SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: COMMISSION FILE NUMBER:
JANUARY 31, 1995 0-3713
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NATIONAL COMPUTER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0850527
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11000 PRAIRIE LAKES DRIVE
EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612/829-3000
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Securities registered pursuant to Section 12(g) of the Act:
Common Shares--par value $.03 a share
(Title of Class)
Rights to Purchase Series A Participating Preferred Stock
(Title of Class)
------------------------
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, 1995.
Common Shares, $.03 par value -- $212,612,000
------------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of March 31, 1995.
Common Shares, $.03 par value -- 15,342,474 shares
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<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended January 31,
1995 are incorporated by reference into Parts I, II and IV.
Portions of the definitive proxy statement dated April 19, 1995 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 AND GOVERNMENT -- The Company develops and markets optical
scanning hardware, image-based data collection systems, related work stations,
proprietary software and scannable documents. 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. Data gathering and processing services are also provided.
HEALTH CARE -- 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. The Company markets optical scanning hardware
and proprietary software for patient data collection and administrative
management.
BANKING AND FINANCIAL -- 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- or 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, government and health care marketplaces, the Company's
products and services are directed to sales/marketing applications including
sales/order entry, customer satisfaction surveys and customer data collection;
operations applications including quality measurement and inventory analysis;
administrative applications including billing, collections and payroll; general
data collection, analysis and management; 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 11 -- Business Segment
Data of Notes to Consolidated Financial Statements included in the Annual Report
to Stockholders for the year ended January 31, 1995, incorporated herein by
reference.
The Company's headquarters are located at 11000 Prairie Lakes Drive, Eden
Prairie, Minnesota 55344, telephone 612/829-3000.
<PAGE>
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. In the last year, a new family of low-cost
scanners, NCS OpScan 2, 3 and 4, was 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 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, was
released for general distribution in 1994.
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 health care administration.
SCANNABLE FORMS
The design, manufacture and sale of scannable forms, including
multiple-page booklets, accounts for a significant portion of 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.
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.
MEASUREMENT AND DATA SERVICES
NCS markets scanning and computer processing services to major test
publishers, state education agencies, the federal government, local school
districts and commercial customers. For these customers, NCS develops and
executes projects including planning, document design, distribution logistics,
data collection, editing, analysis and final reporting.
Examples of high volume processing services include test scoring for major
test publishers, educational assessment testing for states and information
processing for various agencies of the federal government such as processing
student financial aid information for the U.S. Department of Education.
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 recordkeeping 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 management of customer systems for offsite processing
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.
NCS provides software support service by periodically issuing software
program revisions to improve systems performance and to accommodate changes in
the tax law and other regulatory changes. The Company also periodically releases
new software applications which it licenses to its customers.
MARKETING
NCS markets its 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, government,
business or health care marketplaces. Outside the United States, the Company's
systems and associated products and services are sold through sales employees,
distributors or independent sales agents. NCS markets its financial systems
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 customer service and support engineers. NCS
emphasizes prompt, reliable service and close customer relationships. Technical
and maintenance support may include labor, parts, operational training and,
where applicable, programming of the equipment and design of forms.
DEVELOPMENT OF PRODUCTS AND SERVICES
The Company's development efforts are directed toward new product
development and enhancements to existing products. During the fiscal years ended
January 31, 1995, 1994 and 1993, the Company spent, including certain
capitalized software development costs, approximately $20.4 million, $20.8
million and $17.3 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 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, government, business and health care markets where
scanning technology has advantages over other data entry technologies. NCS
scanning systems incorporate optical scanning equipment, computer hardware and
proprietary software which are marketed and sold as turn-key systems.
In addition to the functional competition provided by alternative methods
of data capture, including on-line terminal keyboards and optical character
readers, other scanning vendors supply products that compete with those of the
Company.
The Company's scannable forms compete with those produced by commercial and
specialized forms printers in various localities throughout the United States.
Principal competitive factors in the scannable forms printing industry are
product quality, service and price.
NCS' data processing, test publishing and computer processing services
compete with several test publishers and data processing service bureaus. The
Company's customer support maintenance organization competes with service
provided by manufacturers, other national service companies and local providers
of maintenance services.
NCS' financial systems compete with systems developed by users, service
bureaus and other direct competitors offering asset management accounting
systems. The Company believes that it is one of the leading suppliers of systems
to bank trust departments.
PATENTS, TRADEMARKS AND LICENSES
The Company holds certain patents, registered and unregistered trademarks
and copyrights. The Company also has 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.
"Sentry", "Trustware", "BondMaster", "CertMaster", "OpScan" and "Precept"
appearing herein are registered trademarks of National Computer Systems, Inc.
EMPLOYEES
As of February 28, 1995, 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.
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all of the executive officers of the
Company as of February 28, 1995 are listed below along with their business
experience during the past five years.
NAME AGE POSITION
- -------------------- --- ------------------------------------------
Charles W. Oswald 67 Chairman of the Board
Russell A. Gullotti 52 President and Chief Executive Officer
Robert C. Bowen 53 Senior Vice President
John W. Fenton, Jr. 54 Secretary-Treasurer
Donald J. Gibson 64 Senior Vice President
Richard L. Poss 49 Vice President
David W. Smith 50 Vice President
Jeffrey W. Taylor 41 Vice President and Chief Financial Officer
Adrienne T. Tietz 48 Vice President
Mr. Oswald has been Chairman of the Board since October, 1994 and prior to
that Chairman of the Board and Chief Executive Officer of NCS for more than five
years.
Mr. Gullotti has been President and Chief Executive Officer since October,
1994 and prior to that held senior executive positions in sales and marketing,
services and administration with Digital Equipment Corporation (computer
manufacturing and services) for more than five years.
Mr. Bowen has been a Senior Vice President of NCS for more than five years.
Mr. Fenton has been Secretary-Treasurer of NCS for more than five years.
Mr. Gibson has been a Senior Vice President of NCS for more than five
years.
Mr. 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 Chief Financial Officer since May,
1994 and prior to that Vice President and Corporate Controller of NCS for more
than five years.
Ms. Tietz has been a Vice President of NCS for more than five years.
Officers are elected annually by the Board of Directors. There are no
family relationships among these officers, nor any arrangement or understanding
between any officer and any other person pursuant to which the officer was
selected.
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 (1) 40,000 Education software product development and
support
Iowa City, IA Assessment test processing and data proces-
Building 1 (1) 168,000 sing services, general offices and operations
Building 2 (1) 112,000
Minnetonka, MN (1) 54,000 Test publishing and scoring general offices
and operations
Eagan, MN (1) 109,000 Scanner hardware development and manu-
facturing; 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 34,000 Forms design and production
Yorkshire England (1)
Huntsville, AL 15,000 Financial systems software development
Atlanta, GA 16,000 Financial systems sales offices with support
and training
Cambridge, MA 33,000 Financial systems software development,sales,
support and training offices
Wayne, PA 27,000 Corporate trust general offices and
operations
- ---------------------------
(1) Denotes NCS owned facility.
