-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, EaxX7tdNu3GQoCVJCWMMykZPBd5By1PRHjI5B+FsJHH2Lj7dQUPv4v2y1k1r+EzX HzQ5TXZ2Fo5Poviuulry/A== 0000912057-94-001490.txt : 19940429 0000912057-94-001490.hdr.sgml : 19940429 ACCESSION NUMBER: 0000912057-94-001490 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19940131 FILED AS OF DATE: 19940428 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL COMPUTER SYSTEMS INC CENTRAL INDEX KEY: 0000069999 STANDARD INDUSTRIAL CLASSIFICATION: 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: 94524757 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 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1994 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 (Zip Code) executive offices) 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 31, 1994. Common Shares, $.03 par value -- $147,344,000 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 31, 1994. Common Shares, $.03 par value -- 15,014,617 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the year ended January 31, 1994 are incorporated by reference into Parts I, II and IV. Portions of the definitive proxy statement dated April 20, 1994 are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS National Computer Systems, Inc. ("NCS" or the "Company") provides integrated information management products and services, designed to collect and interpret data, to four primary markets: EDUCATION -- NCS develops and markets systems and services which include optical scanning systems, related proprietary software, hardware and software maintenance, scannable documents, proprietary student and financial administrative systems, assessment test processing and other data gathering and processing services. BUSINESS -- The Company develops and markets optical scanning hardware, image-based data collection systems, related work stations, proprietary software and forms for applications within the commercial marketplace. Using forms-based data entry scanning technology, customers are able to automate labor-intensive data collection and information processes with significantly increased efficiency and accuracy. ASSESSMENTS -- The Company publishes and markets psychological assessment instruments, scoring systems and scanning products to clinical professionals in the behavioral and mental health markets. Organizational survey and assessment testing and services and vocational counseling tests are marketed to the corporate human resources market. FINANCIAL SERVICES -- NCS develops and markets computer-based systems with proprietary software and services for automating asset management in the financial services industry, primarily banking. Applications for NCS' products and services within the education market include administrative applications such as attendance, scheduling, grade reporting and registration/enrollment; library and inventory management; financial management and payroll; and testing applications including test generation, teacher-created tests and norm-referenced and criterion-referenced testing. NCS also provides scanning and computer processing services for the large volume, complex processing needs of major test publishers, state education agencies, the federal government and local school districts. In the business marketplace, the Company's products and services are directed to sales/marketing applications including sales/order entry and customer satisfaction surveys; operations applications including quality measurement and inventory analysis; administrative applications including billing, collections and payroll; health care administration including the gathering of individual patient information; human resource applications including applicant tracking, benefits enrollment and employee evaluation; aptitude, vocational interest and organizational assessment testing; and surveys or ballots. The Company provides the financial services marketplace with computer-based systems including proprietary software products and services for automated asset management systems for trust asset management in personal trust, corporate trust, private banking and employee benefits accounting. NCS operates two business segments: (1) Optical Scanning Products, Services and Related Software and (2) Financial Systems. See Note 10 -- Business Segment Data of Notes to Consolidated Financial Statements included in the Annual Report to Stockholders for the year ended January 31, 1994, incorporated herein by reference. The Company's headquarters are located at 11000 Prairie Lakes Drive, Eden Prairie, Minnesota 55344, telephone 612/829-3000. 1 OPTICAL SCANNING 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. Such applications include multiple choice tests; employee and benefits administration; quality measurement and customer satisfaction surveys; customer order entry; market research and field sales reporting; and personality assessment or psychological diagnostic information. The Company's major lines of scanning hardware include scanners marketed as Sentry-R- and OpScan-R- products. Recently, new low-cost scanners were introduced to expand the Company's line of scanning products. These lines of scanners provide a wide range of capabilities to meet the needs of all customers. The optical 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, optional features offered include bar code reading capability, a transport printer to print alphanumeric messages on scanned documents, optional read formats and upgraded computer capability options. NCS markets the Precept-R- image-based data collection system which represents 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 APPLICATION SOFTWARE NCS offers a number of standard software programs for use with NCS systems. 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 accountability in school administration and in the measurement of student progress. The Company offers standard integrated software systems in lieu of custom design and programming work performed by the customers. This has resulted in the introduction and marketing of new and enhanced software products. The MicroCIMS-TM- product, an advanced student management software system, is in the initial distribution stage following product release. 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 data base 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 healthcare administration. SCANNABLE FORMS The design, manufacture and sale of scannable forms, including multiple-page booklets, represents an important contribution to the Company's revenues and operating income. 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 business setting. 2 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. TransOptic-R- paper is used to permit Sentry scanners to read both sides of the form at the same time. Special inks are used in printing all forms. MEASUREMENT AND DATA SERVICES NCS markets scanning and computer processing services to major test publishers, state education agencies, the federal government and local school districts. 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 the federal government such as processing student financial aid information for the U.S. Department of Education. ASSESSMENT AND SURVEY SERVICES 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 industries 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 record keeping for bank trust departments and other organizations with trust powers. Applications include personal trust, corporate trust and employee benefits. These systems utilize proprietary software developed by NCS and licensed for periods of five years or more 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 personal trust departments of smaller banks the Company offers outsourcing and computer processing services 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. The ULTRUST-R- system, an advanced trust accounting system for money center, super-regional and large international banks, was discontinued during the fourth quarter of fiscal 1993. See Note 2 -- Restructuring Charge of Notes to Consolidated Financial Statements included in the Annual Report to Stockholders for the year ended January 31, 1994, incorporated herein by reference. 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. 3 MARKETING NCS markets its information systems hardware and software and scanning and computer processing services directly through sales employees located throughout the United States, who direct their efforts to either the education or business marketplace. 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 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. 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 field 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. Substantially all customer leased or purchased equipment manufactured by NCS is maintained by Company personnel. 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, 1994, 1993 and 1992, the Company spent, including certain capitalized software development costs, approximately $22.0 million, $17.3 million and $17.7 million, respectively, principally on 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 either 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 information management industry is intense. Optical scanning is only one of numerous data input methods. The Company has attempted to develop education, business and assessment 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 in various localities throughout the United States. Principal competitive factors in the scannable forms printing industry are product quality, service and price. 4 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 license rights 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. "Trans-Optic", "Sentry", "Trustware", "ULTRUST", "BondMaster", "CertMaster", "OpScan" and "Precept" appearing herein are registered trademarks of National Computer Systems, Inc. EMPLOYEES As of February 28, 1994, 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 28, 1994 are listed below along with their business experience during the past five years.
NAME AGE POSITION - ----------------------- --- --------------------------------------- Charles W. Oswald 66 Chairman of the Board and Chief Executive Officer David C. Malmberg 51 Vice Chairman of the Board Robert C. Bowen 52 Senior Vice President Norman A. Cocke 48 Senior Vice President and Chief Financial Officer John W. Fenton, Jr. 53 Secretary-Treasurer Donald J. Gibson 63 Senior Vice President Richard L. Poss 48 Vice President David W. Smith 49 Vice President Jeffrey W. Taylor 40 Vice President and Corporate Controller Adrienne T. Tietz 47 Vice President Arthur E. Weisberg 68 Senior Staff Officer
Mr. Oswald has been Chairman of the Board and Chief Executive Officer of NCS for more than five years. Mr. Malmberg has been Vice Chairman of the Board since August, 1992 and prior to that was President and Chief Operating Officer of NCS for more than five years. 5 Mr. Bowen has been a Senior Vice President of NCS since November 1989 and a Vice President of NCS since August 1989. From June 1988 to July 1989 he was President of Science Research Associates, Inc. (publishing/communications). Mr. Cocke has been Senior Vice President and Chief Financial Officer of NCS since March 1992. From March 1987 to November 1991 he was Vice President, Finance and Administration of the United States Group of AT&T Global Information Solutions (formerly NCR Corporation) (information processing systems). Mr. Fenton has been Secretary-Treasurer of NCS for more than five years. Mr. Gibson has been a Senior Vice President of NCS since November 1989 and prior to that was a Vice President for more than five years. Mr. Poss has been 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 Corporate Controller of NCS for more than five years. Ms. Tietz has been a Vice President of NCS since November 1989. From March 1989 to October 1989 she was Director of Strategic Planning for NCS. Mr. Weisberg has been a Senior Staff Officer of NCS since May 1989 and prior to that was a lawyer with the law firm of Dorsey & Whitney 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. 6 ITEM 2. PROPERTIES The Company's principal facilities are as follows:
SQUARE LOCATION FOOTAGE GENERAL PURPOSE - ---------------------------- --------- ------------------------------------------------------------------------ Eden Prairie, MN 76,000 Executive general offices; education and international general offices, sales and marketing Mesa, AZ 22,000 Education software product development and support Iowa City, IA (1) 168,000 Assessment test processing and data processing services 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 forms general offices Edina, MN (1) 101,000 Business systems and services general offices, sales and marketing; scanner software development Owatonna, MN (1) 128,000 Forms design and production Columbia, PA (1) 121,000 Forms design and production Rotherham, South Yorkshire, 34,000 Forms design and production 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 year ended January 31, 1994 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, 1994 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, 1994 is incorporated herein by reference. 7 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, 1994 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, 1994, are incorporated herein by reference: Consolidated Balance Sheets -- January 31, 1994 and 1993 Consolidated Statements of Income -- Years ended January 31, 1994, 1993 and 1992 Consolidated Statements of Changes in Stockholders' Equity --Years ended January 31, 1994, 1993 and 1992 Consolidated Statements of Cash Flows -- Years ended January 31, 1994, 1993 and 1992 Notes to Consolidated Financial Statements -- January 31, 1994 Report of Independent Auditors dated March 16, 1994 "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 dated April 20, 1994 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 dated April 20, 1994 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 dated April 20, 1994 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in footnote 7 to the "Summary Compensation Table" included under the caption "Executive Compensation" in the Company's definitive proxy statement dated April 20, 1994 is incorporated herein by reference. The information contained in the third and sixth paragraphs which follow the footnotes to the table set forth under the caption "Election of Directors" in the Company's definitive proxy statement dated April 20, 1994 is incorporated herein by reference. 8 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 of the registrant to its stockholders for the year ended January 31, 1994, are incorporated by reference in Item 8: Consolidated Balance Sheets -- January 31, 1994 and 1993 Consolidated Statements of Income -- Years ended January 31, 1994, 1993 and 1992 Consolidated Statements of Changes in Stockholders' Equity -- Years ended January 31, 1994, 1993 and 1992 Consolidated Statements of Cash Flows -- Years ended January 31, 1994, 1993 and 1992 Notes to Consolidated Financial Statements -- January 31, 1994 Report of Independent Auditors dated March 16, 1994. (2) The following consolidated financial statement schedules of National Computer Systems, Inc. and subsidiaries are included in Item 14(d): Schedule II -- Amounts receivable from related parties and underwriters, promoters, and employees other than related parties Schedule V -- Property, plant and equipment Schedule VI -- Accumulated depreciation, depletion and amortization of property, plant and equipment All other 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 - --------- 3A -- 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. 3B -- By-Laws, as amended, are incorporated herein by reference to Exhibit 3(b) to the NCS Form 10-Q for the quarter ended July 31, 1985. 4A -- 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. 4B -- Rights Agreement dated as of June 23, 1987 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 4.1 to the NCS Form 8-K -- reporting date: June 23, 1987. 4C -- Amended and Restated Credit Agreement dated as of July 31, 1991 between NCS and First Bank National Association, as agent, and as further amended by the First Amendment thereto dated as of January 25, 1994. *10A -- 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. *10B -- 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.
9
EXHIBIT - --------- *10C -- 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. *10D -- 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. *10E -- NCS 1990 Employee Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 10F to the Company's Form 10-K for the fiscal year ended January 31, 1993. *10F -- NCS 1990 Long-Term Incentive Plan is incorporated herein by reference to Exhibit 10H to the Company's Form 10-K for the fiscal year ended January 31, 1990. *10G -- 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. *10H -- 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. *10I -- NCS Corporate Management Incentive Plan -- 1993 is incorporated herein by reference to Exhibit 10J to the Company's Form 10-K for the fiscal year ended January 31, 1993. *10J -- NCS Corporate Management Incentive Plan -- 1994. *10K -- Agreement dated December 3, 1993 between NCS and Philip W. Arneson and Delores A. Arneson. 11 -- Statement Re: Computation of Earnings Per Share. 13 -- Portions of NCS' Annual Report to Stockholders for the fiscal year ended January 31, 1994. 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, 1994 on behalf of other officers and directors. - ------------------------ * Indicates management contract or compensatory plan or arrangement required to be filed as an exhibit to this report.
(b) Reports on Form 8-K In a report filed on Form 8-K dated January 5, 1994, the Company reported a fourth quarter fiscal 1993 charge for product discontinuance and restructuring. See Note 2 -- Restructuring Charge of Notes to Consolidated Financial Statements included in the Annual Report to Stockholders for the year ended January 31, 1994, incorporated herein by reference. (c) Exhibits The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this report. 10 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: April 26, 1994 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 CHARLES W. OSWALD* Chairman of the Board of ------------------------------ Directors Charles W. Oswald (principal executive officer) By DAVID C. MALMBERG* ------------------------------ Director David C. Malmberg By DR. DAVID P. CAMPBELL* ------------------------------ Director Dr. David P. Campbell By WILLIAM W. CHORSKE* ------------------------------ Director William W. Chorske By DAVID C. COX* ------------------------------ Director David C. Cox By JEAN B. KEFFELER* ------------------------------ Director Jean B. Keffeler 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 11 By ROBERT F. ZICARELLI* ------------------------------ Director Robert F. Zicarelli By NORMAN A. COCKE* Senior Vice President and ------------------------------ Chief Financial Officer Norman A. Cocke (principal financial officer) By JEFFREY W. TAYLOR* Vice President and ------------------------------ Controller (principal Jeffrey W. Taylor 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: April 26, 1994 (ATTORNEY-IN-FACT) 12 FORM 10-K NATIONAL COMPUTER SYSTEMS, INC. FOR THE FISCAL YEAR ENDED JANUARY 31, 1994 INDEX TO CONSOLIDATED FINANCIAL SCHEDULES
SCHEDULE NUMBER - --------- II -- Amounts receivable from related parties and underwriters, promoters, and employees other than related parties V -- Property, plant and equipment VI -- Accumulated depreciation, depletion and amortization of property, plant and equipment
All other schedules have been omitted because they are not required or are inapplicable. 13 SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES NATIONAL COMPUTER SYSTEMS, INC.
COL. D COL. E COL. B DEDUCTIONS BALANCE -------------------- BALANCE AT END OF AT AMOUNTS PERIOD COL. A BEGINNING COL. C AMOUNTS WRITTEN ---------------------- NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED OFF CURRENT NOT CURRENT - ------------------------------- --------- --------- --------- --------- --------- ----------- Year Ended January 31, 1994: Philip W. Arneson (A)........ $ 373,646 $ 121,354 $ -0- $ 295,000 $ 200,000 $ -0- Year Ended January 31, 1993: Philip W. Arneson............ $ 173,646 $ 200,000 $ -0- $ -0- $ 373,646 $ -0- Year Ended January 31, 1992: Philip W. Arneson............ $ -0- $ 225,000 $ 51,354 $ -0- $ 173,646 $ -0- - ------------------------ (A) Mr. Arneson ceased being a Senior Vice President and President, NCS Financial on August 4, 1993. On June 29, 1992, Mr. Arneson filed a petition under Chapter 7 of the Federal Bankruptcy Code and, on October 14, 1992, a notice of discharge was issued. On October 7, 1992, Mr. Arneson entered into an agreement with NCS reaffirming his obligation to repay the loans obtained from NCS. The loans have been restructured and collection of a portion of the loans has been permanently forgiven. All after-tax amounts from gains realized on the sale of NCS Common Stock plus certain other contractual amounts from NCS, if payable, will be applied to the loan balance or forgiven amounts. The loans bear an interest rate of 1% over the prime rate and are secured by mortgages on Mr. Arneson's home and an assignment of life insurance proceeds.
14 SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT NATIONAL COMPUTER SYSTEMS, INC.
COL. B COL. E BALANCE OTHER COL. F AT COL. C CHANGES-ADD BALANCE COL. A BEGINNING ADDITIONS COL. D (DEDUCT)- AT END OF CLASSIFICATION OF PERIOD AT COST RETIREMENTS DESCRIBE (A) PERIOD - ----------------------------------- --------- --------- -------------- ------------- --------- (IN THOUSANDS) Year Ended January 31, 1994: Land............................. $ 3,270 $ 1,026 $ -- $ 2 $ 4,298 Building and improvements........ 28,165 4,901 209 99 32,956 Machinery and equipment.......... 82,443 14,832 7,878 (447 ) 88,950 Equipment held for lease......... 9,012 1,176 1,950 (33 ) 8,205 Rotable service parts............ 12,667 1,917 4,663 1,164 11,085 --------- --------- -------------- ------------- --------- $ 135,557 $ 23,852 $ 14,700 $ 785 $ 145,494 --------- --------- -------------- ------------- --------- --------- --------- -------------- ------------- --------- Year Ended January 31, 1993: Land............................. $ 3,565 $ -- $ 295 $ -- $ 3,270 Building and improvements........ 28,513 482 889 59 28,165 Machinery and equipment.......... 72,755 11,643 3,481 1,526 82,443 Equipment held for lease......... 9,869 769 1,777 151 9,012 Rotable service parts............ 15,218 1,490 4,917 876 12,667 --------- --------- -------------- ------------- --------- $ 129,920 $ 14,384 $ 11,359 $ 2,612 $ 135,557 --------- --------- -------------- ------------- --------- --------- --------- -------------- ------------- --------- Year Ended January 31, 1992: Land............................. $ 3,551 $ -- $ -- $ 14 $ 3,565 Building and improvements........ 29,127 1,216 399 (1,431 ) 28,513 Machinery and equipment.......... 70,809 6,666 6,873 2,153 72,755 Equipment held for lease......... 11,035 1,422 2,581 (7 ) 9,869 Rotable service parts............ 19,461 2,153 6,396 -- 15,218 --------- --------- -------------- ------------- --------- $ 133,983 $ 11,457 $ 16,249 $ 729 $ 129,920 --------- --------- -------------- ------------- --------- --------- --------- -------------- ------------- --------- - ------------------------ (A) Includes equipment and rotable service parts obtained through acquisition, translation adjustment of property, plant and equipment held by NCS foreign subsidiaries and transfers from other balance sheet captions.
15 SCHEDULE VI -- ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT NATIONAL COMPUTER SYSTEMS, INC.
COL. C COL. E COL. B ADDITIONS OTHER COL. F BALANCE AT CHARGED TO CHANGES-ADD BALANCE AT COL. A BEGINNING COSTS AND COL. D (DEDUCT)- END OF DESCRIPTION OF PERIOD EXPENSES (A) RETIREMENTS DESCRIBE (B) PERIOD - --------------------------------- ----------- ------------- ----------- ------------- ----------- Year Ended January 31, 1994: Building and improvements...... $ 6,736 $ 1,113 $ 118 $ -- $ 7,731 Machinery and equipment........ 54,484 9,655 7,676 (20) 56,443 Equipment held for lease....... 7,141 1,040 1,265 (7) 6,909 Rotable service parts.......... 5,063 4,481 4,629 (10) 4,905 ----------- ------------- ----------- ------------- ----------- $ 73,424 $ 16,289 $ 13,688 $ (37) $ 75,988 ----------- ------------- ----------- ------------- ----------- ----------- ------------- ----------- ------------- ----------- Year Ended January 31, 1993: Building and improvements...... $ 6,625 $ 967 $ 856 $ -- $ 6,736 Machinery and equipment........ 46,028 10,190 3,306 1,572 54,484 Equipment held for lease....... 6,927 1,020 950 144 7,141 Rotable service parts.......... 3,431 6,249 4,917 300 5,063 ----------- ------------- ----------- ------------- ----------- $ 63,011 $ 18,426 $ 10,029 $ 2,016 $ 73,424 ----------- ------------- ----------- ------------- ----------- ----------- ------------- ----------- ------------- ----------- Year Ended January 31, 1992: Building and improvements...... $ 5,897 $ 1,002 $ 274 $ -- $ 6,625 Machinery and equipment........ 42,169 9,232 5,373 -- 46,028 Equipment held for lease....... 7,516 1,395 1,984 -- 6,927 Rotable service parts.......... 3,598 6,229 6,396 -- 3,431 ----------- ------------- ----------- ------------- ----------- $ 59,180 $ 17,858 $ 14,027 $ -0- $ 63,011 ----------- ------------- ----------- ------------- ----------- ----------- ------------- ----------- ------------- ----------- - ------------------------ (A) Depreciation has been computed based on estimated useful lives of the assets as follows:
YEARS --------- Plant and equipment: Building and improvements........................ 5 to 40 Machinery and equipment.......................... 3 to 20 Equipment held for lease......................... 2 to 5 Rotable service parts............................ 1 to 7 (B) Includes translation adjustment of accumulated depreciation of property, plant and equipment held by NCS foreign subsidiaries and transfers from other balance sheet captions.
16 FORM 10-K NATIONAL COMPUTER SYSTEMS, INC. FOR THE FISCAL YEAR ENDED JANUARY 31, 1994 EXHIBIT INDEX
EXHIBIT - --------- 4C Amended and Restated Credit Agreement dated as of July 31, 1991 between NCS and First Bank National Association, as agent, and as further amended by the First Amendment dated as of January 25, 1994. 10J NCS Corporate Management Incentive Plan -- 1994. 10K Agreement dated December 3, 1993 between NCS and Philip W. Arneson and Delores A. Arneson. 11 Statement Re: Computation of Earnings per Share. 13 Portions of the Annual Report to Stockholders for the fiscal year ended January 31, 1994. 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, 1994 on behalf of other officers and directors.
