SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: COMMISSION FILE NUMBER:
JANUARY 31, 1996 0-3713
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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 Identification No.)
incorporation or organization)
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
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Securities registered pursuant to Section 12(g) of the Act:
Common Shares--par value $.03 a share
(Title of Class)
Rights to Purchase Series A Participating Preferred Stock
(Title of Class)
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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 (or such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. _X_
State the aggregate market value of the voting shares held by non-affiliates of
the registrant as of March 8, 1996.
Common Shares, $.03 par value -- $234,550,000
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of March 8, 1996.
Common Shares, $.03 par value -- 15,389,801 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended January 31,
1996 are incorporated by reference into Parts I, II and IV.
Portions of the definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 23, 1996 are incorporated by reference into Part
III.
<PAGE>
PART I
ITEM 1. BUSINESS
National Computer Systems, Inc. ("NCS" or the "Company") is a global data
collection services and systems company which provides quality information
management services and systems for data collection. Data collection and
management includes capturing and aggregating data; creating a database or
datastream; processing the data using software; and analyzing and reporting
results. The Company also develops and markets computer-based systems with
proprietary software and services for automating trust asset management.
NCS data collection services include data processing, analysis, data management,
reporting services, networking, hardware maintenance and professional services
to meet customer needs. Data collection systems include optical mark read (OMR)
and image scanning hardware, other data collection technologies, proprietary
software, software maintenance and pre-printed forms. Data can be in the form of
marks, machine printed bar codes and text, and/or handprinted alphanumeric
characters. The Company also provides utility and application software to
enhance the capability of NCS customers to manage their information effectively.
Application software products are focused on specific applications within target
markets.
NCS markets its mission critical data collection and management services and
systems within four major markets: education, selected commercial niches,
government, and health care.
EDUCATION -- NCS develops and markets data collection services and systems
which provide optical scanning, image based data collection and computer
processing services for the large volume, complex processing needs of major test
publishers, state education agencies, universities and colleges, and local
school districts. The Company also supplies optical scanning systems and forms
to individual school districts for in-house student assessment testing
applications and administrative applications such as attendance, scheduling,
grade reporting and registration; library and inventory management; financial
management and payroll; and testing applications, including test generation,
teacher created tests and norm-or criterion-referenced testing. NCS develops and
markets application software for the administration of curriculum, student, and
financial data at the classroom, school, school district, and state levels. The
Company's information processing services are provided in support of federal
student financial aid programs for post-secondary education.
COMMERCIAL -- NCS develops and markets data collection services and
products targeted at certain key applications in this market. These include
sales/marketing applications, such as sales/order entry and quality measurement;
inventory control and analysis; customer satisfaction surveys and customer data
collection; training and development in the human resources area; employee
attitude surveys; customer billing; payroll; human resource applications,
including applicant tracking; benefits enrollment and employee evaluation; and
general data collection, analysis and management. NCS provides scanners and
forms for customers to do their own data collection as well as processing
services in support of customers that prefer to outsource these services.
GOVERNMENT -- The Company provides its services and products to governmental
agencies for many of the same applications as in the commercial marketplace.
Data collection and computer processing services, including image based data
collection systems, are provided for federal and state programs.
HEALTH CARE -- NCS publishes and markets a wide variety of assessment
instruments used by mental and behavioral health professionals. When used with
NCS' data collection products, these instruments assist clinical professionals
in the diagnosis and treatment of patients plus track the progress of those
patients. NCS scanners and forms, other data capture devices and proprietary
software are also used by hospitals and clinics for collection of data during
patient visits and for administrative management. The accuracy and cost
effectiveness of this approach provides significant benefits to both health care
providers and patients.
NCS also develops and markets computer-based systems with proprietary software
and services for automating trust asset management in personal trust, corporate
trust and private banking in the financial services industry, primarily banking.
NCS software delivers critical accounting, transaction processing, and customer
reporting capabilities to institutions of all sizes. NCS provides complete
service bureau processing capability and facilities management services,
allowing a financial institution to off-load all of its asset management
processing to NCS.
NCS operates in two business segments: (1) data collection services and systems
and (2) financial systems. See Note 11 of Notes to Consolidated Financial
Statements included in the annual report to stockholders for the fiscal year
ended January 31, 1996, which is incorporated herein by reference, for business
segment data.
The Company's headquarters are located at 11000 Prairie Lakes Drive, Eden
Prairie, Minnesota 55344, telephone 612/829-3000.
<PAGE>
DATA COLLECTION PRODUCTS, SERVICES AND RELATED SOFTWARE
Scanning Systems
NCS manufactures optical mark reading (OMR) scanners which can read data
from specially designed forms printed by the Company with specifically
formulated inks. Computing capability is built into most scanners. Scanners
usually incorporate or interface directly with software developed by the
Company. Optical scanning equipment is most effective for applications where
highest accuracy, precise response definition and cost effective data capture is
required.
The Company's lines of scanning hardware include scanners marketed as
Sentry-R- and OpScan-R- products. These lines of scanners provide a wide range
of capabilities to meet the needs of customers. The OMR scanning systems utilize
a proprietary mark discrimination system to distinguish valid marks, thus
providing a very high degree of accuracy in processing responses. To enhance the
usefulness of the OpScan line, the Company offers optional features, such as bar
code reading capability, a transport printer to print alphanumeric messages on
scanned documents, optional read formats and upgraded computer capability
options.
NCS markets image-based data collection systems which represent an
extension of the Company's optical mark reading technology. When attached to a
workstation computer and using sophisticated software, these scanners allow
customers to efficiently and accurately collect and interpret the widest
possible range of information from a printed form, including printed and
handwritten data.
Scanning and Related Software
NCS offers a number of standard software programs for use with NCS systems.
Processing and application software is an important component in the Company's
marketing of its scanning products and services. A principal strategy of the
Company in servicing the education marketplace is to concentrate on those
systems that facilitate the measurement of student progress and accountability
in school administration. The Company offers standard integrated software
systems plus, on a fee basis, offers customization services.
Software products include software to assist educators in student
management, including such applications as grade reporting, attendance gathering
and scheduling, as well as financial management; software for obtaining
information about student performance and for analyzing and reporting test
results and student progress; software to enable users to easily develop new
scanning applications; software to assist scanner users with data entry to
statistical analysis or database management systems and other software
applications packages; software packages to statistically analyze survey or
assessment data and produce a wide range of reports designed to meet a variety
of reporting requirements; and software for health care administration.
Scannable Forms
The Company designs, manufactures and sells scannable forms, including
multiple-page booklets. A variety of custom forms are produced that are tailored
to meet specific customer needs. In addition, standardized forms are
increasingly used, especially with microcomputer-based scanners, in such
standard applications as testing, attendance, scheduling and student evaluation
at the classroom level or customer surveys or market research in the commercial
setting.
The Company believes that the use of a properly designed and printed form
is an essential element in assuring that a scanning system performs with
greatest accuracy and optimum capability. In order to assure a high degree of
consistency, reliability and accuracy, NCS has emphasized the use of its forms
with its equipment. The Company prints its forms to exacting specifications.
Data Collection Services
NCS markets data collection and data processing services to major test
publishers, state education agencies, the federal government, local school
districts and commercial customers. For these customers, NCS develops and
executes projects including planning, document design, distribution logistics,
data collection, editing, analysis and final reporting.
Examples of high volume processing services include test scoring for major
test publishers, educational assessment testing for states and information
processing for various agencies of the federal government, such as processing
student financial aid information for the U.S. Department of Education. Optical
mark reading and image scanning technologies are utilized in the data collection
process for these customers.
The Company publishes and distributes tests and provides scoring services
and equipment for the professional counseling market; for industrial and
clinical psychologists, psychiatrists and human resource professionals; and
educators. These tests and services include personality assessment and
psychological diagnostic testing, career development, guidance counseling and
human resource organizational assessments.
NCS provides specialized survey and scannable information processing
services to selected niches in the commercial marketplace. In addition to
scoring, analyzing and reporting survey results, the Company assists customers
in designing survey instruments, conducting surveys and interpreting survey
results.
FINANCIAL SYSTEMS
NCS develops, sells and supports systems for asset and investment
management reporting and recordkeeping for bank trust departments and other
organizations with trust powers. Applications include personal trust, corporate
trust and private banking. These systems utilize proprietary software developed
by NCS and licensed generally for periods of five years as well as hardware
manufactured by others. Each system is designed to address the unique needs of
customers. NCS supports these installations with customer response centers,
trust consultants, system conversion specialists and training staffs.
For corporate trust customers, and more recently for personal trust
customers, the Company offers management of customer-owned systems and
traditional time-sharing from its service bureau facility. For the personal
trust market, the Company provides trust accounting systems to small to medium
sized banks through its Trustware-R- Series 7 product line and to larger banks
through the Trustware Series 11 product line. Management of debt securities is
provided by the Company's BondMaster-R- software system or CertMaster-R-software
for complex debt instruments. These offerings are enhanced with the addition of
an optical disk-based system for data storage and other modular software
offerings.
NCS provides software support service by periodically issuing software
program revisions to improve systems performance and to accommodate changes in
the tax law and other regulatory changes. The Company also periodically releases
new software applications which it licenses to its customers.
MARKETING
NCS markets its data collection hardware and software and its data
collection and computer processing services directly through sales employees
located throughout the United States, who direct their efforts to the education,
commercial, government, or health care marketplaces. Outside the United States,
the Company's systems and associated products and services are sold through
sales employees, distributors or independent sales agents. NCS markets its
financial systems and services through a separate staff of sales employees. The
Company's published tests and test scoring services are marketed principally in
the United States through telemarketing, direct mail, professional journal
advertising and professional trade convention attendance and elsewhere through
distributors. Each of the Company's sales organizations is supported by
marketing and sales support personnel.
SOFTWARE SUPPORT, TECHNICAL SUPPORT AND MAINTENANCE
Software support is provided on a contractual basis to customers licensing
application software systems from the Company. NCS assists customers with
installation, training, hardware or software upgrades and development of
specific customer application software on a fee for service basis.
The Company offers technical support and hardware maintenance to customers
purchasing or leasing its equipment either on a contractual basis or through its
national network of customer service and support engineers. NCS emphasizes
prompt, reliable service and close customer relationships. Technical and
maintenance support may include labor, parts, operational training and, where
applicable, programming of the equipment and design of forms.
DEVELOPMENT OF PRODUCTS AND SERVICES
The Company's development efforts are directed toward new product
development and enhancements to existing products. During the fiscal years ended
January 31, 1996, 1995 and 1994, the Company spent, including certain
capitalized software development costs, approximately $18.8 million, $20.4
million and $20.8 million, respectively. The expenditures relate principally to
software product development (primarily focused on application software) and
scanning software and equipment development.
MANUFACTURING
The Company assembles its scanning equipment from electronic components,
metal stampings, molded plastic parts and mechanical sub-assemblies. These parts
are generally available from multiple sources. The Company assembles most of the
scanning systems equipment at its Eagan, Minnesota facility. Computer hardware,
other than scanning equipment, is purchased from other manufacturers.
Scannable forms are produced at NCS' printing plants in Columbia,
Pennsylvania; Owatonna, Minnesota; and Rotherham, South Yorkshire, England. The
ink and paper used in forms production are produced to the Company's
specifications by a limited number of suppliers. Although the Company has no
long-term supply contracts with its paper or ink suppliers, the Company has had
long-term relationships with such suppliers and believes that these
relationships are good.
COMPETITION
Competition in the data collection and information management industry is
intense. Optical scanning is only one of numerous data collection methods. The
Company has attempted to develop education, government, commercial and health
care markets where scanning technology has advantages over other data entry
technologies. NCS scanning systems incorporate optical scanning equipment,
computer hardware and proprietary software which are marketed and sold as
turn-key systems.
In addition to the functional competition provided by alternative methods
of data capture, including on-line terminal keyboards and optical character
readers, other scanning vendors supply products that compete with those of the
Company.
The Company's scannable forms compete with those produced by commercial and
specialized forms printers. Principal competitive factors in the scannable forms
printing industry are product quality, service and price.
NCS' data processing, test publishing and computer processing services
compete with several test publishers and data processing service bureaus. The
Company's customer support maintenance organization competes with service
provided by manufacturers, other national service companies and local providers
of maintenance services.
NCS' financial systems compete with systems developed by users, service
bureaus and other direct competitors offering asset management accounting
systems. The Company believes that it is one of the leading suppliers of systems
to bank trust departments.
PATENTS, TRADEMARKS AND LICENSES
The Company holds certain patents, registered and unregistered trademarks
and copyrights. The Company also has rights under licensing arrangements to a
number of patents, trademarks, copyrights and manufacturing processes and
materials. Included among these licenses are agreements with publishers of
various copyrighted psychological, aptitude and achievement tests to distribute
these tests, to print and sell answer sheets for such tests, and to score such
tests. Payment of royalties is usually based upon the volume of tests
distributed, answer sheets sold, and tests scored. NCS believes that its
business is not dependent upon any one individual patent, trademark, copyright
or license right or group thereof.
"Sentry", "Trustware", "BondMaster", "CertMaster", "OpScan", "MicroCIMS"
and "NCS Accra" appearing herein are trademarks or registered trademarks of
National Computer Systems, Inc.
EMPLOYEES
As of February 29, 1996, the Company employed approximately 2,700 full-time
employees. None of the Company's employees are subject to a collective
bargaining agreement, and the Company believes that its employee relations are
excellent.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all of the executive officers of the
Company as of February 29, 1996 are listed below along with their business
experience during the past five years.