The Company believes that its facilities are adequate to meet its current
needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to nor is its property subject to any material
pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the year ended
January 31, 1995 to a vote of security holders through the solicitation of
proxies or otherwise.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
"Quarterly Market Data" included in the Annual Report to Stockholders for
the year ended January 31, 1995 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, 1995 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Results of Operations and
Financial Condition" included in the Annual Report to Stockholders for the year
ended January 31, 1995 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, 1995, are incorporated herein by
reference:
Consolidated Balance Sheets -- January 31, 1995 and 1994
Consolidated Statements of Income -- Years ended January 31, 1995, 1994 and
1993
Consolidated Statements of Changes in Stockholders' Equity -- Years ended
January 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows -- Years ended January 31, 1995, 1994
and 1993
Notes to Consolidated Financial Statements -- January 31, 1995
Report of Independent Auditors dated March 15, 1995
"Quarterly Results of Operations (Unaudited)"
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Election of Directors" included in the Company's definitive proxy
statement dated April 19, 1995 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 19, 1995 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 19, 1995 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the fourth paragraph which follows the
footnotes to the table set forth under the caption "Election of Directors" in
the Company's definitive proxy statement dated April 19, 1995 is incorporated
herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) List of Financial Statements and Financial Statement Schedules
(1) The following consolidated financial statements of National Computer
Systems, Inc. and subsidiaries, included in the annual report of the
registrant to its stockholders for the year ended January 31, 1995,
are incorporated by reference in Item 8:
Consolidated Balance Sheets -- January 31, 1995 and 1994
Consolidated Statements of Income --
Years ended January 31, 1995, 1994 and 1993
Consolidated Statements of Changes in Stockholders' Equity --
Years ended January 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows --
Years ended January 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements -- January 31, 1995
Report of Independent Auditors dated March 15, 1995.
(2) The following consolidated financial statement schedules of National
Computer Systems, Inc. and subsidiaries are included in Item 14(d):
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
(3) -- Listing of Exhibits:
EXHIBIT
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 is incorporated herein by
reference to Exhibit 4C to the Company's Form 10-K for the
fiscal year ended January 31, 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.
*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 1995 Employee Stock Option Plan.
*10G -- 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.
*10H -- 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.
*10I -- 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.
*10J -- Agreement dated August 4, 1994 between NCS and Russell A.
Gullotti, as amended August 8, 1994, is incorporated herein
by reference to Exhibit 10(a) to the Company's Form 10-Q for
the fiscal quarter ended October 31, 1994.
*10K -- Agreement dated August 22, 1994 between NCS and Charles W.
Oswald is incorporated herein by reference to Exhibit 10(b)
to the Company's Form 10-Q for the fiscal quarter ended
October 31, 1994.
*10L -- 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.
*10M -- NCS Corporate Management Incentive Plan -- 1994 is incorporated
herein by reference to Exhibit 10J to the Company's Form 10-K
for the fiscal year ended January 31, 1994.
*10N -- NCS Corporate Management Incentive Plan -- 1995.
*10O -- Oswald Stock Option Plan.
11 -- Statement Re: Computation of Earnings Per Share.
13 -- Portions of NCS' Annual Report to Stockholders for the fiscal
year ended January 31, 1995.
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, 1995 on behalf of
other officers and directors.
27 -- Financial Data Schedule.
- ----------------
* Indicates management contract or compensatory plan or arrangement required to
be filed as an exhibit to this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
January 31, 1995.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
required or are inapplicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONAL COMPUTER SYSTEMS, INC.
Dated: April 27, 1995 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
By RUSSELL A. GULLOTTI* Director, President and Chief Executive Officer
-------------------------- (principal executive officer)
Russell A. Gullotti
By DR. DAVID P. CAMPBELL*
-------------------------- Director
Dr. David P. Campbell
By DAVID C. COX*
-------------------------- Director
David C. Cox
By JEAN B. KEFFELER*
-------------------------- Director
Jean B. Keffeler
By STEPHEN G. SHANK*
-------------------------- Director
Stephen G. Shank
By JOHN E. STEURI*
--------------------------- Director
John E. Steuri
By JEFFREY E. STIEFLER*
--------------------------- Director
Jeffrey E. Stiefler
By JOHN W. VESSEY*
--------------------------- Director
John W. Vessey
By JEFFREY W. TAYLOR* Vice President and Chief Financial Officer
--------------------------- (principal financial officer and 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 27, 1995
(ATTORNEY-IN-FACT)
<PAGE>
FORM 10-K
NATIONAL COMPUTER SYSTEMS, INC.
FOR THE FISCAL YEAR ENDED JANUARY 31, 1995
EXHIBIT INDEX
EXHIBIT
- -------------
10F NCS 1995 Employee Stock Option Plan.
10N NCS Corporate Management Incentive Plan -- 1995.
10O Oswald Stock Option Plan.
11 Statement Re: Computation of Earnings per Share.
13 Portions of the Annual Report to Stockholders for the
fiscal year ended January 31, 1995.
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, 1995
on behalf of other officers and directors.
27 Financial Data Schedule.
EXHIBIT 10F
NATIONAL COMPUTER SYSTEMS, INC.
1995 EMPLOYEE STOCK OPTION PLAN
1. Objectives of Plan.
This 1995 Employee Stock Option Plan (the "Plan") has been adopted by the
Board of Directors of National Computer Systems, Inc., a Minnesota
corporation (herein called the "Company"), to secure the advantages of
stock ownership on the part of its present and future key employees,
including salaried officers and directors, and including salaried
officers and directors of any one or more subsidiary corporations wholly
owned by it (herein called "related companies"), to provide incentives
for such individuals to remain with the company or related companies and
to devote their energies to strengthen and maintain the continued success
of the Company through stock ownership. Options granted under this Plan
may be either incentive stock options ("Incentive Stock Options") within
the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or options which do not qualify as Incentive Stock
Options.
2. Administration of Plan.
(A) The Plan shall be administered by the Board of Directors of the
Company (the "Board"); provided, however, that all actions of the
Board with respect to the Plan shall be approved by the
affirmative vote of directors constituting a majority of the
members of the Board and all of whom are "disinterested persons"
with respect to the Plan within the meaning of Rule 16b-3(d)(3)
under the Securities Act of 1934 as presently in effect.
(B) Subject to the provisions of the Plan, the Board shall have
authority, in its discretion:
(1) To construe and interpret the Plan and all options granted
hereunder, and to determine the terms and provisions (and
amendments thereof) of the options granted under the Plan
(which need not be identical).
(2) To determine individuals to whom and the time or times at
which options shall be granted, the number of shares to be
subject to each option, the option price, and the duration
of leaves of absence which may be granted to participants
without constituting a termination of their employment for
the purposes of the Plan.
(3) To adopt, amend and rescind rules and regulations relating
to administration of the Plan and make all determinations
necessary or advisable for the administration of the Plan,
which shall be binding and conclusive on all participants in
the Plan and on their legal representatives and
beneficiaries.
