-----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, RR6IEMrRsfaGA4lhCamO9n1xppPqY9V05O0VRiVyJ8obGgPhOR+OTBocjPmo/AGK Vq9dyrEx77CnXx1clvq6lw== 0000069999-98-000024.txt : 19981215 0000069999-98-000024.hdr.sgml : 19981215 ACCESSION NUMBER: 0000069999-98-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL COMPUTER SYSTEMS INC CENTRAL INDEX KEY: 0000069999 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] 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: 98768920 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 QUARTERLY REPORT ON 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: October 31, 1998 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: (612)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 stock, par value $.03 per share, outstanding on December 10, 1998, was 31,294,426. PART I. FINANCIAL INFORMATION Item 1. Financial Statements NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three Months Ended October 31, ------------------- 1998 1997 ------ ------ (In thousands, except per share amounts) REVENUES Information services $ 71,586 $ 56,821 Product sales 50,305 45,846 Maintenance and support 13,517 12,720 -------- -------- Total revenues 135,408 115,387 COST OF REVENUES Cost of information services 58,484 47,502 Cost of product sales 21,204 18,256 Cost of maintenance and support 8,345 8,886 -------- -------- Gross margin 47,375 40,743 OPERATING EXPENSES Sales and marketing 16,594 14,993 Research and development 3,478 2,324 General and administrative 14,468 13,419 -------- -------- INCOME FROM OPERATIONS 12,835 10,007 Interest expense 193 330 Other (income) expense, net (216) (449) -------- -------- INCOME BEFORE INCOME TAXES 12,858 10,126 Income taxes 5,100 4,100 -------- -------- NET INCOME $ 7,758 $ 6,026 ======== ======== EARNINGS PER SHARE Basic $0.25 $0.20 Diluted 0.24 0.19 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 31,075 30,470 Diluted 32,648 32,043 See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) Nine Months Ended October 31, ------------------- 1998 1997 ------ ------ (In thousands, except per share amounts) REVENUES Information services $193,868 $136,173 Product sales 128,370 118,740 Maintenance and support 39,213 35,474 -------- -------- Total revenues 361,451 290,387 COST OF REVENUES Cost of information services 145,466 105,150 Cost of product sales 54,699 51,295 Cost of maintenance and support 25,112 24,321 -------- -------- Gross margin 136,174 109,621 OPERATING EXPENSES Sales and marketing 48,174 41,119 Research and development 8,194 6,026 General and administrative 41,296 33,296 -------- -------- INCOME FROM OPERATIONS 38,510 29,180 Interest expense 726 965 Other (income) expense, net 89 (270) -------- -------- INCOME BEFORE INCOME TAXES 37,695 28,485 Income taxes 15,100 11,400 -------- -------- NET INCOME $ 22,595 $ 17,085 ======== ======= EARNINGS PER SHARE Basic $0.73 $0.56 Diluted 0.70 0.54 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 30,959 30,328 Diluted 32,474 31,742 See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) October 31, January 31, 1998 1998 ----------- ----------- (In thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 33,144 $ 23,267 Receivables 95,211 101,334 Inventories: Finished products 5,690 5,166 Scoring services and work in process 14,035 8,218 Raw materials and purchased parts 1,838 2,855 -------- -------- Total inventories 21,563 16,239 Prepaid expenses and other 8,180 6,562 -------- -------- TOTAL CURRENT ASSETS 158,098 147,402 PROPERTY, PLANT AND EQUIPMENT Land, buildings and improvements 59,594 57,281 Machinery and equipment 158,422 141,949 Accumulated depreciation (116,719) (105,206) -------- -------- Net property, plant and equipment 101,297 94,024 INTELLECTUAL PROPERTIES, NET Acquired and internally developed software products 13,034 14,967 Assessment instruments 9,199 10,317 -------- -------- Total intellectual properties 22,233 25,284 OTHER ASSETS, NET Goodwill 52,526 45,634 Other assets 5,917 3,070 -------- -------- Total other assets 58,443 48,704 -------- -------- TOTAL ASSETS $340,071 $315,414 ======== ======== See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) October 31, January 31, 1998 1998 ----------- ----------- (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 3,479 $ 6,448 Accounts payable 28,310 26,767 Accrued expenses 44,659 36,237 Deferred income 34,436 29,026 Income taxes 2,896 4,156 -------- -------- TOTAL CURRENT LIABILITIES 113,780 102,634 LONG-TERM DEBT -- less current maturities 7,662 12,396 DEFERRED INCOME TAXES 3,542 6,390 COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY Preferred stock - - Common stock--issued and outstanding - 31,248 and 30,846 shares, respectively 938 925 Paid-in capital 7,866 4,518 Retained earnings 212,272 194,348 Accumulated other comprehensive income - Foreign currency translation adjustment (3,976) (2,343) Deferred compensation (2,013) (3,454) -------- -------- TOTAL STOCKHOLDERS' EQUITY 215,087 193,994 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $340,071 $315,414 ======== ======== See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine Months Ended October 31, ------------------- 1998 1997 ------- ------- (In thousands) OPERATING ACTIVITIES Net income $ 22,595 $ 17,085 Depreciation, amortization and other noncash expenses 24,271 21,628 Provision for deferred income taxes (1,265) (406) Changes in operating assets and liabilities: Accounts receivable 6,573 6,237 Inventory and other current assets (6,616) (4,467) Accounts payable and accrued expenses 9,879 (4,962) Deferred income 4,688 1,153 ------- ------- Net cash provided by operating activities 60,125 36,268 ------- ------- INVESTING ACTIVITIES Purchases of property, plant and equipment (16,688) (14,378) Purchases of business systems (5,429) (1,000) Acquisitions, net (15,760) (35,216) Other, net (2,225) (3,730) ------- ------- Net cash used in investing activities (40,102) (54,324) ------- ------- FINANCING ACTIVITIES Net repayment of borrowings (6,025) (1,167) Issuance (repurchase) of common stock, net 549 (12,647) Dividends paid (4,670) (4,125) ------- ------- Net cash used by financing activities (10,146) (17,939) ------- ------- Increase (decrease) in cash and cash equivalents 9,877 (35,995) CASH AND CASH EQUIVALENTS - beginning of period 23,267 58,079 ------- ------- CASH AND CASH EQUIVALENTS - end of period $33,144 $22,084 ======= ======= See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 financial position, results of operations and cash flows for all periods presented have been made. The results of operations for the period ended October 31, 1998, are not necessarily indicative of the operating results that may be expected for the entire fiscal year ending January 31, 1999. 