NAME AGE POSITION
- --------------------------- -------- -------------------------
Russell A. Gullotti 53 Chairman of the Board,
President and Chief
Executive Officer
Robert C. Bowen 54 Senior Vice President
Michael C. Brewer 49 Vice President and General
Counsel
John W. Fenton, Jr. 55 Secretary-Treasurer
Donald J. Gibson 65 Senior Vice President
Clive Hay-Smith 38 Vice President
Karen L. Howard 53 Vice President
Richard L. Poss 50 Senior Vice President
David W. Smith 51 Vice President
Jeffrey W. Taylor 42 Vice President and Chief
Financial Officer
Adrienne T. Tietz 49 Vice President
Mr. Gullotti has been President and Chief Executive Officer since October,
1994 and Chairman of the Board since May, 1995. Prior to that he held senior
executive positions in sales and marketing, services and administration with
Digital Equipment Corporation (computer manufacturing and services) for more
than five years.
Mr. Bowen has been a Senior Vice President of NCS for more than five years.
Mr. Brewer has been Vice President and General Counsel of NCS since May,
1995. Prior to that he was General Counsel of NCS from May, 1992 until May, 1995
and Associate General Counsel of NCS from May, 1990 until May, 1992.
Mr. Fenton has been Secretary-Treasurer of NCS for more than five years.
Mr.Gibson has been a Senior Vice President of NCS for more than five years.
Mr. Hay-Smith has been a Vice President of NCS since December, 1993. Prior
to that he was a sales and distribution executive with Control Data Systems,
Inc. (computer systems integrator) from March, 1989 to August, 1993.
Ms. Howard has been a Vice President of NCS since February, 1996. Prior to
that she was a Principal of Gemini Consulting (management consulting) from July,
1994 to January, 1996 and before that, a human resources executive with Digital
Equipment Corporation for more than five years.
Mr. Poss has been a Senior Vice President since November, 1995 and a Vice
President of NCS for more than five years.
Mr. Smith has been a Vice President of NCS for more than five years.
Mr. Taylor has been Vice President and Chief Financial Officer since May,
1994 and prior to that Vice President and Corporate Controller of NCS for more
than five years.
Ms. Tietz has been a Vice President of NCS for more than five years.
Officers are elected annually by the Board of Directors. There are no
family relationships among these officers, nor any arrangement or understanding
between any officer and any other person pursuant to which the officer was
selected.
PRIVATE SECURITIES LITIGATION REFORM ACT
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing, as Exhibit 99
hereto, cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in forward
looking statements of the Company made by, or on behalf of, the Company.
ITEM 2. PROPERTIES
The Company's principal facilities are as follows:
SQUARE
LOCATION FOOTAGE GENERAL PURPOSE
- -------------------- ------- ----------------------------
Eden Prairie, MN 52,000 Executive general offices
Mesa, AZ (1) 40,000 Education software and services
general offices, sales and
marketing, product development
and support
Iowa City, IA Assessment test processing
Building 1 (1) 168,000 and data processing services,
Building 2 (1) 112,000 general offices and operations
Minnetonka, MN (1) 54,000 Test publishing and scoring
general offices and operations
Eagan, MN (1) 109,000 Scanner hardware development
and manufacturing; customer
support services general
offices and operations; and
international operations
general offices, sales and
marketing
Edina, MN (1) 101,000 Data Collection Systems
general offices, sales and
marketing; scanner software
development; and forms
general offices
Owatonna, MN (1) 128,000 Forms design and production
Columbia, PA (1) 121,000 Forms design and production
Rotherham, South 34,000 Forms design and production
Yorkshire England (1)
Huntsville, AL 15,000 Financial systems software
development
Atlanta, GA 16,000 Financial systems sales
offices with support and
training
Cambridge, MA 33,000 Financial systems software
development, sales, support
and training offices
Wayne, PA 27,000 Corporate trust general
offices and operations
- --------------------------
(1) Denotes NCS owned facility.
The Company believes that its facilities are adequate to meet its current
needs.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to nor is its property subject to any material
pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal
year ended January 31, 1996 to a vote of security holders through the
solicitation of proxies or otherwise.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
"Quarterly Market Data" included in the Annual Report to Stockholders for
the year ended January 31, 1996 is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
"Five Year Financial Data" included in the Annual Report to Stockholders
for the year ended January 31, 1996 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Results of Operations and
Financial Condition" included in the Annual Report to Stockholders for the year
ended January 31, 1996 is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and supplementary data of
the registrant and its subsidiaries, included in the Annual Report to
Stockholders for the year ended January 31, 1996, are incorporated herein by
reference:
Consolidated Balance Sheets -- January 31, 1996 and 1995
Consolidated Statements of Income -- Years ended January 31, 1996, 1995 and
1994
Consolidated Statements of Changes in Stockholders' Equity -- Years ended
January 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows -- Years ended January 31, 1996, 1995
and 1994
Notes to Consolidated Financial Statements -- January 31, 1996
Report of Independent Auditors dated March 3, 1996
"Quarterly Results of Operations (Unaudited)"
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Election of Directors" included in the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 23, 1996 and
"Executive Officers of the Registrant" in Part I of this report are incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
"Summary Compensation Table" and "Stock Options" included in the Company's
definitive proxy statement for the Annual Meeting of Stockholders to be held on
May 23, 1996 are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Election of Directors" and "Ownership of NCS Common Stock by Certain
Beneficial Owners and Executive Officers" included in the Company's definitive
proxy statement for the Annual Meeting of Stockholders to be held on May 23,
1996 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended January 31, 1996, the Company paid Dr. David P.
Campbell, a director of the Company, $116,241 as royalties relating to tests
developed by Dr. Campbell for which the Company has a long-term exclusive
license.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) List of Financial Statements and Financial Statement Schedules
(1) The following consolidated financial statements of National Computer
Systems, Inc. and subsidiaries, included in the Annual Report to Stockholders
for the year ended January 31, 1996, are incorporated by reference in Item 8:
Consolidated Balance Sheets -- January 31, 1996 and 1995
Consolidated Statements of Income -- Years ended January 31, 1996, 1995
and 1994
Consolidated Statements of Changes in Stockholders' Equity -- Years
ended January 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows -- Years ended January 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements -- January 31, 1996
Report of Independent Auditors dated March 3, 1996
(2) Consolidated financial statement schedules of National Computer
Systems, Inc. and subsidiaries required to be filed by Item 14(d):
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have
been omitted.
(3) Listing of Exhibits:
EXHIBIT
3.1 -- Restated Articles of Incorporation, as amended, are incorporated
herein by reference to Exhibit 3 to the NCS Form 10-Q for the
quarter ended April 30, 1987.
3.2 -- Bylaws, as amended and restated, are incorporated herein by
reference to Exhibit 3.2 to the NCS Form 8-K dated March 4,1996.
4.1 -- Instruments with respect to long-term debt where the total debt
authorized thereunder does not exceed 10% of the consolidated
total assets of the registrant are not being filed; the
registrant will furnish a copy of any such instrument to the
Commission upon request.
4.2 -- Amended and Restated Rights Agreement dated as of March 4, 1996
between NCS and Norwest Bank Minnesota, N.A. (including the form
of Right Certificate attached as Exhibit B thereto) is
incorporated herein by reference to Exhibit 1 to Amendment No. 2
to Form 8-A/A dated March 13, 1996.
4.3 -- Amended and Restated Credit Agreement dated as of July 31, 1991
between NCS and Norwest Bank, National Association, The First
National Bank of Chicago and First Bank National Association,
and as further amended by the First Amendment thereto dated as
of January 25, 1994, is incorporated herein by reference to
Exhibit 4C to the Company's Form 10-K for the fiscal year ended
January 31, 1994.
4.4 -- Second Amendment dated as of July 22, 1994, Assignment Agreement
dated as June 1, 1995 and the Third Amendment dated July 24,
1995 to the Amended and restated Credit Agreement dated as of
July 31,1991 between NCS and Norwest Bank, National Association,
The First National Bank of Chicago and First Bank National
Association and as further amended by the First Amendment
thereto dated as of January 25, 1994.
*10.1-- NCS 1982 Employee Stock Option Plan is incorporated herein by
reference to Exhibit 28 to Form S-8 Registration Statement and
Exhibit 28 to Post Effective Amendment No. 1 to Form S-8
Registration Statement No. 2-80386.
*10.2-- NCS 1984 Employee Stock Option Plan is incorporated herein by
reference to Exhibit 10 to the Company's Form 10-Q for the
quarter ended July 31, 1984.
*10.3-- NCS 1986 Employee Stock Option Plan is incorporated herein by
reference to Exhibit 10D to the Company's Form 10-K for the
fiscal year ended January 31, 1986.
*10.4-- NCS Non-Employee Director Stock Option Plan is incorporated herein
by reference to Exhibit 10F to the Company's Form 10-K for the
fiscal year ended January 31, 1989.
*10.5-- NCS 1990 Employee Stock Option Plan, as amended, is incorporated
herein by reference to Exhibit 10.1 to the Company's Form 10-Q
for the quarter ended October 31, 1995.
*10.6-- NCS 1995 Employee Stock Option Plan, as amended, is incorporated
herein by reference to Exhibit 10.2 to the Company's Form 10-Q
for the quarter ended October 31, 1995.
*10.7-- NCS 1990 Long-Term Incentive Plan, as amended, is incorporated
herein by reference to Exhibit 10.3 to the Company's Form 10-Q
for the quarter ended October 31, 1995.
*10.8-- NCS 1992 Employee Stock Purchase Plan is incorporated herein by
reference to Exhibit 10I to the Company's Form 10-K for the
fiscal year ended January 31, 1992.
*10.9-- Description of Retirement Arrangements with David C. Malmberg is
incorporated herein by reference to Exhibit 19 to the Company's
Form 10-Q for the fiscal quarter ended October 31, 1992.
*10.10-- Agreement dated August 4, 1994 between NCS and Russell A.
Gullotti, as amended August 8, 1994, is incorporated herein by
reference to Exhibit 10(a) to the Company's Form 10-Q for the
fiscal quarter ended October 31, 1994.
*10.11-- Agreement dated August 22, 1994 between NCS and Charles W. Oswald
is incorporated herein by reference to Exhibit 10 (b) to the
Company's Form 10-Q for the fiscal quarter ended October 31,
1994.
*10.12-- Oswald Stock Option Plan is incorporated herein by reference
to Exhibit 10O to the Company's Form 10-K for the fiscal year
ended January 31, 1995.
*10.13-- NCS Corporate Management Incentive Plan -- 1995 is incorporated
herein by reference to Exhibit 10N to the Company's Form 10-K
for the fiscal year ended January 31, 1995.
*10.14-- NCS Corporate Management Incentive Plan -- 1996.
11 -- Statement Re: Computation of Earnings Per Share.
13 -- Portions of NCS' Annual Report to Stockholders for the fiscal year
ended January 31, 1996.
21 -- Significant Subsidiaries.
23 -- Consent of Independent Auditors.
24 -- Power of Attorney authorizing J. W. Fenton, Jr. to sign the NCS
Form 10-K for the year ended January 31, 1996 on behalf of other
officers and directors.
27 -- Financial Data Schedule.
99 -- Cautionary statements identifying important factors that could
cause the Company's actual results to differ from those
projected in forward looking statements.
- ----------------
* Indicates management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
January 31, 1996.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are
not required or are inapplicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONAL COMPUTER SYSTEMS, INC.
Dated: March 20, 1996 By: /s/ J. W. FENTON, JR.
------------------------
J. W. Fenton, Jr.
SECRETARY-TREASURER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By RUSSELL A. GULLOTTI * Chairman of the Board of Directors,
---------------------------------- President and Chief Executive
Russell A. Gullotti Officer (principal executive officer)
By DR. DAVID P. CAMPBELL * Director
------------------------------------
Dr. David P. Campbell
By DAVID C. COX * Director
------------------------------------
David C. Cox
By JEAN B. KEFFELER * Director
------------------------------------
Jean B. Keffeler
By CHARLES W. OSWALD * Director
------------------------------------
Charles W. Oswald
By STEPHEN G. SHANK Director
------------------------------------
Stephen G. Shank
By JOHN E. STEURI * Director
------------------------------------
John E. Steuri
By JEFFREY E. STIEFLER * Director
------------------------------------
Jeffrey E. Stiefler
By JOHN W. VESSEY * Director
------------------------------------
John W. Vessey
By JEFFREY W. TAYLOR * Vice President and Chief
------------------------------------ Financial Officer (principal
Jeffrey W. Taylor financial officer and
principal accounting officer)
* Executed on behalf of the indicated officers and directors of the
registrant by J. W. Fenton, Jr., Secretary-Treasurer, duly appointed
attorney-in-fact.
/s/ J. W. FENTON, JR.
- ----------------------------------- Dated: March 20, 1996
(ATTORNEY-IN-FACT)
<PAGE>
FORM 10-K
NATIONAL COMPUTER SYSTEMS, INC.
FOR THE FISCAL YEAR ENDED JANUARY 31, 1996
EXHIBIT INDEX
EXHIBIT
- -------------
4.4 Second Amendment dated as of July 22, 1994, Assignment Agreement dated
as of June 1, 1995 and the Third Amendment dated July 24, 1995 to the
Amended and Restated Credit Agreement dated as of July 31, 1991
between NCS and Norwest Bank, National Association, The First National
Bank of Chicago and First Bank National Association and as further
amended by the First Amendment thereto dated as of January 25, 1994.
10.14 NCS Corporate Management Incentive Plan -- 1996.
11 Statement Re: Computation of Earnings per Share.
13 Portions of the Annual Report to Stockholders for the fiscal year
ended January 31, 1996.