(4) To accelerate the time at which all or any part of an option
may be exercised.
(5) To determine which options (that are not Incentive Stock
Options), whether granted before or after the date of
adoption or any amendments to this Plan, shall be deemed to
be stock options governed by and subject to the terms and
conditions of this Plan.
3. Participants.
Options may be granted under the Plan to such key full or part time
executive, administrative, supervisory, technical, or professional
employees (including salaried officers and directors) of the Company, or
of subsidiaries of the Company, including subsidiaries which become such
after adoption of the Plan, in such amounts as shall be determined from
time to time by the Board.
In determining the persons to whom options shall be granted and the
number of shares subject to each option, the Board may take into account
the nature of services rendered by the proposed grantees, their past,
present and potential contributions to the success of the Company, and
such other factors as the Board in its discretion shall deem relevant. A
person who has been granted an option under this Plan may be granted an
additional option or options under the Plan if the Board shall so
determine; provided, however, that to the extent that the aggregate fair
market value, determined at the time an Incentive Stock Option is
granted, of the stock with respect to which all Incentive Stock Options
owned by a Participant are exercisable for the first time by such
optionee during any calendar year under all plans of the employer
corporation and its parent and subsidiary corporations exceeds $100,000,
such options shall be treated as options that do not qualify as Incentive
Stock Options. No person may be granted options under the Plan for more
than 100,000 shares in the aggregate in any calendar year.
4. Number of Shares Available for Options.
Under this Plan, options may be granted for shares of the Company's
Common Stock, $.03 per value. The Common Stock subject to options shall
be either authorized but unissued shares or shares reacquired by the
Company. Subject to the provisions of paragraph 5 hereof, the number of
shares of Common Stock that may be made the subject of options shall not
exceed the aggregate of 350,000 shares. In the event that any outstanding
option under the Plan for any reason expires or is terminated
unexercised, the common shares allocable to the unexercised portion of
such option may again be subject to an option under the Plan.
5. Adjustments.
If there shall be any change in the Common Stock through merger,
consolidation, reorganization, recapitalization, stock dividend, stock
split or other change in the capitalization or corporate structure of the
Company, the Board shall make appropriate adjustments in the Plan and any
options outstanding under the Plan. Such adjustments shall include, where
appropriate, changes in the aggregate number of shares subject to the
Plan and such changes in the number of shares and the price per share
subject to outstanding options as are necessary in order to prevent
dilution or enlargement of option rights.
6. Term of Plan.
No option shall be granted pursuant to this Plan later than January 31,
2005, but options theretofore granted may extend beyond that date in
accordance with their terms.
7. Terms and Conditions of Options.
Options granted hereunder shall be evidenced by a written notice from the
Company to the participant evidencing the granting of an option
hereunder, or shall be evidenced by an agreement in such form as the
Board of Directors shall from time to time require. Said notice or
agreement shall refer to this Plan, and make acceptance thereof by a
participant subject to the provisions hereof. Such option shall comply
with and be subject to the following terms and conditions:
(A) Number of Shares. Each option shall state the number of shares to
which it pertains.
(B) Option Price. Each option shall state the option price, which
shall not be less than 100% of the fair market value of the shares
of the Common Stock of the Company on the date of the granting of
the option. During such time as the Common Stock is not listed
upon an established stock exchange, the fair market value per
share shall be the "last trade price" as reported by the National
Association of Security Dealers, Inc. If the Common Stock is
listed upon an established stock exchange or exchanges, such fair
market value shall be deemed to be the highest closing price of
the Common Stock on such stock exchange or exchanges on the date
the option is granted, or, if no sale of the Company's Common
Stock shall have been made on any stock exchange on that day, on
the next preceding day on which there was a sale of such stock.
Subject to the foregoing, the Board in fixing the option price
shall have full authority and discretion and be fully protected in
doing so.
(C) Option Period and Exercise of Option.
(1) No option period shall exceed ten years, and except as
otherwise provided on subdivisions (D) and (E) hereof, no
option period shall be for less than one year.
(2) Any option granted under the Plan may be exercised by
notifying the Company in writing of such exercise prior to
the termination of such option. The option price for the
number of shares of Common Stock for which the option is
exercised shall become immediately due and payable;
provided, however, that in lieu of cash an optionee may,
with the approval of the Board, exercise an option by
tendering to the Company shares of the Common Stock of the
Company owned by the optionee and with the certificates
therefor registered in the optionee's name, having a fair
market value equal to the cash exercise price of the shares
being purchased.
(3) During the lifetime of the optionee, the option shall be
exercisable only by the optionee and shall not be assignable
or transferable, and no other person shall acquire any
rights therein. Except as provided in Subdivisions (D) and
(E) hereof, no option may be exercised at any time unless
the holder thereof is then an employee of the Company or a
subsidiary of the Company.
(D) Termination of Employment Except Death. In the event an optionee
shall cease to be employed by the Company or a related company for
any reason other than death, then, and in that event, but subject
to the condition that no option shall be exercisable after its
expiration date, such optionee shall have the right to exercise
the option at any time within three months after such termination
of employment, to the extent the optionee's right to exercise same
had accrued pursuant to Article 7(C) of the Plan and had not
previously been exercised at the date of such termination. Whether
authorized leaves of absence or absence because of military or
governmental service shall constitute termination of employment,
for the purpose of the Plan, shall be determined by the Board,
which determination shall be final and conclusive.
(E) Death of Optionee and Transfer of Option. If any optionee shall
die while in the employ of the Company or a related company, or
within a period of three months after the termination of
employment with the Company or related companies and shall not
have fully exercised the option, said option may be exercised
(subject to the condition that no option shall be exercisable
after its expiration date), to the extent that the optionee's
right to exercise such option had accrued pursuant to Article 7(C)
of the Plan at the time of death and had not previously been
exercised, at any time within one year after the optionee's death,
by the executors or administrators of the optionee or by any
person or persons who shall have acquired the option directly from
the optionee by bequest or inheritance. No option shall be
transferable by the optionee otherwise than by will or by the laws
of descent and distribution.
(F) 10 - Percent Shareholder Rule. Notwithstanding any other provision
in the Plan, if at the time an Option is otherwise to be granted
pursuant to the Plan, the optionee owns directly or indirectly
(within the meaning of Section 424 (d) of the Code) Common Stock
of the Company possessing more than 10% of the total combined
voting power of all classes of stock of the Company or its parent
or subsidiary corporations, if any (within the meaning of Section
422(b)(6) of the Code), then any Incentive Stock Option to be
granted to such optionee pursuant to the Plan shall satisfy the
requirements of Section 422(c)(5) of the Code, and the option
price shall be not less than 110% of the fair market value of the
Common Stock of the Company on the date of grant, determined as
described herein, and such option by its terms shall not be
exercisable after the fifth anniversary of the date of grant.