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 31, 1998. 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 (in thousands, except per share data): Three Months Nine Months Ended October 31, Ended October 31, ----------------- ----------------- 1998 1997 1998 1997 ------- ------- ------- ------- Earnings: Net income Basic earnings per share $ 7,758 $ 6,026 $22,595 $17,085 Adjustments for dilutive securities: Interest expense on convertible debentures, net of tax 56 64 161 192 ------- ------- ------- ------- Adjusted net income for diluted earnings per share $ 7,814 $ 6,090 $22,756 $17,277 ======= ======= ======= ======= Weighted Average Share Basic average shares 31,075 30,470 30,959 30,328 Adjustments for dilutive securities: Employee stock options, net of tax proceeds 971 738 923 559 Contingent stock awards, net of tax proceeds 94 252 83 272 Convertible debentures 508 583 509 583 ------- ------- ------- ------- Diluted average shares 32,648 32,043 32,474 31,742 ======= ======= ======= ======= Basic earnings per share $ 0.25 $ 0.20 $ 0.73 $ 0.56 ======= ======= ======= ======= Diluted earnings per share $ 0.24 $ 0.19 $ 0.70 $ 0.54 ======= ======= ======= ======= Note C - 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 D - As of February 1, 1998, the Company adopted Statement of Financial Accounting Standard (SFAS) 130, Reporting Comprehensive Income. SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or stockholders' equity. SFAS 130 requires the Company's foreign currency translation adjustments, which prior to adoption were reported in retained earnings to be separately classified as other comprehensive income. Prior year financial statements have been reclassified to conform to the current requirements. The components of comprehensive income, for the three month and nine month periods ended October 31, 1998 and 1997 are as follows (in thousands): Quarter Year-to-date 1998 1997 1998 1997 ------- ------- ------- ------- Net income $ 7,758 $ 6,026 $22,595 $17,085 Foreign currency translation adjustments (872) (391) (1,633) (282) ------- ------- ------- ------- Comprehensive income $ 6,886 $ 5,635 $20,962 $16,803 ======= ======= ======= ======= Note E - As previously disclosed, a former customer of the Company filed a lawsuit against the Company on April 30, 1997. The lawsuit alleges certain claims against the Company in connection with three loan processing and servicing agreements; the claims are for expenses, an undisclosed amount of lost profits and damages associated with loan defaults. The Company has tendered the defense of this claim to its insurer, and the insurer accepted the defense subject to a reservation of rights. The Company has filed an answer to the complaint denying the claims, and the Company will vigorously defend this litigation. In addition, the Company has filed a counterclaim against the former customer and its' corporate affiliate seeking compensatory damages in an amount to be determined at trial. The Company does not believe the outcome of this litigation would result in a material adverse effect on the Company's consolidated financial position or results of operations. Note F - In September 1998, the Company acquired all of the common stock of American Cybercasting Corporation (ACC), also known as Educational Structures, a business specializing in customized K-12 teacher support tools for lesson planning and curriculum support. The purchase price was approximately $10.5 million, net of cash acquired, and was allocated principally to goodwill of $9.3 million and assessment instruments of $0.9 million. The impact of this acquisition on third quarter operations was to reduce diluted earnings per share by approximately one cent. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition National Computer Systems, Inc. is an information services company providing software, services and systems for the collection, management and interpretation of data. The Company markets these products and services to the education, commercial, and government markets through its various operating units. Recap of 1998 Third Quarter Results For the quarter ended October 31, 1998, total revenues increased by $20.0 million or 17.4% from the quarter ended October 31, 1997. Overall gross margin declined by 0.3 percentage point as a percent of revenue, though gross margin dollars increased $6.6 million or 16.3%. Income from operations for the quarter increased $2.8 million or 28.3% over the prior year third quarter and improved slightly as a percentage of revenues. Net income increased 28.7% over the quarter ended October 31, 1997, and earnings per share (diluted) increased 26.3% to $.24 per share from $.19 in the prior year third quarter. Included in the third quarter results are the operations of Educational Structures since September 14, 1998, the date the Company acquired ACC. Also included in research and development expense is a charge for purchased in-process R&D of $200,000 related to this acquisition. Together, these acquisition-related factors reduced reported third quarter and year-to-date earnings by slightly more than one cent per share. For the nine months ended October 31, 1998, revenues increased $71.0 million or 24.5% over the same period of the prior year. The gross margin percentage remained constant at 37.7% for the nine months ended October 31, 1998 and 1997. Operating expenses increased 21.4%, however, as a percentage of revenue, these expenses decreased 0.7% from year to year. Income from operations was 32.3% higher than the nine months ended October 31, 1997, and earnings per share (diluted) increased 29.6% to $.70 from $.54 in the prior year. Revenues Total revenues for the three and nine month periods ended October 31, 1998 were up 17.4% and 24.5%, respectively. Approximately 3 percentage points of revenue growth for the nine months were due to acquisitions completed in July 1997. By revenue category, 1998 compares to 1997 as follows: Quarter Year-to-date ------- ------------ Information services +26.0% +42.4% Product sales + 9.7% + 8.1% Maintenance and support + 6.3% +10.5% Three-fourths of the $20 million of overall revenue increase in the third quarter of 1998 was attributable to growth in information services. That growth came from several sources: assessment and testing services, K-12 networking services, commercial outsourcing and professional services related to education software. Third quarter increases in product sales came principally from education software licensing and related network hardware. Increased maintenance and support revenues were the result of increased support revenues related to education