21 Significant Subsidiaries.
23 Consent of Independent Auditors.
24 Power of Attorney authorizing a certain person to sign the NCS Form
10- K for the year ended January 31, 1996 on behalf of other officers
and directors.
27 Financial Data Schedule.
99 Cautionary statements identifying important factors that could cause
the Company's actual results to differ from those projected in forward
looking statements.
EXHIBIT 10.14
NATIONAL COMPUTER SYSTEMS
CORPORATE
MANAGEMENT INCENTIVE PLAN
1996
It is NCS' intent to compensate its senior management employees in a manner
which permits the Corporation to attract, retain, and motivate outstanding
people.
The NCS Corporate Management Incentive Plan (MIP) is designed to reward key
senior managers for achieving specific annual NCS financial goals and for
individual performance in accomplishing these goals. It aligns the interests of
NCS senior management with NCS business and financial plans.
PLAN ELIGIBILITY
Participation in the plan is determined by position. Eligible positions and
target bonus amounts are determined each year and may change from year to year.
Participants must be full-time NCS employees. Eligibility is limited and
includes those positions which significantly impact financial results.
The eligible positions and participants will be reviewed annually and approved
by the CEO.
Positions and participants in the plan will be selected from the following:
- CEO,
- Corporate staff officers,
- NCS Business presidents, senior vice presidents and, on a selected
basis, their direct management reports,
- Selected other vice presidents
Any position or participant exceptions, exclusions and inclusions, to the above
must be documented and approved by the CEO.
TARGET BONUS
Each approved position will be eligible for a specific target bonus award
percentage level. This target bonus opportunity will be a percentage of the May
31, 1996, annual base salary for the participant. The target bonus is tied
directly to the participant's unit financial performance and an overall
evaluation of each individual's performance. Potential earned payouts range from
0% at threshold minimum, to 100% at target bonus, to a pre-defined
overachievement percentage for each executive at maximum.
INCENTIVE COMPONENTS
Participants will have 70% of their potential target bonus based on financial
goals and objectives (30% Revenue and 40% Contribution or Net Income). The
remaining 30% of their potential target bonus will be based upon an overall
evaluation of the participant's performance during the fiscal year. This overall
evaluation will include performance against defined individual objectives and an
overall evaluation of performance relative to:
1) What you have done to improve shareholder value?
2) How you have improved customer satisfaction and NCS' ability to serve
the customer?
3) What you have done to improve the quality/predictability of your
business?
4) What you have done to develop your organization?
5) How have you demonstrated personal leadership and corporate-wide
perspectives/orientation?
6) How well didyou deal with issues/problems?
No bonus award payouts will be made to participants for achievement of the 70%
financial performance if the individual's operating unit (NCS Business or
Division or Market Unit) does not accomplish its minimum profit contribution
objective(s). (i.e., a division participant requires that the division achieve
its minimum profit contribution threshold.)
OVERALL EVALUATION
Each participant will have 30% of their target bonus award based upon an overall
evaluation of the participant's performance. These will be completed for all MIP
participants.
DETERMINATION OF MIP AWARDS
Generally speaking, actual financial results will not include extraordinary
gains or losses. In any such matters, including acquisitions, the CEO will make
the appropriate approval decisions where needed.
PAYOUTS AND PRO-RATA
Earned award payouts will be made no later than April 15, following the end of
the plan fiscal year. Any participant must be a full-time employee and be
actively employed by NCS on the last day of the fiscal year to be eligible to
receive a payout. In coming into or out of an MIP eligible position,
participants will be given pro-rata earned award payouts based upon the length
of time in such position, however, participants must be in the plan at least six
(6) full months during the fiscal year to be eligible to receive any pro-rata
award. Pro-rata payouts will be subject to review and approval by the CEO.
DISABILITY, DEATH, OR SPECIAL CIRCUMSTANCES
In the case of disability, death or other special circumstances impacting a
participant in the plan, the CEO may approve pro-rata award payouts.
PLAN EXCEPTIONS AND ADMINISTRATION
Exceptions and/or modifications to the plan must be approved by the CEO. All
decisions made are final.
DISCLAIMER
Participation in this plan is not to be construed as an employment contract or
agreement by the participant.
EXHIBIT 11
<TABLE>
<CAPTION>
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
NATIONAL COMPUTER SYSTEMS, INC.
YEAR ENDED JANUARY 31,
----------------------------------------------
1996 1995 1994 1993 1992
====== ====== ====== ====== ======
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 15,472 15,164 15,438 15,915 16,002
Dilutive stock options -- based
on the treasury stock method
using average market price 213 61 97 151 136
------- ------- ------- ------- -------
TOTAL 15,685 15,225 15,535 16,066 16,138
======= ======= ======= ======= =======
Net income (loss) $22,259 $13,398 $(2,509) $16,508 $15,474
======= ======= ======= ======= =======
Net income (loss) per share $ 1.42 $ 0.88 $ (0.16) $ 1.03 $ 0.96
======= ======= ======= ======= =======
FULLY DILUTED
Average shares outstanding 15,472 15,164 15,438 15,915 16,002
Dilutive stock options -- based on
the treasury stock method using
the higher of year-end market
price or average market price 262 148 99 164 199
Assumed conversion of convertible
subordinated debenture -- -- -- -- 361
------- ------- ------- ------- -------
TOTAL 15,734 15,312 15,537 16,079 16,562
======= ======= ======= ======= =======
Net income (loss) $22,259 $13,398 $(2,509) $16,508 $15,474
Add interest on convertible subordinated
debenture, net of the income tax effect -- -- -- -- 363
======= ======= ======= ======= =======
$22,259 $13,398 $(2,509) $16,508 $15,837
======= ======= ======= ======= =======
Net income (loss) per share $ 1.42 $ 0.88 $ (0.16) $ 1.03 $ 0.96
======= ======= ======= ======= =======
</TABLE>
EXHIBIT 13
<TABLE>
<CAPTION>
FIVE YEAR FINANCIAL DATA (Unaudited)
(Dollars in thousands, except per share amounts)
YEAR ENDED JANUARY 31,
------------------------------------------------------------
1996 1995(1) 1994(2) 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Financial Results
Revenues $358,976 $336,943 $305,453 $300,067 $302,506
Income (loss) from operations 39,737 23,146 (2,301) 27,258 28,704
Income (loss) before income tax
provision (benefit) 37,009 19,148 (2,859) 26,608 24,174
Income tax provision (benefit) 14,750 5,750 (350) 10,100 8,700
Net income (loss) 22,259 13,398 (2,509) 16,508 15,474
Net income (loss) per share $ 1.42 $ .88 $ (.16) $ 1.03 $ .96
Average number of shares outstanding 15,685 15,225 15,535 16,066 16,138
Dividends paid per share $ .36 $ .36 $ .36 $ .33 $ .29
Financial Position
Current ratio 1.6 1.5 1.5 1.6 1.7
Working capital $ 40,763 $ 35,614 $ 36,217 $ 38,792 $ 39,836
Total assets 235,260 240,757 220,173 214,739 217,578
Long-term debt, including
current maturities 28,540 50,525 47,351 25,350 39,751
Stockholders' equity 128,198 113,123 100,147 121,317 112,316
</TABLE>
(1) Includes a special charge of $11,339 pre-tax, $5,189 after-tax or $.34 per
share.
(2) Includes a special charge of $25,000 pre-tax, $15,500 after-tax or $1.00 per
share.
<PAGE>
QUARTERLY MARKET DATA (Unaudited)
The Company's Common Stock is traded on the Nasdaq National Market System under
the symbol "NLCS." As of January 31, 1996, there were approximately 1,900
stockholders of record. Set forth below is certain information regarding the
sales prices of, and dividends paid with respect to, the Company's Common Stock
during the year ended January 31, 1996 and 1995:
YEAR ENDED JANUARY 31, 1996
-------------------------------------
Quarter 1st 2nd 3rd 4th
- --------------------- ------- ------- ------- -------
Sales prices per share
High $17.75 $21.50 $22.00 $22.00
Low 14.86 16.25 17.75 17.50
Dividends paid per share $ .09 $ .09 $ .09 $ .09
YEAR ENDED JANUARY 31, 1995
-------------------------------------
Quarter 1st 2nd 3rd 4th
- ------------------------ ------- ------- ------- -------
Sales prices per share
High $ 13.50 $ 13.25 $ 14.75 $ 17.25
Low 10.88 10.50 11.50 12.13
Dividends paid per share $ .09 $ .09 $ .09 $ .09
<TABLE>
<CAPTION>
QUARTERLY RESULTS OF OPERATIONS
(In thousands, except per share amounts)
THREE MONTHS ENDED
-----------------------------------------------
April 30 July 31 October 31 January 31
-------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended January 31, 1996
Revenues $74,297 $88,442 $97,321 $98,916
Gross profit 29,114 33,957 35,037 38,608
Net income 2,365 5,644 6,172 8,078
Net income per share $ 0.15 $ 0.36 $ 0.39 $ 0.52
Year Ended January 31, 1995
Revenues $68,750 $80,131 $94,608 $93,454
Gross profit 27,081 31,165 31,239 38,452
Net income 1,950 4,715 4,578 2,155(1)
Net income per share $ 0.13 $ 0.31 $ 0.30 $ 0.14
</TABLE>
(1) Includes a $5,189 after-tax special charge ($ .34 per share).
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The fiscal years referenced herein are as follows:
Fiscal Year Year Ended
1995 - January 31, 1996
1994 - January 31, 1995
1993 - January 31, 1994
Income and Expense Items as a Percentage of Revenues
Fiscal Year 1995 1994 1993
- ------------------------------------------------------------
Revenues
Net sales 82.5% 80.8% 77.5%
Maintenance and support 17.5 19.2 22.5
- ------------------------------------------------------------
Total revenues 100.0 100.0 100.0
Costs Of Revenues
Cost of sales(1) 60.9 60.1 57.4
Cost of maintenance and support(2) 66.6 70.0 73.6
- ------------------------------------------------------------
Total gross profit 38.1 38.0 38.9
Operating Expenses
Sales and marketing 12.5 13.1 15.7
Research and development 3.9 4.0 3.1
General and administrative 10.7 10.6 12.7
Special charges -- 3.4 8.2
- -------------------------------------------------------------
Income (loss) from operations 11.1 6.9 (0.8)
Income (loss) before taxes 10.3 5.7 (0.9)
Net income (loss) 6.2% 4.0% (0.8)%
=============================================================
(1) As a percentage of sales revenue.
(2) As a percentage of maintenance and support revenue.
National Computer Systems, Inc. (the Company or NCS) operates two business
segments. The Company's largest business segment is Data Collection Services and
Systems. This segment markets those products and related application software
and services predominantly in education, but also to business, government and
health care markets through its various operating units. The Financial Systems
segment designs, develops and markets asset management software and service,
primarily for bank trust departments. This includes systems for personal trust
asset management for individuals and corporate trust applications such as stock
and bond transfer systems.
RECAP OF 1995 RESULTS
Total revenues in fiscal 1995 were up 6.5% from the prior year to a record
$359.0 million. The Company's overall gross profit percentage on revenues was
relatively constant with the prior year, while total gross profit dollars
increased over fiscal 1994 by $8.8 million or 6.9%. Sales and marketing expenses
increased slightly, by $.6 million, however, those expenses declined to 12.5% of
revenues from 13.1% in fiscal 1994. Research and development expenses increased
by $.5 million, remaining relatively constant, year-to-year, as a percent of
revenues. General and administrative expenses increased by $2.4 million, also
relatively constant, year-to-year, as a percent of revenues. The Company's
income from operations increased 15.2% to $39.7 million over the prior year
income from operations of $34.4 million, before the 1994 special charges
discussed below. Interest expense declined slightly as lower average borrowing
levels were somewhat offset by higher interest rates. Net income of $22.3
million or $1.42 per share compares to fiscal 1994 net income of $18.6 million
or $1.22 per share before the 1994 special charges.
SPECIAL CHARGES
In fiscal 1994, the Company recorded an $11.3 million special charge consisting
of three components: The restructuring and statutory reorganization of the
Company's German operations, the discontinuation of an employee benefits
software development project, and the write-down of certain investments in
anticipation of disposition. See Note 2 of Notes to Consolidated Financial
Statements for further discussion.
In fiscal 1993, the Company recorded a $25 million special charge, $22.8 million
of which was to terminate the Ultrust product and the related Cambridge,
Massachusetts operations dedicated to the product. The charge also included $2.2
million for the restructuring of the Administrative Software division of the
Education business, principally the closing of the Company's Salt Lake City
software development facility and the consolidation of product development
activities into facilities in Mesa, Arizona. See Note 2 of Notes to Consolidated
Financial Statements for further discussion.
REVENUES
Fiscal 1995 versus Fiscal 1994. Total revenues for fiscal 1995 were up 6.5% to
$359.0 million from $336.9 million in fiscal 1994. Revenue growth in fiscal 1995
as compared to fiscal 1994, by NCS business segment, was as follows:
Data Collection Services and Systems -
Education + 6.3%
Business, Government, Health Care and other + 4.8%
Overall + 5.6%
Financial Systems +11.6%
Data Collection Services and Systems benefited from higher volumes of
educational assessments and student financial aid services at the Company's Iowa
City service center. Higher software licensing revenues from school
administrative software were also a significant factor in the year-to-year
increase. Higher services revenues, notwithstanding lower hardware maintenance
revenues, as well as improved hardware and forms sales generated the revenue
growth for Business, Government and Health Care. Substantially all of the
revenue growth in Financial Systems was due to the acquisition of its
International Private Banking subsidiary in the latter part of fiscal 1994. See
Note 3 of Notes to Consolidated Financial Statements for further discussion. By
revenue category, net sales were up 8.8% in fiscal 1995 over fiscal 1994 due to
the higher assessment, software licensing and services revenues mentioned above,
as well as increased proprietary hardware sales. Maintenance and support
revenues were down 2.8% due to lower third-party hardware maintenance revenues,
partially offset by higher software support revenues.