17 EX-4 2 EXHIBIT 4C EXHIBIT 4C FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS FIRST AMENDMENT, dated as of January 25, 1994, 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 as administrative agent for the Banks (in such capacity, the "Agent"). WHEREAS, the Company, the Banks and the Agent entered into an Amended and Restated Credit Agreement dated as of July 31, 1991 (the "Credit Agreement"); and WHEREAS, the parties desire to amend the Credit Agreement as hereinafter provided. NOW, THEREFORE, in consideration of the premises, the sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. CERTAIN DEFINED TERMS. Each capitalized term used herein without being defined but which is defined in the Credit Agreement shall have the respective meaning ascribed to such term in the Credit Agreement. 2. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is hereby amended as follows: (a) Section 1.2 is amended by deleting "August 1, 1994" from the definition of "Termination Date" and inserting in lieu thereof: "August 1, 1996". (b) Section 2.17(a)(ii) is amended by inserting immediately after "Amount" and prior to the final period thereof: "; PROVIDED, that from and after the Determination Date, as defined below, through the Termination Date, the Commitment Fee shall be .25 of 1% per annum (computed as described above); (for purposes of this Section, the -- "Determination Date" shall be that Business Day (if any) after January 20, 1994 when the Agent shall have determined, based upon evidence in form and substance satisfactory to the Agent, that (A) no Default or Event of Default exists and (B) the Consolidated Net Income of the Company for its four immediately preceding fiscal quarters shall have been more than $0)". (c) Section 6.2 is amended in its entirety to provide: "Permit, at the end of (a) any fiscal quarter ending prior to January 1, 1994, its Consolidated Tangible Net Worth to be less than the sum of $90,000,000 plus 50% of the sum of Consolidated Net Income for each fiscal quarter after January 31, 1991 through the date of determination; and (b) any fiscal quarter ending after January 1, 1994, its Consolidated Tangible Net Worth to be less than $90,000,000 plus 50% of the sum of Consolidated Net Income for each fiscal quarter after January 31, 1993 through the date of determination." 3. AFFIRMATIONS. The parties hereto acknowledge and confirm that (a) the Credit Agreement, as hereby amended, is and remains in full force and effect in accordance with its terms and (b) the three Notes executed by the Company in connection with the Credit Agreement and dated November 12, 1991 remain the Notes under the Credit Agreement, as hereby amended, and are in full force and effect in accordance with their terms. 4. 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. 18 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Amended and Restated Credit Agreement to be executed as of the day and year first above written. NATIONAL COMPUTER SYSTEMS, INC. By: _____/S/_CHARLES W. OSWALD________ Name: ________Charles W. Oswald_______ Title: ________Chairman and CEO_______ By: ______/S/_J.W. FENTON, JR.________ Name: ________J. W. Fenton, Jr._______ Title: _____Secretary -- Treasurer____ FIRST BANK NATIONAL ASSOCIATION, in its individual capacity and as Agent By: _______/S/_JOEL C. KOZLAK_________ Title: _________Vice President________ NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By: _________/S/_MARY FALCK___________ Title: _________Vice President________ THE FIRST NATIONAL BANK OF CHICAGO By: ___/S/_ARMUND J. SCHOEN, JR.______ Title: _________Vice President________ 19 AMENDED AND RESTATED CREDIT AGREEMENT AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement"), dated as of July 31, 1991, among NATIONAL COMPUTER SYSTEMS, INC. (the "Company"), a Minnesota corporation, the BANKS signatories hereto (each a "Bank" and, collectively, the "Banks") and FIRST BANK NATIONAL ASSOCIATION as administrative agent for the Banks (in such capacity, the "Agent"). Recitals: A. The Company, the Banks and the Agent entered into a Credit Agreement dated as of March 29, 1989 (the "Original Credit Agreement"). B. The Original Credit Agreement was amended by a First Amendment thereto (the "First Amendment"), dated as of December 31, 1990. C. The Company, the Banks and the Agent wish to amend and restate the Original Credit Agreement as amended by the First Amendment on the terms and subject to the conditions of this Agreement. NOW THEREFORE, in consideration of the mutual premises herein set forth, the parties hereto agree as follows: SECTION 1. DEFINITIONS AND ACCOUNTING TERMS. 1.1. ACCOUNTING TERMS AND DETERMINATIONS. All accounting terms not otherwise specifically defined herein shall be construed, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with Generally Accepted Accounting Principles. When used herein, the term "financial statements" shall include the notes and schedules thereto. 1.2. OTHER DEFINED TERMS. Unless the context otherwise requires, as used herein and in the exhibits hereto, the following terms shall have the following respective meanings (such terms to be equally applicable to both the singular and plural forms of the terms defined): "ACCOUNTANTS" shall mean Ernst & Young or such other firm of independent certified public accountants of recognized national standing selected by the Company. "AFFILIATE" shall mean, with respect to any Person, a Person (other than, in the case of the Company, a Consolidated Subsidiary) which directly or indirectly controls, is controlled by, or is under common control with, such other Person. For purposes of this definition, "control" (including with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "AGGREGATE COMMITMENT AMOUNT" shall mean the sum of all the Commitments, $40,000,000, or as reduced pursuant to Section 2.3. "AGGREGATE OUTSTANDINGS" shall mean at the time of any determination, the aggregate unpaid principal balance of all Loans. "APPLICABLE CD RATE" shall mean with respect to any CD Loan for the applicable Interest Period, the Reserve Adjusted CD Rate plus the applicable CD Spread. "APPLICABLE FEDERAL FUNDS RATE" shall mean on any day, the Federal Funds Rate plus the applicable Federal Funds Spread. "APPLICABLE LIBO RATE" shall mean with respect to any LIBOR Loan for the applicable Interest Period, the Reserve Adjusted LIBO Rate plus the applicable LIBOR Spread. 20 "APPLICABLE REFERENCE RATE" shall mean (a) on any day during the period August 1, 1991 through July 31, 1992, the Reference Rate on such Day; and (b) on any day after July 31, 1992, the Reference Rate MINUS the applicable Reference Spread and Leverage Adjustment (if any), but in no case shall such Applicable Reference Rate be less than the Minimum Rate. "ASSESSMENT RATE" shall mean for the Interest Period for a CD Loan, the rate per annum (expressed as a percentage) determined by the Agent to be the sum of the net annual assessment rate in effect on the first day of such Interest Period for a CD Loan for calculating the assessment payable by the Agent to the Federal Deposit Insurance Corporation or any successor ("FDIC") for FDIC's insuring time deposits at offices of the Agent in the United States and all other rates assessed in connection with the making of a CD Loan. "AVERAGE UNUSED COMMITMENT AMOUNT" shall mean for any period for which Commitment Fees are being determined, an amount determined by dividing (a) the sum of the Unused Commitment Amounts for the days in said period by (b) the number of days in said period. "BORROWING DATE" shall mean a Business Day or Eurodollar Business Day on which the making of a Loan occurs or is proposed to occur. "BORROWING REQUEST" shall mean a written request signed by the Company in the form of Exhibit E hereto. "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or any other day on which commercial banks in Minneapolis, Minnesota or Chicago, Illinois are authorized or required by law or other governmental action to close. "CASH AVAILABLE FOR DEBT SERVICE" shall mean for any period of determination, (a) the sum of (i) Consolidated Income Before Taxes and before the effect of any extraordinary items for said period, and (ii) Fixed Interest Charges for said period, less (b) income taxes provided for during said period, except income taxes provided for with respect to extraordinary items, all determined for the Company and its Consolidated Subsidiaries on a consolidated basis in accordance with Generally Accepted Accounting Principles consistently applied. "CD LOANS" shall mean all Loans bearing interest at a rate based upon the Reserve Adjusted CD Rate. "CD RATE" shall mean with respect to the Banks, on any calculation date and for any Interest Period: (a) the rate per annum for negotiable certificates of deposit having a maturity comparable to the Interest Period for the related CD Loan as such rate is released by the Federal Reserve Board as reported on page 120 (or other applicable page) of Telerate Data Service under the heading "Certs of Deposit"; but if by 2:00 p.m. (Minneapolis time) no such rate is reported, then (b) the rate per annum (rounded upward, if necessary, to the next higher 1/100th of 1%) determined by the Agent (which determination shall be conclusive in the absence of manifest error) to be the average of the secondary market bid rates at approximately 2:30 p.m. (Minneapolis time) for the purchase of certificates of deposit issued by the Agent in the dollar amount comparable to the requested CD Loan and having a maturity comparable to the Interest Period for such CD Loan; and PROVIDED, FURTHER, that if the Agent does not at the time of determination issue certificates of deposit with the same maturity as the related CD Loan, then certificates of deposit with the maturities closest to the maturity of such CD Loan shall be used to determine the CD Rate for such CD Loan. "CD RESERVE PERCENTAGE" shall mean the percentage, expressed as a decimal, which is in effect on the first day of the relevant Interest Period for a CD Loan, as specified by the Federal Reserve Board (or any successor) for determining the applicable reserve requirement (including, without limitation, any basic, supplemental or emergency reserves) for the Agent in respect of new non-personal time deposits in Dollars having a maturity comparable to the requested CD Loan and in an amount equal to or exceeding $100,000. 21 "CD SPREAD" shall mean with respect to CD Loans: (a) for the period August 1, 1991 through July 31, 1992, 0.625%; and (b) for the period August 1, 1992 through the Termination Date, one of the following: (i) if the Leverage Ratio is less than .35:1, then 0.75%, (ii) if the Leverage Ratio is greater than or equal to .35:1 but less than .50:1, then 1.05% or (iii) if the Leverage Ratio is greater than or equal to .50:1, then 1.35%. "CLC" shall mean CLC Financial Services, Inc., a Minnesota corporation. "CLC GUARANTIES" shall mean as of the date of determination, the total principal amount of all guaranties of indebtedness of CLC issued by the Company or any Consolidated Subsidiary less the amount by which the Present Value of Firm Term Revenues as of the date of determination exceeds the total principal amount of all indebtedness of CLC for money borrowed (other than the principal amount of indebtedness of CLC guaranteed by the Company or any Consolidated Subsidiary) as of the date of determination. "CODE" shall mean the Internal Revenue Code of 1986, as amended, as from time to time in effect. "COMMITMENTS" shall mean the Banks' undertakings to make Loans to the Company, subject to the terms and conditions hereof, in the Aggregate Commitment Amount. "COMMITMENT AMOUNT" shall mean in respect of any Bank, the amount set forth next to the name of such Bank on the signature pages hereof, or as such amount may be changed by assignment or as decreased pursuant to Section 2.3 hereof. "COMMITMENT FEE" shall have the meaning set forth in Section 2.17 hereof. "COMPLIANCE CERTIFICATE" shall mean the certificate of the Company in the form of Exhibit F hereto required to be delivered under this Agreement. "CONSOLIDATED DEBT SERVICE" shall mean, for any period, the sum of (a) Fixed Interest Charges for said period, (b) dividends paid during said period and (c) Mandatory Principal Payments, all determined for the Company and its Consolidated Subsidiaries on a consolidated basis in accordance with Generally Accepted Accounting Principles consistently applied. "CONSOLIDATED INCOME BEFORE TAXES" shall mean, for any period, income before income taxes of the Company and its Consolidated Subsidiaries determined in accordance with Generally Accepted Accounting Principles consistently applied. "CONSOLIDATED INTEREST BEARING DEBT" shall mean with respect to the Company and its Consolidated Subsidiaries, all items of debt for money borrowed and all obligations under capital leases, all determined on a consolidated basis in accordance with Generally Accepted Accounting Principles consistently applied, but excluding the ESOP Debt. "CONSOLIDATED NET INCOME" shall mean, for any period, the balance remaining after deducting from the gross revenues of the Company and its Consolidated Subsidiaries all expenses and other proper charges (including taxes on income), all determined on a consolidated basis in accordance with Generally Accepted Accounting Principles consistently applied. "CONSOLIDATED SUBSIDIARY" shall mean, as of the date of any determination, any Subsidiary of the Company included in the financial statements of the Company and its Subsidiaries prepared on a consolidated basis in accordance with Generally Accepted Accounting Principles. "CONSOLIDATED TANGIBLE NET WORTH" shall mean, as of the date of any determination, (i) the sum of the amounts set forth on the consolidated balance sheet of the Company and its Consolidated Subsidiaries as (a) the par or stated value of all outstanding capital stock and (b) capital surplus, retained earnings and premium on capital stock LESS (ii) the net book value of Goodwill of the Company and its Consolidated Subsidiaries; PROVIDED, THAT any effect that the ESOP Debt has on capital stock, capital surplus or retained earnings of the Company shall be disregarded in determining Consolidated Tangible Net Worth. 22 "CONTINGENT LIABILITIES" shall mean with respect to the Company and its Consolidated Subsidiaries and as of the date of determination, the sum of the CLC Guaranties and the total amount of all letters of credit, guarantees of indebtedness of any other Person (other than CLC) and other agreements to pay the obligations of any other Person (other than CLC). "DEFAULT" shall mean an event, act or occurrence which, with the giving of notice or the lapse of time (or both), would become an Event of Default. "DISCLOSURE SCHEDULE" shall mean the schedule which is attached hereto as Exhibit B. "DOLLARS" or "$" shall mean lawful currency of the United States of America. "EFFECTIVE DATE" shall mean the date of this Agreement. "EFFECTIVE PERIOD" shall mean the period from the Effective Date to the earlier of the day on which the Commitments terminate or the Business Day preceding the Termination Date. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, as from time to time in effect. "ESOP" shall mean the National Computer Systems, Inc. Employee Stock Ownership Plan, dated as of February 1, 1989, an employee stock ownership plan created by the Company under Section 4975(e)(7) of the Code. "ESOP DEBT" shall mean the debt obligation of the ESOP dated May 4, 1989 in the original principal amount of $9,999,631.25, the proceeds of which were used by the ESOP to purchase shares of the Company. "EURODOLLAR BUSINESS DAY" shall mean a Business Day upon which commercial banks in London, England are open for domestic and international business. "EVENT OF DEFAULT" shall mean any event set forth in Section 7 hereof. "EXCESS PAYMENT" shall mean any payment or prepayment received by a Bank, whether voluntary or involuntary, through the exercise of the right of setoff or otherwise, in excess of its Pro Rata Share. "FEDERAL FUNDS LOAN" shall mean all Loans bearing interest at a rate based upon the Federal Funds Rate. "FEDERAL FUNDS RATE" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with member banks of the Federal Reserve System arranged by Federal funds brokers as published by the Federal Reserve Bank of New York for such day or, if such day is not a Business Day, for the next preceding Business Day (or, if such rate is not so published for any day, the average rate charged to the Bank on such day on such transactions as determined by the Agent). "FEDERAL FUNDS SPREAD" shall mean with respect to Federal Funds Loans, 0.75%. "FEDERAL RESERVE BOARD" shall mean the Board of Governors of the Federal Reserve System or any governmental authority succeeding to its functions. "FINANCIAL STATEMENTS" shall have the meaning set forth in Section 3.7 hereof. "FIXED INTEREST CHARGES" shall mean for any period of determination, the total interest expenses on Consolidated Interest Bearing Debt, except interest expenses on the ESOP Debt. "FIXED RATE LOAN" shall mean a CD Loan or a LIBOR Loan. "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" shall mean generally accepted accounting principles as in effect from time to time, including, without limitation, applicable statements, bulletins and interpretations by the Financial Accounting Standards Board and applicable bulletins, opinions and interpretations issued by the American Institute of Certified Public Accountants or its committees. 23 "GOODWILL" shall mean the excess of the cost of an acquired enterprise over the book value of the acquired net assets, all determined in accordance with Generally Accepted Accounting Principles consistently applied. "GOVERNMENTAL BODY" shall mean any court or any federal, state or municipal department, commission, board, bureau, agency, public authority or instrumentality. "GOVERNMENTAL YIELD" shall mean as of the date of determination, the yield on U.S. Treasury Securities (as published by the Federal Reserve Bank of New York) having a maturity closest to the last day of the Interest Period applicable to the Fixed Rate Loan being prepaid, if determining the Prepayment Penalty, and having a maturity of one year, if determining the Present Value of Firm Term Revenues. "IMMEDIATELY AVAILABLE FUNDS" shall mean funds with good value on the day and in the city in which payment is received. "INTEREST PERIOD" shall mean, with respect to any Fixed Rate Loan, a period from the Borrowing Date with respect to such Loan (or the date of the expiration of the then current Interest Period with respect to such Loan) to (i) with respect to a LIBOR Loan, a date 1, 2, 3, or 6 months thereafter as selected by the Company in its Borrowing Request for such Loan (but only to the extent Dollar deposits of such duration are generally available to each of the Banks in the inter-bank Eurodollar market) and (ii) with respect to a CD Loan, a date 1, 2, 3 or 6 months thereafter as selected by the Company in its Borrowing Request for such Loan, subject in all cases to the following: (a) (i)if any Interest Period with respect to a CD Loan would otherwise end on a day which is not a Business Day, that Interest Period shall be extended to the next succeeding Business Day; and (ii) if any Interest Period with respect to a LIBOR Loan would otherwise end on a day which is not a Eurodollar Business Day, that Interest Period shall be extended to the next succeeding Eurodollar Business Day, unless the result of such extension would be to extend such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Eurodollar Business Day; (b) subject to the provisions of Section 2.10 hereof, a Borrowing Request selecting a particular Interest Period once received by the Agent is irrevocable and binding on the Company; (c) no Interest Period shall extend beyond the Termination Date; (d) each Interest Period with respect to a CD Loan may vary in regard to the length of period, in accordance with the practices and customs of banking institutions in connection with certificates of deposit purchased in New York, New York by dealers in certificates of deposit as from time to time in effect; (e) each Interest Period with respect to a LIBOR Loan may vary in regard to the length of period, in accordance with the customs and practices of the international inter-bank markets; and (f) the first Interest Period for any Fixed Rate Loan shall commence on the date of such Loan, and each succeeding Interest Period (if any) for such Loan shall commence on the last day of the preceding Interest Period. "INVOKED EVENT OF DEFAULT" shall mean an Event of Default which either (a) has resulted in the automatic termination of the Commitments and the automatic acceleration of the maturity of the Notes pursuant to Section 7.1 hereof or (b) on account of which the Agent, at the direction of the Majority Banks, has declared the Commitments terminated and has declared the obligations of the Company under the Notes immediately due and payable. "LEVERAGE RATIO" shall mean the ratio (calculated pursuant to Section 6.4 below) for the most recently ended fiscal quarter of the Company. For purposes of determining the applicable CD Spread, LIBOR Spread, Minimum Rate or Reference Spread and Leverage Adjustment, the Agent shall apply the ratio for the most recently ended fiscal quarter of the Company using the data supplied by the 24 Company pursuant to Section 5.6(a) hereof from the day received by the Agent, but if not received within the time period required under Section 5.6(a), then from the day 45 days after the end of the most recently ended fiscal quarter. "LIBO RATE" shall mean with respect to the Agent, the rate per annum (rounded upward, if necessary, to the nearest whole 1/100th of 1%) equal to the rate per annum at which the Agent is offered Dollar deposits in the inter-bank Eurodollar market at approximately 11:00 a.m. (London time) two Eurodollar Business Days prior to the first day of the proposed Interest Period for a LIBOR Loan, for delivery on the first day of such Interest Period in the dollar amount comparable to the amount of, and having a maturity comparable to, the LIBOR Loan to be made by the Banks. "LIBOR LOANS" shall mean all Loans bearing interest at a rate based upon Reserve Adjusted LIBO Rate. "LIBOR RESERVE PERCENTAGE" shall mean the percentage, expressed as a decimal, which is in effect on the first day of the relevant Interest Period for a LIBOR Loan, as specified by the Federal Reserve Board (or any successor) for determining the applicable reserve requirement (including, without limitation, any basic, supplemental or emergency reserves) for the Agent in respect of Eurocurrency liabilities in an amount and with a maturity corresponding to such LIBOR Loan. "LIBOR SPREAD" shall mean with respect to LIBOR Loans: (a) for the period August 1, 1991 through July 31, 1992, 0.625%; and (b) for the period August 1, 1992 through the Termination Date, one of the following: (i) if the Leverage Ratio is less than .35:1, then 0.75%, (ii) if the Leverage Ratio is greater than or equal to .35:1 but less than .50:1, then 1.05% or (iii) if the Leverage Ratio is greater than or equal to .50:1, then 1.35%. "LIEN" shall mean any mortgage, pledge, lien, security interest, conditional sale or other title retention agreement or other similar encumbrance. "LOANS" shall have the meaning set forth in Section 2.1. "MAJORITY BANKS" shall mean Banks having Commitment Amounts equal to at least 60.00% of the Aggregate Commitment Amount. "MANDATORY PRINCIPAL PAYMENTS" shall mean, for any period, the sum of all mandatory principal payments made on indebtedness for borrowed money of the Company or any Consolidated Subsidiary (excluding principal payments made under this Agreement and principal payments made on the ESOP Debt). "MATERIAL SUBSIDIARY" shall mean any Subsidiary which owns, as of the date of the Company's most recent available quarterly consolidated balance sheet, at least 10% of the total of all assets of the Company and its Consolidated Subsidiaries. "MEASUREMENT PERIOD" shall mean, with respect to the determination of Consolidated Net Income and the ratio of Cash Available for Debt Service to Consolidated Debt Service, the fiscal quarter then ended on such determination date and the immediately preceding three fiscal quarters. "MINIMUM RATE" shall mean as calculated on any day, the CD Rate for an Interest Period of 1 month PLUS one of the following: (i) if the Leverage Ratio is less than .35:1, then 0.75%, (ii) if the Leverage Ratio is greater than or equal to .35:1 but less than .50:1, then 1.05% or (iii) if the Leverage Ratio is greater than or equal to .50:1, then 1.35%. "NOTES" shall have the meaning set forth in Section 2.4 hereof. "PBGC" shall mean the Pension Benefit Guaranty Corporation created by Section 4002(a) of ERISA, or any Governmental Body succeeding to the functions thereof. 25 "PERMITTED LIENS" shall mean: (a) Liens given by the Company or a Consolidated Subsidiary to secure the payment of the purchase price of fixed assets (all such Liens being called "Purchase Money Liens") acquired, constructed or improved by the Company or such Consolidated Subsidiary after the Effective Date, PROVIDED that: (i) such Purchase Money Liens shall have been created within nine months of the acquisition, construction or improvement of the fixed assets subject thereto, and (ii) no such Purchase Money Liens shall extend to or cover any other Property of the Company or such Consolidated Subsidiary, as the case may be, and (iii) the aggregate amount of the indebtedness secured by any such Purchase Money Liens in respect of any such Property (whether or not the Company or such Consolidated Subsidiary assumes or otherwise becomes liable for such Indebtedness) shall not exceed 100% of the lesser of the cost or fair market value of such Property at the time of acquisition, construction or improvement thereof; (b) Liens in respect of Property acquired by the Company or a Consolidated Subsidiary which were created prior to, and are in existence on the date of, the acquisition of such Property (whether or not the Company or such Consolidated Subsidiary assumes or otherwise becomes liable for any indebtedness secured thereby) and, in the case of any Person which becomes a Consolidated Subsidiary after the Effective Date, Liens on its Property or on the outstanding shares of its capital stock created prior to, and existing on, the date such Person becomes a Consolidated Subsidiary, PROVIDED that no such Lien shall extend to or cover any other Property of the Company or such Consolidated Subsidiary, as the case may be; (c) Liens and priority claims incidental to the conduct of business or the ownership of Property and assets (including warehousemen's, attorneys' and statutory landlords' liens) and Liens, pledges or deposits in connection with workers' compensation, unemployment insurance, old age benefit or social security obligations, taxes and duties, governmental charges or levies, assessments, performance bonds, statutory obligations or other similar charges, Liens of carriers, contractors, mechanics, repairmen and materialmen, good faith deposits in connection with tenders, bids, contracts or leases to which the Company or any Consolidated Subsidiary is a party or other deposits required to be made in the ordinary course of business and not in connection with the borrowing of money; PROVIDED in each case the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate proceedings; (d) Easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Company and its Subsidiaries taken as a whole; and (e) Liens on Property or assets of the Company or a Consolidated Subsidiary existing as of the date of this Agreement and securing indebtedness of the Company or such Consolidated Subsidiary, as the case may be. "PERSON" shall mean a corporation, an association, a partnership, an organization, a business, an individual, a government or a political subdivision thereof or a governmental agency. "PLAN" shall mean (a) with respect to the Company and any Subsidiary, any plan described in Section 4021(a) of ERISA and not excluded pursuant to Section 4021(b) thereof, under which the Company or any Related Person to the Company or any Subsidiary has contributed, and (b) with respect to any other Person, any employee benefit plan or other plan established or maintained by such Person for the benefit of such Person's employees and to which Title IV of ERISA applies. 26 "PREPAYMENT PENALTY" shall mean with respect to each prepayment of a Fixed Rate Loan made prior to the last day of the Interest Period applicable thereto, the present value on the date of such prepayment (determined in accordance with generally accepted financial practice using the Government Yield as the discount factor and discounted monthly) of a hypothetical payment made on the last day of the Interest Period applicable to such Fixed Rate Loan equal to the amount, if any, by which (a) the amount of interest that would accrue (using the rate of interest applicable to such Fixed Rate Loan) on the amount prepaid between the date of such prepayment and the last day of such Interest Period exceeds (b) the amount of interest that would accrue (using the Government Yield) on the amount prepaid between the date of such prepayment and the last day of such Interest Period. "PRESENT VALUE OF FIRM TERM REVENUES" shall mean as of the date of determination, the present value (determined in accordance with generally accepted financial practice using the Government Yield as the discount factor and discounted quarterly) of finance receivables and rents to be received by CLC under notes receivable and leases with noncancellable terms. "PRO RATA SHARE" shall mean with respect to a Bank and at the time of any determination, the proportion, expressed as a percentage, which the principal amount outstanding on the Note held by it bears to the Aggregate Outstandings, and if at the time of determination the Aggregate Outstandings is zero, then the proportion, expressed as a percentage, which the Bank's Commitment Amount bears to the Aggregate Commitment Amount. "PROPERTY" shall mean all types of real, personal, tangible, intangible or mixed property. "RATE NOTICE" shall have the meaning assigned to the term in Section 2.9 hereof. "REFERENCE BANK" shall mean First Bank National Association. "REFERENCE SPREAD AND LEVERAGE ADJUSTMENT" shall mean on any day the rate per annum calculated as follows: (a) if the difference between the Reserve Adjusted CD Rate for an Interest Period of one month and the Reference Rate is less than or equal to 1.75% and the Leverage Ratio is (i) less than .35:1, then the adjustment is 0.50%, (ii) greater than or equal to .35:1 but less than .50:1, then the adjustment is 0.25% or (iii) greater than or equal to .50:1 but less than or equal to .60:1, then the adjustment is 0%; (b) if the difference between the Reserve Adjusted CD Rate for an Interest Period of one month and the Reference Rate is greater than 1.75% but less than or equal to 2.25% and the Leverage Ratio is (i) less than .35:1, then the adjustment is 0.75%, (ii) greater than or equal to .35:1 but less than .50:1, then the adjustment is 0.50% or (iii) greater than or equal to .50:1 but less than or equal to .60:1, then the adjustment is 0.25%; (c) if the difference between the Reserve Adjusted CD Rate for an Interest Period of one month and the Reference Rate is greater than 2.25% but less than or equal to 2.75% and the Leverage Ratio is (i) less than .35:1, then the adjustment is 1.00%, (ii) greater than or equal to .35:1 but less than .50:1, then the adjustment is 0.75% or (iii) greater than or equal to .50:1 but less than or equal to .60:1, then the adjustment is 0.50%; and (d) if the difference between the Reserve Adjusted CD Rate for an Interest Period of one month and the Reference Rate is greater than 2.75% and the Leverage Ratio is (i) less than .35:1, then the adjustment is 1.25%, (ii) greater than or equal to .35:1 but less than .50:1, then the adjustment is 1.00% or (iii) greater than or equal to .50:1 but less than or equal to .60:1, then the adjustment is .75%. 27 The foregoing with the Minimum Rate are summarized for convenience only in the following table:
GREATER-THAN OR EQUAL TO .35 GREATER-THAN OR EQUAL TO .50 RR-CD LESS-THAN .35 AND GREATER-THAN .5 AND LESS-THAN OR EQUAL TO .60 - ------------------------------ ------------- --------------- --------------- greater than 2.75%............ RR-1.25% RR-1.00% RR-.75% 2.26% to 2.75%................ RR-1.00% RR-.75% RR-.50% 1.76% to 2.25%................ RR-.75% RR-.50% RR-.25% less than or equal to 1.75%... RR-.50% RR-.25% RR Minimum Rate.................. CD+.75% CD+1.05% CD+1.35%
"REFERENCE LOANS" shall mean all Loans bearing interest at a rate based upon the Reference Rate. "REFERENCE RATE" shall mean, with respect to the Agent, for any day, the per annum rate of interest most recently publicly announced from time to time by the Agent as its "reference rate," which may be a rate at, above or below which the Agent lends to other Persons. Each change in any interest rate provided for herein based upon the Reference Rate resulting from a change in the Reference Rate shall take effect at the time of such change in the Reference Rate. "RELATED PERSON" shall mean, with respect to any Person, any trade or business (whether or not incorporated) which, together with such Person, is under common control as described in Section 414(c) of the Code. "REPORTABLE EVENT" shall mean a "reportable event" described in Section 4043(b) of ERISA as to which the 30 day notice period has not been waived. "RESERVE ADJUSTED CD RATE" shall mean with respect to the Agent, the rate per annum (rounded upward, if necessary, to the next higher 1/100th of 1%) calculated in accordance with the following formula: CD+ AR Reserve Adjusted CD Rate = 1-CRP
where CD = CD Rate CRP = CD Reserve Percentage AR = Assessment Rate "RESERVE ADJUSTED LIBO RATE" shall mean, with respect to the Agent, the rate per annum (rounded upward, if necessary, to the next higher 1/100th of 1%) calculated in accordance with the following formula: Reserve Adjusted LIBO Rate = LIBO RATE 1-LRP where LRP = LIBOR Reserve Percentage "SPECIAL COUNSEL" shall mean Dorsey & Whitney, special counsel to the Banks. "SUBSIDIARY" shall mean any corporation, association, partnership, joint venture or other business entity of which the Company and/or any subsidiary of the Company either (a) in respect of a corporation, owns more than 50% of the outstanding stock having ordinary voting power to elect a majority of the board of directors or similar managing body, irrespective of whether or not at the time the stock of any class or classes shall or might have voting power by reason of the happening of any contingency, or (b) in respect of an association, partnership, joint venture or other business entity, is the sole general partner or is entitled to share in more than 50% of the profits, however determined. 28 "TERMINATION DATE" shall mean August 1, 1994. "UNUSED COMMITMENT AMOUNT" shall mean at the date of any determination, the amount by which the Aggregate Commitment Amount on said date exceeds the Aggregate Outstandings on said date. "U.S. TREASURY SECURITIES" shall mean actively traded U.S. Treasury bonds, bills and notes. SECTION 2. THE REVOLVING CREDIT FACILITY. 2.1. REVOLVING CREDIT COMMITMENTS. Upon the terms and subject to the conditions hereof, each Bank severally agrees to make loans (each a "Loan" and, collectively, the "Loans") to the Company pursuant to this Section 2 on a revolving basis at any time and from time to time during the Effective Period. During the Effective Period the Company may borrow, repay and reborrow in accordance with the provisions hereof; PROVIDED, that the Aggregate Outstandings at any time shall not exceed the Aggregate Commitment Amount; and PROVIDED FURTHER, that the aggregate principal amount of all Federal Funds Loans shall not exceed $10,000,000 through July 31, 1992 (except as may be permitted pursuant to Section 2.9 hereof), and shall not exceed $0 thereafter. The principal amount of each Bank's Loan made on a Borrowing Date shall be in an amount equal to its Pro Rata Share of all such Loans. The Loans may be maintained, at the election of the Company made from time to time as permitted herein, as Reference Loans, CD Loans, Federal Funds Loans, or LIBOR Loans or any combination thereof. 2.2. BORROWING PROCEDURE. (a) The Company shall give to the Agent prior notice, in writing (by facsimile, hand delivery or by mail) in the form of a Borrowing Request, of its intention to borrow under Section 2.1 hereof. The Company shall specify in each such notice: (i) the proposed Borrowing Date, which date shall be a Business Day in the case of Reference Loans, Federal Funds Loans and CD Loans or a Eurodollar Business Day in the case of LIBOR Loans, (ii) the aggregate principal amount of the Loans to be made on such date, which shall be in the minimum amount of $500,000 or an integral multiple of $500,000 in excess thereof, (iii) whether such Loans are to be funded as CD, LIBOR, Federal Funds or Reference Loans, and (iv) in the case of Fixed Rate Loans, the initial Interest Period therefor. (b) Each notice of a request to borrow under Section 2.2(a) hereof shall be given by 11:00 a.m. (Minneapolis time) not less than two Eurodollar Business Days prior to the proposed Borrowing Date if such Loan is to be a LIBOR Loan, and on the Borrowing Date if such Loan is to be a CD Loan, a Federal Funds Loan or a Reference Loan. Subject to Section 2.10 hereof, each request to borrow made by the Company pursuant to Section 2.2(a) hereof shall be irrevocable. (c) On the date of receipt of a request to borrow by the Agent, the Agent shall give prompt notice by telephone or telecopier to each Bank of the contents thereof and its Pro Rata Share of such borrowing. Unless the Agent determines that any applicable condition specified in Article IV has not been satisfied, each Bank shall make Immediately Available Funds equal to its Pro Rata Share of the requested Loan available to the Company not later than 2:00 p.m. (Minneapolis time), on each such Borrowing Date. 2.3. DECREASING COMMITMENTS. Upon at least five days irrevocable prior written notice to the Agent (which shall advise each Bank thereof as soon as practicable thereafter), the Company may decrease the Aggregate Commitment Amount; PROVIDED, that (i) each decrease of the Aggregate Commitment Amount shall be in an amount equal to at least $1,000,000, or an integral multiple of $1,000,000 in excess thereof, and (ii) the Aggregate Outstandings, after giving effect to the decreased amount, shall not exceed the Aggregate Commitment Amount. Reductions of the Aggregate Commitment Amount shall be in each Bank's Pro Rata Share and the accompanying prepayments, if any, shall be made to each Bank in the amount of its Pro Rata Share thereof. 29 2.4 THE NOTES AND MATURITY DATE. On or before the date of the initial Loans hereunder, the Company shall duly issue and deliver to the Agent a series of promissory notes substantially in the form of Exhibits A-1, A-2 and A-3 hereto dated the day of delivery thereof, and the Company shall from time to time at the request of any of the Banks issue in the Commitment Amounts replacement promissory notes for such notes or for any replacement promissory notes (each, original or replacement, a "Note" and, collectively, the "Notes"). Each Bank's records regarding the amount of each Loan made by it hereunder and each payment thereon shall be presumed to be accurate until the contrary shall have been established. Each Note shall evidence that the principal amount of each Loan shall be due and payable no later than the Termination Date or upon acceleration under Section 7.1 hereof. 2.5 INTEREST ON LOANS; COMPUTATION. The Loans shall bear interest on the unpaid principal amount thereof as follows: (i) for Reference Loans, at a fluctuating rate per annum equal to the Applicable Reference Rate, (ii) for Federal Funds Loans, at a fluctuating rate per annum equal to the Applicable Federal Funds Rate, (iii) for CD Loans, at a fixed rate per annum equal to the Applicable CD Rate, and (iv) for LIBOR Loans, at a fixed rate per annum equal to the Applicable LIBO Rate. All interest payable on Loans shall be computed on the basis of actual days elapsed and a year of 360 days. Interest does not accrue on a Loan on the day on which the principal of such Loan is paid in full or converted or refunded pursuant to Section 2.8 hereof. 2.6. PAYMENT OF PRINCIPAL OF LOANS; VOLUNTARY PREPAYMENT. The principal amount of all Loans shall be payable in full on or before the Termination Date. The Company shall have the right to prepay the Loans, in whole at any time or in part from time to time in aggregate principal amounts equal to at least $500,000, or integral multiples thereof, with accrued interest on the amount being prepaid to the date of such prepayment; PROVIDED, HOWEVER, that the outstanding principal balance of all Federal Funds Loans shall not be less than $1,000,000 and any prepayment of a Fixed Rate Loan shall be accompanied by the applicable Prepayment Penalty. Each repayment under this Section 2.6 shall be made to the Agent in accordance with Section 2.11. 2.7 INTEREST PAYMENTS. Interest on the Federal Funds Loans shall be payable in arrears on the last Business Day of each week, on the date on which the Federal Funds Loan is paid or converted to another type of Loan and on the Termination Date. Interest on the Reference Loans shall be payable monthly, in arrears, on the last Business Day of each month 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 on the last Business Day of each month during such Interest Period. 2.8. CONVERSIONS AND REFUNDING. Subject to the terms and conditions of this Agreement, the Company shall also have the option at any time to convert any Loan or part thereof (in integral multiples of $500,000) into a Reference Loan, Federal Funds Loan, CD Loan or LIBOR Loan, or refund any CD Loan or LIBOR Loan or part thereof (in integral multiples of $500,000) as a Reference Loan, Federal Funds Loan, CD Loan or LIBOR Loan; PROVIDED, however, that (i) any conversion or refinancing of a Fixed Rate Loan before the last day of its applicable Interest Period shall be accompanied by the applicable Prepayment Penalty, (ii) any partial conversion from CD Loans or LIBOR Loans may not be made if the amount of CD Loans or LIBOR Loans having the same Interest Period, as applicable, remaining outstanding principal balance, after giving effect to such proposed conversion, would be less than $500,000, (iii) any partial conversion from Federal Funds Loans may not be made if the remaining outstanding principal balance after giving effect to such proposed conversion would be less than $1,000,000, and (iv) no Reference Loan, Federal Funds Loan or CD Loan may be converted into a LIBOR Loan and no Reference Loan, Federal Funds Loan or LIBOR Loan may be converted into a CD Loan, if a Default or Event of Default has occurred and is continuing on the proposed date of conversion. The Company shall notify the Agent (which shall advise each Bank thereof as soon as practicable thereafter) in writing of each proposed conversion or refunding, the proposed date therefor (which shall be a Business Day in the case of a CD Loan, Federal Funds Loan or a Reference Loan and a Eurodollar Business Day in the case of a LIBOR Loan) and the duration of the Interest Period 30 therefor, in the case of CD Loans or LIBOR Loans, in accordance with the notice provisions of Section 2.2. Subject to Sections 2.10 hereof, any notice given by the Company under this Section 2.8 shall be irrevocable. Subject to the terms and conditions of this Agreement, if the Company shall fail to notify the Agent in the manner provided in this Section 2.8 of a conversion or refunding of a CD Loan or LIBOR Loan prior to the last day of the then applicable Interest Period and has not repaid it and has the right to convert or refund it, such Loan shall automatically be refunded on such day as a Reference Loan of equal principal amount. 2.9. INABILITY TO DETERMINE CD RATE OR LIBO RATE. If the Agent determines (which determination shall be made in good faith and shall be conclusive and binding upon the Company in the absence of manifest error) that (i) by reason of circumstances then affecting the secondary market for the purchase of certificates of deposit or inter-bank Eurodollar markets, adequate and reasonable means do not or will not exist for ascertaining the CD Rate or the LIBO Rate applicable to any CD Loan or LIBOR Loan, (ii) secondary market bid rates are not available to any Bank for certificates of deposit of relevant amounts and for the relevant Interest Period of a CD Loan, or (iii) Dollar deposits in the relevant amounts and for the relevant Interest Period of a LIBOR Loan are not available to any Bank in the inter-bank Eurodollar markets, or any Bank determines (which determination shall be made in good faith and shall be conclusive and binding upon the Company in the absence of manifest error), and notifies the Agent of such determination, that the CD Rate or LIBO Rate will not adequately and fairly reflect the cost to such Bank of maintaining or funding its CD Loans or LIBOR Loans for such Interest Period, then the Agent shall forthwith give notice (a "Rate Notice") of such determination to the Company, whereupon, until the Agent shall notify the Company that the circumstances giving rise to such suspension no longer exist, (1) the obligations of each Bank to make CD Loans or LIBOR Loans, as appropriate, shall be suspended and (2) the Company shall repay in full, without the Prepayment Penalty, the then outstanding principal amount of the CD Loans or LIBOR Loans affected, together with accrued interest thereon, on the last day of the then current Interest Period for such CD Loans or LIBOR Loans. Unless the Company notifies the Agent to the contrary within two (2) Business Days after receiving a Rate Notice from the Agent pursuant to this Section 2.9, the Company shall, concurrently with repaying the CD Loans or LIBOR Loans pursuant to this subsection, be deemed to have requested and received, in an equal principal amount from each Bank, (A) for any date prior to and including July 31, 1992, Federal Funds Loans for an Interest Period of the lesser of 1 month or the remaining time period through July 31, 1992 and (B) for any date after July 31, 1992, Reference Loans. 2.10. ILLEGALITY. Notwithstanding any other provisions herein, if, after the Effective Date, the introduction of or any change in any applicable law, rule or regulation or in the interpretation or administration thereof by any Governmental Body charged with the interpretation or administration thereof or compliance by any Bank with any request or directive (whether or not having the force of law) of any such authority shall make it unlawful or impracticable, in the reasonable judgment of any Bank, for such Bank to make, maintain or fund CD Loans or LIBOR Loans as contemplated by this Agreement, (i) the obligations of the Banks hereunder to make CD Loans or LIBOR Loans shall forthwith be cancelled, (ii) Loans which would otherwise be made by the Banks as CD Loans or LIBOR Loans shall be made instead as Reference Loans, and (iii) the Company shall pay in full, without the Prepayment Penalty, the then outstanding principal amount of all CD Loans or LIBOR Loans made by the Banks together with accrued interest, on either (A) the last day of the then current Interest Period if such Bank may lawfully continue to fund and maintain such CD Loans or LIBOR Loans to such day or (B) immediately if such Bank may not lawfully continue to fund and maintain such CD Loans or LIBOR Loans to such day. Unless the Company notifies the Agent to the contrary within two (2) Business Days after receiving a notice from such Bank pursuant to this subsection, the Company shall, concurrently with repaying the CD Loans or LIBOR Loans pursuant to this subsection, be deemed to have requested and received Reference Loans in an equal principal amount from the Banks. If circumstances subsequently change so that such Bank is not further affected, such Bank shall so notify the Company of such change and the Banks' obligations to make and continue CD Loans or LIBOR Loans shall be reinstated upon written request of the Company. 31 2.11. PAYMENTS; REMISSION OF FUNDS. Each payment (including any prepayment and all fees due hereunder) to be made hereunder by the Company to any Bank or the Agent shall be made by either wire transfer to First Bank National Association, ABA Number 091000022, Minneapolis, Minnesota, Attn: Commercial Loan Operations; Referencing Loan Account Number 6451701000 or by charging the Company's Account Number 602-3347-898 maintained with the Agent. The Company hereby irrevocably authorizes the Agent to make such charges against its account. On the same Business Day on which the Agent has received any such payment, the Agent shall remit to each Bank entitled to receive such payment such Bank's ratable share thereof in accordance with the payment instructions set forth in Exhibit C hereto, as such instructions may from time to time be changed by written notice from a Bank to the Agent. Each remission of funds to be made by the Agent or any Bank hereunder to the Company shall be made, in the absence of instructions from the Company to the contrary, to the Company in Immediately Available Funds, in the case of the Agent, by depositing such funds in Account Number 602-3347-898 maintained by the Company with the Agent and, in the case of each Bank, by wire transfer to First Bank National Association ABA Number 091000022, Minneapolis, Minnesota, Attn: Commercial Loan Operations; Referencing Loan Account Number 6451701000 (for credit of the Company's Account Number 602-3347-898). If any payment of principal of or interest on any Note becomes due and payable on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall in such case be included in the computation on such principal amount. 2.12. INTEREST ON OVERDUE PAYMENTS. If all or any portion of the principal of any Loan shall not be paid when due, such past due amount, to the extent permitted by applicable law, shall bear interest from the due date thereof until paid at a floating rate 2% above the Applicable Reference Rate from time to time in effect. Such interest shall be payable upon demand. 2.13. MANDATORY PREPAYMENTS. If at any time Aggregate Outstandings owed all of the Banks exceed the Aggregate Commitment Amount, the Company shall promptly make a prepayment of amounts outstanding hereunder in an amount equal to such excess, which amounts shall be applied by the Agent in a manner to minimize the prepayment of any Fixed Rate Loan, but all such prepayments of Fixed Rate Loans shall be accompanied by the applicable Prepayment Penalty. 2.14. CAPITAL ADEQUACY. In the event that any Bank shall have determined that the adoption of any law, treaty, governmental (or quasi-govern-mental) rule, regulation, guideline or order regarding capital adequacy, or any change therein or in the interpretation or application thereof, or compliance by such Bank or its parent corporation with any request or directive regarding capital adequacy (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) from any central bank or governmental agency or body having jurisdiction, does or shall have the effect of reducing the rate of return (by an amount such Bank deems material) on such Bank's capital or the capital of its parent corporation as a consequence of the Commitment and/or the Loans to a level below that which such Bank or its parent corporation could have achieved but for such adoption, change or compliance, then the Company shall, within 10 days after written notice and demand from such Bank, pay to the Agent for the account of such Bank additional amounts sufficient to compensate such Bank or its parent corporation for such reduction. A certificate shall accompany such demand as to the amount of any such reduction (including calculations in reasonable detail showing how such Bank computed such reduction and a statement that such Bank has not allocated a proportionately greater amount of such reduction than is attributable to each of its other commitments to lend or extensions of credit that are affected similarly by such compliance by such Bank, whether or not such Bank allocates any portion of such reduction to such other commitments or credit extensions). Any determination by a Bank under this Section and any certificate as to the amount of such reduction given to the Company by such Bank shall be final, conclusive and binding for all purposes, absent error. 2.15. CHANGE IN LAWS. In the event that any Bank shall have determined (which determination shall be presumed to be correct until the contrary shall have been established) that a change (including a change in governmental or judicial interpretation or applicability) in any application of 32 law or governmental regulation or order (except as described in Section 2.14 above) has increased the cost to such Bank of maintaining any Loan or has reduced any amount receivable by such Bank in respect of any Loan, then, upon demand by such Bank, the Company agrees to pay to such Bank such additional amount or amounts as would compensate such Bank for such increased cost or reduction. If any such change in any applicable law or governmental regulation or order has increased the cost to such Bank of maintaining any CD Loan or LIBOR Loan, then the Company may prepay in full, without the Prepayment Penalty, the then outstanding principal amount of the Fixed Rate Loan or Loans affected by such change. 2.16. FUNDING LOSSES. The Company shall compensate any Bank, upon its written request, for all losses, expenses and liabilities (including, without limitation, any interest paid by such Bank to lenders of funds borrowed by it to make or carry CD Loans or LIBOR Loans to the extent not recovered by such Bank in connection with the re-employment of such funds) which such Bank may sustain: (a) if for any reason, other than a default by such Bank, a borrowing of a CD Rate Loan or LIBOR Loan does not occur on the date specified therefor in the Company's request or notice as to such Loan under Section 2.2 or 2.8, or (b) if, for whatever reason (including, but not limited to, acceleration of the maturity of Loans following an Event of Default), any repayment of a CD Rate Loan or LIBOR Loan, or a conversion pursuant to Section 2.10, occurs on any day other than the last day of the Interest Period applicable thereto. Such Bank's request for compensation shall set forth the basis for the amount requested and shall be final, conclusive and binding, absent error. 2.17. FEES. (a) The Company agrees to pay to the Agent for the account of each Bank a commitment fee ("Commitment Fee") for the period from the Effective Date to and including the earlier of the day on which the Banks' Commitments are terminated or the Termination Date, payable quarterly in arrears on the last Business Day of each of the Company's fiscal quarters, commencing on October 31, 1991 in an amount equal to: (i) for the period from July 31, 1991 through July 31, 1992, .25 of 1% per annum (computed on the basis of actual days in the fiscal quarter of determination and a year of 360 days) of the Average Unused Commitment Amount, and (ii) for the period from August 1, 1992 through the Termination Date, .35 of 1% per annum (computed on the basis of actual days in the fiscal quarter of determination and a year of 360 days) of the Average Unused Commitment Amount. (b) The Company agrees to pay to the Agent an Agent's fee of $5,000 per annum, in advance. The fee shall be paid no later than the day the Company delivers the Notes to the Agent pursuant to Section 4.1(a) hereof, July 31, 1992, and each subsequent July 31 that is more than one day prior to the Termination Date. (c) The Company agrees to reimburse the Agent for all of its out-of-pocket expenses (including, without limitation, all telephone, telecopier, telex and copying charges) incurred in connection with the making and administering of the Loans and incurred in its capacity as Agent. The Company shall make such reimbursement within ten Business Days of the Company's receipt from the Agent of a statement therefor. 2.18. NATURE OF EACH BANK'S OBLIGATIONS. The failure, refusal or inability of any Bank to make a Loan or to be made by it on the relevant Borrowing Date shall not relieve any other Bank of its obligation to make such Loan to be made by it on such Date, but no Bank shall be responsible for the failure of any other Bank to make any Loan to be made by such other Bank. 2.19. TELEPHONIC NOTICES. The Company and each Bank acknowledges that the agreement of the Agent herein to receive and give certain notices specified herein by telephone or facsimile is for the convenience of the Company. The Agent shall be entitled to rely on the authority of the person purporting to be the person authorized by the Company or any Bank to give any notice hereunder, and 33 the Agent shall have no liability to the Company or any Bank on account of any action reasonably taken by the Agent in reliance upon such telephonic or facsimile notice. Each Bank shall be entitled to rely on the authority of the person purporting to be the person authorized by the Agent or the Company to give any notice hereunder, and no Bank shall have any liability to the Agent or the Company on account of any action reasonably taken by such Bank in reliance upon such telephonic or facsimile notice. 