(G) Rights as a Shareholder. An optionee or a transferee of an option
shall have no rights as a shareholder with respect to any shares
covered by an option until the date of the issuance of a stock
certificate for such shares. No adjustment shall be made for
dividends (ordinary or extraordinary whether in cash, securities
or other property) or distributions or other rights for which the
record date is prior to the date such stock certificate is issued,
except as provided in Article 5 hereof.
(H) Discontinuance and Amendment of the Plan. The Board of Directors
may, from time to time, alter, amend, suspend, or discontinue the
Plan with respect to any shares as to which options have not been
granted, and, with the consent of the participant who is a party
thereto, any option agreement may be modified or amended.
Unless approved by the stockholders of the Company, no amendment
to the Plan shall (a) increase the number of shares subject to the
Plan subject to the provisions of paragraph 5 hereof, (b) extend
the term of the Plan, (c) extend the term for which options may be
granted beyond ten years, (d) reduce the option price at which
options may be granted to less than 100% of fair market value at
the date of grant, or (e) in any other fashion cause the options
granted hereunder which are intended to be Incentive Stock
Options, and which are designated as such by the form of agreement
evidencing the granting of such option, to fail to qualify as an
Incentive Stock Option within the meaning of Section 422 of the
Code.
(I) Compliance with Laws Relating to Sale of Securities.
Notwithstanding any other provisions contained herein, the Company
shall have the right, in its exclusive discretion, to withhold the
issuance of any certificates for shares of stock in respect of
which any option has been exercised until, in the opinion of
counsel for the Company, any applicable registration requirements
of the Securities Act of 1933, as amended, any applicable listing
requirements of any national securities exchange on which the
stock may then be listed, and any other requirements of law or of
any regulatory bodies having jurisdiction over such issuance and
delivery, shall have been duly complied with. Pending the receipt
of such opinion of counsel for the Company, the Company may issue
certificates for such stock provided they contain a legend
indicating that said stock represented thereby is not registered
and may not be sold except in compliance with applicable law or
the release of said restrictions by the Company, and, in such
event, the Company shall have the right to instruct the transfer
agent and registrar of its common shares to effect "stop-transfer"
procedures with respect to such shares.
Until the shares reserved for options are registered and/or
listed, if required by law, the Committee may condition the
delivery of any certificate for option shares upon the receipt of
a written representation from the participant that at the time of
exercising such option the participant intends to acquire the
shares being purchased for investment and not for resale or
further distribution.
(J) Other Provisions. The option agreements authorized under the Plan
shall contain such other provisions as the Board of the Company
shall deem advisable.
8. Notification of Disposition.
If an optionee shall dispose of any of the shares of Common Stock of the
Company acquired pursuant to the exercise of an Incentive Stock Option
issued pursuant to the Plan within two years from the date said option
was granted or within one year after the transfer of any such shares to
the optionee upon exercise of said option, then, in order to provide the
Company with the opportunity to claim the benefit of any income tax
deduction which may be available to it under the circumstances, the
optionee shall promptly notify the Company of the dates of acquisition
and disposition of such shares, the number of shares so disposed of, and
the consideration, if any, received for such shares.
In order to comply with all applicable federal or state income tax laws
or regulations, the Company may take such action as it deems appropriate
to insure (i) notice to the Company of any disposition of the common
stock of the Company within the time periods described above and (ii)
that, if necessary, all applicable federal or state payroll, withholding,
income or other taxes are withheld or collected from the optionee.
9. Reliance on Information.
Each member of the Board of Directors and each officer and employee of
the Company shall be fully justified in relying or acting upon any
information furnished in connection with the administration of the Plan
by any other person or persons. In no event shall any person who is or
shall have been a member of the Board of Directors or an officer or
employee of the Company, be liable for any determination made or other
action taken or omission to act in reliance upon any such information or
for any action (including the furnishing of information) taken or any
failure to act, if in good faith.
10. Application of Funds.
The proceeds received by the Company from the sale of its Common Stock
pursuant to options will be used for general corporate purposes.
11. No Obligation to Exercise Option.
The granting of an option hereunder shall impose no obligation upon the
optionee to exercise such option, nor shall it be deemed to or construed
to impose any obligation on the Company or any related company to retain
the optionee in its employ for any period of time.
EXHIBIT 10N
NATIONAL COMPUTER SYSTEMS
CORPORATE
MANAGEMENT INCENTIVE PLAN
1995
It is NCS' intent to compensate its senior management employees in a manner
which permits the Corporation to attract, retain, and motivate outstanding
people.
The NCS Corporate Management Incentive Plan (MIP) is designed to reward key
senior managers for achieving specific annual NCS financial goals and for
individual performance in accomplishing these goals. It aligns the interests of
NCS senior management with NCS business and financial plans.
PLAN ELIGIBILITY
Participation in the plan is determined by position. Eligible positions and
target bonus amounts are determined each year and may change from year to year.
Participants must be full-time NCS employees. Eligibility is limited and
includes those positions which significantly impact financial results.
The eligible positions and participants will be reviewed annually and approved
by the CEO.
Positions and participants in the plan will be selected from the following:
- CEO,
- Corporate staff officers,
- NCS Business presidents, senior vice presidents and, on a selected
basis, their direct management reports,
- Selected other vice presidents
Any position or participant exceptions, exclusions and inclusions, to the above
must be documented and approved by the CEO.
TARGET BONUS
Each approved position will be eligible for a specific target bonus award
percentage level. This target bonus opportunity will be a percentage of the May
31, 1995, 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 or Net Income). The
remaining 30% of their potential target bonus will be based upon an overall
evaluation of the participant's performance during the fiscal year. This overall
evaluation will include performance against defined individual objectives and an
overall evaluation of performance relative to:
1) What you have done to improve shareholder value?
2) How you have improved customer satisfaction and NCS' ability to
serve the customer?
3) What you have done to improve the quality/predictability of your
business?
4) What you have done to develop your organization?
5) How have you demonstrated personal leadership and corporate-wide
perspectives/orientation?
6) How well did you deal with issues/problems?
No bonus award payouts will be made to participants for achievement of the 70%
financial performance if the individual's operating unit (NCS Business or
Division or Market Unit) does not accomplish its minimum profit contribution
objective(s). (i.e., a division participant requires that the division achieve
its minimum profit contribution threshold.)
OVERALL EVALUATION
Each participant will have 30% of their target bonus award based upon an overall
evaluation of the participant's performance. These will be completed for all MIP
participants.
DETERMINATION OF MIP AWARDS
Generally speaking, actual financial results will not include extraordinary
gains or losses. In any such matters, including acquisitions, the CEO will make
the appropriate approval decisions where needed.
PAYOUTS AND PRO-RATA
Earned award payouts will be made no later than April 15, following the end of
the plan fiscal year. Any participant must be a full-time employee and be
actively employed by NCS on the last day of the fiscal year to be eligible to
receive a payout. In coming into or out of an MIP eligible position,
participants will be given pro-rata earned award payouts based upon the length
of time in such position, however, participants must be in the plan at least six
(6) full months during the fiscal year to be eligible to receive any pro-rata
award. Pro-rata payouts will be subject to review and approval by the CEO.
