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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
======= ======= ======= =======
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
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
<PAGE>
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.
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
<PAGE>
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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> AUG-1-1998
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<CASH> 33,144
<SECURITIES> 0
<RECEIVABLES> 95,211
<ALLOWANCES> 0
<INVENTORY> 21,563
<CURRENT-ASSETS> 158,098
<PP&E> 218,016
<DEPRECIATION> (116,719)
<TOTAL-ASSETS> 340,071
<CURRENT-LIABILITIES> 113,780
<BONDS> 7,662
0
0
<COMMON> 938
<OTHER-SE> 214,149
<TOTAL-LIABILITY-AND-EQUITY> 340,071
<SALES> 50,305
<TOTAL-REVENUES> 135,408
<CGS> 21,204
<TOTAL-COSTS> 88,033
<OTHER-EXPENSES> 35,540
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193
<INCOME-PRETAX> 12,858
<INCOME-TAX> 5,100
<INCOME-CONTINUING> 7,758
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,758
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.24
</TABLE>
