section 2 shall be inapplicable, and, subject to section 8, the compensation and benefits to be provided to Gullotti by the Company following the Change in Control shall be as provided in the Severance Agreement. 3. Options Issued under Employee Stock Options Plans. (a) All agreements relating to stock options ("Gullotti Stock Option Agreements") granted to Gullotti under any of NCS' employee stock option plans (excluding any of the Company's long-term incentive plans) (the "Stock Option Plans"), pursuant to which options are outstanding and unexercised as of the date of this agreement shall remain in full force and effect according to the terms set forth in each Gullotti Stock Option Agreement. Without limiting the generality of the foregoing, such options will vest and terminate in accordance with such terms of the Gullotti Stock Option Agreements. (b) Gullotti will not be granted additional stock options under any Stock Option Plan. (c) In its discretion and in extraordinary circumstances relating to the Company's business, operations or stock price, the NCS Board of Directors or the Compensation Committee of the Board of Directors (the "Compensation Committee"), as appropriate, may, but shall not be obligated to, modify the provisions of sections 3(a) and (b) above in a manner favorable to Gullotti. (d) If a Change in Control occurs prior to the Retirement Date, section 3 of this agreement shall be inapplicable, and the compensation and benefits to be provided to Gullotti by the Company following the Change in Control shall be as provided in the Severance Agreement. 4. Annual Management Incentive Awards. (a) Gullotti shall be entitled to receive from NCS the full amount of any bonus payable to Gullotti in 2001 pursuant to the terms of the NCS 2000 Management Incentive Plan (the "2000 MIP") and the related individual 2000 MIP agreement dated March 7, 2000 between Gullotti and the Company. (b) Gullotti shall be entitled to participate in the NCS 2001 Management Incentive Plan (the "2001 MIP") pursuant to the terms of the 2000 MIP and a related individual 2001 MIP to be provided to Gullotti in March 2001 (the "2001 Gullotti MIP Addendum"). The bonus payable to Gullotti pursuant to the 2001 MIP and the 2001 Gullotti MIP Addendum shall be equal to 33.3% of the average bonus amounts paid to Gullotti pursuant to the 2000 MIP and the Company's 1999 Management Incentive Plan. Payment of such 2001 MIP bonus to Gullotti shall be made on the Retirement Date. (c) If a Change in Control occurs prior to the Retirement Date, section 4 of this agreement shall be inapplicable, and, subject to section 8, the compensation and benefits to be provided to Gullotti by the Company following the Change in Control shall be as provided in the Severance Agreement. 5. Long-Term Incentive Plan Awards. (a) Subject to the adjustments provided for in section 5(c) below, Gullotti shall be entitled to exercise stock options and receive cash payments in accordance with the long-term incentive award agreements between the Company and Gullotti dated March 3, 1997 (as such agreement has been amended through the date hereof (including any amendments relating to the "carry-over" of any cash payments thereunder)), March 2, 1998, March 2, 1999 and March 7, 2000 in accordance with the existing terms of such agreements. (b) Gullotti shall be entitled to participate in the NCS 2001 long-term incentive plan (the "2001 L-TIP") pursuant to the terms of long-term incentive award agreements to be entered into between the Company and Gullotti in March 2001 (the "2001 Gullotti L-TIP Agreements"). Under the 2001 L-TIP and the 2001 Gullotti L-TIP Agreements, Gullotti shall receive an award of stock options and possible cash payments. The terms of the 2001 L-TIP and the 2001 Gullotti L-TIP Agreements shall be determined by the Compensation Committee in its sole discretion. Subject to the adjustments provided for in section 5(c), the stock options and cash payments to Gullotti pursuant to the 2001 L-TIP and the 2001 Gullotti L-TIP Agreements award shall become vested and paid in accordance with the terms thereof. (c) Because Gullotti will cease to be employed by the Company on the Retirement Date, service within applicable measurement periods for purposes of calculating stock option vesting and cash payments to be made to Gullotti under the above long-term incentive awards in accordance with the terms thereof will be as follows:
Phantom L-TIP Agreement Stock L-TIP Cash Date L-TIP Option Current Award Award Carry-Over - --------------- ------------- ------------- ------------ ---------- 3-3-97 -- -- -- 100% 3-2-98 36/36 (100.0%) -- 36/36 (100.0%) -- 3-2-99 28/36 (77.8%) -- 28/36 (77.8%) -- 3-7-00 16/36 (44.4%) -- 16/36 (44.4%) -- 3-6-01 4/36 (11.1%) 4/12 (33.3%) 4/36 (11.1%) --
(d) In its discretion and in extraordinary circumstances relating to the Company's business, operations or stock price, the Board of Directors or the Compensation Committee, as appropriate, may (but shall not be obligated to) increase the amounts payable to Gullotti pursuant to sections 5(a), (b) and (c) above to amounts in excess of the amounts provided for in such sections 5(a), (b) and (c). (e) If a Change in Control occurs prior to the Retirement Date, section 5 of this agreement shall be inapplicable, and, subject to section 8, the compensation and benefits to be provided to Gullotti by the Company following the Change in Control shall be as provided in the Severance Agreement. 6. Noncompetition Commitments. The noncompetition commitments of Gullotti, which are set forth in the Gullotti Stock Option Agreements and in the long-term incentive award agreements between NCS and Gullotti shall continue in full force and effect as binding obligations of Gullotti. 7. Supplemental Executive Retirement Agreement. In lieu of all benefits due under the Supplemental Executive Retirement Agreement for Russell A. Gullotti dated August 1, 1994 (the "Supplemental Agreement") between NCS and Gullotti, NCS shall pay Gullotti a single lump sum payment of $510,633 as soon as may be practicable after the Retirement Date. The Supplemental Agreement is hereby terminated, effective as of the date of this agreement, and shall be superseded in all respects by this agreement. 