DISABILITY, DEATH, OR SPECIAL CIRCUMSTANCES
In the case of disability, death or other special circumstances impacting a
participant in the plan, the CEO may approve pro-rata award payouts.
PLAN EXCEPTIONS AND ADMINISTRATION
Exceptions and/or modifications to the plan must be approved by the CEO. All
decisions made are final.
DISCLAIMER
Participation in this plan is not to be construed as an employment contract or
agreement by the participant.
EXHIBIT 100
NATIONAL COMPUTER SYSTEMS, INC.
OSWALD STOCK OPTION PLAN
89,000 Shares of National Computer Systems, Inc.
Common Stock, Par Value $.03
The Oswald Stock Option Plan is set forth through the following:
Resolution unanimously adopted (with Mr. Oswald abstaining) by the Board of
Directors of National Computer Systems, Inc. on August 22, 1994, with no
subsequent amendment or recision, as set forth below:
BE IT RESOLVED, That the terms and conditions of the CEO
Transition Package which has been recommended by the Compensation
Committee shall be attached to the minutes of this meeting as an
Exhibit A and is hereby approved, that Mr. Cox and General Vessey are
directed to communicate the terms and conditions of the Package to Mr.
Oswald and that Mr. Cox is hereby directed to execute on behalf of the
Company whatever documents are, in his judgment, necessary to evidence
the Package and Mr. Oswald's acceptance thereof; and
FURTHER RESOLVED, That upon receipt of evidence of the
cancellation of the 39,000 Incentive Stock Options currently owned by
Mr. Oswald, any officer of the Company is hereby authorized to execute
and deliver on behalf of the Company Stock Option Agreements with
respect to the issuance of 89,000 shares of the Company's Common Stock
to Mr. Oswald with the following exercise prices and option terms and
on such other terms and conditions as are set forth in the form of
stock option agreement attached to these minutes as Exhibit B:
Optionee - Charles W. Oswald
Option Terms - Option Exercise Expiration
Shares Price Date
------ -------- ----------
15,000 $ 15.68 5-23-96
12,000 16.50 5-21-97
12,000 17.60 5-20-98
50,000 13.13 8-22-99
-------
89,000
=======
Exercisability - 100% six months after date of grant or
upon Shareholder approval, whichever
is later
FURTHER RESOLVED, That these resolutions and the stock option
agreements referred to above are intended to be a "plan" for purposes
of Rule 16b-3 under the Securities and Exchange Act of 1934; and
FURTHER RESOLVED, That the Common Stock, when issued upon the
exercise of the options granted to Mr. Oswald, shall be duly and
validly issued, fully paid and non-assessable shares of the Common
Stock of the Company; and
FURTHER RESOLVED, That the authority of the Norwest Bank
Minnesota, N.A. as transfer agent and registrar of the Company's Common
Stock is hereby enlarged to reflect the issuance of these shares and
the proper officers of the Company are hereby directed to inform the
transfer agent and registrar and to execute any instruments required in
connection therewith; and
FURTHER RESOLVED, That the officers of the Company are
authorized to do or cause to be done any and all acts and deeds and to
execute and deliver on behalf of the Company all such documents as are
deemed necessary and proper to effect the intent of these resolutions.
National Computer Systems, Inc.
By: /s/ J. W. Fenton, Jr.
Its: Secretary-Treasurer
<PAGE>
EXHIBIT A
CHARLES W. OSWALD RETIREMENT PACKAGE
QUESTIONS/ISSUES CONCLUSIONS/RECOMMENDATIONS
- ---------------- ---------------------------
Continue as an employee? -Until 5/31/95, when he relinquishes Chairman-
ship, at his current base salary of $390K
annually
-No bonus eligibility from 1/31/95 - 5/31/95
-Charles W. Oswald will move to new location by
12/31/94.
Supplemental Retirement
Benefit? No
Consulting Contract? No
Vest LTIP? Yes
Options? -Charles Oswald will exercise 5/24/90 Option Grant
-Replace 5/23/91, 5/21/92, 5/20/93 ISO grants with
non-qualified options at the same price, vesting,
and net 5-year term remaining.
-Grant an additional 50,000 non-qualified shares
today with 5-year term (8/99).
On-Going Cash Compensation? None beyond 5/31/95.
Maintain Healthcare? Yes, for three years beyond 5/31/95(to 5/31/98)
pay Charles W.Oswald's premium costs for Medicare
and Medicare supplemental coverage to provide
total coverage comparable to NCS' group plan.
Office and Secretary? Yes, for 5 years reimburse up to $65,000 annually
for actual office and secretarial costs incurred.
<PAGE>
<TABLE>
EXHIBIT B
Projected Stock Option Valuation
For Charles Oswald
August 1994
<CAPTION>
Qualified Incentive Non-Qualified Stock Projected Net Gain Value
Stock Options Granted Option Grant (Based on Stock Prices below)
----------------------- -------------- -----------------------------
Salary Date Price Shares Shares Price $20 $25 $30
________ ____ _____ ______ ______ _____ _____ _____ _____
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$295,000 5-24-90 $ 9.08 12500 --- --- --- --- ---
$325,000 5-23-91 $ 15.68 15000 15000 $ 15.68 $ 64800 $139800 $ 214800
$375,000 5-21-92 $ 16.50 12000 12000 $ 16.50 $ 42000 $102000 $ 162000
$390,000 5-20-93 $ 17.60 12000 12000 $ 17.60 $ 28800 $ 88800 $ 148800
$390,000 8-22-94 --- --- 50000 $ 13.00 $350000 $600000 $ 850000
------- ------- --------
Total Net $485600 $930000 $1375600
======= ======= ========
</TABLE>
*Assumptions:
-Replace existing ISO grants (except 5/24/90) with Non-
Qualified grants with remaining years of 5-year term
-Same grant prices
-Actual remaining years of total 5-year term
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC.
Stock Option Agreement
Date of Grant: August 22, 1994
Charles W. Oswald
(50,000 shares @ $13.13 expiring 08/22/99)
Dear Charley:
In recognition of the valuable services which you have rendered to National
Computer Systems, Inc. (the "Company") and to induce you to continue to
effectively serve the Company, the Company has, conditioned upon execution of
this Agreement, granted to you a non-revocable option to acquire 50,000 shares
("Option Shares") of the Company's common stock at an option price of $13.13 per
share. The Incentive Stock Option outstanding for a similar number of shares,
option price and expiration date is hereby forfeited. Your option is subject to
Shareholder approval and the terms outlined below.
In order for the Company to maintain its growth and vitality by preventing its
sensitive product and business information from being misused, and in
consideration of its grant, your acceptance of this option includes the
following undertakings as a condition to its grant:
Confidential Information: You agree not to utilize or divulge to others
any information concerning the Company or its business which you have
been told or reasonably know to be information: (i) not generally known
or readily ascertainable by others; (ii) providing a competitive
advantage to NCS; (iii) acquired by NCS at its expense; and (iv)
maintained by NCS in confidence.