Fiscal 1994 versus Fiscal 1993. Total revenues for fiscal 1994 were up 10.3% to
$336.9 million from $305.5 million in fiscal 1993. Revenue growth in fiscal 1994
as compared to fiscal 1993, by NCS business segment, was as follows:
Data Collection Services and Systems -
Education +19.5%
Business, Government, Health Care and other + 1.4%
Overall +10.5%
Financial Systems + 9.3%
Significantly higher volumes of educational assessment and student financial aid
services at the Company's Iowa City service center were the principal factors in
the growth in Data Collection revenues in education. Approximately half of the
revenue growth in Financial Systems was due to the acquisition in the third
quarter of fiscal 1994. See Note 3 of Notes to Consolidated Financial Statements
for further discussion.
By revenue category, net sales were up 15.0% in fiscal 1994 over fiscal 1993 due
to the higher Data Collection revenues in education and student financial aid
services mentioned above, among other increases. Maintenance and support
revenues were down 5.9% due to lower third-party hardware maintenance revenues,
offset somewhat by increases in proprietary maintenance services and software
support.
COST OF REVENUES AND GROSS PROFITS
Fiscal 1995 versus Fiscal 1994. The Company's overall gross profit percentage of
38.1% for fiscal 1995 was slightly improved over the prior year percentage of
38.0%. The gross profit on net sales declined by 0.8 percentage points
year-to-year principally due to lower relative margins on assessment revenues at
the Company's Iowa City service center. This decline was partially offset by
higher margins on domestic non-educational Data Collection Services and Systems
revenues. Maintenance and support margins improved by 3.4 percentage points in
fiscal 1995 over the prior year, totally offsetting the aforementioned decline
in margins on net sales. The year-to-year improvement came from software support
margins.
Fiscal 1994 versus Fiscal 1993. In fiscal 1994, the Company's overall gross
profit declined to 38.0% of total revenues from 38.9% in fiscal 1993. By revenue
category, the gross profit on net sales declined by 2.7 percentage points in
fiscal 1994 from the prior year, due in large measure to lower relative margins
on certain of the incremental student financial aid project revenues at the Iowa
City service center. This was offset by improved gross profit on maintenance and
support revenues, which increased by 3.6 percentage points in fiscal 1994, due
principally to higher margins on hardware maintenance services and improved
software support margins, owing largely to the discontinuance of Ultrust.
OPERATING EXPENSES
Fiscal 1995 versus Fiscal 1994. Sales and marketing expenses increased by $.6
million in fiscal 1995 over fiscal 1994. As a percentage of revenues, sales and
marketing expenses declined by 0.6 percentage points, to 12.5% of total
revenues. This decline is a result of the continuing Company-wide efforts to
manage these costs and expenses.
Research and development expenses increased $.5 million in fiscal 1995 over
fiscal 1994. This increase relates principally to enhancements to the Company's
scanning and imaging technology and related software.
General and administrative expenses increased by $2.4 million or 6.6% in fiscal
1995 from the prior year. As a percent of revenues, these expenses remained
constant year-to-year. The increase reflects additional spending of over $1.0
million to introduce and install enhanced product and project management methods
and tools.
Fiscal 1994 versus Fiscal 1993. In fiscal 1994, sales and marketing expenses
decreased $4.0 million from the prior fiscal year. This, coupled with increased
revenues, decreased these expenses as a percentage of total revenues by 2.6
percentage points. This improvement was due to a concerted Company-wide effort
to reduce these expenses and make sales and marketing efforts more productive
than in fiscal 1993.
Research and development expenses increased $4.1 million or 43.3% in fiscal 1994
over fiscal 1993 due directly to new software product initiatives across the
Company, particularly in Financial Systems and Data Collection relating to
education.
General and administrative expenses declined by $2.9 million or 7.4% in fiscal
1994 from the prior fiscal year. This decrease year-to-year is due to direct
efforts to reduce these expenses.
INTEREST EXPENSE
Interest expense decreased by $0.2 million in fiscal 1995 from the prior year.
The year-to-year decrease is primarily the result of lower average borrowing
levels for the latter half of the year, somewhat offset by slightly higher
interest rates.
Interest expense increased $1.3 million in fiscal 1994 over fiscal 1993. This
was due to higher average borrowing levels in fiscal 1994, as debt levels
increased significantly in the latter part of fiscal 1993 and modestly in fiscal
1994. Interest rates also increased in fiscal 1994 from the prior year. See
Capital Resources and Liquidity below for further discussion of cash flow and
debt.
OTHER INCOME AND EXPENSE
Other income and expense for 1995 and 1994 included no large or unusual items.
Other income in fiscal 1993 includes a $1.6 million gain from the sale of assets
of the Company's Catalog Card Division. This division's net assets and results
of operations were not material to NCS.
INCOME TAXES
The effective income tax rate for fiscal 1995 was 39.9%, which was higher than
the statutory rate as a result of losses from foreign subsidiaries which the
Company is unable to recognize as a benefit in its 1995 tax provision.
The effective income tax rate for fiscal 1994 was 30.0% which was significantly
reduced by the net tax benefits related to the reorganization of the Company's
German operations. See Note 6 of the Notes to Consolidated Financial Statements.
The effective income tax benefit rate for fiscal 1993 was 12.2%, which was
significantly lower than the statutory rate and Company's historical effective
rate. The rate impact of permanent book/tax differences was magnified due to the
low absolute dollar amount of the pre-tax loss.
CAPITAL RESOURCES AND LIQUIDITY
During fiscal 1995, the Company generated $51.9 million of cash from operating
activities. Cash was used for capital expenditures and other investing
activities totaling $19.5 million, debt reduction of $21.0 million, dividends of
$5.6 million and stock repurchases, net of issuances, of $1.9 million. The
Company had paid off its revolving debt balances by January 31, 1996, and had
accumulated cash and cash equivalents of $5.2 million, an increase of $4.0
million from a year earlier.
During fiscal 1994, the Company generated $42.2 million of cash from operations.
The special charges incurred in fiscal 1994 had, after considering tax benefits,
a slightly positive impact on cash from operations. The Company invested $28.3
million in property, plant and equipment in fiscal 1994, which was unusually
high due to the addition of new buildings in Mesa, Arizona and Iowa City, Iowa.
Other investing activities consisted of $6.9 million of software capital
additions, and $3.2 million of investments in two minor acquisitions. The
activities above, and all other cash needs, were financed with cash from
operations and $4.1 million of additional borrowings.
The Company had long-term debt balances, including current maturities of $28.5
million, $50.5 million, and $47.4 million at January 31, 1996, 1995, and 1994
respectively. The items causing the changes in debt balances are described
above. At January 31, 1996, the Company's debt to total capital ratio was 18.2%
compared to 30.9% a year earlier and 32.1% two years earlier. The Company
believes that the current debt to total capital ratio is at an acceptable level
which will allow the Company flexibility to fund future growth initiatives.
Looking toward fiscal 1996, the Company maintains a $40 million revolving credit
facility, all of which was unused at January 31, 1996. The Company expects, in
fiscal 1996, to use its cash flows to fund current operating activities as well
as internal growth in its businesses and possible acquisitions. In 1996, capital
expenditures and software development are expected to remain relatively
constant. The Company considers the $40 million credit facility, cash on hand
and funds from operations to be adequate to meet foreseeable cash requirements.
<PAGE>
<TABLE>
<CAPTION>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JANUARY 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 5,174 $ 1,195
Receivables 81,241 79,149
Inventories 18,740 20,455
Prepaid expenses and other 9,666 9,925
-------- --------
Total Current Assets 114,821 110,724
-------- --------
Property, Plant and Equipment
Land, buildings and improvements 50,044 48,202
Machinery and equipment 103,111 101,336
Rotable service parts 6,793 9,256
Equipment held for lease 7,086 7,583
Accumulated depreciation (87,836) (83,648)
-------- --------
79,198 82,729
-------- --------
Other Assets, net
Acquired and internally developed software products 23,222 27,234
Non-current receivables and other assets 15,593 17,027
Goodwill 2,426 3,043
-------- --------
41,241 47,304
-------- --------
Total Assets $235,260 $240,757
======== ========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLERS' EQUITY
<S> <C> <C>
Current Liabilities
Current maturities of long-term debt $ 4,005 $ 5,212
Accounts payable 19,077 20,655
Accrued expenses 27,997 29,495
Deferred income 18,521 18,645
Income taxes 4,458 1,103
-------- --------
Total Current Liabilities 74,058 75,110
-------- --------
Deferred Income Taxes 8,469 7,211
Long-Term Debt - less current maturities 24,535 45,313
Commitments and Contingencies - -
Stockholders' Equity
Preferred stock - -
Common stock - issued and outstanding -
15,365 and 15,310 shares, respectively 461 459
Paid-in capital 3,427 3,795
Retained earnings 130,007 114,546
Deferred compensation (5,697) (5,677)
-------- --------
Total Stockholders' Equity 128,198 113,123
-------- --------
Total Liabilities and Stockholders' Equity $235,260 $240,757
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JANUARY 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues
Net sales $296,136 $272,305 $236,737
Maintenance and support 62,840 64,638 68,716
-------- -------- --------
Total revenues 358,976 336,943 305,453
Cost of Revenues
Cost of sales 180,392 163,744 135,943
Cost of maintenance and support 41,868 45,262 50,589
-------- -------- --------
Gross profit 136,716 127,937 118,921
Operating Expenses
Sales and marketing 44,773 44,138 48,104
Research and development 13,938 13,422 9,364
General and administrative 38,268 35,892 38,754
Special charges - 11,339 25,000
-------- -------- --------
Income (Loss) From Operations 39,737 23,146 (2,301)
Interest expense 3,311 3,465 2,200
Other (income) expense (583) 533 (1,642)
-------- -------- --------
Income (Loss) Before Income Tax Provision (Benefit) 37,009 19,148 (2,859)
Income tax provision (benefit) 14,750 5,750 (350)
-------- -------- --------
Net Income (Loss) $ 22,259 $ 13,398 $ (2,509)
======== ======== ========
Net Income (Loss) Per Share $ 1.42 $ 0.88 $ (0.16)
Average Shares Outstanding 15,685 15,225 15,535
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK
--------------- PAID-IN RETAINED DEFERRED
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION TOTAL
------ ------ ------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance January 31, 1993 15,899 $477 $13,390 $115,716 $ (8,266) $121,317
Shares issued for employee stock
purchase and option plans 135 4 1,741 - - 1,745
Repurchase of common stock (1,053) (32) (15,317) (566) - (15,915)
Restricted stock awards 2 - 186 - (33) 153
ESOP debt payment - - - - 1,000 1,000
Restricted stock compensation accrual - - - - 226 226
Net loss - - - (2,509) - (2,509)
Cash dividends paid - $.36 per share - - - (5,581) - (5,581)
Foreign currency translation adjustment - - - (289) - (289)
------ ------ -------- --------- --------- ---------
Balance January 31, 1994 14,983 449 - 106,771 (7,073) 100,147
Shares issued for employee stock
purchase and option plans 152 5 1,492 - - 1,497
Repurchase of common stock (32) (1) (359) - - (360)
Restricted stock awards (59) (2) (430) - 432 -
Shares issued for business acquisition 266 8 3,092 - - 3,100
ESOP debt payment - - - - 1,000 1,000
Restricted stock compensation accrual - - - - (36) (36)
Net income - - - 13,398 - 13,398
Cash dividends paid - $.36 per share - - - (5,453) - (5,453)
Foreign currency translation adjustment - - - (170) - (170)
------ ------ ------- --------- --------- ----------
Balance January 31, 1995 15,310 459 3,795 114,546 (5,677) 113,123
Shares issued for employee stock
purchase and option plans 208 6 2,446 - - 2,452
Repurchase of common stock (233) (7) (4,445) - - (4,452)
Restricted stock awards 80 3 1,576 - (1,579) -
Shares issued for business acquisition - - 55 - - 55
ESOP debt payment - - - - 1,000 1,000
Restricted stock compensation accrual - - - - 559 559
Net income - - - 22,259 - 22,259
Cash dividends paid - $.36 per share - - - (5,570) - (5,570)
Foreign currency translation adjustment - - - (1,228) - (1,228)
------ ----- ------ --------- --------- ---------
Balance January 31, 1996 15,365 $461 $3,427 $130,007 $ (5,697) $128,198
====== ===== ====== ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JANUARY 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 22,259 $ 13,398 $ (2,509)
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation 15,643 15,559 16,289
Amortization 11,791 8,412 8,388
Deferred income taxes and other 3,747 (400) (2,434)
Non-cash special charges - 10,375 17,805
Changes in operating assets and liabilities
(net of acquired amounts):
Accounts receivable (2,133) (3,392) (12,346)
Inventory and other current assets 542 (4,285) (3,765)
Accounts payable and accrued expenses 272 3,183 3,879
Deferred income (190) (613) 652
------- ------- -------
Net Cash Provided By Operating Activities 51,931 42,237 25,959
------- ------- -------
Investing Activities
Divestitures (acquisitions), net - (3,216) (1,198)
Purchases of property, plant and equipment (14,091) (29,185) (23,852)
Capitalized software products (4,826) (6,928) (11,474)
Other - net (535) (3,245) (1,728)
------- ------- -------
Net Cash Used In Investing Activities (19,452) (42,574) (38,252)
Financing Activities
Net increase (decrease) in revolving credit borrowing (13,065) 1,100 18,500
Net increase (decrease) in other borrowings (7,920) 3,024 4,501
Issuance (repurchase) of common stock, net (1,945) 1,137 (14,170)
Dividends paid (5,570) (5,453) (5,581)
------- ------- -------
Net Cash Provided By
(Used In) Financing Activities (28,500) (192) 3,250
------- ------- -------
Increase (Decrease) In Cash and Cash Equivalents 3,979 (529) (9,043)
Cash and Cash Equivalents - Beginning of Year 1,195 1,724 10,767
------- ------- -------
Cash and Cash Equivalents - End of Year $ 5,174 $ 1,195 $ 1,724
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1 - ACCOUNTING POLICIES
The fiscal years referenced herein are as follows:
Fiscal Year Year Ended
1995 - January 31, 1996
1994 - January 31, 1995
1993 - January 31, 1994
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions between consolidated entities have been eliminated.