software. By major market, for the third quarter, revenues grew 18% from the education market and over 15% from the large scale data management (non-education) market. Revenues, for the nine months ended October 31, grew 30% from the education market and 9% from the large scale data management market. Cost of Revenues and Gross Margins For the quarter ended October 31, 1998, the Company's overall gross margin declined by 0.3 percentage point to 35.0% from 35.3%. This modest decline is principally due to decreased margins on product sales from 60.2% in the third quarter of the prior year to 57.8% for the quarter ended October 31, 1998. This is due to the increase in lower-margin, non-proprietary network hardware in the overall mix of product sales. On a year-to-date basis, the gross margin in each revenue category (information services, product sales, and maintenance and support) improved as a percentage of revenue, but the overall gross margin remained constant at 37.7% due to changes in mix of revenues. Operating Expenses Sales and marketing expenses increased $1.6 million or 10.7% in the quarter ended October 31, 1998, over the prior year third quarter. As a percentage of revenues, third quarter sales and marketing expenses declined by 0.7 percentage point, due to relatively lower selling costs on information services revenues. For the nine month period ended October 31, 1998 these expenses also decreased 0.9 percentage point as a percent of revenues. Research and development costs increased $1.2 million, including the impact of Education Structures described above, in the quarter ended October 31, 1998 as compared to the quarter ended October 31, 1997. Year-to-date expenditures increased $2.2 million over the prior year. For the full year, these expenses are expected to continue at higher levels for fiscal 1998 than fiscal 1997, as the Company continues its investment in software products and test processing technology. General and administrative expenses increased by $1.0 million for the quarter ended October 31, 1998 from the prior year quarter. As a percentage of revenue, third quarter general and administrative expense declined 0.9 percentage point from 11.6% to 10.7%. For the nine months ended October 31, 1998, these expenses were up $8.0 million due to several factors, including acquisitions made in the second quarter of 1997, (including the related amortization of goodwill), and accruals established for variable compensation plans as a consequence of favorable operating results. Non-operating Expenses Interest expense decreased for the quarter and year-to-date ended October 31, 1998 from the prior year as a result of lower average debt levels. Other income and expense, net, was insignificant for both the quarter and the year-to-date period ending October 31, 1998 and 1997. Provision for Income Taxes The effective income tax rate was 40% for the quarters and nine-month periods ended October 31, 1998 and 1997. Liquidity and Capital Resources For the nine-month period ended October 31, 1998, the Company generated $60.1 million of cash flow from operating activities as compared to $36.2 million in the same period of the prior year. Cash was used principally to fund investments in property, plant and equipment of $16.6 million, business systems of $5.4 million, acquisitions of $15.8 million, net repayment of borrowings of $6.0 million, as well as to pay dividends of $4.7 million. The Company expects for the remainder of fiscal 1998 that its positive cash flows from operations will be adequate to fund its normal financing and investing activities. In addition, the Company anticipates funding internal growth and acquisitions with its cash and cash equivalents on hand, excess cash flows from operations, and an existing revolving credit facility. Year 2000 Matters Many currently installed computer systems and software are coded to accept only two-digit entries in the date code fields. These date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. This problem could result in system failures or miscalculations causing disruptions of business operations (including, among other things, a temporary inability to process transactions, send invoices or engage in other similar business activities). As a result, many companies' computer systems and software will need to be upgraded or replaced in order to comply with Year 2000 requirements. The potential global impact of the Year 2000 problem is not known, and, if not corrected in a timely manner, could affect the Company and the U.S. and world economy generally. The Company's product development processes currently contain steps to include Year 2000 compliance verification for all current and future products. Most of the Company's products are currently Year 2000 compliant, and a product by product Year 2000 status is posted on the Company's internet website at www.ncs.com. The Company has named a full-time year 2000 program leader and formed a team consisting of representatives from each of its business units to address internal and external Year 2000 issues. The Company's internal financial and other computer systems have been reviewed to assess and remediate Year 2000 problems. In addition, executive management regularly monitors the status of the Company's Year 2000 remediation plans. The Company's Year 2000 compliance program includes the following phases: identifying systems with date sensitive points that will need to be addressed; carrying out remediation work to modify those systems or convert to new systems; and conducting validation testing of systems and applications to ensure compliance. As of October 31, 1998, the Company believes it is approximately 60% completed with its total Year 2000 effort. The Company expects to make significant further progress by the end of this fiscal year and be substantially complete by July, 1999. Through October 31, 1998, the Company has spent approximately $4.0 million addressing Year 2000 issues ($1.5 million in fiscal 1997 and $2.5 million through October 31, 1998.) The Company expects to spend approximately $1.0 million in the fourth quarter of fiscal 1998, and estimates approximately $2.0 million of Year 2000 expenses in fiscal 1999. These costs are below that which was originally estimated and consist of primarily the use of internal resources, with relatively minor external costs. All amounts are being expensed currently and are included in the Company's future operating plans and expectations. In addition, the Company has also made, and will continue to make, significant capital investments in its internal business systems. However, these investments are not driven principally by Year 2000 considerations. In