Competitive Employment: You agree not to, while you are a director of
the Company or for a period of one (1) year thereafter, be employed by,
be a director of, or work for a direct competitor of the Company, or
yourself compete directly with the Company.
GENERAL TERMS:
1. This option shall be for the period beginning on date of grant and
ending on August 22, 1999 ("Option Period"). Commencing six (6) months
after the date of grant or upon Shareholder approval, whichever is
later, this option may be exercised in part or full for the total
number of Option Shares, except as provided in paragraphs 3 and 4
below. No Option Shares may be purchased following termination of the
Option Period.
2. The Option Shares shall be the Company's common stock, par value $.03
per share ("Common Stock"), and shall be subject to adjustment if the
outstanding shares of the Common Stock are changed in number (such as a
stock split) or are substituted for a different number or kind of
securities of the Company. In such case, a corresponding adjustment
shall be made in your number of unexercised Option Shares but with a
corresponding adjustment in the price for each unexercised Option
Share. If the outstanding Common Stock of the Company should be
exchanged for other securities of the Company or of another corporation
which is a party to a reorganization, consolidation, or merger with a
company, the unexercised portion of this option shall apply to the
substitute securities.
3. If, prior to the end of the Option Period, you cease to be a director
of the Company by reason of your gross and wilfull misconduct during
the course of your service as a director of the Company, including but
not limited to wrongful appropriation of funds of the Company, or the
commission of a gross misdemeanor or felony, any non-exercised option
right will be terminated as of the date of the misconduct.
4. If you should die during the Option Period, your personal
representatives, administrators or, if applicable, any person or
persons to whom the option is transferred by will or the applicable
laws of descent and distribution shall have twelve (12) months from the
date of your death, but in no event beyond the last day of the Option
Period, to exercise any non-exercised option right that had accrued up
through your date of death according to paragraph 1.
5. Any Option Shares purchased by you shall be subject to the following
restrictions, and the certificates for any Option Shares purchased by
you shall be impressed with a legend making such reference thereto as
shall be necessary or appropriate in the opinion of counsel for the
Company:
"The securities represented by this certificate have not been
registered under the Federal Securities Act of 1933, as
amended, or applicable state securities laws and may not be
sold, transferred, assigned, pledged, offered, or otherwise
disposed of in the absence of an effective registration
statement under applicable securities laws or an opinion from
counsel acceptable to the company stating that such
registration is not required."
6. This option shall be exercised by delivering to the Company the
following:
A. A notice of your intention to exercise your option.Such notice
shall state:
1. The number of shares in respect of which the option
is to be exercised.
2. The price to be paid, including an agreement and
understanding on your part to pay in addition to the
purchase price of the Option Shares a sum equal to
the amount of any Federal and State tax due in
respect to said purchase as computed by the Treasurer
of the Company and an acknowledgment that with
respect to any income tax liability created by the
contemplated purchase, you will indemnify the Company
at all times.
B. Payment of an amount equal to the total purchase price of the
Option Shares either (i) in cash, including check, or (ii) by
delivering Common Stock already owned by you having a fair
market value on the date of exercise equal to the full
purchase price of the Option Shares, or (iii) by any
combination of cash and the method specified in (ii).
C. Payment of an amount sufficient to pay any issue or transfer
taxes which may be applicable plus an amount equal to the
withholding tax liability allocable to the Option Shares being
purchased, all as determined by the Treasurer of the Company.
D. A letter containing representations, in form and content
acceptable to counsel for the Company, reflecting your
understanding of and access to Company finances and business
records, your appreciation of the risks inherent in the
investment, your acknowledgment that the sale is being made in
reliance upon certain exemptive provisions available under the
Securities Act of 1933, your acknowledgment that the purchase
is not being made to share participation with others, or to
participate in any distribution of the shares, and your
acknowledgment that the certificate for such shares may be
impressed with an appropriate legend restricting
transferability, making such reference to this option and to
the rights of the Company hereunder as may be necessary, and
agreeing that "Stop-Transfer" procedures may be effected with
the Transfer Agent of the Company's Common Stock.
On receipt of the foregoing, the Transfer Agent will be
instructed to prepare and deliver certificates for the shares
impressed with such legend.
7. The Company reserves a right to withhold the issuance of any
certificates for Option Shares until, in the opinion of counsel for the
Company, any applicable registration requirements and any other
requirements of law shall have been duly complied with.
8. You have no rights as a stockholder with respect to any Option Shares
until the date of issuance of a stock certificate to you for such
shares.
9. Each member of the Board of Directors of the Company and each officer
and employee of the Company shall be fully justified in relying or
acting upon any information furnished in connection with the
administration of this option, by you, and none of such persons shall
be liable for any determination made or any action taken hereunder, nor
for any failure to act, if done or omitted in good faith.
10. The proceeds received by the Company from the sale of Option Shares to
you hereunder will be used for general corporate purposes.
11. The grant of this option shall not impose any obligation on you to
exercise the option at any time.
12. Nothing contained herein shall be deemed or construed to confer on you
any right to continue as a director of the Company or affect in any way
any legal rights with respect to termination of such directorship or
removal of you as a director.
13. This Option Agreement is not assignable by you except as is provided in
paragraph 4. The option right may only be exercised by you and you
hereby agree that any controversy concerning interpretation of the
option right shall be resolved solely by the Company's Executive
Committee, and their determination shall be binding.
If the above terms of this Agreement are acceptable to you, please signify your
agreement by executing one copy of this Agreement and returning it to the
Company.
Very truly yours,
NATIONAL COMPUTER SYSTEMS, INC.
By: /S/J. W. FENTON, JR.
---------------------------------
J. W. Fenton, Jr.
Secretary/Treasurer
The foregoing Agreement is acceptable to, and is hereby accepted by, me.
/S/ CHARLES W. OSWALD
- ------------------------------
<TABLE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
NATIONAL COMPUTER SYSTEMS, INC.