USE OF ESTIMATES: The consolidated financial statements have been prepared in
accordance with the generally accepted accounting principles which requires
management to make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Those assumptions
and estimates are subject to constant revision, and actual results could differ
from those estimates.
CASH AND EQUIVALENTS: All investments purchased with an original maturity of
three months or less are considered to be cash equivalents. Cash equivalents are
carried at cost which approximates fair market value.
INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or
market. Components of inventory as of January 31, are summarized as follows:
1996 1995
- ----------------------------------------------------------------
Finished Goods $ 6,416 $ 6,408
Scoring services and work in process 8,694 8,974
Raw materials and purchased parts 3,630 5,073
- ----------------------------------------------------------------
$18,740 $20,455
================================================================
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost
and depreciated over the estimated useful lives of the assets using principally
the straight-line method for financial reporting purposes and accelerated
methods for income tax purposes. Significant improvements are capitalized to
property, plant and equipment accounts, while maintenance and repairs are
expensed currently. Rental income from equipment held for lease is recognized as
earned using the operating method of accounting for such leases. Depreciation is
computed using the straight-line method based on the assets' estimated useful
lives ranging from two to forty years.
ROTABLE SERVICE PARTS: Parts continually repaired and reused are carried at cost
and depreciated over their estimated useful lives ranging from three to five
years. Such amounts are reflected as a separate category of property, plant and
equipment.
ACQUIRED AND INTERNALLY DEVELOPED SOFTWARE PRODUCTS: Acquired software product
amounts originate from the allocation of purchase prices of acquired companies
and direct acquisition of software, or rights to software. These products are
generally large, complex, mission-critical application software packages with
established market positions. Products in this category are generally assigned
lives of five years. Internally developed software products represent costs
capitalized in accordance with Statement of Financial Accounting Standards No.
86. Accordingly, software production costs incurred subsequent to establishing
technological feasibility, as defined, are capitalized. Amortization of these
products is computed on a product by product basis ratably as a percentage of
estimated revenue, subject to minimum straight-line amortization over the
products' estimated useful lives of two to five years. Expected revenues and
useful lives are estimates which are subject to changes in technology and
marketplace requirements and are, therefore, subject to revision. The Company
periodically evaluates its software products for impairment by comparison of the
carrying value of the product against anticipated product margins. The carrying
value is adjusted, if necessary. An employee benefits software product and the
Ultrust software product were discontinued in fiscal 1994 and fiscal 1993,
respectively. Refer to Note 2 for further discussion.
<PAGE>
A summary of software activity is as follows:
<TABLE>
<CAPTION>
Internally Accumulated
Acquired Developed Amortization Total
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 31, 1993 $16,684 $29,065 $(15,583) $30,166
Additions 1,165 11,474 - 12,639
Product discontinuation (4,522) (18,495) 5,212 (17,805)
Dispositions - (1,558) 1,057 (501)
Amortization - - (4,407) (4,407)
- ----------------------------------------------------------------------------
Balance, January 31, 1994 13,327 20,486 (13,721) 20,092
Additions 7,868 6,928 - 14,796
Product discontinuation - (2,983) 25 (2,958)
Amortization - - (4,696) (4,696)
- ----------------------------------------------------------------------------
Balance, January 31, 1995 21,195 24,431 (18,392) 27,234
Additions - 4,826 - 4,826
Dispositions (532) (213) 459 (286)
Amortization - - (8,552) (8,552)
- ----------------------------------------------------------------------------
Balance, January 31, 1996 $20,663 $29,044 $(26,485) $23,222
============================================================================
</TABLE>
GOODWILL: Goodwill arising from business acquisitions is amortized on a
straight-line basis over periods ranging from five to twenty years, generally
ten years. Amortization expense was $624 in fiscal 1995, $1,179 in fiscal 1994
and $1,146 in fiscal 1993. Accumulated amortization was $3,109 and $2,493 as of
January 31, 1996 and 1995, respectively.
ACCRUED EXPENSES: Major components of accrued expenses consisted of the
following as of January 31:
1996 1995
- ------------------------------------------------
Employee compensation $13,811 $12,960
Taxes other than income 3,587 3,410
Royalties 2,176 2,241
Scoring 1,477 2,169
Special charges - 679
Other 6,946 8,036
- ------------------------------------------------
$27,997 $29,495
================================================
REVENUE RECOGNITION: Revenue from product sales and software licensing is
recognized at the time of shipment, except in instances where material
fulfillment obligations exist beyond shipment. In such cases, revenue is not
recognized until such obligations are substantially fulfilled or is recognized
in accordance with specific contract terms. Hardware maintenance and software
support revenues are recognized ratably over the contractual period. Revenue
from other services is recognized when such service is performed.
OTHER (INCOME) EXPENSE: Other (income) expense for the year ended January 31,
1994 includes a $1,556 gain on the sale of the assets of the Company's Catalog
Card Division to an entity controlled by the Company's then Chairman of the
Board. The sale was for cash and notes totaling $2,350, including interest. The
disinterested directors of the Company determined that the terms of the sale
were fair and reasonable to the Company. Notes receivable of $1,199 and $1,454,
net, from the acquiring entity are carried in non-current receivables on the
accompanying consolidated balance sheets at January 31, 1996 and 1995,
respectively.
PER SHARE DATA: Net income (loss) per share is based on the weighted average
number of shares of Common Stock and dilutive common stock equivalents
outstanding during the year.
IMPAIRMENT OF LONG-LIVED ASSETS: In March 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present.
The Company will be subject to SFAS No. 121 in the first quarter of 1996 and,
based on current estimates and assumptions, believes the effect of adoption will
not be material.
STOCK-BASED COMPENSATION: In October, 1995, the FASB issued SFAS No. 123,
Accounting for Stock-Based Compensation. The Company currently accounts for
stock options and awards to employees under the provisions of Accounting
Principles Board Opinion No. 25. The Company has not determined whether to
continue to account for stock option under the current method or adopt the
provisions of SFAS No. 123. The impact of adopting this new standard, at this
point, has not been determined. All transactions entered into during the fiscal
years ended January 31, 1996 and 1997 will require footnote disclosure in 1997
as if the new method had been adopted.
NOTE 2 - SPECIAL CHARGES
In the fourth quarter of fiscal 1994, the Company recorded an $11.3 million
pre-tax special charge consisting of three components: the restructuring and
statutory reorganization of the Company's German operations, the discontinuation
of an employee benefits software development project, and the write-down of
certain unconsolidated investments in anticipation of disposition.
The German restructuring and reorganization amounted to a $3.7 million pre-tax
charge to liquidate two of the Company's three operating subsidiaries in Germany
and consolidate all remaining operations, principally distribution and
maintenance, into one remaining subsidiary. The pre-tax charge was principally
to write down goodwill and other assets ($2.9 million) to liquidation values and
the balance of this charge was to accrue exit costs for leased facilities and
other obligations. There were, however, significant tax benefits triggered by
these actions, so that the net after-tax effect of this restructuring was only
$.5 million. These actions are complete and the liquidation will become official
upon the expiration of the German statutory notice periods.
The discontinuation of the employee benefit software product resulted in a $3.2
million pre-tax charge. The charge was principally to write off internal
software development costs and acquired third-party software licenses. The
after-tax effect of this action was approximately $2.0 million.
The balance of the pre-tax special charge ($4.4 million) was to write down
investments in four companies in anticipation of values which will be realized
as the Company proceeds with an orderly disposition of these investments. The
after-tax effect of the write-down of these investments was $2.7 million. One of
these investments was disposed of during fiscal 1995, and a second is under
contract for disposition. The Company continues to hold, for sale, the remaining
two investments whose net carrying value is insignificant.
The special charges totaled $11.3 million pre-tax and $5.2 million or 34 cents
per share on an after-tax basis. These actions represent largely asset
write-downs with related tax benefits and therefore, actually generated cash for
the Company, before considering disposition proceeds.
In the fourth quarter of fiscal 1993, the Company recorded a $25 million pre-tax
special charge. This amount consisted of a $22.8 million charge to terminate the
Ultrust product and related operations, including a non-cash write-off of $17.8
million of software investment, $2.7 million of severance costs, and $2.3
million of facility exit costs, customer accommodations and other items.
The balance of the charge was for the closing of a software development facility
in Salt Lake City and consolidation of those functions into the Company's Mesa,
Arizona facility. Substantially all of this $2.2 million charge related to
severance and other employee-related costs.
This charge reduced fiscal 1993 after-tax earnings by $15.5 million or $1.00 per
share. The cash outlay required by this charge was essentially completed in
1994.
NOTE 3 - SIGNIFICANT TRANSACTIONS
During fiscal 1994, the Company completed two minor acquisitions. In July, 1994,
the Company completed the acquisition of Abacus Data Group, Inc., a developer of
Windows-based instructional management software for the education market. The
purchase price was approximately $3.8 million in a combination of cash and
common stock of the Company, plus contingent earn-out payments, and was
allocated principally to software products and goodwill. In October, 1994, the
Company completed the acquisition of an international private banking product,
DECBank APSYS, along with certain related business assets and operations in
Geneva, Switzerland. The purchase price was approximately $2.9 million in cash
plus assumption of certain liabilities, which was allocated principally to
software products. The operating results of these acquired entities were not
material to NCS.
The Company holds an investment in Dimensional Medicine Inc. (DMI) which is
comprised of 27.5 million shares of DMI common stock (representing 85% of the
outstanding common shares) and a long-term note receivable. The Company has not
consolidated the financial results of DMI as it has been the Company's intention
to divest of the DMI shares. The Company anticipates closing on the sale of DMI
in the first half of 1996. DMI's financial position and results of operations
are not material to the Company.
Fees charged to DMI for installation and servicing of DMI systems were $206 in
fiscal 1995, $518 in fiscal 1994, and $999 in fiscal 1993. Rates and prices
charged for these services approximate those which would prevail between
unrelated parties. The balance of the long-term note, $602 as of January 31,
1996 and $865 as of January 31, 1995, is reflected in non-current receivables in
the accompanying consolidated balance sheets.
<PAGE>
NOTE 4 - LEASES
The Company leases office facilities under noncancelable operating leases which
expire in various years through 2001. Rental expense for all operating leases
was $10,138 in fiscal 1995, $11,026 in fiscal 1994, and $11,242 in fiscal 1993 .
Future minimum rental expense as of January 31, 1996, for noncancelable
operating leases with initial or remaining terms in excess of one year is
$25,150 and is payable as follows: fiscal 1996 - $6,785; fiscal 1997 - $5,799;
fiscal 1998 - $4,804; fiscal 1999 - $3,180; fiscal 2000 - $2,368 and $2,214
beyond.
NOTE 5 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt at January 31, consisted of the following:
1996 1995
- --------------------------------------------------
Revolving credit borrowing $ - $19,600
Secured notes 15,000 15,000
Unsecured note 6,535 6,173
ESOP borrowings 4,000 5,000
Other borrowings, 3,005 4,212
principally foreign
- --------------------------------------------------
28,540 50,525
Less current maturities (4,005) (5,212)
- --------------------------------------------------
Long-term debt $24,535 $45,313
==================================================
Revolving Credit Borrowings: The Company has a $40,000 unsecured revolving
credit facility that terminates August 1, 1998. Interest on debt outstanding
under this facility is computed, at the Company's discretion, based on the prime
rate or the London Interbank Offered Rate (LIBOR). During the year ended January
31, 1996, the interest rate approximated 1.0 % below the prime rate. The Company
pays a fee at an annual rate of .25% on the unused facility amount. The credit
facility contains covenants with which the Company is in compliance.
Secured Notes: In July, 1990 the Company issued $15,000 of 9.88% Secured Notes
due in July, 1997. Interest is paid monthly during the term. The notes are
secured by certain Company-owned real estate. The credit facility contains
covenants with which the Company is in compliance.
Unsecured Note: This unsecured term note is due in five principal payments of
$1,307 per year beginning in April, 1997 and bears interest at .95% over LIBOR.
ESOP Borrowing: The ESOP loan, secured by unallocated shares of Common Stock and
guaranteed by the Company, is due in May 1996. The balance of the loan will be
refinanced, prior to May 1, 1996, for an additional three year period, with
annual payments of $1,000. Interest is payable at rates which approximate 3.5%
under the prime rate.