2.20. SHARING OF EXCESS PAYMENTS. If any Bank shall receive and retain any Excess Payment, then such Bank shall purchase from the other Banks for cash and at face value and without recourse such participation in the Notes and other indebtedness under this Agreement held by such other Banks as shall be necessary to cause such Excess Payment to be shared ratably such that no Bank shall retain any Excess Payment; PROVIDED, that if such Excess Payment or part thereof is thereafter recovered from such purchasing Bank, such purchase from the selling Banks shall be rescinded ratably and each such selling Bank shall repay to such purchasing Bank the purchase price to the extent of such recovery together with an amount equal to such selling Bank's ratable share (according to the proportion of (i) the amount of such selling Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount payable by such purchasing Bank in respect of the total amount so recovered. The Company agrees that any Bank so purchasing a participation from the other Bank pursuant to this Section 2.20 may, to the fullest extent permitted by law, exercise all its right of payment (including, to the extent permitted by applicable law, the right of setoff) with respect to such participation as fully as if such Bank were the direct creditor of the Company in the amount of such participation. 2.21. DISCRETION OF BANK AS TO MANNER OF FUNDING. Each Bank shall be entitled to fund and maintain its funding of CD Loans and LIBOR Loans in any manner it may elect, it being understood, however, that for the purposes of this Agreement all determinations hereunder (including, but not limited to, determinations under Section 2.16) shall be made as if such Bank had actually funded and maintained each CD Loan and LIBOR Loan during the Interest Period for such Loan through the issuance of its certificates of deposit, or the purchase of deposits, having a maturity corresponding to the last day of the Interest Period and bearing an interest rate equal to the Applicable CD Rate or the Applicable LIBO Rate, as the case may be, for such Interest Period. 2.22. SETOFF. The Company hereby affirms and agrees that each Bank shall be entitled to exercise all rights of setoff if an Event of Default shall have occurred. SECTION 3. REPRESENTATIONS AND WARRANTIES. In order to induce the Agent and the Banks to enter into this Agreement and to make the Loans contemplated in Section 2 hereof, the Company hereby makes the following representations and warranties to the Agent and to each Bank: 3.1. EXISTENCE AND POWER. The Company and each Material Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, has all requisite power and authority to own its Property and to carry on its business as now conducted, and is in good standing and authorized to do business in each jurisdiction in which the character of the Property owned and leased by it therein or the transaction of its business makes such qualification necessary except for such jurisdictions where the failure to be in such standing and so authorized will not materially adversely affect the financial condition, business or operations of the Company and its Consolidated Subsidiaries, taken as a whole, or prevent the enforcement of contracts entered into. All subsidiaries are properly described in Exhibit G hereto. 3.2. AUTHORITY. The Company has full power and authority to enter into, execute, deliver and carry out the terms of this Agreement, to make the borrowings contemplated hereby, to execute, deliver and carry out the terms of the Notes, and to incur the obligations provided for herein and therein, and the execution, delivery and performance of this Agreement and the Notes have been duly authorized by all necessary corporate action of the Company; and no consent or approval of, or exemption by, any Governmental Body is required to authorize, or is required in connection with the 34 execution and delivery of, and performance by the Company of its obligations under, this Agreement or the Notes or is required as a condition to the validity or enforceability of this Agreement or the Notes. 3.3. BINDING AGREEMENT. This Agreement constitutes, and each of the Notes when issued and delivered pursuant hereto for value received, will constitute, the valid and legally binding obligations of the Company enforceable against the Company in accordance with their respective terms. 3.4. LITIGATION. There are no actions, suits or arbitration proceedings (whether or not purportedly on behalf of the Company or any Material Subsidiary) pending or, to the knowledge of the Company, threatened against the Company or any Material Subsidiary, or maintained by the Company or any Material Subsidiary, in law or in equity before any Governmental Body which (i) relate to applicable environmental or occupational safety and health standards or alleged violations thereof or (ii) individually or in the aggregate are likely (to the extent not covered by insurance) to result in a material adverse change in the consolidated financial condition of the Company and its Consolidated Subsidiaries, except as disclosed in the Company's annual report on Form 10-K for the year ending January 31, 1991, or its quarterly reports on Form 10-Q for the fiscal quarters ending April 30, 1991 and July 31, 1991, to the Securities and Exchange Commission, Exhibit I hereto or as otherwise disclosed in writing to the Banks prior to the Effective Date. There are no proceedings pending or, to the knowledge of the Company, threatened against the Company or any Material Subsidiary which call into question the validity or enforceability of this Agreement or any of the Notes or any document delivered in connection herewith or therewith, or any action to be taken in connection with the transactions contemplated hereby or thereby. 3.5. NO CONFLICTING AGREEMENTS. Neither the Company nor any Material Subsidiary is in default under any agreement to which it is a party or by which it or any of its Property is bound, the effect of which could reasonably be expected to have a material adverse effect on the business or operations of the Company and its Consolidated Subsidiaries taken as a whole, except as disclosed in the Disclosure Schedule or as otherwise disclosed in writing to the Banks. No provision of (i) the articles of incorporation or bylaws of the Company or any Material Subsidiary, (ii) any existing mortgage or indenture, (iii) any other contract or agreement, (iv) any statute, rule or regulation, or (v) any judgment, decree or order, in any case binding on the Company or any Material Subsidiary or affecting the Property of the Company or any Material Subsidiary, (A) conflicts with, (B) requires any consent under, or (C) would in any way prevent the execution, delivery or carrying out of the terms of, this Agreement or the Notes. The execution and delivery of this Agreement and the Notes and borrowing of money thereunder will not constitute a default under, or result in the creation or imposition of any Lien upon the Property of the Company or any Material Subsidiary pursuant to the terms of any mortgage, indenture, contract, or agreement binding on the Company or any Material Subsidiary or affecting the Property of the Company or any Material Subsidiary. 3.6. TAXES. The Company and each Consolidated Subsidiary has filed or caused to be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes shown to be due and payable on said returns or in any assessments made against it, and no tax liens have been filed and no claims are being asserted with respect to such taxes which are required by Generally Accepted Accounting Principles to be reflected in the Financial Statements and are not so reflected therein. The last audit of the Company by the Internal Revenue Service has been completed through the period ending January 31, 1987. The charges, accruals and reserves on the books of the Company and each Consolidated Subsidiary with respect to all federal, state, local and other taxes are considered by the management of the Company to be adequate, and the Company knows of no unpaid assessment which is due and payable against the Company or any Consolidated Subsidiary, except (a) those not yet delinquent, (b) those not substantial in aggregate amount, or (c) those involving taxes and assessments which are involved in a good faith dispute with respect to tax or other matters. 3.7. FINANCIAL STATEMENTS. The Company has heretofore delivered to each Bank (a) copies of the consolidated balance sheet of the Company as of January 31, 1991, and the related consolidated 35 statements of income, changes in stockholders' equity and cash flows for the year then ended, and (b) copies of the consolidated balance sheet of the Company as of July 31, 1991, and the related consolidated statements of income and cash flows for the six months ending on said date (the statements in (a) and (b) above being sometimes referred to herein as the "Financial Statements"). The Financial Statements set forth in clause (a) above were audited and reported on by the Accountants. The Financial Statements fairly present the consolidated financial condition and the consolidated results of operations of the Company as of the dates and for the periods indicated therein, and the Financial Statements have been prepared in conformity with Generally Accepted Accounting Principles (except as disclosed in the notes thereto). As of the Effective Date, except (i) as reflected in the Financial Statements specified in (a) above or in the footnotes thereto or (ii) as disclosed in the Disclosure Schedule or as otherwise disclosed in writing to the Banks prior to the Effective Date, neither the Company nor any Material Subsidiary has any obligation or liability of any kind (whether fixed, accrued, contingent, unmatured or otherwise) which is material to the Company and the Consolidated Subsidiaries on a consolidated basis and which, in accordance with Generally Accepted Accounting Principles consistently applied, should have been recorded or disclosed in such Financial Statements and were not, other than those incurred in the ordinary course of their respective businesses since the date of such Financial Statements. Since January 31, 1991 to the Effective Date (i) the Company and each Material Subsidiary has conducted its business only in the ordinary course, and (ii) there has been no adverse change in the financial condition of the Company and its Consolidated Subsidiaries taken as a whole which is material to the Company and its Consolidated Subsidiaries on a consolidated basis, except as set forth in the Company's annual report on Form 10-K for year ending January 31, 1991, or its quarterly reports on Form 10-Q for the fiscal quarters ending April 30, 1991 and July 31, 1991, to the Securities and Exchange Commission or as disclosed in writing to the Banks prior to the Effective Date; and there has been no material adverse change in their consolidated financial condition from the most recent consolidated financial statements of the Company and its Consolidated Subsidiaries which have been furnished to the Banks pursuant to this Agreement, except as disclosed in writing to the Banks. 3.8. COMPLIANCE WITH APPLICABLE LAWS. Neither the Company nor any Material Subsidiary is in default with respect to any judgment, order, writ, injunction, decree or decision of any Governmental Body which default would have a material adverse effect on the financial condition, operations or Property of the Company and its Consolidated Subsidiaries on a consolidated basis except as disclosed in the Disclosure Schedule or as otherwise disclosed in writing to the Banks. The Company and each Material Subsidiary is complying in all material respects with all applicable statutes and regulations, including ERISA and applicable environmental, occupational, safety and health and other labor laws, of all Governmental Bodies, a violation of which could reasonably be expected to have a material adverse effect on the financial condition, operations or Property of the Company and its Consolidated Subsidiaries on a consolidated basis except as disclosed in the Disclosure Schedule or as otherwise disclosed in writing to the Banks. 3.9. GOVERNMENTAL REGULATIONS. Neither the Company nor any Material Subsidiary is subject to any statute or regulation which regulates the incurring by the Company of indebtedness for borrowed money. 3.10. PROPERTY. The Company and each Material Subsidiary has good and valid title to, or good and valid leasehold interests in, all of its Property, which is material to the Company and its Consolidated Subsidiaries taken as a whole and such Property is subject to no Liens, except the Permitted Liens. All existing Permitted Liens are accurately listed on Exhibit H hereto. 3.11. FEDERAL RESERVE REGULATIONS. The Company is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, as amended. No part of the proceeds of the Loans will be used to purchase or carry margin 36 stock. No part of the proceeds of the Loans will be used, directly or indirectly, for a purpose which violates any law, rule or regulation of any Governmental Body, including, without limitation, the provisions of Regulations G, T, U, or X of said Board, as amended. 3.12. NO MISREPRESENTATION. No representation or warranty contained herein or in any document to be executed and delivered in connection herewith and no certificate or report furnished or to be furnished by the Company or any Material Subsidiary in connection with the transactions contemplated hereby, contains or will contain a misstatement of material fact, or omits or will omit to state a material fact required to be stated in order to make the statements herein or therein contained (taken as a whole) not misleading in the light of the circumstances under which made. 3.13. PLANS. Each Plan established, maintained or participated in by the Company and each Material Subsidiary is in material compliance with the applicable provisions of ERISA and the Code, and the Company and each Material Subsidiary has filed all material reports required to be filed by ERISA and the Code with respect to any Plan. The Company and each Material Subsidiary currently meets all material requirements imposed by ERISA and the Code with respect to the funding of all Plans. Since the effective date of ERISA, there have not been, nor are there now existing, any events or conditions which would permit any Plan to be terminated by the PBGC under circumstances which would cause the Company to incur a material liability under Title IV of ERISA. Since the effective date of ERISA, no Reportable Event has occurred with respect to any Plan and no Plan has been terminated in whole or in part. No withdrawals from any Plans have occurred which could subject the Company or any of its Material Subsidiaries to any material liability. 3.14. ENVIRONMENTAL, HEALTH AND SAFETY LAWS. There does not exist any violation by the Company or any Subsidiary of any applicable local law, rule or regulation or order of any government, governmental department, board, agency or other instrumentality relating to environmental, pollution, health or safety matters which will or threatens to impose a material liability on the Company or a Subsidiary or which would require a material expenditure by the Company or such Subsidiary to cure. Neither the Company nor any Subsidiary has received any notice to the effect that any of its operations or properties are not in material compliance with any such law, rule, regulation or order or notice that it or its property is the subject of any governmental investigation evaluating whether any remedial action is needed to respond to any release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to have a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole. 3.15. RETIREMENT BENEFITS. Under the accounting rules proposed as of the date of this Agreement by the Financial Accounting Standards Board with respect thereto, the present value of the expected cost to the Company and the Material Subsidiaries of post-retirement medical and insurance benefits with respect to employees, as estimated by the Company in accordance with procedures and assumptions deemed reasonable by the Agent does not exceed $1,000,000. SECTION 4. CONDITIONS PRECEDENT. 4.1. INITIAL LOANS. In addition to the applicable requirements set forth in Section 4.2 hereof, the obligation of each Bank to make its initial Loan hereunder shall be subject to the fulfillment of the following conditions precedent: (a) The Company shall have executed and delivered to the Agent for the account of each Bank the Notes. (b) The Agent shall have received a (with a photocopy for each Bank) certificate of good standing for the Company from the Secretary of State of Minnesota. (c) The Agent shall have received (with a signed copy for each Bank) the signed certificate of the President or a Vice President and the Secretary or an Assistant Secretary of the Company, dated the date of the initial Loan hereunder, certifying as to (i) a true and correct copy of 37 resolutions adopted by the Board of Directors (or the duly empowered Executive Committee of the Board of Directors) of the Company authorizing the execution, delivery and performance by the Company of this Agreement and the Notes and authorizing the issuance by the Company of such Notes in the manner and for the purpose contemplated by this Agreement, (ii) a true and correct copy of the articles of incorporation and the by-laws of the Company as in effect on such date, and (iii) the incumbency and specimen signatures of officers of the Company executing or authorized to execute this Agreement, the Notes and any other documents delivered to the Agent in connection with this Section 4. (d) The Agent shall have received (with a signed copy for each Bank) the signed opinion of counsel for the Company, dated the date of the Notes, in the form of Exhibit D hereto, with such changes (if any) therein as shall be acceptable to the Agent and Special Counsel, and as to such other matters as the Agent may reasonably request. (e) The Agent shall have received the following schedules: Disclosure (including conflicting agreements, compliance with applicable laws), Subsidiaries, Permitted Liens and Litigation (respectively, Exhibits B, G, H and I hereto). (f) The representations and warranties contained in this Agreement shall be true, correct and complete in all material respects as of the date of the initial Loan. (g) The Company shall have delivered to the Agent copies of the certificates of insurance evidencing the insurance coverage of the Company. 4.2. ALL LOANS. The obligation of each Bank to make any Loan is subject to the fulfillment of the following conditions precedent: (a) On each Borrowing Date, and after giving effect to the Loans to be made on any such Date; (i) there shall exist no Default or Event of Default; (ii) the representations and warranties contained in this Agreement shall be true, correct and complete in all material respects on and as of such date to the extent as though made on and as of such date, except with respect to any representation or warranty which specifically refers to an earlier date; and (iii) there has been no adverse change in the financial condition of the Company and its Consolidated Subsidiaries taken as a whole since the last fiscal quarter reported on to the Agent pursuant to Section 5.6 which is material to the Company and its Consolidated Subsidiaries on a consolidated basis. (b) All documents required by the provisions of this Agreement to be executed or delivered to the Agent on or before the applicable Borrowing Date, shall have been executed and shall have been delivered to the Agent at its Minneapolis office, or at such other place designated by the Agent from time to time, on or before such Date. (c) The requested Loan does not exceed the Unused Commitment Amount. SECTION 5. AFFIRMATIVE COVENANTS. The Company covenants and agrees that, on and after the Effective Date, and until the later of the termination of the Commitments or the payment in full of all of its obligations under each Note and performance of all other obligations of the Company hereunder and subject to the conditions stated herein, the Company will: 5.1. PRESERVATION OF CORPORATE EXISTENCE, ETC. Do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the rights (charter and statutory) of the Company and each Material Subsidiary; PROVIDED, HOWEVER, that the Company shall not be required to preserve any such right if the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company or any Material Subsidiary and that the loss thereof will not have a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise) of the Company and its Consolidated Subsidiaries taken as a whole. 38 5.2. TAXES. Pay, or provide adequate reserves or obtain adequate indemnity for the payment of, and will cause each Consolidated Subsidiary to pay or provide adequate reserves or obtain adequate indemnity for the payment of, all taxes and assessments payable by it which become due, other than those not yet delinquent and other than those not substantial in aggregate amount or being contested in good faith and other than those involving foreign taxes and assessments which are involved in a good faith dispute with respect to tax or other matters. 5.3. INSURANCE. (i) Maintain, and cause each Consolidated Subsidiary to maintain, insurance (to the extent insurance is available on a commercially reasonable basis with reputable insurance carriers) on such of its Property, against such risks, and in such amounts as is customarily maintained by similar businesses of similar size with respect to Properties of similar character; or (ii) in lieu thereof, in the case of itself or of any one or more Material Subsidiaries, maintain or cause to be maintained a system or systems of self-insurance which will accord with the practices of companies owning or operating Properties of a similar character. 5.4. MAINTENANCE OF PROPERTIES. Cause all Properties used or useful in the conduct of its business or the business of a Consolidated Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment, and cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; PROVIDED, HOWEVER, that nothing in this Section 5.4 shall prevent the Company from discontinuing the operation or maintenance, or both the operation and maintenance, of any of such Properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Consolidated Subsidiary and would not result in a material adverse effect on the business, properties, assets, operations or condition (financial or otherwise) of the Company and its Consolidated Subsidiaries taken as a whole. 5.5. COMPLIANCE WITH LAWS, ETC. Not violate any laws, rules, regulations, or governmental orders, including, without limitation, those relating to environmental and occupational safety and health standards, to which it is subject, which violation could reasonably be expected to have a material and adverse affect on the business, properties, assets, operations, condition (financial or otherwise) of the Company and its Consolidated Subsidiaries taken as a whole; and not permit any Material Subsidiary to violate any laws, rules, regulations, or governmental orders which violation could reasonably be expected to have a material and adverse affect on the consolidated financial condition of the Company and its Consolidated Subsidiaries. 5.6. FINANCIAL STATEMENTS AND OTHER INFORMATION. Furnish to each Bank: (a) INTERIM REPORTS. Within 45 days after the end of each of the first three quarterly fiscal periods in each fiscal year of the Company, its Form 10-Q for said period, certified, subject to changes resulting from year-end audit adjustments, by a financial officer of the Company and within 45 days after the end of each of its fiscal quarters, a completed Compliance Certificate signed by a financial officer of the Company; (b) ANNUAL REPORTS. Within 120 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its Consolidated Subsidiaries as at the end of such year, and the related consolidated statements of operations, stockholders' equity and cash flows for such year, setting forth in each case in comparative form the consolidated figures set forth by the Company for comparative purposes in its Form 10-K for said period, accompanied by, the opinion (which is not qualified as a result of a limitation on the scope of the audit or nonconformity with Generally Accepted Accounting Principles), thereon of the Accountants, which opinion shall be prepared in accordance with generally accepted auditing standards relating to reporting and shall be based upon an examination by such Accountants of the relevant accounts; (c) REPORTS TO SEC AND TO STOCKHOLDERS. Promptly upon their becoming available, copies of all financial statements, reports, notices and proxy statements sent by the Company to its 39 stockholders, and of all regular and periodic reports filed by the Company or any of its Material Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any governmental authority succeeding to any of its functions; (d) NOTICE OF DEFAULT. Forthwith upon any principal officer of the Company obtaining knowledge of the occurrence of a Default or an Event of Default, an Officer's Certificate specifying the nature and period of existence thereof and what action the Company has taken or is taking or proposes to take with respect thereto; (e) NOTICE OF LITIGATION. Forthwith upon any principal officer of the Company obtaining knowledge, notice of the commencement of or the threatened commencement of any litigation, investigation or proceeding by any Person against the Company or any Consolidated Subsidiary in which the amount in controversy exceeds $5,000,000 or the aggregate of all amounts in controversy exceeds $7,000,000; and (f) OTHER INFORMATION. With reasonable promptness, such other information and data with respect to the Company or any of its Consolidated Subsidiaries as from time to time may be reasonably requested by any Bank. 5.7. INSPECTIONS; DISCUSSIONS. Permit any authorized representatives designated by the Agent (on behalf of Majority Banks) or any Bank, at the Banks' or such Bank's expense, to make reasonable inspections of any of the Properties of the Company or any of its Consolidated Subsidiaries, including its and their books of account, and to discuss its and their affairs, finances and accounts with its and their officers all at such reasonable times and as often as may be reasonably requested by such Bank; PROVIDED, that, if required by the Company, the Agent or any such Bank, as applicable, shall, as a condition to being permitted to make any such inspection, state to the Company in writing that the same is being made solely in order to assist the Agent or such Bank in evaluating its interest in the Notes or its rights and obligations hereunder. 5.8. BOOKS AND RECORDS. Maintain, and cause each of its Consolidated Subsidiaries to maintain, a system of accounting established and administered in accordance with Generally Accepted Accounting Principles applied on a consistent basis, and set aside, and cause each of its Subsidiaries to set aside, on its books all such proper reserves as shall be required by Generally Accepted Accounting Principles. 5.9. USE OF PROCEEDS. Use the proceeds of the Loans hereunder for working capital and general corporate purposes not otherwise inconsistent with the provisions of this Agreement. 5.10. MERGERS AND ACQUISITIONS. In the event that the Company or any Subsidiary merges or consolidates with, or acquires another Person, the Company or such Subsidiary shall be the surviving corporation. The Company shall promptly notify the Agent of any proposed consolidations with or merger into any other Person and any proposed acquisition of any other Person if the purchase price of the assets of such Person being acquired, consolidated with or merged into is in excess of $15,000,000. Before such proposed merger, consolidation or acquisition is completed, the Company shall provide to the Agent such reasonably detailed information which shows, to the best of its knowledge, that such transaction, 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. 