addition, the Company is requesting assurances from its major suppliers that they are addressing the Year 2000 issue and that products purchased by the Company from such suppliers will function properly in the year 2000. Also, contacts are being made with the Company's major customers. These actions are intended to help mitigate the possible external impact of the Year 2000 problem. However, it is impossible to fully assess the potential consequences in the event service interruptions from suppliers occur or in the event that there are disruptions in such infrastructure areas as utilities, communications, transportation, banking and government. Based on its assessments to date, the Company believes it will not experience any material disruption as a result of Year 2000 problems in internal processes, information processing or interface with major customers, or with processing orders and billing. However, if certain critical third-party providers, such as those providers supplying electricity, water or telephone service, experience difficulties resulting in disruption of service to the Company, a shutdown of the Company's operations at individual facilities could occur for the duration of the disruption. The Company is developing a contingency plan to provide for continuity of processing in such event based on the outcome of its validation phase of its Year 2000 compliance program and the results of surveying its major suppliers and customers. Assuming no major disruption in service from utility companies or other critical third-party providers, the Company believes that it will be able to manage its total Year 2000 transition without any material effect on the Company's results of operations or financial condition. The statements which are not historical or current facts or are "goals" or "expectations" contained in this Quarterly 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 31, 1998, 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. Amended and Restated Change In Control Agreement dated as of May 21, 1998, by and between NCS and certain executives of NCS. *10.2. Amended and Restated Severance Agreement dated December 8, 1998, by and between NCS and Russell A. Gullotti 27. Financial Data Schedule ------------------- * - Indicates management contract or compensatory plan or agreement. (b) No reports on Form 8-K were filed for the three months ended October 31, 1998. 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: December 10, 1998 FORM 10-Q NATIONAL COMPUTER SYSTEMS, INC. FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998 EXHIBIT INDEX EXHIBIT 10.1 Amended and Restated Change In Control Agreement dated as of May 21, 1998, by and between NCS and certain executives of NCS. 10.2 Amended and Restated Severance Agreement dated December 8, 1998, by and between NCS and Russell A. Gullotti. 27 Financial Data Schedule. EX-10.1 2 EXHIBIT 10.1 EXHIBIT 10.1 AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT This Agreement, dated as of May 21, 1998, is made by and between National Computer Systems, Inc., a Minnesota corporation (the "Company"), and ___________________ (the "Executive"), and supersedes that Change in Control Agreement dated April 15, 1996. The Board of Directors of the Company has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change in Control of the Company. The Board believes that it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change in Control, to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change in Control and to provide the Executive with compensation and benefit arrangements upon a Change in Control which ensure that the compensation and benefit expectations of the Executive will be satisfied and which are competitive with those of other corporations. To accomplish these objectives, the Board has authorized this Agreement. In consideration of the premises and the mutual covenants contained in this Agreement, the Company and the Executive agree as follows: 1. Definitions. The definitions set forth in Exhibit A to this Agreement are incorporated herein by reference. 2. Term of Agreement. This Agreement shall continue in effect until the earliest of (i) termination of Executive's employment prior to a Change in Control, (ii) a Payment Event shall have occurred and the Company shall have performed all of its obligations and satisfied all of its liabilities under this Agreement or (iii) January 31 of the year following at least six months' notice of nonrenewal by either party if such January 31 occurs prior to a Change in Control. 3. Severance Payments. Upon a Payment Event, in lieu of any further salary payments and any cash severance benefit otherwise payable to the Executive, (a) the Company shall pay to the Executive in cash, within 10 days of the Payment Event, the Severance Payment and (b) for an 24-month period after the Payment Event or until such earlier time that the Executive becomes reemployed, the Company shall arrange to provide the Executive with life, accident and health insurance benefits substantially similar to those that the Executive was receiving upon a Change in Control. Notwithstanding any provision of any incentive compensation plan requiring continued employment after the completed fiscal year or other measuring period as a condition to payment, the Company shall pay to the Executive an amount, in cash, equal to the amount of any incentive compensation that was allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the occurrence of a Payment Event not yet paid to the Executive. 4. Acceleration of Vesting. (a) Stock Awards. Notwithstanding the terms of any option, restricted stock grant, stock appreciation right, performance share plan or any other agreement, now existing or hereafter entered into, in which Executive receives an interest in stock of the Company or a right to obtain an interest in stock in the Company or whose economic value depends upon the stock performance of the Company ("Award"), subject to the passage of time, a future event or the payment of money, such Award shall accelerate and become fully vested upon a Payment Event as though all time had passed, all events had occurred and all performances had been attained. (b) ESOP. Notwithstanding the terms of the ESOP, all unvested shares of Common Stock, if any, in the Executive's unvested ESOP account shall become fully vested upon termination of Executive's employment following a Change in Control. 