Scheduled Maturities: The aggregate principal amounts of long-term debt
scheduled for repayment in each of the five fiscal years 1996 through 2000 are
$4,005, $17,307, $2,307, $2,307, and $1,307, respectively. In each fiscal year,
interest paid approximates interest expense plus capitalized interest of $175 in
1994 and $338 in 1993.
NOTE 6 - INCOME TAXES
The components of the provision for income taxes are as follows:
Current
-----------------------
Year ended January 31, Federal State Foreign Deferred Total
- -----------------------------------------------------------------
1996 $12,787 $1,789 $ 70 $ 104 $14,750
1995 6,175 691 384 (1,500) 5,750
1994 1,566 398 40 (2,354) (350)
- -----------------------------------------------------------------
<PAGE>
Deferred income taxes reflect the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities as of January 31, are as follows:
1996 1995
- ---------------------------------------------------------
Deferred tax assets:
Foreign operating loss carryforwards $2,050 $ 831
Accrued vacation pay 1,648 1,572
Rotable service parts amortization 1,510 1,612
Reserves for uncollectibles 1,284 3,223
Intangible amortization 1,219 1,047
Capital loss carryforward 783 71
Special charges 497 1,395
Other 705 806
Valuation allowance (1,910) (831)
- ----------------------------------------------------------
Total deferred tax assets 7,786 9,726
- ----------------------------------------------------------
Deferred tax liabilities:
Net capitalized software 7,199 7,183
Accelerated depreciation 5,823 5,847
Product cost amortization 1,265 842
Purchased software amortization 1,088 2,016
Installment sales 830 894
Other 50 155
- ----------------------------------------------------------
Total deferred tax liabilities 16,255 16,937
- ----------------------------------------------------------
Net deferred tax liabilities $ 8,469 $ 7,211
==========================================================
A reconciliation of the Company's statutory and effective tax rate is presented
below:
YEAR ENDED JANUARY 31,
--------------------------
1996 1995 1994
------ ------ ------
Statutory rate 35.0% 35.0% (35.0)%
State income taxes net of
federal benefit 3.2 2.3 9.2
Intangible amortization 0.7 3.0 12.9
Foreign sales corporation (0.1) (0.6) (4.7)
Research and development credits (0.3) (2.5) (24.2)
Affordable housing credit (0.7) (1.4) -
Foreign operating losses 2.3 0.8 27.1
Foreign investment loss - (10.2) -
Federal rate adjustment - - 9.8
Other, net (0.2) 3.6 (7.3)
- ---------------------------------------------------------------
Effective rate 39.9% 30.0% (12.2)%
===============================================================
In the year ended January 31, 1995, the tax rate benefit from the foreign
investment losses principally reflects U.S. tax benefits triggered by the
restructuring and reorganization of the Company's German operations discussed in
Note 2.
In the year ended January 31, 1994, the Federal rate adjustment item above is
due to the SFAS No. 109 requirement to increase deferred tax liabilities to
reflect current statutory income tax rates. During that year, after the
Company's adoption of this standard, the U.S. Federal statutory rate increased
from 34% to 35%. This adjustment reflects the resulting increase in the deferred
tax liability of $280. The Company also incurred foreign operating losses of
approximately $2.7 million for the year ended January 31, 1994, which could not
currently be tax benefited, and, therefore, unfavorably impacted the effective
tax benefit rate. None of the remaining items in the year ended January 31, 1994
rate reconciliation above were unusual in nature or amount in comparison to
prior years, however, the rate effects are magnified due to the low absolute
dollar amount of the pre-tax loss.
The Company made tax payments of $10,335, $5,549, and $7,312 in the fiscal years
ended January 31, 1996, 1995 and 1994, respectively.
NOTE 7 - STOCKHOLDERS' EQUITY
The Company has 10,000,000 shares of $.01 par value Preferred Stock authorized
and issuable in one or more series as the Board of Directors may determine; none
is outstanding. 50,000,000 shares of $.03 par value Common Stock are authorized.
There are no restrictions on retained earnings.
<PAGE>
The Company has five Employee Stock Option Plans (1982, 1984, 1986, 1990 and
1995). Options to purchase Common Stock of the Company are granted to employees
at 100% of fair market value on the date of grant and are exercisable over a 60
or 63 month period. Outstanding options under all plans are summarized as
follows:
SHARES PRICE PER SHARE
- ---------------------------------------------------------------
Balance, January 31, 1994 909,350 $ 7.75 to $17.60
Granted 272,250 12.50 to 15.00
Cancelled (300,200) 7.75 to 17.60
Exercised (76,900) 7.75 to 15.00
- ---------------------------------------------------------------
Balance, January 31, 1995 804,500 7.75 to 16.75
- ---------------------------------------------------------------
Granted 222,750 16.75 to 21.25
Cancelled (65,950) 8.25 to 20.13
Exercised (159,350) 7.75 to 16.75
- ---------------------------------------------------------------
Balance, January 31, 1996 801,950 $12.00 to $21.25
===============================================================
Options for 163,650 and 188,050 shares became exercisable during fiscal 1995 and
1994, respectively, and options for 228,250 and 235,750 shares were exercisable
at January 31, 1996 and 1995, respectively. Shares available for grant under the
Plans totaled 380,250 and 209,600 at January 31, 1996 and 1995, respectively.
At January 31, 1996, non-qualified options not covered by the Plans to purchase
102,000 shares at $8.25 to $17.60 per share were outstanding. At January 31,
1995, non-qualified options not covered by the Plans to purchase 107,000 shares
at $8.25 to $17.60 per share were outstanding.
At January 31, 1996, there were 43,000 outstanding options under the
Non-Employee Director Stock Option Plan with exercise prices from $8.25 to
$18.00 per share. At January 31, 1995, there were 36,000 outstanding options
under the Plan with exercise prices from $8.25 to $16.00 per share.
The Company has an Employee Stock Purchase Plan. There were 135,510 shares
available for purchase under the Plan at January 31, 1996.
NOTE 8 - EMPLOYEE BENEFIT PLANS
EMPLOYEE SAVINGS PLAN: The Company has a qualified 401(k) Employee Savings Plan
covering substantially all employees. Company contributions are discretionary.
The Company's contributions to the Plan, representing 401(k) matching
contributions only, were $1,900, $1,700 and $1,674 in fiscal years 1995, 1994,
and 1993, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN: The Company has an Employee Stock Ownership Plan
(ESOP) covering substantially all employees. Benefits, to the extent vested,
become available upon retirement or termination of employment. During 1989, the
ESOP Trust borrowed $10,000 to purchase 792,000 shares of Common Stock. Each
year, the Company makes contributions to the ESOP which are charged to
compensation expense, and used by the ESOP Trust to make loan interest and
principal payments. With each principal payment, a portion of the Common Stock
is allocated to participating employees. In fiscal 1995, the Company's
contribution to the Plan was $1,000 plus interest of $63, which is net of
dividends on unallocated shares of $171. The Company's contribution to the Plan
was $1,000 in fiscal 1994 and fiscal 1993, and interest, which was totally
offset by dividends on unallocated shares, was $206 in fiscal 1994 and $168 in
fiscal 1993. There were 316,800 and 396,000 unallocated shares at January 31,
1996 and 1995, respectively.
The ESOP Trust borrowing, which is guaranteed by the Company, is reflected in
long-term debt, and the Company's obligation to make future contributions to the
ESOP for debt repayment is reflected as a reduction of Stockholders' Equity in
the consolidated financial statements.
LONG-TERM INCENTIVE PLAN: During fiscal 1995, pursuant to a Long-Term Incentive
Plan approved by the stockholders in fiscal 1990, 92,400 shares of Common Stock
were issued to participants on a restricted basis, all of which were outstanding
at January 31, 1996. The shares will be earned by, and released to, the
participants two-thirds on January 31, 1998, and one-third on January 31, 1999,
upon the achievement of specified revenue growth and cumulative earnings
objectives for the three fiscal years ended January 31, 1998, as defined in the
Plan. The cost of the Plan is being accrued over the three year measurement
period. The Plan also contains a cash award element, for each of the three
fiscal years, which is earned only upon attainment of specified annual earnings
objectives as defined in the Plan.
During fiscal 1990, pursuant to the Plan, 171,400 shares of Common Stock were
issued to participants on a restricted basis. At January 31, 1996, 81,650 shares
remain outstanding due to forfeitures by original participants. The shares will
be earned by, and released to, the participants at the end of 10 years, but
release can be accelerated by attainment of 20% return on equity in a fiscal
year, as defined in the Plan. The cost of the Plan is being accrued over the
10-year earning period and will be accelerated if so earned. The Plan also
contains a cash award element which is earned only upon attainment of the 20%
return on equity.
NOTE 9 - CONTINGENCY
The Company has received a claim from a former customer for expenses, alleged
loan defaults, and other damages related to performance under a loan processing
and servicing contract. The Company has tendered the defense of this claim to
its insurer, and the insurer has accepted that defense subject to a reservation
of rights. The Company and its insurer intend to vigorously contest this claim.
While the claim has not yet been fully articulated, the Company believes that
any such claim would be substantially covered by insurance and would not have a
material effect on the Company's financial position.
NOTE 10 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, requires disclosue of fair
value information about financial instruments for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the estimates and assumptions
used, including the discount rate and estimates of future cash flows.
At January 31, 1996 and 1995, the Company had non-current investments and notes
receivable (non-trade) with carrying values of $4,104 and $3,514 respectively,
which approximate fair value at those respective dates.
At January 31, 1996 and 1995, the Company's $15,000, 9.88% Secured Notes had a
fair value of approximately $15,900 and $15,500, respectively, based on the
Company's current borrowing rate for comparable borrowing arrangements. The
Company's ESOP and other long-term debt values approximates market due to the
variable interest rate features of the obligations.
NOTE 11 - BUSINESS SEGMENT DATA
The Company operates two business segments. The predominance of the Company's
business is in the Data Collection Services and Systems segment. This segment
markets those products and services and related application software to
education, business, government and health care markets through various
operating units. The Financial Systems segment designs, develops and markets
asset management software, primarily for bank trust departments. This includes
systems for personal trust asset management for individuals and corporate trust
applications such as stock and bond transfer systems. Below is a summary of
certain financial information related to the two segments for fiscal years ended
January 31.
<PAGE>
<TABLE>
<CAPTION>
DATA COLLECTION FINANCIAL
SERVICES AND SYSTEMS SYSTEMS TOTAL
---------------------------- -------------------------- -----------------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $300,883 $284,875 $257,813 $ 58,093 $52,068 $47,640 $358,976 $336,943 $305,453
======== ======== ======== ======== ======= ======= ======== ======== ========
Operating income (loss) 42,017 37,316 25,447 9,648 2,820 (19,621) 51,665 40,136 5,826
Special charges included above - 3,718 2,200 - 3,175 22,800 - 6,893 25,000
Corporate expense 11,928 16,990(1) 8,127
Interest and other expense, net 2,728 3,998 558
-------- -------- --------
Total income (loss) before
income taxes 37,009 19,148 (2,859)
======== ======== ========
Identifiable assets 191,571 201,312 177,664 33,093 31,382 25,340 224,664 232,694 203,004
Corporate assets 10,596 8,063 17,169
-------- -------- --------
Total assets 235,260 240,757 220,173
======== ======== ========
Depreciation and amortization 22,378 19,579 20,263 4,445 3,553 3,507 26,823 23,132 23,770
Corporate depreciation
and amortization 611 839 907
-------- -------- --------
Total depreciation and
amortization 27,434 23,971 24,677
======== ======== ========
Capital expenditures 12,288 31,317 24,425 6,233 4,374 9,391 18,521 35,691 33,816
Corporate capital expenditures 396 422 1,510
-------- -------- --------
Total capital expenditures $ 18,917 $ 36,113 $ 35,326
======== ======== ========
</TABLE>
(1) Includes special charge of $4,446.
Capital expenditures include property, plant and equipment additions and
capitalized software. The Company's foreign operations and export sales are less
than 10% of total revenues. Sales to all government agencies for the fiscal
years ended January 31, 1996, 1995 and 1994 were $148,313, $143,187, and
$110,107 of which $42,664, $41,455, and $23,001, respectively, were to U.S.
government agencies, principally the U.S. Department of Education, with the
remainder to state and local government agencies, predominantly school districts
and state departments of education. The Company considers its credit risk in
trade receivables to be minimal with regard to the governmental customers
described above. With regard to the Company's non-governmental customers,
including those in the Financial Systems segment, credit investigations are
performed to minimize credit losses, which historically have been insignificant.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
National Computer Systems, Inc.
We have audited the accompanying consolidated balance sheets of National
Computer Systems, Inc. and subsidiaries as of January 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended January 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National Computer
Systems, Inc. and subsidiaries at January 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 1996, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
March 3, 1996
EXHIBIT 21
SIGNIFICANT SUBSIDIARIES
NATIONAL COMPUTER SYSTEMS, INC.
STATE OR
OTHER
JURISDICTION
OF NAME UNDER WHICH
NAME OF SUBSIDIARY INCORPORATION SUBSIDIARY DOES BUSINESS
- ------------------ ------------- ------------------------
NCS Holdings, Inc. Minnesota NCS Holdings, Inc.
NCS Financial Systems, Inc. Minnesota NCS Financial Services
Financial Systems Division
of National Computer
Systems
NCS Data Forms, Inc. Minnesota Data Forms Division of
National Computer Systems
Interpretive Scoring Minnesota NCS Assessments
Systems, Inc. Professional Assessment
Services Division of
National Computer
Note: All other subsidiaries of National Computer Systems, Inc. are not
significant subsidiaries taken as a whole.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of National Computer Systems, Inc. of our report dated March 3, 1996,
included in the 1995 Annual Report to Stockholders of National Computer Systems,
Inc. and subsidiaries.