5.11. ERISA. The Company will maintain, and cause each Material Subsidiary to maintain, each Plan in compliance with all material applicable requirements of ERISA and the Code and with all material applicable rulings and regulations issued under the provisions of ERISA and of the Code. 5.12. ENVIRONMENTAL MATTERS; REPORTING. The Company will observe and comply with, and cause each Subsidiary to observe and comply with, all laws, rules, regulations and orders of any government or government agency relating to health, safety, pollution, hazardous materials or other environmental matters to the extent non-compliance could result in a material liability or otherwise have a material adverse effect on the Company and the Subsidiaries as a consolidated enterprise. The 40 Company will give the Agent prompt written notice of any violation as to any environmental matter by the Company or any Subsidiary and of the commencement of any judicial or administrative proceeding relating to health, safety or environmental matters (a) in which an adverse determination or result which could result in the revocation of or have a material adverse effect on any operating permits, air emission permits, water discharge permits, hazardous waste permits or other permits held by the Company or any Subsidiary which are material to the operations of the Company or such Subsidiary, or (b) which will or threatens to impose a material liability on the Company or such Subsidiary to any Person or which will require a material expenditure by the Company or such Subsidiary to cure any alleged problem or violation. SECTION 6. NEGATIVE COVENANTS. The Company covenants and agrees that, on and after the Effective Date and until the later of the termination of the Commitments or the payment in full of all of its obligations under each Note and the performance of all other obligations of the Company hereunder, and subject to the conditions stated herein, the Company will not: 6.1. CONSOLIDATED NET INCOME. Permit, at the end of any Measurement Period, Consolidated Net Income for such Measurement Period to be zero or less than zero. 6.2. MINIMUM CONSOLIDATED TANGIBLE NET WORTH. Permit, at the end of any fiscal quarter, its Consolidated Tangible Net Worth to be less than the sum of $90,000,000 plus 50% of the sum of Consolidated Net Income for each fiscal quarter after January 31, 1991 through the date of determination. 6.3. CASH FLOW. Permit, as of the last day of any Measurement Period, the ratio of (a) Cash Available for Debt Service to (b) Consolidated Debt Service, to be less than 1.75 to 1.00. 6.4. DEBT TO NET WORTH. Permit, as of the last day of any fiscal quarter, the ratio of (a) the sum of (i) Consolidated Interest Bearing Debt plus (ii) Contingent Liabilities to (b) Consolidated Tangible Net Worth to exceed .60 to 1.00. 6.5. NATURE OF BUSINESS. Engage, or permit any of its Consolidated Subsidiaries to engage, in any business that would substantially change the general nature of the business conducted by the Company and its Consolidated Subsidiaries, taken on a consolidated basis, on the Effective Date. 6.6. LIENS. Except for Permitted Liens, create, incur, assume or suffer to exist any Lien against or in any of the Property now owned or hereafter acquired by the Company or any Consolidated Subsidiary, or permit any Consolidated Subsidiary so to do. 6.7. PLANS. The Company will not permit, and will not allow any Material Subsidiary to permit, any event to occur or condition to exist which would permit any Plan to terminate under any circumstances which would cause the Lien provided for in Section 4068 of ERISA to attach to any assets of the Company or a Material Subsidiary; and the Company will not permit the underfunded amount of Plan benefits guaranteed under Title IV of ERISA to exceed $1,000,000. SECTION 7. DEFAULT. 7.1. EVENTS OF DEFAULT. The following shall each constitute an "Event of Default" hereunder: (a) Default in the payment when due of any amount owing by the Company: (i) under any of the Notes in respect of the principal thereof or interest thereon; (ii) of any Commitment Fee; or (iii) any other amount due under this Agreement; or (b) Default shall be made in the due observance or performance by the Company of any term, covenant or agreement in Section 6.1, 6.2, 6.3 or 6.4 hereof and such Default shall have continued unremedied for a period of five days after the Agent (upon instruction of Majority Banks) notifies the Company in writing of such Default; or (c) Default shall be made in the due observance or performance by the Company of any other term, covenant, or agreement on its part to be performed or observed under this Agreement 41 (and not constituting an Event of Default under any other clause of this Section 7.1) and, such Default shall have continued unremedied for a period of 30 days after the Agent (upon instruction of Majority Banks) notifies the Company in writing of such Default; or (d) Any representation or warranty made by the Company herein, or in any certificate, report, opinion, or notice delivered or to be delivered pursuant hereto shall prove to have been incorrect or misleading (whether because of misstatement or omission) in any material respect when made; or (e) The Company, any Consolidated Subsidiary, or CLC shall default (subject to applicable notice or grace periods) in the payment when due of any principal of or interest on any indebtedness for borrowed money whether such indebtedness now exists or shall hereafter be created, or any event of default (with respect to the Company, any Consolidated Subsidiary, or CLC) as defined in any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money of, or guaranteed by, the Company, any Consolidated Subsidiary, or CLC shall occur and shall permit such indebtedness to be accelerated; or (f) The Company or any Material Subsidiary shall: (i) suspend or discontinue its business, or (ii) make an assignment for the benefit of creditors, or (iii) generally fail to pay, or admit in writing its inability to pay, its debts as they become due, or (iv) file a voluntary petition in bankruptcy, or (v) file any petition or answer seeking for itself any reorganization, arrangement, composition, readjustment of debt, liquidation or dissolution or similar relief under any present or future statute, law or regulation of any jurisdiction, or (vi) petition or apply to any tribunal for any receiver, custodian or any trustee for any substantial part of its Property, or (vii) have commenced against it any such proceeding which remains undismissed for a period of 60 days, or (viii) file any answer admitting or not contesting the material allegations of any such petition filed against it, or of any order, judgment or decree approving such petition in any such proceeding, or (ix) seek, approve, consent to, or acquiesce in any such proceeding, or in the appointment of any trustee, receiver, custodian, liquidator, or fiscal agent for it, or any substantial part of its Property, or an order is entered appointing any such trustee, receiver, custodian, liquidator or fiscal agent and such order remains in effect for 60 days, or (x) take any formal action for the purpose of effecting any of the foregoing or looking to the liquidation or dissolution of the Company; or (g) Any bankruptcy reorganization, debt arrangement or other proceedings under any bankruptcy or insolvency law shall be instituted by or against the Company or any Material Subsidiary, and, if instituted against the Company or a Material Subsidiary, shall have been consented to or acquiesced in by the Company or such Material Subsidiary, or shall remain undismissed for 60 days, or an order for relief shall have been entered against the Company or such Material Subsidiary and remain unstayed on appeal for 60 days; or (h) There shall be entered against the Company or any Consolidated Subsidiary one or more judgments or decrees in an aggregate amount at any one time outstanding in excess of $5,000,000, excluding those judgments or decrees that shall have been satisfied, vacated, discharged, or stayed or bonded pending appeal, which stay or bond shall have been effective on or before the date on which the time for appeal from the judgment or order has expired; or (i) With respect to any Plan (other than a multiemployer Plan) as to which the Company or any Related Person to the Company may have any liability, there shall exist, for a period of 30 days, a deficiency which is material to the consolidated financial condition of the Company and its Consolidated Subsidiaries in the Plan assets available to satisfy the benefits guaranteeable under ERISA with respect to such Plan, and (x) steps are undertaken to terminate such Plan or (y) such Plan is terminated or (z) any Reportable Event which presents a material risk of termination with respect to such Plan shall occur. 42 Upon the occurrence of an Event of Default described in Sections 7.1(f) or 7.1(g), the Commitments shall terminate and the obligations of the Company under this Agreement and all of the Notes shall become immediately due and payable without declaration or notice to the Company. During the existence of any other Event of Default, the Agent, at the direction of the Majority Banks, shall notify the Company that the Commitments have been terminated and/or that the obligations of the Company under all of the Notes have been declared immediately due and payable in which event the Commitments shall be terminated and/or the obligations of the Company under all of the Notes shall be immediately due and payable. Except for the notice provided for in the preceding sentence, the Company hereby expressly waives any presentment, demand, protest, notice of protest or other notice of any kind. The Company hereby further expressly waives and covenants not to assert any appraisement, valuation, stay, extension, redemption or similar laws, now or at any time hereafter in force which might delay, prevent or otherwise impede the performance or enforcement of this Agreement or the Notes. If the Commitments shall have been terminated or the obligations of the Company under this Agreement and all of the Notes shall have been declared due and payable pursuant to the provisions of this Section 7.1, the Banks agree, by and among themselves, that any funds received after such termination from or on behalf of the Company by the Agent or any of the Banks (except funds received by any Bank as a result of a purchase pursuant to the provisions of Section 2.19 hereof) shall be remitted to the Agent if received by any Bank and applied by the Agent in the following manner and order: (a) first, to reimburse the Agent and the Banks for any expenses due from the Company pursuant to the provisions of Section 12 hereof; (b) second, to the payment to each Bank of its Pro Rata Share of accrued and unpaid interest on the outstanding Loans; (c) third, to the payment to each Bank of its Pro Rata Share of the outstanding unpaid principal balance of the Loans, in such order as the Agent in its sole discretion may determine; and (d) fourth, to the payment to each Bank and the Agent of any other amount owing under this Agreement or any of the Notes. If the obligations of the Company under all of the Notes shall have become, or been declared to be, due and payable pursuant to the provisions of this Section 7.1, the Agent may, and, upon the direction of the Majority Banks shall, proceed to enforce the rights of the holders of the Notes, by suit in equity, action at law and/or other appropriate proceedings, whether for payment or the specific performance of any covenant or agreement contained in this Agreement or the Notes. The Agent shall be justified in failing or refusing to take any action hereunder. 7.2. WAIVER OF DEFAULTS. Except as otherwise specifically provided by the provisions hereof, the Agent may, by written notice to the Company (if authorized by the Majority Banks, or in the event of a default in the payment of principal of or interest on any Note if authorized by all of the Banks) on behalf of the Banks, at any time and from time to time, waive in whole or in part, and absolutely or conditionally, any Event of Default which shall have occurred hereunder or under the Notes. Any such waiver shall be for such period and subject to such conditions or limitations as shall be specified in any such notice. In the case of any such waiver, the rights of the Company, the Banks and the Agent under this Agreement and the Notes shall be otherwise unaffected, and any Event of Default so waived shall be deemed to be cured and not continuing to the extent and on the conditions or limitations set forth in such waiver, but no such waiver shall extend to any subsequent or other Event of Default, or impair any right, remedy or power consequent thereupon. The Company may take any action prohibited, or omit to perform any act required to be performed, under this Agreement and the Notes if it shall have 43 obtained the written waiver with respect thereto signed by the Agent and containing a representation therein that such waiver has been authorized in accordance with the provisions of this Section 7.2 and Section 10 hereof. SECTION 8. THE AGENT. The Banks and the Agent agree by and among themselves that: 8.1. APPOINTMENT. First Bank National Association is hereby designated the Agent by each of the other Banks to perform such duties on behalf of the other Banks and itself, and to have such powers, as are set forth herein and as are reasonably incidental thereto. 8.2. DELEGATION OF DUTIES, ETC. The Agent may execute any of its duties and perform any of its powers hereunder by or through agents or employees, and shall be entitled to consult with legal counsel and any accountant selected by it. Any action taken or omitted to be taken or suffered in good faith by the Agent in accordance with the opinion of such counsel or accountant shall be full justification and protection to it. 8.3. INDEMNIFICATION. Each Bank hereby indemnifies the Agent in its capacity as such, to the extent not reimbursed by the Company, in its Pro Rata Share, from and against any and all claims, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or the Notes or any action taken or omitted to be taken or suffered in good faith by the Agent hereunder, provided that no Bank shall be liable for any portion of any of the foregoing items resulting from the gross negligence or willful misconduct of the Agent. 8.4. EXCULPATORY PROVISIONS. Neither the Agent nor any of its officers, directors, employees or agents shall be liable for any action taken or omitted to be taken or suffered by it or them hereunder or in connection herewith, except that the Agent shall be liable for its own gross negligence or willful misconduct. The Agent shall not be liable in any manner for the effectiveness, enforceability, collectibility, genuineness, validity or the due execution of this Agreement or any Note, or for the due authorization, authenticity or accuracy of the representations and warranties herein and therein or in any other certificate, report, notice, consent, opinion, statement, or other document furnished or to be furnished hereunder or thereunder, and shall be entitled to rely upon any of the foregoing believed by it to be genuine and correct and to have been signed and sent or made by the proper Person. The Agent shall be under no duty or responsibility to any Bank to ascertain or to inquire into the performance or observance by the Company or any Subsidiary of any of the provisions hereof or thereof. Each other Bank expressly acknowledges that the Agent has not made any representations or warranties to it and that no act taken by the Agent shall be deemed to constitute any representation or warranty by the Agent to any other Bank. Each Bank acknowledges that it has taken and will continue to take such action and to make such investigation as it deems necessary to inform itself of the affairs of the Company and each Subsidiary, and each Bank acknowledges that it has made and will continue to make its own independent investigation of the creditworthiness and the business and operations of the Company and each Subsidiary, and that, in entering into this Agreement, and in making its Loans hereunder, it has not relied and will not rely upon any information or representations furnished or given by the Agent or any other Bank. 8.5. AGENT IN ITS INDIVIDUAL CAPACITY. With respect to all Loans made by it hereunder and any renewals, extensions or deferrals of the payment thereof and any Note issued to or held by it, the Agent shall have the same rights and powers hereunder as any Bank, and may exercise the same as though it were not the Agent, and the term "Bank" or "Banks" shall, unless the context otherwise requires, include the Agent in its individual capacity. 8.6. KNOWLEDGE OF DEFAULT. The Agent shall be entitled to assume that no Event of Default exists, unless the officers of the Agent immediately responsible for matters concerning this Agreement shall have actual knowledge of such occurrence or shall have been notified in writing by a Bank that such Bank considers that an Event of Default exists and specifying the nature thereof. 44 8.7. RESIGNATION OR REMOVAL OF AGENT. The Agent may at any time and, upon receipt of a written request from Banks having Commitment Amounts equal to at least 60% of the Aggregate Commitment Amount, will, by written notice to the Banks and the Company, resign its agency under this Agreement. No such resignation shall become effective unless and until a successor Agent under this Agreement is appointed, such successor to be appointed by the Majority Banks with the prior written consent of the Company; PROVIDED, that if such successor Agent is one of the Banks, then no such consent is required; and PROVIDED, FURTHER, that if no successor Agent shall have been so appointed and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may appoint any Bank a successor Agent which successor Agent shall be deemed to be acceptable to the Majority Banks and the Company. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations, under this Agreement. After the retiring Agent's resignation hereunder as Agent, (a) each reference herein to a place for giving of notice or deliveries to the Agent shall be deemed to refer to the principal office of the successor Agent or such other office of the successor Agent as it may specify to each party hereto, and (b) the provisions of this Section 8 shall inure to the benefit of the retiring Agent as to any actions taken or omitted to be taken by such retiring Agent while it was Agent under this Agreement. 8.8. REQUESTS TO THE AGENT. Except as otherwise expressly provided herein, whenever the Agent is authorized and empowered hereunder on behalf of the Banks to give any approval or consent, or to make any request, or to take any other action on behalf of the Banks, the Agent shall be required to give such approval or consent, or to make such request or to take such other action only when so requested in writing by the Majority Banks. 8.9. OTHER DEALINGS. The Agent (as a Bank) and any Bank, subject to the provisions of Section 2.19 hereof may, without liability to account, accept deposits from, lend money to and generally engage in any kind of banking or other business with the Company or any other Person. 8.10. CALCULATIONS. The Agent shall not be liable for any error in computing the amount payable to any Bank whether in respect of the Notes hereunder, fees or any other amounts due to the Banks under this Agreement, absent gross negligence or willful misconduct. In the event an error in computing any amount payable to any Bank is made, the Agent, the Company and each affected Bank shall, forthwith upon discovery of such error, make such adjustments as shall be required to correct such error. 8.11. AVAILABILITY OF FUNDS. Unless the Agent shall have been notified by a Bank prior to any date proposed for a Loan hereunder that such Bank does not intend to make available to the Agent such Bank's Pro Rata Share of any Loan to be made on such date or any other sum required to be made available to the Agent by such Bank hereunder, the Agent may assume that such Bank has made such proceeds available to the Agent on such date, and the Agent may in reliance upon such assumption (but shall not be required to) make available to the Company a corresponding amount. If such corresponding amount is not in fact made available to the Agent by such Bank, the Agent shall be entitled to recover such amount on demand from such Bank (or, if such Bank fails to pay such amount forthwith upon such demand, from the Company) together with interest thereon in respect of each day during the period commencing on the date such amount was made available to the Company and ending on (but excluding) the date the Agent recovers such amount at a rate per annum equal to the applicable interest rate in respect of such Note. SECTION 9. NOTICES. 9.1. NOTICES, ETC. Except where telephonic instructions or notices are authorized herein to be given, all notices, demands, instructions and other communications required or permitted to be given to or made upon any party hereto shall be in writing and shall be personally delivered or sent by certified mail, postage prepaid, return receipt requested, or by prepaid telex or telegram (with messenger delivery specified in the case of a telegram), or by telecopier, and shall be deemed to be given for 45 purposes of this Agreement on the day that such writing is delivered or sent to the intended recipient thereof in accordance with the provisions of this Section 9.1. Unless otherwise specified in a notice sent or delivered in accordance with the foregoing provisions of this Section 9.1, notices, demands, instructions and other communications in writing shall be given to or made upon the respective parties hereto at their respective addresses (or to their respective telex or telecopier numbers) indicated on Exhibit C hereto, and in the case of telephonic instructions or notices, by calling the telephone number or numbers indicated for such party on such Exhibit C. 9.2. NOTICES BY AGENT OR A BANK. In the event that the Agent or any Bank takes any action or gives any consent or notice provided for by this Agreement, notice of such action, consent or notice shall be given forthwith to all the Banks by the Agent or the Bank taking such action or giving such consent or notice, provided, that the failure to give any such notice shall not invalidate any such action, consent or notice in respect of the Company. SECTION 10. AMENDMENTS AND WAIVERS. With the written consent of the Majority Banks, the Agent and the Company may, subject to the provisions of this Section 10, from time to time enter into agreements amendatory or supplemental hereto for the purpose of changing any provisions of this Agreement or the Notes, or changing in any manner the rights of the Banks, the Agent or the Company hereunder and thereunder, or waiving compliance with any provision hereof or thereof. No such amendatory or supplemental agreement or waiver shall, directly or indirectly, without the written consent of all of the Banks, (a) change the Aggregate Commitment Amount or the Commitment Amount of any Bank, (b) change the maturity of any Note or extend the Termination Date, or reduce the rate of interest of, change the time or manner of payment of, or the principal amount of, any Note, (c) change the amount of any fee or the time of payment thereof, (d) change the definition of "Majority Banks," (e) modify the provisions of Sections 6 hereof or (f) modify the provisions of this Section 10 or Section 7.2. Any such amendatory or supplemental agreement or waiver shall apply equally to each of the Banks and shall be binding on the Company and all of the Banks and the Agent. No provision hereof relating to the Agent shall be amended, modified, or waived without the written consent of the Agent. The Company shall be entitled to rely upon the provisions of any such amendatory or supplemental agreement or waiver if it shall have obtained any of the same in writing from the Agent who therein shall have represented that such agreement or waiver has been authorized in accordance with the provisions of this Section 10. SECTION 11. OTHER PROVISIONS. 11.1. SALE OF PARTICIPATIONS; ASSIGNMENTS. Each Bank shall have the right at any time to (a) sell undivided participation interests in all or any part of the Commitment and the Notes held by it or the obligations of the Company owing to such Bank under any of such Notes to one or more commercial banks, merchant banks, savings and loan associations or any other financial institutions and (b) transfer a portion or all of its Commitment or assign its interest in Notes held by it and the obligations of the Company under any such Notes to one or more parties that are not parties to this Agreement; PROVIDED, that (i) such Bank shall remain bound as set forth in any confidentiality agreement signed by it and such transferee or prospective transferee or assignee shall enter into a similar confidentiality agreement with the Company; (ii) such sale or assignment (unless, in the case of assignment, the Company and the Agent shall otherwise consent in writing, which consent shall not be unreasonably withheld) shall not relieve such Bank of any obligation or liability under this Agreement; (iii) such sale or assignment will not result in any increased cost to the Agent or the Company (unless, in the case of assignment, the Company and the Agent shall otherwise consent in writing, which consent shall not be unreasonably withheld); (iv) such Bank shall (unless, in the case of assignment, otherwise consented to in writing by the Company and the Agent, which consent shall not be unreasonably withheld) make and receive all payments for account of its participants or assignees and shall retain exclusively, and shall continue to exercise exclusively, all rights of approval, administration, waiver and amendment available under the Agreement and with respect to such Bank's Loans made pursuant to this Agreement and such Bank's Notes, even after giving effect to any such sale or assignment, and such Bank shall not, except with respect only to those items set forth in clauses (a), 46 (b) and (c) of Section 10 hereof, enter into any agreement with its participants or assignees that would require such Bank to obtain the consent or approval of any of its participants or assignees with respect to such rights, and make such arrangements with its participants or assignees as may be necessary to accomplish the foregoing; and (v) no such disposition shall, without the consent of the Company, which consent shall not be unreasonably withheld, require the Company to file a registration statement with the Securities and Exchange Commission or apply to qualify the Notes under the blue sky law of any state. 11.2. NO WAIVER OF RIGHTS BY THE BANKS. No failure on the part of the Agent or of any Bank to exercise, and no delay in exercising, any right or remedy hereunder or under the Notes shall operate as a waiver thereof, except as provided in Section 10 hereof, nor shall any single or partial exercise by the Agent or any Bank of any right, remedy or power hereunder or thereunder preclude any other or future exercise thereof, or the exercise of any other right, remedy or power. The rights, remedies and powers provided herein and in the Notes are cumulative and not exclusive of any other rights, remedies or powers which the Agent or the Banks or any holder of any Note would otherwise have. Notice to or demand on the Company in any circumstance in which the terms of this Agreement or the Notes do not require notice or demand to be given shall not entitle the Company to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Agent or any Bank or the holder of any Note to take any other or further action in any circumstances without notice or demand. 11.3. HEADINGS; PLURALS. Section headings have been inserted herein for convenience only and shall not be construed to be a part hereof or thereof. Unless the context otherwise requires, words in the singular number include the plural, and words in the plural include the singular. 11.4. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute one agreement. It shall not be necessary in making proof of this Agreement or of any document required to be executed and delivered in connection herewith or therewith to produce or account for more than one counterpart if signed by the party against whom the Agreement is being enforced. 