5. Gross-Up Payment. Following a Payment Event, the Company shall cause its independent auditors promptly to review, at the Company's sole expense, the applicability of Section 4999 of the Code to the Total Payments to be received by Executive. If such auditors determine that any of the Total Payments would be subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties with respect to such tax (such excise tax, together with any interest and penalties, being collectively referred to as the "Excise Tax"), then, in addition to any amounts otherwise payable under this Agreement, the Company shall pay within 30 days of such determination an additional cash payment (the "Gross-Up Payment") equal to the Excise Tax imposed on the Total Payments plus any Excise Tax, any other income taxes and FICA taxes (determined using the highest applicable rate) that may be imposed on the Gross-Up Payment. If no determination by the Company's auditors is made prior to the time a tax return reflecting the Total Payments is required to be filed by Executive, Executive will be entitled to receive a Gross-Up Payment calculated on the basis of the Total Payments reported by him in such tax return, within 30 days of the filing of such tax return. In all events, if any tax authority determines that a greater Excise Tax should be imposed on the Total Payments than is determined by the Company's independent auditors or reflected in Executive's tax return pursuant to this Section 5, Executive shall be entitled to receive the full Gross-Up Payment calculated on the basis of the amount of Excise Tax determined to be payable by such tax authority from the Company within 30 days of such determination. 6. Fees and Expenses. The Company shall pay to the Executive reasonable legal fees and reasonable expenses incurred in good faith by the Executive in obtaining the Severance Payment (including, but not limited to, all such fees and expenses, if any, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder). Such payment shall be made within five business days after delivery of the Executive's written request for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. No Mitigation. The Company agrees that if a Payment Event occurs, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company. The amount of any payment or benefit provided for in Section 3 (other than clause (b)) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or any Subsidiary, or otherwise. 8. Miscellaneous. (a) 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. (b) 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, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. (c) Amendments. No amendment or modification of this Agreement shall be deemed effective unless made in writing and signed by the parties hereto. (d) 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. (e) 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. (f) Successor to Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) 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 executors, personal representatives or administrators of the Executive's estate. (g) 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: Corporate Secretary National Computer Systems, Inc. P.O. Box 9365 Minneapolis, MN 55440 To the Executive: -------------------------- National Computer Systems, Inc. 11000 Prairie Lakes Drive Eden Prairie, MN 55344 (h) 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. (i) 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. (j) 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. IN WITNESS WHEREOF, Executive and the Company have executed this Agreement as of the date set forth in the first paragraph. NATIONAL COMPUTER SYSTEMS, INC. By: /s/ Russell A. Gullotti Russell A. Gullotti Its: Chairman, President and Chief Executive Officer ------------------------------ Executive EXHIBIT A "Acquiring Person" shall mean any Person who or which, alone or together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding, but shall not include the Company, any Subsidiary of the Company or any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of Common Stock organized, appointed or established for, or pursuant to the terms of, any such plan. For purposes of this Agreement, any calculation of the number of shares of Common Stock outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares of Common Stock of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "Applicable Incentive Amount" means two times the amounts payable to the Executive pursuant to all Incentive Compensation Plans if performance had been at Target Level at the end of the applicable performance periods. "Beneficial Owner" means beneficial owner (as defined in Rule 13d-3 under the Exchange Act) and "beneficially own" has a meaning correlative therewith. "Cause" means (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company or a Subsidiary, as such duties may be defined from time to time, or abide by the written policies of the Company or of the Executive's primary employer (other than any such failure resulting from the Executive's termination for Good Reason by the Executive) after a written demand for substantial performance is delivered to the Executive by the Board of Directors which demand specifically identifies the manner in which the Board of Directors believes that the Executive has not substantially performed the Executive's duties or has not abided by written policies, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its Subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and its Subsidiaries. "Change in Control" means (i) a public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) is made by the Company or any Person that such Person has become an Acquiring Person, unless approved by the Board of Directors, (ii) a public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) is made by the Company or any Person that such Person beneficially owns more than 50% of the Common Stock, regardless of whether approved by the Board of Directors, (iii) a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company or any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of Common Stock organized, appointed or established for, or pursuant to the terms of, any such plan) is commenced (within the meaning of Rule 14d-2(a) of the General Rules and Regulations under the Exchange Act), if, upon the consummation thereof, such Person would be an Acquiring Person, (iv) the Company enters into a merger, consolidation or statutory share exchange with any other Person in which the surviving entity would not have as its directors at least 60% of the Continuing Directors and would not have at least 60% of its common stock owned by the common shareholders of the Company prior to such merger, consolidation or statutory share exchange, or (v) a sale or disposition of all or substantially all of the assets of the Company or the dissolution of the Company. "Code" means the