<CAPTION>
YEAR ENDED JANUARY 31
----------------------------------------------------------------------
1995 1994 1993 1992 1991
=========== =========== =========== =========== ===========
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 15,164 15,438 15,915 16,002 15,891
Dilutive stock options -- based
on the treasury stock method
using average market price 61 97 151 136 --
----------- ----------- ----------- ---------- -----------
TOTAL 15,225 15,535 16,066 16,138 15,891
=========== =========== =========== ========== ===========
Net income (loss) $ 13,398 $ (2,509) $ 16,508 $ 15,474 $ 13,022
=========== =========== =========== =========== ===========
Net income (loss) per share $ 0.88 $ (0.16) $ 1.03 $ 0.96 $ 0.82
=========== =========== =========== =========== ===========
FULLY DILUTED (1)
Average shares outstanding 15,164 15,438 15,915 16,002 15,891
Dilutive stock options -- based on
the treasury stock method using
the higher of year-end market
price or average market price 148 99 164 199 78
Assumed conversion of convertible
subordinated debenture -- -- -- 361 1,937
----------- ----------- ----------- ----------- -----------
TOTAL 15,312 15,537 16,079 16,562 17,906
=========== =========== =========== =========== ===========
Net income (loss) $ 13,398 $ (2,509) $ 16,508 $ 15,474 $ 13,022
Add interest on convertible subordinated
debenture, net of the income tax effect -- -- -- 363 1,795
=========== =========== =========== =========== ===========
$ 13,398 $ (2,509) $ 16,508 $ 15,837 $ 14,817
=========== =========== =========== =========== ===========
Net income (loss) per share $ 0.88 $ (0.16) $ 1.03 $ 0.96 $ 0.83
=========== =========== =========== =========== ===========
<FN>
(1) - Fully converted in the year ended January 31, 1991, which is
anti-dilutive.
</FN>
</TABLE>
EXHIBIT 13
PORTIONS OF THE
ANNUAL REPORT TO STOCKHOLDERS
FOR THE FISCAL YEAR ENDED JANUARY 31, 1995
<TABLE>
FIVE-YEAR FINANCIAL DATA (Unaudited)
(Dollars in thousands, except per share amounts)
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Financial Results
Revenues ...................... $336,943 $305,453 $300,067 $302,506 $315,283
Income (loss) from operations . 23,146(1) (2,301)(2) 27,258 28,704 28,064
Income (loss) before income tax
provision (benefit) ......... 19,148 (2,859) 26,608 24,174 20,972
Income tax provision (benefit). 5,750 (350) 10,100 8,700 7,950
Net income (loss).............. 13,398 (2,509) 16,508 15,474 13,022
Net income (loss) per share.... $ .88 $ (.16) $ 1.03 $ .96 $ .82
Average number of shares
outstanding ................. 15,225 15,535 16,066 16,138 15,891
Dividends paid per share ...... $ .36 $ .36 $ .33 $ .29 $ .28
Financial Position
Current ratio ................. 1.5 1.5 1.6 1.7 2.0
Working capital ............... $ 35,614 $ 36,217 $ 38,792 $ 39,836 $ 51,351
Total assets .................. 240,757 220,173 214,739 217,578 225,159
Long-term debt, including
current maturities ........... 50,525 47,351 25,350 39,751 57,991
Stockholders' equity .......... 113,123 100,147 121,317 112,316 100,646
<FN>
(1) Includes a $11,339 pre-tax special charge. (2) Includes a $25,000 pre-tax
special charge.
</FN>
</TABLE>
<PAGE>
<TABLE>
QUARTERLY MARKET DATA (Unaudited)
The Company's stock is traded on the NASDAQ National Market System under
the symbol "NLCS." As of January 31, 1995, there were approximately 2,000
stockholders of record.
<CAPTION>
YEAR ENDED JANUARY 31, 1995
-------------------------------------
Quarter 1st 2nd 3rd 4th
- --------------------------------- -------- -------- -------- -------
<S> <C> <C> <C> <C>
Sales prices per share
High .................... $ 13.50 $ 13.25 $ 14.75 $ 17.25
Low ..................... 10.88 10.50 11.50 12.13
Dividends paid per share ........ $ .09 $ .09 $ .09 $ .09
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1994
-------------------------------------
Quarter 1st 2nd 3rd 4th
- --------------------------------- -------- -------- -------- -------
<S> <C> <C> <C> <C>
Sales prices per share
High .................... $ 16.00 $ 18.00 $ 17.75 $ 13.25
Low ..................... 13.25 14.88 11.50 10.25
Dividends paid per share ........ $ .09 $ .09 $ .09 $ .09
</TABLE>
<TABLE>
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
(In thousands, except per share amounts)
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
April 30 July 31 October 31 January 31
-------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended January 31, 1995
Revenues ...................... $68,750 $80,131 $94,608 $93,454
Gross profit .................. 27,081 31,165 31,239 38,452
Net income .................... 1,950 4,715 4,578 2,155 (1)
Net income per share .......... $ 0.13 $ 0.31 $ 0.30 $ 0.14
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) (2)
Net income (loss) per share ... $ 0.11 $ 0.27 $ 0.10 $ (0.66)
<FN>
(1) Includes a $11,339 pre-tax special charge. (2) Includes a $25,000 pre-tax
special charge.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
<TABLE>
INCOME AND EXPENSE ITEMS AS A PERCENTAGE OF REVENUES
<CAPTION>
FISCAL YEAR
-----------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Revenues
Net sales ............................ 80.8% 77.5% 77.1%
Maintenance and support .............. 19.2 22.5 22.9
----- ----- -----
Total revenues ............... 100.0 100.0 100.0
Cost of Revenues
Cost of sales(1) ..................... 60.1 57.4 57.7
Cost of maintenance and support(2) ... 70.0 73.6 76.1
----- ----- -----
Total gross profit ........... 38.0 38.9 38.1
Operating Expenses
Sales and marketing .................. 13.1 15.7 13.2
Research and development ............. 4.0 3.1 3.0
General and administrative ........... 10.6 12.7 12.9
Special charges ...................... 3.4 8.2 --
----- ----- -----
Income (loss) from operations ................ 6.9 (0.8) 9.1
Income (loss) before taxes ................... 5.7 (0.9) 8.9
----- ----- -----
Net income (loss) ............................ 4.0% (0.8)% 5.5%
===== ===== =====
<FN>
(1) As a percentage of sales revenue.
(2) As a percentage of maintenance and support revenue.
</FN>
</TABLE>
Note: The fiscal years referenced herein are as follows: fiscal 1994 - year
ended January 31, 1995; fiscal 1993 - year ended January 31, 1994; fiscal 1992 -
year ended January 31, 1993.
National Computer Systems, Inc. (the Company or NCS) operates two business
segments. The predominance of the Company's business is centered around its
proprietary optical scanning hardware and forms technology. This segment markets
those products and related application software and services predominantly in
education, but also to business, government, and healthcare markets through its
various operating units. The financial systems segment designs, develops and
markets asset management software, primarily for bank trust departments. This
includes systems for personal trust asset management for individuals and
corporate trust applications such as stock and bond transfer systems.