8. Medical and Hospitalization Benefits. If a Change in Control occurs prior to the Retirement Date, NCS shall provide Gullotti and his spouse with the medical and hospitalization benefits described in section 2(b) from the date of the Change in Control through June 1, 2007. All the expense and cost associated with the provision of such medical and hospitalization benefits to Gullotti and his spouse (not including any cost of continuation coverage under COBRA) shall be paid by NCS (whether those benefits are provided under existing employee benefit plans, individual insurance policies or otherwise), except that Gullotti and his spouse shall contribute to the cost of such medical and hospitalization benefits the dollar amount equal to the amount that is required of active regular full-time executive employees for such medical and hospitalization coverage. 9. Continued Board Service. If Gullotti continues to serve as a member of the Board of Directors of NCS after the Retirement Date, Gullotti shall be entitled to receive such compensation, stock options and other benefits as are then being made available to NCS' other non-employee directors. 10. Miscellaneous. (a) Disability or Death of Gullotti. If Gullotti should become disabled (such that he is unable to perform his job responsibilities for NCS) or die prior to the earlier of the date of a Change in Control or the Retirement Date, this agreement shall be terminated as of the date of such disability or his death, and no further compensation or benefits shall be payable hereunder (except for the lump sum payment provided for in section 7). Nothing contained in this section 10(a) shall affect the rights of Gullotti and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees or legatees to any compensation or benefits under any other NCS plans or programs or agreements between NCS and Gullotti (other than this agreement) in effect as of the date of Gullotti's disability or death (including any plans, programs and agreements referred to herein but not superseded hereby). (b) Governing Law. All matters relating to the interpretation, construction, validity and enforcement of this agreement shall be governed by the internal laws of the State of Minnesota without giving effect to any choice or conflict of law provision or rule (whether of the State of Minnesota or any other jurisdiction) that would cause the application of laws of any jurisdiction other than the State of Minnesota. (c) Entire Agreement. This agreement contains the entire agreement of the parties relating to the subject matter hereof and supersedes all prior agreements and understandings with respect to such subject matter (including, without limitation, the Supplemental Agreement), and the parties hereto have made no agreements relating to the subject matter of this agreement which are not set forth herein (d) Amendments. No amendment or modification of this agreement shall be deemed effective unless made in writing and signed by the parties hereto. (e) No Waiver. No term or condition of this agreement shall be deemed to have been waived, nor shall there be any estoppel to enforce any provisions of this agreement, except by a statement in writing signed by the party against whom enforcement of the waiver or estoppel is sought. Any written waiver shall not be deemed a continuing waiver unless specifically stated, shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. (f) Successor to Company. In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business 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. (g) Successor to Gullotti. Subject to section 10(a), this agreement shall inure to the benefit of and be enforceable by Gullotti's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. (h) Notices. 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 mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, 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 actual receipt: To the Company: National Computer Systems, Inc. P.O. Box 9365 Minneapolis, MN 55440 Attention: General Counsel To Gullotti: Russell A. Gullotti 7051 Kenmare Drive Bloomington, MN 55438 (i) Counterparts. This agreement may be simultaneously executed in any number of counterparts, and such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. (j) Severability. To the extent any provision of this agreement shall be invalid or unenforceable, it shall be considered deleted herefrom and the remainder of such provision and of this agreement shall be unaffected and shall continue in full force and effect. (k) Captions and Headings. The captions and paragraph headings used in this agreement are for convenience of reference only and shall not affect the construction or interpretation of this agreement or any of the provisions hereof. (l) Taxes. Gullotti shall be responsible for all federal, state, city or other taxes owed by him as a result of the retirement payments and other benefits payable under this agreement. The Company may withhold from any retirement payments and other benefits payable hereunder all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling. IN WITNESS WHEREOF, NCS and Gullotti have executed this agreement as of the date set forth in the first paragraph. NATIONAL COMPUTER SYSTEMS, INC. By: /s/ David C. Cox -------------------- David C. Cox, Chairman of the Compensation Committee of the Board of Directors and Authorized Signatory /s/ Russell A. Gullotti -------------------- Russell A. Gullotti EX-27 3 0003.txt FDS --
5 This schedule contains summary information extracted from the financial statements for National Computer Systems, Inc. and Subsidiaries, for the fiscal year ending February 3, 2001, and is qualified in its entirety by reference to such financial statements. 1000 U.S. Dollars 3-MOS FEB-03-2001 APR-30-2000 JUL-29-2000 1 6457 24956 176687 0 42223 9955 281474 (136065) 499946 179075 0 0 0 978 318278 499946 49897 204698 21164 129065 47841 0 412 27707 11000 16707 0 0 0 16707 0.51 0.5
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