Internal Revenue Code of 1986, as the same may be amended from time to time. "Common Stock" means the Company's Common Stock, $.03 par value per share. "Continuing Director" means any Person who is a member of the Board of Directors of the Company, is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person or a representative of an Acquiring Person or of any such Affiliate or Associate, and was a member of the Board of Directors immediately prior to a Change in Control. A Continuing Director also means any Person who subsequently becomes a member of the Board of Directors of the Company and is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person or a representative of an Acquiring Person or of any such Affiliate or Associate, if such Person's initial nomination for election or initial election to the Board of Directors is recommended or approved by a majority of the Continuing Directors; provided that any Person who first becomes a member of the Board of Directors of the Company in connection with a transaction described by clause (iv) of the definition of "Change in Control" shall not be a Continuing Director. "Disability" means any physical or mental illness or impairment that renders Executive unable to substantially perform all of such Executive's duties and services hereunder in a satisfactory manner for a period of 60 consecutive days. "ESOP" means the Company's Employee Stock Ownership Plan as in effect on the date hereof or hereafter amended. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Good Reason" means (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, office, title and reporting requirement), authority, duties or responsibilities or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) the Company's requiring the Executive to be based at any office or location further than 60 miles from Executive's place of employment immediately prior to a Change in Control; (iii) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; (iv) any failure by the Company to comply with and satisfy Section 8(e) of this Agreement, provided that such successor has received at least ten days prior written notice from the Company or the Executive of the requirements of Section 8(e) of the Agreement; (v) a reduction in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (vi) the failure by the Company or a Subsidiary to pay to the Executive any portion of the Executive's compensation within seven days of the date of such compensation is due; (vii) the failure by the Company or a Subsidiary to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation unless an equitable arrangement (embodied in an ongoing substitute or alternative plan or arrangement) has been made with respect to such plan, or the failure by the Company or a Subsidiary to continue the Executive's participation therein (or in such substitute or alternative plan or arrangement) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed at the time of the Change in Control; or (viii) the failure by the Company or a Subsidiary to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's or a Subsidiary's retirement, life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control, the taking of any action by the Company or a Subsidiary which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company or a Subsidiary to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company and its Subsidiary in accordance with the Company's or a Subsidiary's normal vacation policy in effect at the time of the Change in Control. "Incentive Compensation Plans" means any incentive compensation plan of the Company in which Executive participates that has a performance period commencing (i) coincident with or (ii) most recently prior to, whichever applies, the date on which the Change in Control or Severance Event occurs, assuming that the Executive was continuously employed by the Company or a Subsidiary until the last day of the performance period. "Payment Event" means the occurrence of a Change in Control coincident with or followed (i) at any time before the end of the 24th month immediately following the month in which the Change in Control occurred, by the termination of the Executive's employment with the Company or a Subsidiary for any reason other than (A) by the Executive without Good Reason, (B) by the Company as a result of the Disability of the Executive or for Cause or (C) as a result of the death of the Executive or (ii) in the event the Executive remains continuously employed by the Company or a Subsidiary until the end of the 24th month immediately following the month in which the Change in Control occurred, the termination of the Executive's employment with the Company or a Subsidiary, at any time during the three-month period immediately following the expiration of such 24-month period, for any reason other than (A) by the Company as a result of the Disability of the Executive or (B) as a result of the death of the Executive. Any transfer of the Executive's employment from the Company to a Subsidiary, from a Subsidiary to the Company, or from one Subsidiary to another Subsidiary shall not constitute a termination of the Executive's employment for purposes of this Agreement. "Person" means any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. "Severance Payment" means an amount equal to the higher of (a) two times Executive's annual base salary in effect immediately prior to the occurrence of the Change in Control plus two times the Applicable Incentive Amount or (b) two times Executive's annual base salary in effect immediately prior to the occurrence of the Payment Event plus two times the Applicable Incentive Amount. "Subsidiary" means a corporation or other entity or enterprise, whether incorporated or unincorporated, of which at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others serving similar functions with respect to such corporation or other entity or enterprise is owned, directly or indirectly, by the Company. "Target Level" means that (a) all of Executive's personal goals and objectives as set forth in any Incentive Compensation Plan performance goal sheet or addendum applicable to the Executive are accomplished and (b) the "Target" for Company's financial goals and objectives specified in any such sheet or addendum are achieved. EX-10.2 3 EXHIBIT 10.2 EXHIBIT 10.2 AMENDED AND RESTATED SEVERANCE AGREEMENT This Agreement, dated December 8, 1998, is made by and between National Computer Systems, Inc., a Minnesota corporation (the "Company"), and Russell A. Gullotti (the "Executive"), and supersedes that certain Amended and Restated Severance Agreement dated May 23, 1996 between the Company and Executive. In consideration of the premises and the mutual covenants contained in this Agreement, the Company and the Executive agree as follows: 1. Definitions. The definitions set forth in Exhibit A to this Agreement are incorporated herein by reference. 