11.5. SEVERABILITY. Every provision of this Agreement and each Note is intended to be severable, and if any term or provision hereof or thereof shall be invalid, illegal or unenforceable for any reason, the validity, legality and enforceability of the remaining provisions hereof or thereof shall not be affected or impaired thereby, and any invalidity, illegality or unenforceability in any jurisdiction shall not affect the validity, legality or enforceability of any such term or provision in any other jurisdiction. 11.6. INTEGRATION. All exhibits to this Agreement shall be deemed to be a part of this Agreement. This Agreement, the exhibits hereto and the Notes embody the entire agreement and understanding between the Company, the Agent and the Banks with respect to the subject matter hereof and thereof and supersede all prior agreements and understandings between the Company and the Agent and the Banks with respect to the subject matter hereof and thereof. 11.7. SUCCESSORS AND ASSIGNS; SURVIVAL OF REPRESENTATIONS AND WARRANTIES. This Agreement shall be binding upon and inure to the benefit of the Banks, the Agent and the Company and their respective successors and assigns; PROVIDED, HOWEVER, that the Company may not assign or otherwise dispose of any of its rights hereunder. The Agent may assign its agency to another institution wholly owned by or under common ownership with Agent upon notice to all parties hereto. All covenants, agreements, warranties and representations made herein and in all certificates or other documents delivered in connection with this Agreement by or on behalf of the Company shall survive the execution and delivery hereof and thereof, and all such covenants, agreements, representations and warranties shall inure to the respective successors and assigns of the Banks and the Agent whether or not so expressed. 47 11.8. APPLICABLE LAW. This Agreement and the Notes shall be construed and enforceable in accordance with, and be governed by, the internal laws of the State of Minnesota, without regard to principles of conflict of laws. THE COMPANY, THE AGENT AND THE BANKS WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY. 11.9. INTEREST. At no time shall the interest rate payable on the Notes, together with the Commitment Fees to the extent such Fees are construed to constitute interest, exceed the maximum rate of interest permitted by applicable law. 11.10. CHANGE IN ACCOUNTING PRINCIPLES. If any changes in accounting principles from those used in the preparation of the Financial Statements hereafter occasioned by the promulgation of rules, regulations, pronouncements and opinions by or required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions) result in a change in the method of calculation of financial covenants, standards or terms found herein the parties hereto agree to enter into negotiations in order to amend such provisions so as to equitably reflect such changes with the desired result that the criteria for evaluating the financial condition of the Company and its Subsidiaries shall be the same as if such changes had not been made. 11.11. TRANSFER OF NOTES. In the event that the holder of any Note (including any Bank) shall transfer such Note pursuant to the provisions of Section 11.1 hereof, it shall immediately advise the Agent and the Company of such transfer; PROVIDED, HOWEVER, that the Company shall not be liable for any material increase in the amount which would have been payable by the Company under this Agreement and the Notes in the absence of such transfer; and PROVIDED, FURTHER, that the Agent and the Company shall be entitled conclusively to assume that no transfer of any Note has been made by any holder (including any Bank), unless and until the Agent and the Company shall have received written notice to the contrary. Subject to the provisions of Section 11.1 hereof, no Bank shall, by reason of the transfer of any Note or otherwise, be relieved of any of its obligations hereunder. Each transferee of any Note shall take such Note subject to the provisions of this Agreement and to any request made, waiver or consent given or other action taken hereunder, prior to the receipt by the Agent and the Company of written notice of such transfer, by each previous holder of such Note; and, except as expressly otherwise provided in such notice, the Agent and the Company shall be entitled conclusively to assume that the transferee named in such notice shall thereafter be vested with all rights and powers under this Agreement of the Bank named as the Person entitled to payment of the Note which is the subject of such transfer. 11.12. CONSENT TO JURISDICTION. All actions or proceedings with respect to this Agreement may be instituted in any state or federal court of competent jurisdiction in the State of Minnesota, and by execution and delivery of this Agreement, the Company irrevocably and unconditionally submits to the nonexclusive jurisdiction of each such court, and irrevocably and unconditionally waives (a) any objection the Company may now or hereafter have to the laying of venue in any of such courts, and (b) any claim that any action or proceeding brought in any of such courts has been brought in an inconvenient forum. The Company agrees that so long as the Company shall be obligated to the Banks under this Agreement, the Company shall maintain duly appointed agents reasonably satisfactory to the Agent for the service of process in the State of Minnesota, and shall keep the Agent advised in writing of the identity and location of such agents. The failure of such agents to give notice to the Company of any such service shall not impair or affect the validity of such service or of any judgment rendered in any action or proceeding based thereon. 11.13. CONFIDENTIALITY. Each Bank shall maintain in confidence and not publish, disseminate or disclose in any manner or to any Person and shall not use (x) any material nonpublic information relating to the Company and its Subsidiaries or (y) any technical, nonfinancial information, data or know-how which is identified as confidential by the Company, in either case which may be furnished pursuant to this Agreement, (hereinafter collectively called "Confidential Information"), subject to each Bank's (a) obligation to disclose any such Confidential Information pursuant to a request or 48 order under applicable laws and regulations or pursuant to a subpoena or other legal process, (b) right to disclose any such nontechnical or financial Confidential Information to bank examiners, its affiliates, auditors, counsel, other professional advisors and other Banks, (c) right to use any such Confidential Information in connection with the transactions set forth herein including, but not limited to, the sale or proposed sale of participations as provided in Section 11.1 hereof and (d) right to disclose any such Confidential Information in connection with the transactions set forth herein or in connection with any litigation or dispute involving the Banks and the Company or any of its Subsidiaries or any transfer or other disposition made or proposed to be made by such Bank of any of its Notes or other extensions of credit to the Company or any of its Subsidiaries. Notwithstanding the foregoing provisions of this Section 11.13, (i) the foregoing obligation of confidentiality shall not apply to any such Confidential Information that was known to such Bank or any of its affiliates prior to the time it received such Confidential Information from the Company or its Subsidiaries pursuant to this Agreement, other than as a result of the disclosure thereof by a Person who, to the knowledge of such Bank, was prohibited from disclosing it by any duty of confidentiality arising (under this Agreement or otherwise) by contract or law; and (ii) the foregoing obligation of confidentiality shall not apply to any such Confidential Information that becomes part of the public domain independently of any act of such Bank not permitted hereunder (through publication, the issuance of a patent disclosing such information or otherwise) or when identical or substantially similar information is received by such Bank without restriction as to its disclosure or use, from a Person who, to the knowledge or reasonable belief of such Bank, was not prohibited from disclosing it by any duty of confidentiality arising (under this Agreement or otherwise) by contract or law. SECTION 12. COSTS. 12.1. COSTS OF ENFORCEMENT. The Company agrees to pay to the Agent, for the account of the Agent or the Banks upon receipt of an invoice therefor, whether or not any Loan is made under this Agreement, (i) the reasonable fees and expenses of Special Counsel in connection with the negotiation, preparation, execution and delivery of this Agreement, (ii) the reasonable fees and expenses of other counsel to the Banks in connection with the negotiation, preparation, execution and delivery of this Agreement up to but not exceeding $2,500 in the aggregate, (iii) the reasonable fees and expenses of counsel for the Agent and the Banks in connection with any amendment, modification or waiver of any of the terms of this Agreement or any Note, and (iv) the costs and other expenses (including, without limitation, reasonable legal fees (including the reasonable allocable cost of inside counsel) and disbursements) incurred by the Agent or any Bank (as a direct or indirect result of action taken or omitted to be taken by or on behalf of the Company) in enforcing or seeking to enforce any of the rights of the Agent, the Banks or any of them under this Agreement. 12.2. TAXES. The Company agrees to pay all stamp, transfer and other taxes payable or determined to be payable in connection with the execution and delivery of this Agreement. The Company shall pay all such taxes payable or determined to be payable in connection with issuance of its Notes and the making of any Loan, and the Company agrees to save and hold the Agent and each Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. 12.3. DEFENSE OF PROCEEDINGS. If any action, suit or proceeding arising from any of the foregoing is brought against the Agent, any Bank, or any other Person indemnified or intended to be indemnified pursuant to this Section 12, the Company, to the extent and in the manner directed by the Person or Persons indemnified or intended to be indemnified, will resist and defend such action, suit or proceeding or cause the same to be resisted and defended by counsel designated by the Company (which counsel shall be acceptable to the Person or Persons indemnified or intended to be indemnified). If the Company shall fail to do any act or thing which it has covenanted to do hereunder or any representation or warranty on the part of the Company contained herein shall be breached, the Agent may (but shall not be obligated to) do the same or cause it to be done or remedy any such breach, and may expend its funds for such purpose. Any and all amounts so expended by the Agent shall be repayable to 49 it by the Company immediately upon the Agent's demand therefor, with interest at a rate per annum (computed on the basis of a year consisting of 360 days) equal to the Applicable Reference Rate from time to time in effect plus 1/4 of one percent. 12.4. SURVIVAL. The obligations of the Company under this Section 12 shall survive the repayment of the Notes and the payment of all other sums due under this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first written above. NATIONAL COMPUTER SYSTEMS, INC. By: _______/s/_CHARLES W. OSWALD______ Name: Charles W. Oswald Its: Chairman and Chief Executive Officer By: _______/s/_J. W. FENTON, JR.______ Name: J.W. Fenton, Jr. Its: Secretary-Treasurer
COMMITMENT AMOUNT - --------------------------------------------- $16,000,000 FIRST BANK NATIONAL ASSOCIATION, in its individual corporate capacity and as Agent By /s/ANNE H. FERRELL Title Vice President $12,000,000 NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By /s/EDWARD J. MEYER, JR. Title Vice President $12,000,000 THE FIRST NATIONAL BANK OF CHICAGO By /s/ARMUND J. SCHOEN, JR. Title Vice President AGGREGATE COMMITMENT AMOUNTS - --------------------------------------------- $40,000,000
50 EX-10 3 EXHIBIT 10J EXHIBIT 10J NATIONAL COMPUTER SYSTEMS CORPORATE MANAGEMENT INCENTIVE PLAN 1994 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 the corporate/ NCS Business/Division 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 and, on a selected basis, their direct management reports, - Division general managers. 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, 1994, 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 (20% Revenue and 50% Contribution). 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 make NCS more productive. (Re-engineering, continuous improvements, cost reduction programs) 4) What you have done to develop the strength of your organization. 5) How well you deal with issues/problems. 51 6) How you demonstrate personal, quality leadership to the Corporation. 7) What you have done to make NCS a better place to work. No bonus award payouts will be made to participants for achievement of the 70% financial performance if the individual's operating unit (Corporate or NCS Business or Division) does not accomplish its minimum profit contribution objective(s). (i.e., a division participant requires that the division achieve its minimum profit contribution threshold.) Additionally, total earned bonus payouts will be increased or decreased up to 20% based on actual achievement of the NCS Corporate net income financial goal. - If NCS overachieves its 1994 net income goal by 1% to 20%, earned MIP payouts will be INCREASED, prorated, by 1% to 20% of the earned bonus award. - If NCS underachieves its 1994 net income goal, earned MIP bonus awards will be DECREASED, prorated, by the same % amount as the net income shortfall, up to 20%. 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 in accordance with the BASIS OF OVERALL EVALUATION IN 1994 (attached). 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. 52 3/94 1994 CORPORATE MIP BASIS OF OVERALL EVALUATION IN 1994 Thirty percent (30%) of each participant's 1994 target bonus award is based on an overall evaluation of the individual's performance during the fiscal year. Consideration should be given to the individual's performance against the seven (7) factors listed below as well as how effectively the individual accomplished all aspects of responsibilities and expectations in achieving the approved business and financial plan. This adds an element of subjectivity and judgement into the MIP process and is useful because it allows for flexibility in determining earned bonus awards instead of making awards based solely on defined objectives or based only "on the numbers." The rating is to be made independent of financial performance results achieved for the 70% portion. It is recommended that prior to making a final determination, the MIP participant should be given an opportunity to complete a self-appraisal rating and comments on himself/herself for consideration by the evaluating manager.
BONUS WEIGHTING BASIS OF OVERALL EVALUATION IN 1994 - ----------- 1. What have you done to improve shareholder value? 2. How have you improved customer satisfaction and NCS' ability to serve the customer? 30% 3. What have you done to help NCS be more productive? (Re-engineering, continuous improvements, cost reduction programs)? 4. What have you done to develop the strength of your organization? 5. How well did you deal with issues/problems? 6. How did you demonstrate personal, quality leadership to the Corporation? 7. What have you done to make NCS a better place to work?
53 EX-10 4 EXHIBIT 10J EXHIBIT 10K AGREEMENT This Agreement entered into this 3RD day of December, 1993 between NATIONAL COMPUTER SYSTEMS, INC. ("NCS"), and PHILIP W. ARNESON ("P. Arneson"), and, to the extent her individual interest appears herein, DELORES A. ARNESON ("D. Arneson") (P. Arneson and D. Arneson collectively hereinafter referred to as "Arneson") relative to NCS loans to Arneson and the employment termination package between NCS and P. Arneson. WHEREAS, P. Arneson's duties as Senior Vice President of NCS and President, NCS Financial ceased effective August 4, 1993; and WHEREAS, on April 30, 1993 the parties entered into a written agreement clarifying and confirming the rights and obligations of the parties respective to certain loans made by NCS to Arneson and the rights and obligations of each of the parties thereto, which agreement by reference is made a part hereof; and WHEREAS, NCS has guaranteed a first mortgage on the Spicer, Minnesota homestead of Arneson, which mortgage is in the principal sum of Two Hundred Seventy Five Thousand Dollars ($275,000); and WHEREAS, the parties have reached an understanding respective to the treatment of various rights, benefits and obligations of the parties relating to P. Arneson's termination of employment. NOW THEREFORE, in consideration of the mutual promises contained herein, NCS and Arneson agree as follows: 1. P. Arneson represents, understands and agrees that his duties as Senior Vice President of NCS and President, NCS Financial ceased upon the close of business August 4, 1993. 2. The agreement entered into by and between the parties dated April 30, 1993 is incorporated herein by reference and affirmed by the parties and remains in full force and effect, except insofar as the same is modified by the contents hereof. 3. Since August 4, 1993, NCS has paid to P. Arneson his regular salary of Two Hundred Thousand Dollars ($200,000) per annum, and NCS will continue the semi-monthly installments thereof to P. Arneson or his heirs until January 31, 1994, the close of NCS's fiscal year. 4. Beginning February 1, 1994, NCS will pay to P. Arneson or his heirs the sum of One Hundred Thousand Dollars ($100,000) to be paid at the rate of Sixteen Thousand Six Hundred Sixty-Six and 66/100 Dollars ($16,666.66) per month, in semi-monthly installments, for the months of February through July, 1994 (6 months). For purposes of eligibility for medical, dental, and life insurance coverage and stock option grants only, P. Arneson will be an NCS employee during the elected payment periods. 5. Beginning February 1, 1994, NCS will deduct interest from any amounts paid as set forth in Paragraph 4 above in accordance with the following: calculated at a rate per annum equal to one percent (1%) in excess of the rate of interest from time to time publicly announced by Norwest Bank Minnesota, N.A. The current withholding amount for interest of $1,300 per payment, or $2,600 per month will be continued through January 31, 1994. 6. Since August 4, 1993, NCS has maintained intact all of P. Arneson's employment benefits, and those elected by him, and will continue to maintain the same through January 31, 1994. Commencing on February 1, 1994, NCS will maintain the employee medical, dental and life insurance benefits as provided to other employees until July 31, 1994, or until P. Arneson becomes 54 completely covered by another plan, whichever occurs earlier. Currently outstanding employee stock options will continue to vest until July 31, 1994. Except for the PC Quote bonus, all other employee benefits, including but not limited to, bonuses, the outstanding Long-Term Incentive Plan award, sick or vacation time will cease as of January 31, 1994. P. Arneson may choose to continue the medical, dental and life coverage as personal coverage at P. Arneson's expense for eighteen (18) months after the end of the 1994 semi-monthly payment periods, or until covered by another plan. 7. NCS and P. Arneson agree that no allowance will be made by NCS to P. Arneson as and for office space, secretarial services, or expense reimbursement. 8. The present indebtedness owing by Arneson to NCS is Four Hundred Forty Five Thousand Dollars ($445,000) which is secured by a mortgage to NCS on the homestead of Arneson located at Spicer, Minnesota, said mortgage is subordinated to a mortgage on said property in favor of Norwest Bank Minnesota, N.A. in an original principal amount of Two Hundred Seventy Five Thousand Dollars ($275,000). With respect to the Four Hundred Forty Five Thousand Dollars ($445,000) of indebtedness, NCS will credit the avails of any and all existing stock options to which P. Arneson would be entitled to exercise through the end of the 1994 semi-monthly payments. a. To the extent P. Arneson exercises any stock options pursuant to present stock option agreements between Arneson and NCS, he will enter into an open market sale of the subject shares of NCS stock. NCS will then receive from and apply to Arneson's outstanding balance the difference between the market price recognized through the open market sale, after commissions, and the option price specified in the applicable stock option agreement, less an amount to be reasonably determined by NCS to cover P. Arneson's income taxes on the gain, which amount shall be retained by P. Arneson. b. Because of Arneson's bankruptcy and the inability to repay the indebtedness owing by Arneson to NCS, NCS agrees that it will on January 15, 1994, forgive Two Hundred Forty-Five Thousand Dollars ($245,000) of indebtedness of Arneson. Subsequently, in the event that the amounts or credits realized by P. Arneson pursuant to this Agreement exceed the remaining loan balance, NCS has the right to recover any amount so forgiven before any remaining amounts are paid to Arneson. At all times, the determination of the amount to be forgiven will be solely that of P. Arneson. NCS shall neither be responsible nor liable for the payment of any taxes incurred as the result of such debt forgiveness. The NCS guaranty to Norwest Bank Minnesota, N.A. of the loan secured by a first mortgage on the Arneson homestead in Spicer, Minnesota is not modified by this Agreement. NCS will maintain an assignment of the NCS Group Term Life Insurance equal to the portion provided by NCS (at no cost to P. Arneson) and release any assignment of amounts in excess thereof. 9. NCS has an investment in the publicly traded common stock of PC Quote, Inc. NCS does hereby reaffirm an agreement heretofore made with P. Arneson for the payment of a special bonus of Two Hundred Thousand Dollars ($200,000) if the NASDAQ quoted stock price of PC Quote, Inc. common shares remains above Four Dollars ($4.00) per share for ninety (90) consecutive days or is acquired by another entity for Four Dollars ($4.00) or more per share prior to January 31, 1995; accordingly, if such event occurs, NCS will credit Arneson's indebtedness by the amount of $200,000. Any liability for income taxes shall be Arneson's responsibility. 10. It is understood that P. Arneson is not an agent or representative of NCS. It is further understood that his membership on the Board of Directors of PC Quote is in his personal and individual capacity, however, it is his intent to cooperate fully with the designated NCS officer responsible for this investment. 55 11. In consideration of this agreement, P. Arneson, with the advice of counsel, hereby releases and discharges NCS, its employees, directors, officers, agents, successors, and assigns from any and all liability for damages or claims of any kind and agrees not to institute any claim for damages or otherwise, by charge or otherwise, nor authorize any other party, governmental or otherwise, to institute any claim via administrative or legal proceedings against NCS for any such claims including, but not limited to, any claims arising under or based upon the Minnesota Human Rights Act, Minn. Stat. SectionSection 363.01 et seq.; Title VII of the Civil Rights Act, 42 U.S.C. SectionSection 2000e et seq.; the Age Discrimination in Employment Act, 29 U.S.C.SectionSection 621 et seq.; or the Americans With Disabilities Act, 42 U.S.C. SectionSection 12101 et seq.; and any contract, quasi contract, or tort claims, whether developed or undeveloped, arising from or related to P. Arneson's employment with NCS, and/or the cessation of P. Arneson's employment with NCS. P. Arneson and NCS agree that, by signing this Agreement, P. Arneson does not waive any claims arising after the execution of this Agreement. 12. NCS does hereby release and discharge P. Arneson from any and all liability for damages or claims arising from or related to P. Arneson's employment with NCS except as provided in this Agreement and to the extent of modification of the Agreement between the parties dated April 30, 1993. 13. P. Arneson agrees that he was not entitled to the payments and benefits outlined in paragraphs 3, 4, and 6 as a result of his employment with NCS, but that the payments and benefits are being provided as consideration for his acceptance and execution of this Agreement. 14. P. Arneson has been informed of his right to rescind this Agreement as far as it extends to potential claims under Minn. Stat. SectionSection 363.01 et SEQ. (prohibiting discrimination in employment) by written notice to NCS within fifteen (15) calendar days following his execution of this Agreement. To be effective, such written notice must either be delivered by hand or sent by certified mail, return receipt requested, addressed to Mr. J.W. Fenton, Jr., Secretary-Treasurer, National Computer Systems, Inc., 11000 Prairie Lakes Drive, P.O. Box 9365, Minneapolis, MN 55440, delivered or post-marked within such fifteen (15) day period. P. Arneson understands that NCS will have no obligations under this Agreement in the event such notice is timely delivered and any payments made as of that date by NCS pursuant to paragraph 3 and 4, above, shall be immediately repaid by P. Arneson to NCS. 15. P. Arneson has been informed of his right to revoke this Agreement as far as it extends to potential claims under the Age Discrimination in Employment Act, 29 U.S.C. SectionSection 621 et SEQ. by informing NCS of his intent to revoke this Agreement within seven (7) calendar days following his execution of this Agreement. To be effective, such written notice must either be delivered by hand or sent by certified mail, return receipt requested, addressed to Mr. J.W. Fenton, Jr., Secretary-Treasurer, National Computer Systems, Inc., 11000 Prairie Lakes Drive, P.O. Box 9365, Minneapolis, MN 55440, delivered or postmarked within such seven (7) day period. This Agreement shall not become effective or enforceable until the seven (7) day period has expired. 16. P. Arneson has also been informed that the terms of this Agreement shall be open for acceptance by him for a period of twenty-one (21) days during which time he may consider whether to accept this Agreement. 17. This Agreement constitutes a contract enforceable against either party and shall be construed and enforced in accordance with the laws of the State of Minnesota. Nothing contained in this Agreement is intended to violate any applicable law. If any part of this Agreement is construed to be in violation of a state and/or federal law, then that part shall be null and void, but the balance of the provisions of this Agreement shall remain in full force and effect. 18. This Agreement shall not in any way be construed as an admission by NCS that it has acted wrongfully with respect to P. Arneson or any other person, or that P. Arneson has any rights 56 whatsoever against NCS. NCS specifically disclaims any liability to, or wrongful acts against, P. Arneson or any other person, on the part of itself, its directors, its employees, its representatives or its agents. 19. The terms of this Agreement shall remain strictly confidential between the parties hereto, and shall not be disclosed to third persons unless required by law. 20. P. Arneson hereby affirms and acknowledges that he has read the foregoing Agreement and that he has been advised to consult with an attorney prior to signing this Agreement. P. Arneson agrees that the provisions set forth in this Agreement are written in language understandable to him and further affirms that he understands the meaning of the terms of this Agreement and their effect. P. Arneson represents that he enters into this Agreement freely and voluntarily. 21. This Agreement may be executed by facsimile signatures which shall be valid and enforceable as original signature. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed as of this 3rd day of December, 1993. NATIONAL COMPUTER SYSTEMS, INC. By /s/ CHARLES W. OSWALD ----------------------------------- Its Chairman ----------------------------------- /s/ PHILLIP W. ARNESON ----------------------------------- Philip W. Arneson /s/ DELORES A. ARNESON ----------------------------------- Delores A. Arneson 57 EX-11 5 EXHIBIT 11 EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE NATIONAL COMPUTER SYSTEMS, INC.