We also consent to the incorporation by reference in Post Effective
Amendment Number 2 to Registration Statement Number 2-80386 on Form S-8 (1982
Employee Stock Option Plan), Post Effective Amendment Number 1 to Registration
Statement Number 2-96965 on Form S-8 (1984 Employee Stock Option Plan),
Registration Statement Number 33-9830 on Form S-3 (Selling Shareholder),
Registration Statement Number 33-21511 on Form S-8 (1986 Employee Stock Option
Plan), Registration Statement Number 333-00377 on Form S-8 (1989 Non-Employee
Director Stock Option Plan), Registration Statements Number 33-48509 and
333-00381 on Form S-8 (1990 Employee Stock Option Plan), Registration Statement
Number 333-00379 on Form S-8 (1990 Long-Term Incentive Plan), Registration
Statement Number 33-48510 on Form S-8 (1992 Employee Stock Purchase Plan),
Registration Statement Number 33-68854 on Form S-8 (option held by former
director) and Registration Statement Number 333-00383 on Form S-8 (1995 Employee
Stock Option Plan) of our report dated March 3, 1996 with respect to the
consolidated financial statements incorporated herein by reference in this
Annual Report (Form 10-K) of National Computer Systems, Inc.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
March 20, 1996
EXHIBIT 24
POWER OF ATTORNEY
FORM 10-K FOR YEAR ENDED JANUARY 31, 1996
The undersigned directors and officers of NATIONAL COMPUTER SYSTEMS, INC.
hereby constitute and appoint J. W. Fenton, Jr., their true and lawful
attorney-in-fact and agent, for each of them and in their name, place and stead,
in any and all capacities (including without limitation, as Director and/or
principal Executive Officer, principal Financial Officer, principal Accounting
Officer or any other officer of the Company), to sign its Annual Report on Form
10-K for the year ended January 31, 1996, which is to be filed with the
Securities and Exchange Commission, with all exhibits thereto, and any and all
documents in connection therewith, hereby granting unto said attorney-in-fact
and agent full power and authority to do and perform any and all acts and things
requisite and necessary to be done, and hereby ratifying and confirming all that
said attorney-in-fact and agent may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands this 4th
day of March, 1996.
/s/ RUSSELL A. GULLOTTI /s/ STEPHEN G. SHANK
- ---------------------------------------- -------------------------------------
Russell A. Gullotti Stephen G. Shank
/s/ DAVID P. CAMPBELL /s/ JOHN E. STEURI
- ---------------------------------------- -------------------------------------
David P. Campbell John E. Steuri
/s/ DAVID C. COX /s/ JEFFREY E. STIEFLER
- --------------------------------------- -------------------------------------
David C. Cox Jeffrey E. Stiefler
/s/ JEAN B. KEFFELER /S/ JOHN W. VESSEY
- ---------------------------------------- --------------------------------------
Jean B. Keffeler John W. Vessey
/s/ CHARLES W. OSWALD /s/ JEFFREY W. TAYLOR
- ---------------------------------------- --------------------------------------
Charles W. Oswald Jeffrey W. Taylor
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES, FOR
THE FISCAL YEAR ENDED JANUARY 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> JAN-31-1996
<CASH> 5,174
<SECURITIES> 0
<RECEIVABLES> 79,677
<ALLOWANCES> 0
<INVENTORY> 18,740
<CURRENT-ASSETS> 114,821
<PP&E> 167,034
<DEPRECIATION> (87,836)
<TOTAL-ASSETS> 235,260
<CURRENT-LIABILITIES> 74,058
<BONDS> 24,535
0
0
<COMMON> 461
<OTHER-SE> 127,737
<TOTAL-LIABILITY-AND-EQUITY> 235,260
<SALES> 296,136
<TOTAL-REVENUES> 358,976
<CGS> 180,392
<TOTAL-COSTS> 222,260
<OTHER-EXPENSES> 96,979
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,311
<INCOME-PRETAX> 37,009
<INCOME-TAX> 14,750
<INCOME-CONTINUING> 22,259
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,259
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.42
</TABLE>
EXHIBIT 99
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
National Computer Systems, Inc. (the "Company") desires to take advantage of the
new "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 and is filing this Exhibit to its Annual Report on Form 10-K in order to do
so. When used in this Annual Report on Form 10-K and in future filings by the
Company with the Securities and Exchange Commission, in the Company's annual
report, quarterly reports, press releases and in oral statements made with the
approval of an authorized executive officer, the words or phases `will likely
result', `look for', `may result', `will continue', `is anticipated', `expect',
`project' or similar expressions are intended to identify `forward-looking
statements' within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. The Company cautions readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. In addition, the Company cautions readers that the following
important factors, among others, could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from any forward-looking statements made by, or on behalf of,
the Company:
Difficulties or delays in the development, production, testing and
marketing of the Company's products, including, but not limited to, a
failure to ship new products and technologies when anticipated, (e.g.,
school administrative software products such as MicroCIMS-TM-,
financial systems software such as the NCS Desktop and other offerings,
and new data collections services and systems such as NCS Accra-TM-);
Occurrences affecting the slope or speed of the life cycle curve for
many of the Company's existing products, or affecting the Company's
ability to reduce product and other costs, and to increase
productivity;
Difficulties in, and cost of, obtaining raw materials, supplies,
electronic components and any other items needed for the production of
the Company's scanning devices, scannable forms, and other products;
and capacity constraints limiting the amounts of orders for these items
causing effects on the Company's ability to ship its products;
The costs and other effects of legal and administrative cases and
proceedings; claims of customers, both current and former; settlements
and investigations; and changes in those items; developments or
assertions by or against the Company relating to intellectual property
rights and licenses; adoption of new, or changes in, accounting
policies and practices and the application of such policies and
practices;
The amount, and rate of growth in, the Company's selling, general and
administrative expenses; and the impact of unusual items resulting from
the Company's ongoing evaluation of its business strategies, asset
valuations and organizational structures;
The effects of, and changes in, trade, monetary and fiscal policies,
laws and regulations, other activities of government agencies,
particularly the U.S. Department of Education and local taxing
authorities which fund education, and similar organizations; changes in
social and economic conditions, such as trade restrictions or
prohibitions, inflation and monetary fluctuations, import and other
charges or taxes; the ability or inability of the Company to obtain, or
hedge against, foreign currency, foreign exchange rates and
fluctuations in those rates; unstable governments and legal systems,
and intergovernmental disputes.
The Company does NOT undertake and specifically declines any obligations to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
EXHIBIT 4.4
SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated
as of July 22, 1994 (this "Amendment"), by and among NATIONAL COMPUTER SYSTEMS,
INC., a Minnesota corporation (the "Company"), the BANKS signatories hereto
(each a "Bank" and, collectively, the "Banks") and FIRST BANK NATIONAL
ASSOCIATION, a national banking association, as administrative agent for the
Banks (in such capacity, the "Agent").
WITNESSETH:
WHEREAS, the Company, the Banks and the Agent entered into an Amended
and Restated Credit Agreement dated as of July 31, 1991, as amended by a First
Amendment to Amended and Restated Credit Agreement dated as of January 25, 1994
(as so amended, the "Credit Agreement"); and
WHEREAS, the Company and the Banks desire to amend the Credit
Agreement in certain respects.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged by the parties hereto, it is agreed as follows:
1. Defined Terms. All terms capitalized and used in this Amendment
without being defined shall have the meanings set forth in the Credit Agreement,
as amended hereby.
2. Restatement of Original Aggregate Commitment Amount. At the
Company's request, the Banks hereby agree that the full original Aggregate
Commitment Amount of $40,000,000 shall be reinstated as of the effective date
hereof, with each Bank assuming its original Pro Rata Share of such Aggregate
Commitment Amount. The reinstatement set forth above is limited to the express
terms thereof, and nothing herein shall be deemed a consent by the Banks to any
subsequent reinstatement of any portion of the Aggregate Commitment Amount
following a reduction thereof pursuant to Section 2.3 of the Credit Agreement,
or any right on the part of the Company to have any such portion of the
Aggregate Commitment Amount so reinstated.
3. Conditions to Effectiveness of This Amendment. This Amendment shall
become effective when the Agent shall have received this Amendment, duly
executed and delivered by the Company and the Banks, and the following
conditions are satisfied:
(a) the following documents each in form and substance satisfactory to
the Agent and its counsel, shall have been delivered to the Agent:
(i) copies of the resolutions of the Board of Directors of
the Company authorizing the execution, delivery and performance of
this Amendment and any other instrument or document hereunder and the
other matters contemplated hereby, certified by the Secretary or an
Assistant Secretary of the Company;
(ii) copies of certificates signed by the Secretary or an
Assistant Secretary of the Company as to the incumbency and specimen
signature of each Person authorized to execute and delivered this
Amendment and any other instrument or agreement hereunder;
(iii) copies of certificates of the Secretary, an Assistant
Secretary or authorized representative of the Company certifying that
there have been no changes to the Articles of Incorporation or bylaws
of the Company since the date of the most recent certified copy
thereof delivered to the Agent; and
(iv)such other documents, instruments, opinions and approvals
as the Banks may reasonably request.
(b) The Company agrees to pay the reasonable fees and expenses,
including reasonable attorneys' fees, incurred by the Agent in connection with
this Amendment.
4. Affirmations. The parties hereto acknowledge and confirm that, the
Credit Agreement as hereby amended remains in full force and effect in
accordance with its terms, and (ii) the Company acknowledges and confirms that
it will continue to comply with the covenants set out in the Credit Agreement,
as amended hereby, and that its representations and warranties set out in the
Credit Agreement, as amended hereby, are true and correct as of the date of this
Amendment, except to the extent that such representations and warranties relate
to an earlier date, in which case they were true and correct as of such earlier
date.
5. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be original; but such counterparts shall
together constitute but one and the same instrument, with the same effect as if
the signatures hereto were on the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by the respective officers thereunto duly authorized as of the date
first above written.
NATIONAL COMPUTER SYSTEMS, INC.
By: /s/ Charles W. Oswald
Name: Charles W. Oswald
Its: Chairman, President and Chief
Executive Officer
By: /s/ J.W. Fenton, Jr.
Name: J.W. Fenton, Jr.
Its: Secretary-Treasurer
FIRST BANK NATIONAL ASSOCIATION,
in its individual capacity and as Agent
By: /s/ Joel C. Kozlak
Its: Vice President
NORWEST BANK MINNESOTA
NATIONAL ASSOCIATION
By: /s/ Mary D. Falck
Its: Vice President
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ Armund J. Schoen, Jr.
Its: Vice President
<PAGE>
ASSIGNMENT AGREEMENT
This Agreement (the "Agreement") is entered into as of the 1st
day of June, 1995 by and among First Bank National Association, a national
banking association ("First"), Norwest Bank Minnesota, National Association, a
national banking association ("Norwest"), The First National Bank of Chicago, a
national banking association ("First Chicago"), and National Computer Systems,
Inc., a Minnesota corporation ("NCS").
The parties have entered into an Amended and Restated Credit
Agreement dated as of July 31, 1991, as amended by amendments dated January 25,
1994 and July 22, 1994, setting forth the terms on which the Banks, as defined
therein, have extended a $40,000,000 line of credit to NCS (together with all
amendments, modifications and restatements thereof, the "Credit Agreement").
The parties have agreed that First shall resign its capacity
as Agent under the Credit Agreement and that Norwest shall be appointed as Agent
under the Credit Agreement.
In connection with the transfer of the agency under the Credit
Agreement, First shall assign $4,000,000 of its $16,000,000 commitment under the
Credit Agreement to Norwest.
ACCORDINGLY, in consideration of the mutual covenants
contained in the Credit Agreement and herein, the parties hereby agree as
follows:
1. Definitions. Unless otherwise defined herein, terms used
herein have the meanings provided in the Credit Agreement. In addition, the
following term has the meaning set forth below:
"Adjustment Date" means June 1, 1995.
2. Agency. Pursuant to Section 8.7 of the Credit Agreement,
First hereby resigns its capacity as Agent under the Credit Agreement, and
First, Norwest and First Chicago hereby appoint Norwest as the successor Agent
thereunder. The Company hereby consents to the appointment of Norwest as Agent
under the Credit Agreement, and Norwest hereby accepts such appointment. Each
reference in the Credit Agreement to the "Agent" shall hereafter be deemed to be
a reference to Norwest acting in its capacity as Agent thereunder.
Notwithstanding any provision of the Credit Agreement or the Notes, all payments
under the Credit Agreement and the notes from and after the date hereof shall be
made to Norwest at its main office in Minneapolis, Minnesota, or at such other
place as the Agent may from time to time direct.
3. Assignment of Loan.
(a) First hereby assigns to Norwest, and Norwest hereby
purchases from First, one quarter (25%) of First's interests as a Bank
under the Credit Agreement, including $4,000,000 of First's Commitment
Amount and one-quarter (25%) of the outstanding Loans owing to First.
(b) First represents and warrants to Norwest that the
aggregate principal amount of the outstanding Loans owing to First on
the Adjustment Date is $1,640,000. Except as set forth in the preceding
sentence, the assignment effected hereby is made without representation
or warranty.