2. Term of Agreement. This Agreement shall continue in effect indefinitely. 3. Severance Payments. If Executive's employment is involuntarily terminated other than for Cause or if Executive voluntarily terminates his employment within 60 days after the occurrence of a Severance Event, in lieu of any cash severance benefit otherwise payable to the Executive, (a) for a period of two years from the termination of Executive's employment and subject to normal tax withholding, (i) the Company shall continue Executive's base salary and (ii) the Company shall arrange to provide the Executive with the insurance, fringe benefits and perquisites (which currently include monthly country club dues, investment planning services, tax preparation services and an annual physical) that Executive would have received if he had remained employed upon the same terms and conditions existing before the Severance Event and (b) the Company shall pay the Executive the Applicable Bonus Amount within 90 days of termination of Executive's employment. Notwithstanding any provision of any incentive compensation plan requiring continued employment after the completed fiscal year or other measuring period as a condition to payment, the Company shall pay to the Executive an amount, in cash, equal to the amount of any incentive compensation that was allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the occurrence of a Severance Event not yet paid to the Executive. 4. Acceleration of Vesting. (a) Stock Awards. Notwithstanding the terms of any option, restricted stock grant, stock appreciation right, performance share plan or any other agreement, now existing or hereafter entered into, in which Executive receives an interest in stock of the Company or a right to obtain an interest in stock in the Company or whose economic value depends upon the stock performance of the Company ("Award"), subject to the passage of time, a future event or the payment of money, such Award shall accelerate and become fully vested upon termination of Executive's employment following a Change in Control as though all time had passed, all events had occurred and all performances had been attained. (b) ESOP. Notwithstanding the terms of the ESOP, all unvested shares of Common Stock, if any, in the Executive's unvested ESOP account shall become fully vested upon termination of Executive's employment following a Change in Control. 5. Gross-Up Payment. Upon the occurrence of a Change in Control, the Company shall cause its independent auditors promptly to review, at the Company's sole expense, the applicability of Section 4999 of the Code to the Total Payments to be received by Executive. If such auditors determine that any of the Total Payments would be subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties with respect to such tax (such excise tax, together with any interest and penalties, being collectively referred to as the "Excise Tax"), then, in addition to any amounts otherwise payable under this Agreement, the Company shall pay within 30 days of such determination an additional cash payment (the "Gross-Up Payment") equal to the Excise Tax imposed on the Total Payments plus any Excise Tax, any other income taxes and FICA taxes (determined using the highest applicable rate) that may be imposed on the Gross-Up Payment. If no determination by the Company's auditors is made prior to the time a tax return reflecting the Total Payments is required to be filed by Executive, Executive will be entitled to receive a Gross-Up Payment calculated on the basis of the Total Payments reported by him in such tax return, within 30 days of the filing of such tax return. In all events, if any tax authority determines that a greater Excise Tax should be imposed on the Total Payments than is determined by the Company's independent auditors or reflected in Executive's tax return pursuant to this Section 5, Executive shall be entitled to receive the full Gross-Up Payment calculated on the basis of the amount of Excise Tax determined to be payable by such tax authority from the Company within 30 days of such determination. 6. Fees and Expenses. The Company shall pay to the Executive reasonable legal fees and reasonable expenses incurred in good faith by the Executive in obtaining the payments and other benefits provided by this Agreement (including, but not limited to, all such fees and expenses, if any, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder). Such payment shall be made within five business days after delivery of the Executive's written request for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. No Mitigation. The Company agrees that Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company. The amount of any payment or benefit provided for in Section 3 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or any Subsidiary, or otherwise. 8. Miscellaneous. (a) 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. (b) 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, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein, except that certain Supplemental Executive Retirement Agreement dated October 1, 1994 between Executive and the Company. (c) Amendments. No amendment or modification of this Agreement shall be deemed effective unless made in writing and signed by the parties hereto. (d) 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. (e) 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. (f) Successor to Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) 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 executors, personal representatives or administrators of the Executive's estate. (g) 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 To the Executive: Russell A. Gullotti 7051 Kenmare Drive Bloomington, MN 55438 (h) 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. (i) 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. (j) 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. IN WITNESS WHEREOF, Executive and the Company have executed this Agreement as of the date set forth in the first paragraph. NATIONAL COMPUTER SYSTEMS, INC. By /s/ David C. Cox /s/ Russell A. Gullotti David C. Cox Russell A. Gullotti Its Director and Chairman -- Compensation Committee EXHIBIT A "Acquiring Person" shall mean any Person who or which, alone or together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding, but shall not include the Company, any Subsidiary of the Company or