YEAR ENDED JANUARY 31 ----------------------------------------------------- 1994 1993 1992 1991 1990 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRIMARY Average shares outstanding................ 15,438 15,915 16,002 15,891 16,003 Dilutive stock options -- based on the treasury stock method using average market price............................. 97 151 136 -- 20 --------- --------- --------- --------- --------- TOTAL................................... 15,535 16,066 16,138 15,891 16,023 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss)........................... $ (2,509) $ 16,508 $ 15,474 $ 13,022 $ 7,317 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) per share................. $ (.16) $ 1.03 $ .96 $ .82 $ .46 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- FULLY DILUTED Average shares outstanding................ 15,438 15,915 16,002 15,891 16,003 Dilutive stock options -- based on the treasury stock method using the higher of year-end market price or average market price.................................... 99 164 199 78 47 Assumed conversion of convertible subordinated debenture................... -- -- 361 1,937 2,250 --------- --------- --------- --------- --------- TOTAL................................... 15,537 16,079 16,562 17,906 18,300 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss)........................... $ (2,509) $ 16,508 $ 15,474 $ 13,022 $ 7,317 Add interest on convertible subordinated debenture, net of the income tax effect.... -- -- 363 1,795 1,999 --------- --------- --------- --------- --------- $ (2,509) $ 16,508 $ 15,837 $ 14,817 $ 9,316 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) per share................. $ (.16) $ 1.03 $ .96 $ .83 $ .51 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
58 EX-13 6 EXHIBIT 13 EXHIBIT 13 PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED JANUARY 31, 1994 FIVE-YEAR FINANCIAL DATA
YEAR ENDED JANUARY 31, --------------------------------------------------------------- 1994 1993 1992 1991 1990 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Financial Results Revenues...................................... $ 305,453 $ 300,067 $ 302,506 $ 315,283 $ 284,203 Income (loss) from operations................. (2,301 (1) 27,258 28,704 28,064 17,472 Income (loss) before income taxes............. (2,859) 26,608 24,174 20,972 11,517 Income taxes.................................. (350) 10,100 8,700 7,950 4,200 Net income (loss)............................. (2,509) 16,508 15,474 13,022 7,317 Net income (loss) per share................... $ (.16) $ 1.03 $ .96 $ .82 $ .46 Average number of shares outstanding.......... 15,535 16,066 16,138 15,891 16,023 Cash dividends per share...................... $ .36 $ .33 $ .29 $ .28 $ .28 Financial Position Current ratio................................. 1.5 1.6 1.7 2.0 1.8 Working capital............................... $ 36,217 $ 38,792 $ 39,836 $ 51,351 $ 50,574 Total assets.................................. 220,173 214,739 217,578 225,159 250,395 Long-term debt, less current maturities....... 44,674 23,869 37,214 56,034 82,337 Stockholders' equity.......................... $ 100,147 $ 121,317 $ 112,316 $ 100,646 $ 90,192 - ------------------------ (1) Includes a $25,000 pre-tax restructuring charge. See Note 2 of Notes to Consolidated Financial Statements.
59 QUARTERLY MARKET DATA (UNAUDITED) The Company stock is traded on the NASDAQ National Market System under the symbol "NLCS." As of January 31, 1994, there were approximately 2,200 stockholders of record.
YEAR ENDED JANUARY 31, 1994 ------------------------------------------ QUARTER 1ST 2ND 3RD 4TH - ------------------------------------------ --------- --------- --------- --------- Sales prices per share High.................................... $ 16.00 $ 18.00 $ 17.75 $ 13.25 Low..................................... 13.25 14.87 11.50 10.25 Dividends paid per share.................. $ .09 $ .09 $ .09 $ .09
YEAR ENDED JANUARY 31, 1993 ------------------------------------------ QUARTER 1ST 2ND 3RD 4TH - ------------------------------------------ --------- --------- --------- --------- Sales prices per share High.................................... $ 16.75 $ 15.75 $ 19.25 $ 18.75 Low..................................... 13.50 12.50 14.25 14.25 Dividends paid per share.................. $ .08 $ .08 $ .08 $ .09
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED ---------------------------------------------- APRIL 30 JULY 31 OCTOBER 31 JANUARY 31 --------- --------- ----------- ----------- Year Ended January 31, 1994 Revenues................................... $ 68,514 $ 75,669 $ 77,645 $ 83,625 Gross profit............................... 26,789 30,996 27,870 33,266 Net income (loss).......................... 1,732 4,233 1,505 (9,979)(1) Net income (loss) per share................ $ 0.11 $ 0.27 $ 0.10 $ (0.66 ) Year Ended January 31, 1993 Revenues................................... $ 65,543 $ 74,792 $ 73,719 $ 86,013 Gross profit............................... 23,905 30,901 27,331 32,266 Net income................................. 1,574 4,803 3,753 6,378 Net income per share....................... $ 0.10 $ 0.30 $ 0.23 $ 0.40 - ------------------------ (1) Includes a $25,000 pre-tax restructuring charge. See Note 2 of Notes to Consolidated Financial Statements.
60 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION INCOME AND EXPENSE ITEMS AS A PERCENTAGE OF REVENUES
FISCAL YEAR ----------------------------------- 1993 1992 1991 ----------- ---------- ---------- Revenues Net sales..................................................... 77.5% 77.1% 76.1% Maintenance and support....................................... 22.5 22.9 23.9 ----- ----- ----- Total revenues.............................................. 100.0 100.0 100.0 Costs and expenses Cost of sales (1)............................................. 57.4 57.7 58.0 Cost of maintenance and support (2)........................... 73.6 76.1 72.4 ----- ----- ----- Total gross margin.......................................... 38.9 38.1 38.5 Sales and marketing............................................. 15.7 13.2 11.9 Research and development........................................ 3.1 3.0 2.7 General and administrative...................................... 12.7 12.9 14.4 Restructuring charge............................................ 8.2 -- -- ----- ----- ----- Income (loss) from operations................................... (0.8 ) 9.1 9.5 Income (loss) before taxes...................................... (0.9 ) 8.9 8.0 Net income (loss)............................................... (0.8 )% 5.5 % 5.1 % ----- ----- ----- ----- ----- ----- - ------------------------ (1) As a percentage of sales revenue. (2) As a percentage of maintenance and support revenue.
Note: The fiscal years referenced herein are as follows: fiscal 1993 -- year ended January 31, 1994; fiscal 1992 -- year ended January 31, 1993; fiscal 1991 - -- year ended January 31, 1992. The Company operates two business segments. The financial systems segment (NCS Financial) 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. The remainder of the Company's business is centered around its proprietary optical scanning hardware and forms technology. This segment markets those products and services and related application software to education, business, and professional markets through the NCS Education, NCS Technology and NCS Assessment businesses. In order to provide improved financial reporting, additional expense detail is being reported in the accompanying fiscal 1993 consolidated statements of income. Specifically, the sales and marketing and the research and development lines have been added. Certain reclassifications, particularly related to isolating research and development expenses, have been made to the prior years statements to conform to the current year classification. RECAP OF 1993 RESULTS Total revenues in fiscal 1993 were up 1.8% to $305.5 million. Results fell short of expectations as, despite a sizeable increase in sales and marketing efforts, significant revenue gains were not achieved. The Company's overall gross margin percentage on revenues was also slightly improved in fiscal 1993. However, the increase in sales and marketing costs more than offset the sales and gross margin improvements. These expenses were increased to spur revenue growth, but those efforts were not as successful as intended. Research and development expense was up slightly in 1993 and general and administrative expenses were essentially flat. Interest and other non-operating items were also comparable on a net basis. In summary, before the effects of the restructuring charge discussed below, pre-tax income was down 16.8% to $22.1 million principally due to the higher sales and marketing expenses. The restructuring charge of $25 million caused a net pre-tax loss of $2.9 million for fiscal 1993. A more detailed discussion follows. 61 RESTRUCTURING CHARGE In January, 1994, the Company announced it would incur a $25 million restructuring charge, principally to terminate the Ultrust product and the related Cambridge, Massachusetts operations dedicated to the product. Ultrust was a sophisticated asset management system for the largest trust banks in the market and included full multi-currency accounting and other features designed to facilitate global asset management. While Ultrust was intended to be marketed as packaged software, it became apparent that the Ultrust product could not meet the level of customized, individualized functionality, on an economically viable basis, that customers in this market segment demanded. Also, rapid changes in technology since the commencement of development, while not fatal to its viability, limited the potential for the product. Further investment in the product could not be justified and the product was terminated. The related charge of $22.8 million includes the non-cash write off of the investment in software of $17.8 million. The remainder of the Ultrust charge consists of $2.7 million for severance and out-placement costs for approximately 80 people, and $2.3 million in facility costs, customer accommodations and other items. The restructuring charge also included the restructuring of the administrative software division of the NCS 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. Substantially all of this $2.2 million charge was related to severance, relocation and other employee costs. It is expected that substantially all of the above restructuring actions and related cash payments will be completed by June, 1994. The elimination of the Ultrust operating losses will have an immediate positive effect on future operating results of NCS Financial. The benefits of the NCS Education software restructuring will be realized more gradually as the operating efficiencies of a single location are instituted, since the Company is not anticipating a significant net reduction in its NCS Education business workforce. REVENUES FISCAL 1993 VERSUS FISCAL 1992. Total revenues for fiscal 1993 were up 1.8% to $305.5 million from $300.1 million in fiscal 1992. Total revenue results for fiscal 1993 as compared to fiscal 1992 by the four major NCS businesses were as follows: NCS Technology.................................... +3.3 % NCS Education..................................... +6.1 % NCS Assessments................................... +4.4 % NCS Financial..................................... -12.4 %
Significantly higher volumes of educational assessments and student financial aid processing at the Company's Iowa City service center resulted in an overall increase in NCS Education revenues, notwithstanding the loss of approximately $8 million of Guaranteed Student Loan (GSL) contract revenue. NCS Financial revenues were down due to the absence of any Ultrust sales in 1993, versus $5.8 million of such revenues in fiscal 1992. Ultrust has been discontinued as described above. The results of NCS Financial, and NCS as a whole, were significantly impacted by the operating losses in the Ultrust product line, which will not recur in the future. By revenue category, net sales were up 2.3% in fiscal 1993 over fiscal 1992 due to the higher assessment and processing revenues mentioned above, as well as increased scannable forms sales. Maintenance and support revenues were up very slightly from year to year as both software support and hardware maintenance were up only marginally. FISCAL 1992 VERSUS FISCAL 1991. Total revenues for fiscal 1992 versus fiscal 1991 were essentially flat year to year (down less than 1%). Variations by the four major business units were as follows: NCS Technology..................................... -8.1 % NCS Education...................................... +1.0 % NCS Assessments.................................... +5.1 % NCS Financial...................................... +6.2 %
62 NCS Technology revenues declined year to year principally due to the mid-1991 divestiture of certain European operations. NCS Financial showed an increase in fiscal 1992 over the prior year due to increases in corporate trust products and Ultrust sales. By revenue category, net sales were up in 1992 by less than 1% with major factors being as noted in the previous paragraph. Maintenance and support revenues were down $3.9 million or 5.3% in fiscal 1992 from the prior year. This was due to the decline in third party, non-proprietary hardware maintenance and the European divestiture referred to above. Software support revenues rose modestly year to year. COST OF REVENUES AND GROSS MARGINS FISCAL 1993 VERSUS FISCAL 1992. The Company's overall gross margin percentage improved to 38.9% in fiscal 1993 from 38.1% in fiscal 1992. The gross margin on net sales improved 0.3 percentage points year to year as a percentage of net sales due principally to improved margins on non-GSL student financial aid processing. Maintenance and support margins improved by 2.5 percentage points year to year as a percentage of related revenues due to lower parts costs related to hardware maintenance. FISCAL 1992 VERSUS FISCAL 1991. The Company's overall gross margin percentage declined by 0.4 percentage points as a percentage of total revenues in fiscal 1992 from fiscal 1991. The gross margin percentage on sales improved slightly as a percentage of sales in fiscal 1992 from fiscal 1991; however, this was offset by a decline in the gross margin percentage on maintenance and support year to year as both hardware maintenance and software support margins declined. OPERATING EXPENSES FISCAL 1993 VERSUS FISCAL 1992. Sales and marketing expenses increased by $8.4 million in fiscal 1993 over fiscal 1992. This was a 21% increase year to year and was incurred predominantly in NCS Technology, though all the four major businesses contributed to the increase. The increase in this area was to increase sales momentum, and while sales did increase slightly in fiscal 1993, they did not increase as much as anticipated. The Company is currently evaluating its expenditures in this area to control them to fully productive levels in fiscal 1994. Research and development expenses were up slightly in fiscal 1993 from the prior year. This increase was spread among the four major NCS businesses, with the largest increase coming in scanning hardware and software engineering. General and administrative expenses were essentially unchanged overall from fiscal 1992 to fiscal 1993. FISCAL 1992 VERSUS FISCAL 1991. Sales and marketing expenses increased $3.6 million or 10.1% in fiscal 1992 over fiscal 1991. The majority of this increase came in NCS Education as that business took on the responsibility for sales of its CIMS-R- product from IBM. Research and development increased year to year by $.8 million or 10.0%. This increase came almost evenly from NCS Assessments and NCS Financial due to product development initiatives. General and administrative expenses declined $5.1 million or 11.7% due to the divestiture of certain European operations in 1991 and through concerted efforts to control these expenses Company wide. INTEREST EXPENSE Interest expense increased by $0.3 million in fiscal 1993 from fiscal 1992. The increase was due to an increase in the average borrowings outstanding, as interest rates did not vary significantly. See Capital Resources and Liquidity below for further discussion of cash flow and debt. Interest expense had declined $1.5 million in fiscal 1992 from fiscal 1991 due to significantly lower outstanding borrowing balances during fiscal 1992 when compared to the prior year. Lower rates also contributed to the year to year decrease. 63 OTHER INCOME AND EXPENSE 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. During fiscal 1992, the Company concluded certain litigation with a resulting net gain of approximately $1.0 million which is included in other income and expense. This gain predominantly includes the favorable resolution of certain claims relating to the original procurement of the GSL processing contract in 1987. During fiscal 1991, a provision for loss of $750,000 was recorded for the divestiture of certain European operations and is included in other expense. INCOME TAXES The effective income tax benefit rate for fiscal 1993 is 12.2%, which is significantly lower than the statutory rate and NCS' historical effective rate. The magnified rate impact of permanent book/tax differences is due to the low absolute dollar amount of the pre-tax loss. Refer also to Note 6 of the Notes to Consolidated Financial Statements. The recent U.S. federal income tax law changes will have only a slight upward impact, if any, on the Company's effective tax rate in the future, as the Company is anticipating that its effective tax rate will return to a level commensurate with prior periods. The effective income tax rates for fiscal 1992 and 1991 were 38.0% and 36.0%, respectively, with the increase in 1992 being due to lower research and development credits in 1992. CAPITAL RESOURCES AND LIQUIDITY During fiscal 1993, the Company generated $26.0 million of cash from operating activities. This was significantly below the prior year's generation of $54.3 million due to lower levels of income, lower non-cash expenses, and growth in receivables. The significant receivables growth was due to heavy billing activity in the last quarter of the fiscal year as the Company's days of billings outstanding remained virtually constant with the prior year. The accrued expense increase in fiscal 1993 includes the residual of the restructuring charges, which will require cash outlay in the first half of fiscal 1994. Cash was used for capital expenditures and other investing activities totalling $38.3 million. This investment level is higher than the fiscal 1992 amount of $24.5 million due to higher plant and equipment expenditures, including an additional forms plant in the United Kingdom, and investments in software development prior to the discontinuation of Ultrust. The Company also repurchased over one million common shares during fiscal 1993, using $15.9 million of cash. All these activities described above were financed with $9.0 million cash on hand and increased borrowings of $23.0 million during fiscal 1993. During fiscal 1992, $54.3 million of cash was generated from operating activities. Cash was used for capital expenditures and other investing activities totalling $24.5 million, debt reduction of $13.4 million, dividends of $5.3 million and stock repurchases, net of issuances, of $2.7 million. Since revolving debt balances were reduced to zero and only term debt remained at January 31, 1993, the Company's cash and cash equivalents balance increased $8.4 million to $10.8 million. The Company had long-term debt balances, including current maturities of $47.4 million, $25.4 million, and $39.8 million at January 31, 1994, 1993, and 1992, respectively. The items causing the changes in debt balances are explained above. At January 31, 1994, the Company's total debt to equity ratio was .47 to 1, up from .21 to 1 a year earlier and .35 to 1 two years prior. The Company believes that the current debt to equity ratio is within its acceptable operating range. Looking toward fiscal 1994, the Company maintains a $30 million revolving credit facility, $11.5 million of which was unused at January 31, 1994. The Company expects cash flow from operations to return to more traditional levels in fiscal 1994 and will use such cash to fund capital expenditures and reduce debt to the extent possible. In fiscal 1994, capital expenditures are likely to increase, principally for plant and office construction projects in Iowa City, Iowa and Mesa, Arizona, with software development decreasing from 1993 levels. Remaining Board of Directors' authorization for stock repurchases total 308,000 shares. The Company considers the $30 million credit facility and funds from operations to be adequate to meet foreseeable cash requirements. 64 NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
JANUARY 31, -------------------- 1994 1993 --------- --------- Current Assets Cash and cash equivalents............................................ $ 1,724 $ 10,767 --------- --------- Receivables Trade.............................................................. 70,100 63,016 Other.............................................................. 5,328 2,354 --------- --------- 75,428 65,370 --------- --------- Inventories.......................................................... 17,370 14,006 Prepaid expenses and other........................................... 9,198 8,644 --------- --------- Total Current Assets............................................... 103,720 98,787 --------- --------- Property, Plant & Equipment Land, buildings and improvements..................................... 37,254 31,435 Machinery and equipment.............................................. 88,950 82,443 Rotable service parts................................................ 11,085 12,667 Equipment held for lease............................................. 8,205 9,012 Accumulated depreciation............................................. (75,988) (73,424) --------- --------- 69,506 62,133 --------- --------- Other Assets, net Acquired and internally developed software products.................. 20,092 30,166 Non-current receivables, investments and other assets................ 21,896 17,452 Goodwill............................................................. 4,959 6,201 --------- --------- 46,947 53,819 --------- --------- Total Assets....................................................... $ 220,173 $ 214,739 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt................................. $ 2,677 $ 1,481 Accounts payable..................................................... 18,777 18,006 Accrued expenses..................................................... 27,093 21,403 Deferred income...................................................... 18,956 16,808 Income taxes......................................................... -- 2,297 --------- --------- Total Current Liabilities.......................................... 67,503 59,995 --------- --------- Deferred Income Taxes.................................................. 7,849 9,558 Long-Term Debt -- less current maturities.............................. 44,674 23,869 Commitments............................................................ -- -- Stockholders' Equity Preferred stock...................................................... -- -- Common stock -- issued and outstanding -- 14,983 and 15,899 shares, respectively........................................................ 449 477 Paid-in capital...................................................... -- 13,390 Retained earnings.................................................... 106,771 115,716 Deferred compensation................................................ (7,073) (8,266) --------- --------- Total Stockholders' Equity......................................... 100,147 121,317 --------- --------- Total Liabilities and Stockholders' Equity......................... $ 220,173 $ 214,739 --------- --------- --------- ---------
See Notes to Consolidated Financial Statements. 65 NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JANUARY 31, ------------------------------- 1994 1993 1992 --------- --------- --------- Revenues Net sales................................................. $ 236,737 $ 231,483 $ 230,060 Maintenance and support................................... 68,716 68,584 72,446 --------- --------- --------- Total revenues.......................................... 305,453 300,067 302,506 Costs And Expenses Cost of sales............................................. 135,943 133,457 133,532 Cost of maintenance and support........................... 50,589 52,207 52,438 --------- --------- --------- Gross margin............................................ 118,921 114,403 116,536 Sales and marketing....................................... 48,104 39,695 36,065 Research and development.................................. 9,364 8,865 8,057 General and administrative................................ 38,754 38,585 43,710 Restructuring charge...................................... 25,000 -- -- --------- --------- --------- Income (Loss) From Operations............................... (2,301) 27,258 28,704 Interest expense.......................................... 2,200 1,889 3,361 Other (income) expense, net............................... (1,642) (1,239) 1,169 --------- --------- --------- Income (Loss) Before Income Taxes........................... (2,859) 26,608 24,174 Income tax provision (benefit)............................ (350) 10,100 8,700 --------- --------- --------- Net Income (Loss)........................................... $ (2,509) $ 16,508 $ 15,474 --------- --------- --------- --------- --------- --------- Net Income (Loss) Per Share................................. $ (0.16) $ 1.03 $ 0.96 Average Shares Outstanding.................................. 15,535 16,066 16,138 --------- --------- --------- --------- --------- ---------
See Notes to Consolidated Financial Statements. 66 NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ---------------------- PAID-IN RETAINED DEFERRED SHARES AMOUNT CAPITAL EARNINGS COMPENSATION TOTAL --------- ----------- --------- --------- ----------- --------- Balance January 31, 1991................ 15,934 $ 478 $ 15,198 $ 95,142 $ (10,172) $ 100,646 Shares issued for employee stock purchase and option plans............ 165 5 1,567 1,572 Repurchase of common stock............ (78) (2) (1,049) (1,051) Restricted stock awards............... 6 130 (130) -- ESOP debt payment..................... 1,000 1,000 Restricted stock compensation accrual.............................. 139 139 Net income............................ 15,474 15,474 Cash dividends paid -- $.29 per share................................ (4,641) (4,641) Foreign currency translation adjustment........................... (823) (823) --------- ----- --------- --------- ----------- --------- Balance January 31, 1992................ 16,027 481 15,846 105,152 (9,163) 112,316 Shares issued for employee stock purchase and option plans............ 194 6 2,222 2,228 Repurchase of common stock............ (338) (10) (4,931) (4,941) Restricted stock awards............... 16 253 (253) -- ESOP debt payment..................... 1,000 1,000 Restricted stock compensation accrual.............................. 150 150 Net income............................ 16,508 16,508 Cash dividends paid -- $.33 per share................................ (5,261) (5,261) Foreign currency translation adjustment........................... (683) (683) --------- ----- --------- --------- ----------- --------- 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 --------- ----- --------- --------- ----------- --------- --------- ----- --------- --------- ----------- ---------
See Notes to Consolidated Financial Statements. 67 NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED JANUARY 31, ------------------------------- 1994 1993 1992 --------- --------- --------- Operating Activities Net income (loss).......................................... $ (2,509) $ 16,508 $ 15,474 Adjustments to reconcile to net cash provided by operating activities: Depreciation............................................. 16,289 18,426 17,858 Amortization............................................. 8,388 10,131 7,359 Deferred income taxes and other.......................... (2,434) (501) (978) Non-cash restructuring charge............................ 17,805 -- -- Changes in operating assets and liabilities (net of acquired amounts): Decrease (increase) in accounts receivable............. (12,346) 1,830 (6,685) Decrease (increase) in inventory and other current assets................................................ (3,765) 3,100 7,525 Increase in accounts payable and accrued expenses...... 3,879 552 1,797 Increase in deferred income............................ 652 4,278 2,622 --------- --------- --------- Net Cash Provided By Operating Activities.............. 25,959 54,324 44,972 --------- --------- --------- Investing Activities Divestitures (acquisitions)................................ (1,198) 154 (1,527) Purchases of property, plant and equipment................. (21,935) (12,894) (9,304) Purchases of rotable service parts......................... (1,917) (1,490) (2,153) Capitalized software products.............................. (11,474) (8,409) (9,658) Other -- net............................................... (1,728) (1,906) (1,866) --------- --------- --------- Net Cash Used In Investing Activities.................. (38,252) (24,545) (24,508) --------- --------- --------- Financing Activities Net increase (decrease) in revolving credit borrowing...... 18,500 (15,000) 5,000 Repayment of subordinated debenture........................ -- -- (22,497) Net proceeds of other borrowings........................... 4,501 1,599 257 Issuance (repurchase) of common stock, net................. (14,170) (2,713) 521 Dividends paid............................................. (5,581) (5,261) (4,641) --------- --------- --------- Net Cash Provided By (Used In) Financing Activities.... 3,250 (21,375) (21,360) --------- --------- --------- Increase (Decrease) In Cash and Cash Equivalents............. (9,043) 8,404 (896) Cash and Cash Equivalents -- Beginning of Year............... 10,767 2,363 3,259 --------- --------- --------- Cash and Cash Equivalents -- End of Year..................... $ 1,724 $ 10,767 $ 2,363 --------- --------- --------- --------- --------- ---------