(c) From and after the Adjustment Date:
(i) Norwest's Commitment Amount shall be $16,000,000, and
Norwest shall be deemed to have assumed First's
Commitment to the extent of the increase in its
Commitment Amount in accordance herewith;
(ii) First Commitment Amount shall be $12,000,000, and
First shall be relieved of all of its obligations
under the Credit Agreement to the extent of the
reduction in its Commitment Amount in accordance
herewith;
(iii) Norwest's Pro Rata Share shall be 40%, and First's
Pro Rata Share shall be 30%.
(d) As of the Adjustment Date, after giving effect to the
assignment effected hereby, the principal amount of Loans owing to
Norwest shall be $1,640,000, and the principal amount of Loans owing to
First shall be $1,230,000.
(e) On or before the Adjustment Date, the Borrower shall issue
and deliver to the Agent its promissory notes in the forms of Exhibits
A and B to this Agreement (the "Replacement Notes"). The Agent shall
deliver the Replacement Notes to the applicable Banks promptly upon
receipt by the Agent.
(f) On the Adjustment Date, Norwest shall wire-transfer
$410,000 to First in full payment for the interest in the Loans and the
Credit Agreement assigned by First hereunder. Such payment shall be
directed as follows:
First Bank National Association
ABA Routing No. 09100022
for credit to:
Commercial Loan Service Center
Account No. 30000472160600
Reference: National Computer Systems, Inc.
(g) Each of the parties hereto hereby consents to the
assignment described in this section 3.
4. Miscellaneous. NCS and First shall execute and deliver such
further documents and do such further acts and things as Norwest may reasonably
request in order to effect the purpose of this Agreement. This Agreement may be
executed in any number of counterparts by the parties hereto, each of which
counterparts shall be deemed to be an original and all of which shall together
constitute one and the same agreement. This Agreement shall be governed by the
internal law of the State of Minnesota.
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the Adjustment Date set forth above.
FIRST BANK NATIONAL NORWEST BANK MINNESOTA,
ASSOCIATION, as a Bank as the NATIONAL ASSOCIATION, as a
resigning Agent Bank and as the successor Agent
By /s/ Joel C. Kozlak By /s/ Mary D. Falck
Its Vice President Its Vice President
THE FIRST NATIONAL BANK OF NATIONAL COMPUTER SYSTEMS, INC.
CHICAGO
By /s/ Amy L. Golz By /s/ Russell A. Gullotti
Its Assistant Vice President Its Chairman and CEO
By /s/ J.W. Fenton, Jr.
Its Secretary-Treasurer
<PAGE>
EXHIBIT A
NOTE
$12,000,000 June 1, 1995
For Value Received, National Computer Systems, Inc. (the "Company")
hereby promises to pay to the order of First Bank National Association (the
"Bank") the principal amount of each Loan made by the Bank to the Company under
the Credit Agreement (as defined below) in accordance with the provisions of
Section 2 of the Credit Agreement; provided that on or before the Termination
Date (as defined in the Credit Agreement), the Company shall pay in full the
unpaid principal amount of all Loans made by the Bank to the Company under the
Credit Agreement.
The Company also promises to pay interest on the unpaid principal
amount hereof from the date hereof until paid at the rates and at the times
determined in accordance with the provisions of the Amended and Restated Credit
Agreement (together with all amendments, modifications and restatements thereof,
the "Credit Agreement") dates as of July 31, 1991, among the Company, the banks
which are from time to time parties thereto, and Norwest Bank Minnesota,
National Association, as agent for such banks (in such capacity, the "Agent")
and as the successor to First Bank National Association in its capacity as agent
thereunder.
Both the principal hereof and the interest hereon are payable in lawful
money of the United States of America at the main office of Norwest Bank
Minnesota, National Association in Minneapolis, Minnesota, or at such other
place as the Agent may from time to time designate, in Immediately Available
Funds.
The Company waives presentment, demand, protest and notice of any kind.
No failure to exercise, and no delay in exercising, any rights hereunder on the
part of the holder hereof shall operate as a waiver of such rights.
In the event an action is commenced to enforce payment of this Note,
the Company shall pay all costs of collection and enforcement of this Note,
including, without limitation, reasonable attorneys' fees.
This Note is one of the "Notes" referred to in, and is entitled to the
benefits of, the Credit Agreement, which, among other things, contains
provisions for acceleration of the maturity hereof upon the happening of certain
stated events and for prepayment, from time to time, of amounts outstanding
under this Note upon certain stated terms and conditions.
This Note is issued in partial substitution for, but not in payment of,
the Company's Note, dated November 12, 1991, payable to the order of the Bank in
the face principal amount of $16,000,000.
Unless otherwise defined herein, capitalized terms used herein are used
with the defined meanings given in the credit Agreement. This Note shall be
governed by and construed in accordance with the internal laws of the State of
Minnesota, with respect to principles of conflict of laws.
NATIONAL COMPUTER SYSTEMS, INC.
By
Its
By
Its
<PAGE>
EXHIBIT B
NOTE
$16,000,000 June 1, 1995
For Value Received, National Computer Systems, Inc. (the "Company")
hereby promises to pay to the order of Norwest Bank Minnesota National
Association (the "Bank") the principal amount of each Loan made by the Bank to
the Company under the Credit Agreement (as defined below) in accordance with the
provisions of Section 2 of the Credit Agreement; provided that on or before the
Termination Date (as defined in the Credit Agreement), the Company shall pay in
full the unpaid principal amount of all Loans made by the Bank to the Company
under the Credit Agreement.
The Company also promises to pay interest on the unpaid principal
amount hereof from the date hereof until paid at the rates and at the times
determined in accordance with the provisions of the Amended and Restated Credit
Agreement (together with all amendments, modifications and restatements thereof,
the "Credit Agreement") dates as of July 31, 1991, among the Company, the banks
which are from time to time parties thereto, and Norwest Bank Minnesota,
National Association, as agent for such banks (in such capacity, the "Agent")
and as the successor to First Bank National Association in its capacity as agent
thereunder.
Both the principal hereof and the interest hereon are payable in lawful
money of the United States of America at the main office of Norwest Bank
Minnesota, National Association in Minneapolis, Minnesota, or at such other
place as the Agent may from time to time designate, in Immediately Available
Funds.
The Company waives presentment, demand, protest and notice of any kind.
No failure to exercise, and no delay in exercising, any rights hereunder on the
part of the holder hereof shall operate as a waiver of such rights.
In the event an action is commenced to enforce payment of this Note,
the Company shall pay all costs of collection and enforcement of this Note,
including, without limitation, reasonable attorneys' fees.
This Note is one of the "Notes" referred to in, and is entitled to the
benefits of, the Credit Agreement, which, among other things, contains
provisions for acceleration of the maturity hereof upon the happening of certain
stated events and for prepayment, from time to time, of amounts outstanding
under this Note upon certain stated terms and conditions.
This Note is issued (i) in partial substitution for, but not in payment
of, the Company's Note, dated November 12, 1991, payable to the order of the
Bank in the face principal amount of $12,000,000, and (ii) in partial
substitution for, but not in payment of, the Company's Note, dated November 12,
1991, payable to the order of First Bank National Association in the face
principal amount of $16,000,000.
Unless otherwise defined herein, capitalized terms used herein are used
with the defined meanings given in the credit Agreement. This Note shall be
governed by and construed in accordance with the internal laws of the State of
Minnesota, with respect to principles of conflict of laws.
NATIONAL COMPUTER SYSTEMS, INC.
By
Its
By
Its
<PAGE>
THIRD AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, DATED
AS OF JULY 24, 1995 (this "Amendment"), by and among NATIONAL COMPUTER SYSTEMS,
INC., a Minnesota corporation (the "Company"), the BANKS signatories hereto
(each a "Bank" and collectively the "Banks") and NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION, a national banking association, as administrative agent
for the Banks (in such capacity, the "Agent").
WITNESSETH:
WHEREAS, the Company, the Banks and the Agent are parties to an
Amended and Restated Credit Agreement dated as of July 31, 1991, as amended by a
First Amendment to Amended and Restated Credit Agreement dated as of January 25,
1994 and a Second Amendment to Amended and Restated Credit Agreement dated as of
July 22, 1994 (as so amended, the "Credit Agreement"); and
WHEREAS, the Company and the Banks desire to amend the Credit
Agreement in certain respects.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged by the parties hereto, it is agreed as follows:
1. Defined Terms. All terms capitalized and used in this Amendment
without being defined shall have the meaning set forth in the Credit Agreement,
as amended hereby.
2. Amendments to Credit Agreement. The Credit Agreement is hereby
amended as follows:
(a) The definition of "LIBO Rate" in Section 1.2 is deleted in its
entirety and the following definition is substituted in its place:
"LIBO Rate" shall mean the rate per annum determined by the
Agent, on the basis of the Reuters Screen LIBO page, to be the rate at
which U.S. Dollar deposits in immediately available funds are offered
to the Agent as of 11:00 a.m. (London time) two Eurodollar Business
Days prior to the beginning of the proposed Interest Period for funds
to be made available on the first day of such Interest Period in an
amount approximately equal to the amount of the LIBOR Loan to be made
by the Agent (in its individual capacity) and maturing at the end of
such Interest Period."
(b) The definition of "Termination Date" in Section 1.2 is amended by
changing the date set forth therein from "August 1, 1996" to "August 1, 1998".
(c) Section 2.2(a) is amended by deleting clause (ii) thereof and
substituting in its place the following new clause:
"(ii) the aggregate principal amount of the Loans to be made on such
date, which shall be in the minimum amount of (A) $100,000 or an
integral multiple of $100,000 in the case of Reference Loans, and (B)
$500,000 or an integral multiple of $100,000 in excess of $500,000 in
the case of CD Loans and LIBOR Loans."
(d) Section 2.7 is amended by deleting the second and third sentences
thereof and substituting in their place the following two new sentences:
"Interest on the Reference Loans shall be payable monthly, in arrears,
on the first Business Day of the month following the month such
interest has accrued and on the Termination Date. Interest on the Fixed
Rate Loans shall be payable in arrears on the last day of the
applicable Interest Period or such other date as such Loans are paid in
full; provided, however, that accrued interest on CD Loans or Libor
Loans with an Interest Period exceeding approximately 30 days or one
month, respectively, shall also be payable during such Interest Period
on the first Business Day of the month following the month such
interest has accrued."
(e) Section 2.8 is amended by deleting clause (iv) thereof and
substituting in its place the following new clause:
"(iv) no Reference Loan, Federal Funds Loan or CD Loan may be converted
into a LIBOR Loan, no Reference Loan, Federal Funds Loan or LIBOR Loan
may be converted into a CD Loan and no LIBOR Loan or CD Loan may be
refunded if a Default or Event of Default has occurred and is
continuing on the proposed date of conversion or refunding."
(f) The following new Section 5.13 is added at the end of Section 5:
"5.13. Sales and Transfers of Assets. The Company
shall promptly notify the Agent of any proposed sale or transfer of
assets of the Company or any Subsidiary if such assets shall have an
aggregate book value or fair market value in excess of $15,000,000, or
are proposed to be sold or transferred for a purchase price in excess
of $15,000,000, whether in a single transaction or a series of
transactions. Before such proposed sale or transfer is completed, the
Company shall provide to the Agent such reasonably detailed information
which shows, to the best of its knowledge, that such transaction or
transactions, when completed, will not cause a Default or an Event of
Default and shall provide the Agent with any additional information
reasonably requested by the Agent or the Banks."
3. Conditions to Effectiveness of This Amendment. This Amendment shall
become effective when the Agent shall have received this Amendment, duly
executed and delivered by the Company and the Banks, and the following
conditions are satisfied:
(a) The following documents, each in form and substance satisfactory
to the Agent and its counsel, shall have been delivered to the Agent:
(i) copies of the resolutions of the Board of Directors of the
Company authorizing the execution, delivery and performance of this
Amendment and any other instrument or document hereunder and the other
matters contemplated hereby, certified by the Secretary or an Assistant
Secretary of the Company;
(ii) copies of the certificates signed by the Secretary
or an Assistant Secretary of the Company as to the incumbency and
specimen signature of each Person authorized to execute and deliver
this Amendment and any other instrument or agreement hereunder;
(iii) copies of certificates of the Secretary, an Assistant
Secretary or authorized representative of the Company certifying that
there have been no changes to the Articles of Incorporation or bylaws
of the Company since the date of the most recent certified copy thereof
delivered to the Agent or the predecessor Agent; and
(iv) such other documents, instruments, opinions and approvals
as the Banks may reasonably request.
(b) The Company shall have paid the reasonable fees and expenses,
including reasonable attorneys' fees, incurred by the Agent in connection with
this Amendment.
4. Affirmations. The parties hereto acknowledge and confirm that the
Credit Agreement as hereby amended remains in full force and effect in
accordance with its terms, and the Company acknowledges and confirms that it
will continue to comply with the covenants set out in the Credit Agreement, as
amended hereby, and that its representations and warranties set out in the
Credit Agreement, as amended hereby, are true and correct as of the date of this
Amendment, except to the extent that such representations and warranties relate
to an earlier date, in which case they were true and correct as of such earlier
date.
5. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument, with the same effect as if
the signatures hereto were on the same instrument.
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[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by the respective officers thereunto duly authorized as
of the date first above written.
NATIONAL COMPUTER SYSTEMS, INC.
By: /s/ Russell A. Gullotti
Its: Chairman, President and Chief Exec.
Officer
By: /s/ J.W. Fenton, Jr.
Its: Secretary - Treasurer
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
in its individual capacity and as Agent
By: /s/ Mary D. Falck
Its: Vice President
FIRST BANK NATIONAL ASSOCIATION
By: /s/ Joel C. Kozlak
Its: Vice President
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ Amy L. Golz
Its: Assistant Vice President
