-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EtV1fi6hrBVOAmJXveCSo6Y9B7/4DS3sURrj6z0F/vCeZtLPyLH2KYU2nRn66CKk RA2nFee3OzVUGZaHqWgd5w== 0000069999-96-000016.txt : 19960322 0000069999-96-000016.hdr.sgml : 19960322 ACCESSION NUMBER: 0000069999-96-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19960321 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL COMPUTER SYSTEMS INC CENTRAL INDEX KEY: 0000069999 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 410850527 STATE OF INCORPORATION: MN FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-03713 FILM NUMBER: 96536743 BUSINESS ADDRESS: STREET 1: 11000 PRAIRIE LAKES DR CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 BUSINESS PHONE: 6128293000 MAIL ADDRESS: STREET 1: P O BOX 9365 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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 ------------------------ 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 ------------------------ 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) ------------------------ 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. 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. 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. 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. 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. 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. 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) 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. EX-10.14 2 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. EX-11 3 EXHIBIT 11
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) 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 ======= ======= ======= ======= =======
EX-13 4 EXHIBIT 13
FIVE YEAR FINANCIAL DATA (Unaudited) (Dollars in thousands, except per share amounts) YEAR ENDED JANUARY 31, ------------------------------------------------------------ 1996 1995(1) 1994(2) 1993 1992 -------- -------- -------- -------- -------- 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
(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. 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
QUARTERLY RESULTS OF OPERATIONS (In thousands, except per share amounts) THREE MONTHS ENDED ----------------------------------------------- April 30 July 31 October 31 January 31 -------- ------- ---------- ---------- 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
(1) Includes a $5,189 after-tax special charge ($ .34 per share). 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.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) JANUARY 31, -------------------- 1996 1995 -------- -------- 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 ======== ========
LIABILITIES AND STOCKHOLERS' EQUITY 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 ======== ========
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED JANUARY 31, ------------------------------ 1996 1995 1994 -------- -------- -------- 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
See Notes to Consolidated Financial Statements.
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 ------ ------ ------- -------- ------------ ----------- 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 ====== ===== ====== ========= ========= =========
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED JANUARY 31, ------------------------------ 1996 1995 1994 -------- -------- -------- 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 ======= ======= =======
See Notes to Consolidated Financial Statements. 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. A summary of software activity is as follows:
Internally Accumulated Acquired Developed Amortization Total - --------------------------------------------------------------------------- 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 ============================================================================
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. 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) - ----------------------------------------------------------------- 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. 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.
DATA COLLECTION FINANCIAL SERVICES AND SYSTEMS SYSTEMS TOTAL ---------------------------- -------------------------- ----------------------------- 1996 1995 1994 1996 1995 1994 1996 1995 1994 -------- -------- -------- -------- ------- ------- -------- -------- -------- 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 ======== ======== ========
(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. 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 EX-21 5 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. EX-23 6 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 EX-24 7 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 EX-27 8
5 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. 1,000 YEAR JAN-31-1996 JAN-31-1996 5,174 0 79,677 0 18,740 114,821 167,034 (87,836) 235,260 74,058 24,535 0 0 461 127,737 235,260 296,136 358,976 180,392 222,260 96,979 0 3,311 37,009 14,750 22,259 0 0 0 22,259 1.42 1.42
EX-99 9 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. EX-4.4 10 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 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 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 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 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. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] [SIGNATURE PAGE FOLLOWS] 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 -----END PRIVACY-ENHANCED MESSAGE-----