See Notes to Consolidated Financial Statements. 68 NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1 -- ACCOUNTING POLICIES FISCAL YEARS: The fiscal years referenced herein are as follows: fiscal 1993 -- year ended January 31, 1994; fiscal 1992 -- year ended January 31, 1993; fiscal 1991 -- year ended January 31, 1992. 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. In order to provide improved financial reporting, additional expense lines are being reported in the accompanying fiscal 1993 consolidated statement of income. Specifically, the sales and marketing line and the research and development line have been added. The prior years statements of income have been reclassified also, to conform to the current year's presentation. CASH EQUIVALENTS: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist of investments in money market funds, subject to daily withdrawal without limitation. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out method) or market. Components of inventory are summarized as follows:
JANUARY 31, -------------------- 1994 1993 --------- --------- Finished products................................................................ $ 6,094 $ 5,629 Scoring services and work in process............................................. 6,117 4,017 Raw materials and purchased parts................................................ 5,159 4,360 --------- --------- $ 17,370 $ 14,006 --------- --------- --------- ---------
ROTABLE SERVICE PARTS: Rotable service parts (parts continually repaired and reused) are carried at cost and depreciated over their useful lives, which range up to seven years, with a weighted average of approximately five years. Such amounts are reflected as a separate category of property, plant and equipment. PROPERTY, PLANT AND EQUIPMENT: Assets are stated at cost. Major improvements are capitalized 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. GOODWILL: The excess of cost over the underlying fair value of net assets at dates of acquisition is amortized on a straight-line basis over periods ranging from five to 20 years. Accumulated amortization was $6,253 and $5,212 at January 31, 1994 and 1993, respectively. ACQUIRED AND INTERNALLY DEVELOPED SOFTWARE PRODUCTS: Acquired software product amounts originate from the allocation of purchase prices of acquired companies. These products (principally BondMaster-R- and CIMS) are large, complex, mission-critical application software packages with substantial, well-established market positions. Products in this category have been assigned lives of five to 10 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 the establishment of technological feasibility, as defined, are capitalized. Amortization begins once the respective product becomes generally available for sale. These products are amortized on a product by product basis ratably as a percentage of expected revenue, subject to minimum straight-line amortization, over two to five years. The Company's Ultrust software product was discontinued in fiscal 1993. Refer to Note 2 for further discussion. 69 NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- ACCOUNTING POLICIES (CONTINUED) A summary of software activity is as follows:
INTERNALLY ACCUMULATED ACQUIRED DEVELOPED AMORTIZATION TOTAL --------- ----------- ------------ --------- Balance, January 31, 1991.............................................. $ 16,684 $ 10,998 $ (6,227) $ 21,455 Additions................................................... -- 9,658 -- 9,658 Amortization................................................ -- -- (3,202) (3,202) --------- ----------- ------------ --------- Balance, January 31, 1992.............................................. 16,684 20,656 (9,429) 27,911 Additions................................................... -- 8,409 -- 8,409 Amortization................................................ -- -- (6,154) (6,154) --------- ----------- ------------ --------- 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 --------- ----------- ------------ --------- --------- ----------- ------------ ---------
ACCRUED EXPENSES: Major components of accrued expenses are summarized as follows:
JANUARY 31, -------------------- 1994 1993 --------- --------- Employee compensation and benefits......................................................... $ 10,168 $ 8,069 Restructuring accrual...................................................................... 5,328 -- Scoring.................................................................................... 2,355 2,272 Taxes other than income.................................................................... 3,383 3,728 Royalties.................................................................................. 2,196 2,259 Other...................................................................................... 3,663 5,075 --------- --------- $ 27,093 $ 21,403 --------- --------- --------- ---------
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 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 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 Chairman. The sale was for cash and notes totalling $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 $1,525, net, from the acquiring entity are carried in non-current receivables on the Company's balance sheet. Other income for the year ended January 31, 1993 includes $1,027, net, related to the conclusion of certain litigation in the Company's favor. Other expense for the year ended January 31, 1992 includes $750 representing a provision for loss on the disposition of certain European operations. 70 NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- ACCOUNTING POLICIES (CONTINUED) INCOME TAXES: As of the beginning of fiscal year 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes". As was previously disclosed, the cumulative effect of the change in accounting principle was not material and, accordingly, no cumulative effect of the change is shown in the accompanying financial statements. Refer to Note 6 also. PER SHARE DATA: Net income (loss) per share is based on the weighted average number of shares of Common Stock and common stock equivalents outstanding during the year. NOTE 2 -- RESTRUCTURING CHARGE In the fourth quarter of fiscal 1993, the Company recorded a $25 million pre-tax restructuring 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 costs, customer accommodations and other items. The balance of the charge was for the closing of an NCS Education 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, relocation, and other employee-related costs. This charge reduced after-tax earnings by $15.5 million or $1.00 per share. NOTE 3 -- SIGNIFICANT TRANSACTIONS During the year ended January 31, 1994 the Company reached an agreement with Dimensional Medicine Inc. (DMI) to convert notes and accounts receivable from DMI into 27.5 million shares of DMI common stock (representing 85% of the outstanding common shares) and a new long-term note in the amount of $1,105. The NCS carrying value of the DMI shares at January 31, 1994 represents their estimated fair value. NCS recorded no loss on this conversion since carrying values had been adequately reserved. NCS has not consolidated the financial results of DMI since the December, 1993 completion of the transaction, because it is the Company's intention to divest of the DMI shares, and its control is, therefore, temporary. DMI's results of operations are immaterial to NCS. For the years ended January 31, 1994, 1993 and 1992, NCS fees charged to DMI for installation and servicing of DMI systems were $999, $1,354, and $1,588, respectively. Rates and prices charged for these services are believed to generally approximate those which would prevail between unrelated parties. The Company had a note receivable from DMI included in other assets in the amount of $3,675 at January 31, 1993. The Company's net receivables from DMI of $68 and $589 are included in trade receivables at January 31, 1994 and 1993, respectively. 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 as follows: fiscal 1993 -- $11,242; fiscal 1992 -- $10,029; fiscal 1991 -- $10,883. Future minimum rental expense as of January 31, 1994, for noncancelable operating leases with initial or remaining terms in excess of one year is $26,455 and is payable as follows: fiscal 1994 -- $7,516; fiscal 1995 -- $5,261; fiscal 1996 -- $4,784; fiscal 1997 -- $4,472; fiscal 1998 -- $3,297 and $1,125 beyond. 71 NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- LONG-TERM DEBT AND CREDIT ARRANGEMENTS Long-term debt at January 31, 1994 and 1993 consisted of the following:
JANUARY 31, -------------------- 1994 1993 --------- --------- Revolving credit borrowings...................................................... $ 18,500 $ -- Secured notes.................................................................... 15,000 15,000 Unsecured note................................................................... 6,175 -- ESOP borrowing................................................................... 6,000 7,000 Other notes and mortgages........................................................ 1,676 3,350 --------- --------- 47,351 25,350 Less current maturities.......................................................... (2,677) (1,481) --------- --------- Long-term debt................................................................... $ 44,674 $ 23,869 --------- --------- --------- ---------
REVOLVING CREDIT BORROWINGS: The Company has a $30,000 unsecured revolving credit facility which terminates August 1, 1996. Interest on debt outstanding under this facility is computed, at the Company's discretion, based on the prime or the London interbank offered rates (LIBOR). During the year ended January 31, 1994, the interest rate approximated 1.5% below the prime rate. The Company pays a fee at an annual rate of .35% on the unused facility amount. The credit agreement 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 1997. Interest only is paid monthly during the term. The notes are secured by certain Company-owned real estate. The credit agreement contains covenants requiring compliance on a continuing basis. The Company is in compliance with all covenants. UNSECURED NOTE: During fiscal 1993, the Company opened a Sterling-based credit facility with a bank to finance plant construction in the United Kingdom. At January 31, 1994, the outstanding balance under that facility was L4,100 or $6,175. Subsequently, a commitment was received to convert the balance to an unsecured term note with five principal payments of L850 per year beginning in April, 1997, and bearing interest at .95% over the Sterling LIBOR rate. ESOP BORROWING: The loan, secured by unallocated shares of Common Stock and guaranteed by the Company, is payable over seven years with annual payments of $1,000 with the balance at maturity. Interest is payable quarterly at rates which approximate 3.25% under the prime rate. SCHEDULED MATURITIES: The aggregate principal amounts of long-term debt scheduled for repayment in each of the five fiscal years 1994 through 1998 are $2,677, $1,000, $22,500, $16,280, and $1,280, respectively. In all fiscal years interest paid approximates interest expense plus interest capitalized of $338 in 1993, $209 in 1992, and $681 in 1991. NOTE 6 -- INCOME TAXES Effective February 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by SFAS 109. As permitted under the standard, prior years' financial statements have not been restated. The cumulative effect of adopting SFAS 109 was not material. 72 NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- INCOME TAXES (CONTINUED) The components of the provision for income taxes are as follows:
CURRENT DEFERRED TOTAL --------------------------------- --------- --------- YEAR ENDED JANUARY 31, FEDERAL STATE FOREIGN - ------------------------------------------------- --------- --------- ----------- 1994 (Liability method).......................... $ 1,566 $ 398 $ 40 $ (2,354) $ (350) 1993 (Deferred method)........................... 8,535 1,088 426 51 10,100 1992 (Deferred method)........................... 11,597 990 174 (4,061) 8,700
Deferred income taxes reflect the net effects 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 are as follows:
JANUARY 31, 1994 --------------- Deferred tax assets: Rotable service parts amortization................................................... $ 1,787 Accrued vacation pay................................................................. 1,515 Reserves for uncollectibles.......................................................... 1,470 Foreign operating loss carryforwards................................................. 1,966 Intangible amortization.............................................................. 767 Restructuring costs.................................................................. 534 Other................................................................................ 742 Valuation allowance.................................................................. (1,966) ------- Total deferred tax assets............................................................ 6,815 ------- Deferred tax liabilities: Net capitalized software............................................................. 6,300 Accelerated depreciation............................................................. 4,951 Purchased software amortization...................................................... 1,617 Installment sales.................................................................... 987 Benefit plan expense................................................................. 546 Other................................................................................ 263 ------- Total deferred tax liabilities....................................................... 14,664 ------- Net deferred tax liabilities......................................................... $ 7,849 ------- -------
The components of the provision for deferred income taxes for the years ended January 31, 1993 and 1992 are as follows:
YEAR ENDED JANUARY 31, ------------------------ 1993 1992 ----------- ----------- Accelerated depreciation...................................................... $ (352) $ (253) Installment sales............................................................. 665 (29) Rotable service parts amortization............................................ (262) (6,749) Software expense.............................................................. 1,291 3,524 Alternative minimum tax....................................................... (1,162) -- Other......................................................................... (129) (554) ----------- ----------- $ 51 $ (4,061) ----------- ----------- ----------- -----------
73 NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- INCOME TAXES (CONTINUED) A reconciliation of the Company's statutory and effective tax rate is presented below:
YEAR ENDED JANUARY 31, ------------------------------- 1994 1993 1992 --------- --------- --------- Statutory rate................................................................. (35.0)% 34.0% 34.0% State income taxes net of federal benefit...................................... 9.2 2.7 2.7 Intangible amortization........................................................ 12.9 2.0 2.2 Foreign sales corporation...................................................... (4.7) (0.2) (0.3) Research and development credits............................................... (24.2) (1.0) (2.6) Foreign operating losses....................................................... 27.1 0.6 0.8 Federal rate adjustment........................................................ 9.8 -- -- Other.......................................................................... (7.3) (0.1) (0.8) --------- --------- --------- Effective rate................................................................. (12.2)% 38.0% 36.0% --------- --------- --------- --------- --------- ---------
The Federal rate adjustment item above is due to the SFAS 109 requirement to increase deferred tax liabilities to reflect current statutory income tax rates. During fiscal 1993, 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 benefitted, and therefore unfavorably impacted the effective tax benefit rate. None of the remaining items in the current year's rate reconciliation above were unusual in nature or amount in comparison to prior years. The Company made income tax payments of $7,132, $7,638, and $12,053 in the fiscal years ended January 31, 1994, 1993 and 1992, 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 four Employee Stock Option Plans (1982, 1984, 1986, and 1990). 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 five-year period. Outstanding options under all Plans are summarized as follows:
SHARES PRICE PER SHARE ---------- -------------------- Balance, January 31, 1992....................................................... 736,350 $7.75 to $15.68 Granted....................................................................... 239,500 15.00 to 16.50 Cancelled..................................................................... (45,500) 7.75 to 15.00 Exercised..................................................................... (130,500) 7.75 to 14.25 ---------- -------------------- Balance, January 31, 1993....................................................... 799,850 7.75 to 16.50 Granted....................................................................... 230,500 12.00 to 17.60 Cancelled..................................................................... (50,870) 8.00 to 16.25 Exercised..................................................................... (70,130) 7.75 to 15.00 ---------- -------------------- Balance, January 31, 1994....................................................... 909,350 $7.75 to $17.60 ---------- -------------------- ---------- --------------------
74 NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- STOCKHOLDERS' EQUITY (CONTINUED) Options for 194,050 and 157,550 shares became exercisable during fiscal 1993 and 1992, respectively, and options for 275,800 and 176,000 shares were exercisable at the end of the respective years. Shares available for grant under the Plans totalled 260,552 and 101,852 at January 31, 1994 and 1993, respectively. At January 31, 1994, non-qualified options not covered by the Plans to purchase 13,000 shares at $12.88 to $16.00 per share were outstanding. At January 31, 1993, non-qualified options not covered by the Plans to purchase 11,000 shares at $12.88 to $15.00 per share were outstanding. At January 31, 1994, there were 30,000 outstanding options under the Non-Employee Director Stock Option Plan with per share prices from $8.25 to $16.00. At January 31, 1993, there were 24,000 outstanding options under the Plan with per share prices from $8.25 to $15.00. The Company has an Employee Stock Purchase Plan. There were 274,333 shares available for purchase under the Plan at January 31, 1994. NOTE 8 -- EMPLOYEE BENEFIT PLANS Employee Savings Plan: The Company has a qualified 401k Employee Savings Plan covering substantially all employees. Company contributions are discretionary. The Company's contributions to the plan, representing 401k matching contributions only, were $1,674, $1,438 and $1,253 in fiscal years 1993, 1992, and 1991, 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 on retirement or termination of employment. During fiscal 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 then used to make loan interest and principal payments. With each principal payment, which is charged to compensation expense, a portion of the Common Stock is allocated to participating employees. In fiscal 1993, the Company's contribution to the Plan was $1,000, and interest was totally offset by dividends of $168 on unallocated shares. In fiscal 1992, the Company's contribution to the Plan was $1,000 plus interest of $20, which is net of dividends on unallocated shares of $220. The Company's contribution to the Plan in fiscal 1991 was $1,000 plus interest of $269, which is net of dividends on unallocated shares of $194. 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 1990, pursuant to a Long-term Incentive Plan approved by the stockholders, 171,400 shares of Common Stock were issued to participants on a restricted basis. 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 -- FAIR VALUES OF FINANCIAL INSTRUMENTS FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure 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 assumptions used, including the discount rate and estimates of future cash flows. 75 NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) At January 31, 1994 and 1993, the Company had non-current investments and notes receivable (non-trade) with carrying values of $8,608 and $7,042, respectively, which approximate fair value at those respective dates. At January 31, 1994 and 1993, the Company's $15,000, 9.88% Secured Notes had a fair value of approximately $16,100 and $16,700, respectively, due to lower interest rates currently prevailing. The Company's ESOP and other long-term debt approximates market due to the variable interest rate features of the obligations. NOTE 10 -- BUSINESS SEGMENT DATA The Company operates two business segments. The financial systems segment (NCS Financial) 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. The remainder of the Company's business consists of several interdependent business units, centered around its proprietary optical scanning hardware and forms technology. This segment markets those products and services and related application software to education, business and professional markets through the NCS Education, NCS Technology, and NCS Assessments businesses. Below is a summary of certain financial information related to the two segments for fiscal years ended January 31. 76 NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- BUSINESS SEGMENT DATA (CONTINUED)
OPTICAL SCANNING PRODUCTS, SERVICES AND RELATED SOFTWARE FINANCIAL SYSTEMS TOTAL ---------------------------------------- ------------------------------------ --------------- 1994 1993 1992 1994 1993 1992 1994 -------------- ----------- ----------- -------------- --------- --------- --------------- Revenues........................ $ 257,813 $ 245,709 $ 251,317 $ 47,640 $ 54,358 $ 51,189 $ 305,453 -------------- ----------- ----------- -------------- --------- --------- --------------- -------------- ----------- ----------- -------------- --------- --------- --------------- Operating income (loss)......... 25,447(1) 28,802 32,691 (19,621 )(2) 6,564 5,149 5,826(3) Corporate expense............... 8,127 Interest and other expense, net............................ 558 --------------- Total income (loss) before income taxes................. (2,859) --------------- --------------- Identifiable assets............. 177,664 151,252 169,667 25,340 40,787 31,914 203,004 Corporate assets................ 17,169 --------------- Total assets.................. 220,173 --------------- --------------- Depreciation and amortization... 20,263 22,920 20,974 3,507 5,002 3,604 23,770 Corporate depreciation and amortization................... 907 --------------- Total depreciation and amortization................. 24,677 --------------- --------------- Capital expenditures............ 24,425 17,286 13,111 9,391 5,089 7,519 33,816 Corporate capital expenditures................... 1,510 --------------- Total capital expenditures.... $ 35,326 --------------- --------------- 1993 1992 ----------- ----------- Revenues........................ $ 300,067 $ 302,506 ----------- ----------- ----------- ----------- Operating income (loss)......... 35,366 37,840 Corporate expense............... 8,108 9,136 Interest and other expense, net............................ 650 4,530 ----------- ----------- Total income (loss) before income taxes................. 26,608 24,174 ----------- ----------- ----------- ----------- Identifiable assets............. 192,039 201,581 Corporate assets................ 22,700 15,997 ----------- ----------- Total assets.................. 214,739 217,578 ----------- ----------- ----------- ----------- Depreciation and amortization... 27,922 24,578 Corporate depreciation and amortization................... 635 639 ----------- ----------- Total depreciation and amortization................. 28,557 25,217 ----------- ----------- ----------- ----------- Capital expenditures............ 22,375 20,630 Corporate capital expenditures................... 418 485 ----------- ----------- Total capital expenditures.... $ 22,793 $ 21,115 ----------- ----------- ----------- ----------- - ------------------------ (1) Includes restructuring charge of $2,200. (2) Includes restructuring charge of $22,800. (3) Includes restructuring charge of $25,000.
77 NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- BUSINESS SEGMENT DATA (CONTINUED) Capital expenditures include property, plant and equipment additions as well as rotable service parts 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, 1994, 1993 and 1992 were $97,198, $95,232 and $96,498 of which $23,001, $26,134 and $31,172, 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. 78 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, 1994 and 1993, 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, 1994. 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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 1994, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG Minneapolis, Minnesota March 16, 1994 79 EX-21 7 EXHIBIT 21 EXHIBIT 21 SIGNIFICANT SUBSIDIARIES NATIONAL COMPUTER SYSTEMS, INC.
STATE OR OTHER JURISDICTION OF NAME UNDER WHICH SUBSIDIARY DOES NAME OF SUBSIDIARY INCORPORATION BUSINESS - -------------------------------- ----------- --------------------------------- NCS Holdings, Inc. Minnesota NCS Holdings, Inc. NCS Financial Systems, Inc. Minnesota NCS Financial Services Financial Systems Division of National Computer Systems, Inc. NCS Data Forms, Inc. Minnesota Data Forms Division of National Computer Systems, Inc. Interpretive Scoring Systems, Minnesota NCS Assessments Inc. Professional Assessment Services Division of National Computer Systems, Inc.
Note: All other subsidiaries of National Computer Systems, Inc. are not significant subsidiaries taken as a whole. 80 EX-23 8 EXHIBIT 23 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 16, 1994, included in the 1993 Annual Report to Stockholders of National Computer Systems, Inc. Our audits also included the consolidated financial statement schedules listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the consolidated financial statement schedules, referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. 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 33-48509 on Form S-8 (1990 Employee Stock Option Plan), Registration Statement Number 33-48510 on Form S-8 (1992 Employee Stock Purchase Plan) and Registration Statement Number 33-68854 on Form S-8 (option held by former director) of our report dated March 16, 1994 with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the consolidated financial statement schedules included in this Annual Report (Form 10-K) of National Computer Systems, Inc. /s/ ERNST & YOUNG Minneapolis, Minnesota April 26, 1994 81 EX-24 9 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY FORM 10-K FOR YEAR ENDED JANUARY 31, 1994 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, 1994, 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 7th day of March, 1994. /s/ CHARLES W. OSWALD -------------------------------------------- Charles W. Oswald /s/ DAVID C. MALMBERG -------------------------------------------- David C. Malmberg /s/ DAVID P. CAMPBELL -------------------------------------------- David P. Campbell /s/ WILLIAM W. CHORSKE -------------------------------------------- William W. Chorske /s/ DAVID C. COX -------------------------------------------- David C. Cox /s/ ROBERT F. ZICARELLI -------------------------------------------- Robert F. Zicarelli /s/ NORMAN A. COCKE -------------------------------------------- Norman A. Cocke /s/ JEAN B. KEFFELER -------------------------------------------- Jean B. Keffeler /s/ STEPHEN G. SHANK -------------------------------------------- Stephen G. Shank /s/ JOHN E. STEURI -------------------------------------------- John E. Steuri /s/ JEFFREY E. STIEFLER -------------------------------------------- Jeffrey E. Stiefler /s/ JOHN W. VESSEY -------------------------------------------- John W. Vessey /s/ JEFFREY W. TAYLOR -------------------------------------------- Jeffrey W. Taylor 82 -----END PRIVACY-ENHANCED MESSAGE-----