any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of Common Stock organized, appointed or established for, or pursuant to the terms of, any such plan. For purposes of this Agreement, any calculation of the number of shares of Common Stock outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares of Common Stock of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "Applicable Bonus Amount" means two times the amounts payable to the Executive pursuant to all Incentive Compensation Plans if performance had been at Target Level at the end of the applicable performance periods. "Beneficial Owner" means beneficial owner (as defined in Rule 13d-3 under the Exchange Act) and "beneficially own" has a meaning correlative therewith. "Cause" means (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company or a Subsidiary, as such duties may be defined from time to time, or abide by the written policies of the Company or of the Executive's primary employer after a written demand for substantial performance is delivered to the Executive by the Board of Directors which demand specifically identifies the manner in which the Board of Directors believes that the Executive has not substantially performed the Executive's duties or has not abided by written policies, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its Subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and its Subsidiaries. "Change in Control" means (i) a public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) is made by the Company or any Person that such Person has become an Acquiring Person, unless approved by the Board of Directors, (ii) a public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) is made by the Company or any Person that such Person beneficially owns more than 50% of the Common Stock, regardless of whether approved by the Board of Directors, (iii) a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company or any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of Common Stock organized, appointed or established for, or pursuant to the terms of, any such plan) is commenced (within the meaning of Rule 14d-2(a) of the General Rules and Regulations under the Exchange Act), if, upon the consummation thereof, such Person would be an Acquiring Person, (iv) the Company enters into a merger, consolidation or statutory share exchange with any other Person in which the surviving entity would not have as its directors at least 60% of the Continuing Directors and would not have at least 60% of its common stock owned by the common shareholders of the Company prior to such merger, consolidation or statutory share exchange, or (v) a sale or disposition of all or substantially all of the assets of the Company or the dissolution of the Company. "Code" means the Internal Revenue Code of 1986, as the same may be amended from time to time. "Common Stock" means the Company's Common Stock, $.03 par value per share. "Continuing Director" means any Person who is a member of the Board of Directors of the Company, is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person or a representative of an Acquiring Person or of any such Affiliate or Associate, and was a member of the Board of Directors immediately prior to a Change in Control. A Continuing Director also means any Person who subsequently becomes a member of the Board of Directors of the Company and is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person or a representative of an Acquiring Person or of any such Affiliate or Associate, if such Person's initial nomination for election or initial election to the Board of Directors is recommended or approved by a majority of the Continuing Directors; provided that any Person who first becomes a member of the Board of Directors of the Company in connection with a transaction described by clause (iv) of the definition of "Change in Control" shall not be a Continuing Director. "ESOP" means the Company's Employee Stock Ownership Plan as in effect on the date hereof or hereafter amended. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Incentive Compensation Plans" means any incentive compensation plan of the Company in which Executive participates that has a performance period commencing (i) coincident with or (ii) most recently prior to, whichever applies, the date on which the Change in Control or Severance Event occurs, assuming that the Executive was continuously employed by the Company or a Subsidiary until the last day of the performance period. "Severance Event" means (i) Executive's duties are reassigned inconsistent with his duties as Chairman and Chief Executive Officer of the Company, (ii) the Company reduces, in a manner not agreed to by Executive, Executive's base salary and/or the target percentage of Executive's defined MIP, (iii) Executive is required to relocate in a manner not agreed to by Executive, (iv) a substantial reduction in benefits or perquisites or other involuntary material adverse change in the terms and conditions of Executive's employment or (v) a Change in Control resulting in an involuntary change in Executive's responsibilities or an infringement on Executive's ability to perform the role of Chairman and Chief Executive Officer. "Person" means any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. "Subsidiary" means a corporation or other entity or enterprise, whether incorporated or unincorporated, of which at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others serving similar functions with respect to such corporation or other entity or enterprise is owned, directly or indirectly, by the Company. "Target Level" means that (a) all of Executive's personal goals and objectives as set forth in any Incentive Compensation Plan performance goal sheet or addendum applicable to the Executive are accomplished and (b) the "Target" for Company's financial goals and objectives specified in any such sheet or addendum are achieved. "Total Payments" means any payment for benefits received or to be received by Executive payable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company as a result of the termination of Executive's employment with the Company. EX-27 4 FDS --
5 This schedule contains summary information extracted from the financial statements for National Computer Systems, Inc. and Subsidiaries, for the fiscal year ended January 31, 1999, and is qualified in its entirety by reference to such financial statements. 1000 U.S. Dollars 3-MOS JAN-31-1999 AUG-1-1998 OCT-31-1998 1 33,144 0 95,211 0 21,563 158,098 218,016 (116,719) 340,071 113,780 7,662 0 0 938 214,149 340,071 50,305 135,408 21,204 88,033 35,540 0 193 12,858 5,100 7,758 0 0 0 7,758 0.25 0.24
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