RECAP OF 1994 RESULTS
Total revenues in fiscal 1994 were a record $336.9 million, up 10.3% from the
prior year. The Company's overall gross profit percentage on revenues declined
slightly (.9 of one percent) from last year, however, total gross profit dollars
exceeded the prior year by $9.0 million or 7.6%. The revenue growth was achieved
with $4.0 million less sales and marketing expense than in the prior year, with
those expenses declining to 13.1% of revenues in fiscal 1994 from 15.7% in
fiscal 1993. Research and development expenses increased by $4.1 million in
fiscal 1994, principally directed at new products. General and administrative
expenses declined by $2.9 million from the prior year. The Company's income from
operations, before the special charges discussed below, grew to $34.5 million or
10.2% of revenues in fiscal 1994 from $22.7 million or 7.4% of revenues in
fiscal 1993. Interest expense was $1.3 million higher in fiscal 1994 than the
prior fiscal year, due to higher average borrowing levels and higher interest
rates. A $1.6 million disposition gain realized in fiscal 1993 and reflected in
other income and expense did not recur in fiscal 1994. Income, before the
special charges described below, totaled $18.6 million or $1.22 per share
compared with $13.0 million or $.84 per share in fiscal 1993. After pre-tax
special charges described below of $11.3 million in fiscal 1994 and $25.0
million in fiscal 1993, net income was $13.4 million or $.88 per share in fiscal
1994 compared to a net loss of $2.5 million or $.16 per share in fiscal 1993.
SPECIAL CHARGES
In fiscal 1994, the Company recorded an $11.3 million special charge consisting
of three components: the restructuring and statutory reorganization of the
Company's German operations, the discontinuation of an employee benefits
software development project, and the write-down of certain investments in
anticipation of disposition. These actions should reduce ongoing operating
expenses by approximately $1 million annually. See Note 2 of Notes to
Consolidated Financial Statements for further discussion.
In fiscal 1993, the Company recorded a $25 million special charge, $22.8 million
of which was to terminate the Ultrust product and the related Cambridge,
Massachusetts operations dedicated to the product. 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 charge also
included $2.2 million for 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. See Note 2 of Notes to
Consolidated Financial Statements for further discussion.
REVENUES
Fiscal 1994 versus Fiscal 1993. Total revenues for fiscal 1994 were up 10.3% to
$336.9 million from $305.5 million in fiscal 1993. Total revenues for fiscal
1994 as compared to fiscal 1993, by major NCS business area, were as follows:
Education +19.5%
Business, Government,
Healthcare and other +1.4%
Financial Systems +9.3%
Significantly higher volumes of educational assessment and student financial aid
processing at the Company's Iowa City service center were the principal factors
in the growth in revenues in education. Approximately half of the revenue growth
in financial systems was due to a minor acquisition in the third quarter of
fiscal 1994. See Note 3 of Notes to Consolidated Financial Statements for
further discussion. Going forward, the financial systems business faces
challenges related to certain industry trends, such as consolidation by
financial institutions. However, the Company believes opportunities exist to
expand its offerings of products and services and to pursue asset management
organizations other than banks.
By revenue category, net sales were up 15.0% in fiscal 1994 over fiscal 1993 due
to the higher education and student financial aid revenues mentioned above,
among other increases. Maintenance and support revenues were down 5.9% due to
lower third-party hardware maintenance revenues, offset somewhat by increases in
proprietary services and software support.
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 major NCS business area were as follows:
Education +6.1%
Business, Government,
Healthcare and other +4.5%
Financial Systems -12.4%
Significantly higher volumes of educational assessment and student financial aid
processing at the Company's Iowa City service center resulted in an overall
increase in education revenues, notwithstanding the loss of approximately $8
million of Guaranteed Student Loan (GSL) contract revenue. Financial system's
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 financial systems, 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.
COST OF REVENUES AND GROSS PROFITS
Fiscal 1994 versus Fiscal 1993. In fiscal 1994, the Company's overall gross
profit declined slightly to 38.0% of total revenues from 38.9% in fiscal 1993.
By revenue category, the gross profit on net sales declined by 2.7 percentage
points in fiscal 1994 from the prior year, due in large measure to lower
relative margins on certain of the incremental revenues at the Iowa City service
center. This was offset by gross profit on the maintenance and support revenues,
which improved by 3.6 percentage points in fiscal 1994, due principally to
higher margins on hardware maintenance services and improved software support
margins owing largely to the discontinuance of Ultrust.
The Company is experiencing significant price increases for the type of paper
most commonly used in its scannable forms product. This is consistent with paper
price movements in the general marketplace and the Company will attempt to
offset these increases, to the extent possible, with increases in productivity
and, where necessary, with price increases to its customers. It is the Company's
current belief that these price increases will unfavorably impact gross profit
to some extent, but should not materially impact overall profitability.
Fiscal 1993 versus Fiscal 1992. The Company's overall gross profit percentage
improved to 38.9% in fiscal 1993 from 38.1% in fiscal 1992. The gross profit 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 gross profit improved by 2.5 percentage
points year to year as a percentage of related revenues due to lower parts costs
related to hardware maintenance.
OPERATING EXPENSES
Fiscal 1994 versus Fiscal 1993. In fiscal 1994, sales and marketing expenses
decreased $4.0 million from the prior fiscal year. This, coupled with increased
revenues, decreased these expenses as a percentage of total revenues by 2.6
percentage points. This improvement over fiscal 1993 is due to a concerted
Company-wide effort to reduce these expenses and make sales and marketing
efforts more productive.
Research and development expenses increased $4.1 million or 43.3% in fiscal 1994
over fiscal 1993 due directly to new software product initiatives across the
Company, particularly in financial systems and education.
General and administrative expenses declined by $2.9 million or 7.4% in fiscal
1994 from the prior fiscal year. This decrease year-to-year is due to
Company-wide efforts to reduce these expenses.
Fiscal 1993 versus Fiscal 1992. Sales and marketing expenses increased by $8.4
million in fiscal 1993 over fiscal 1992. This was a 21.2% increase year to year
and was incurred in all the major business areas. The increase was intended to
increase sales momentum, and while sales did increase slightly in fiscal 1993,
they did not increase as much as anticipated.
Research and development expenses were up slightly in fiscal 1993 from the prior
year. This increase was spread among all NCS businesses, with the largest
increase coming in scanning hardware and software engineering.
Total general and administrative expenses were essentially unchanged from fiscal
1992 to fiscal 1993.
INTEREST EXPENSE
Interest expense increased $1.3 million in fiscal 1994 over fiscal 1993. This
was due to higher average borrowing levels in fiscal 1994, as debt levels
increased significantly in the latter part of fiscal 1993 and modestly in fiscal
1994. Interest rates also increased in fiscal 1994 from the prior year. See
Capital Resources and Liquidity below for further discussion of cash flow and
debt.
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.
OTHER INCOME AND EXPENSE
Other income and expense in fiscal 1994 included no large or unusual items and
was, therefore, insignificant.
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 reflects the favorable resolution of certain claims relating
to the original procurement of the GSL processing contract in 1987.
INCOME TAXES
The effective income tax rate for fiscal 1994 was 30.0% which was significantly
reduced by the net tax benefit related to the reorganization of the Company's
German operations. See Note 6 of the Notes to Consolidated Financial Statements.
The effective income tax benefit rate for fiscal 1993 was 12.2%, which was
significantly lower than the statutory rate and the Company's historical
effective rate. The rate impact of permanent book/tax differences is magnified
due to the low absolute dollar amount of the pre-tax loss. The effective income
tax rate for fiscal 1992 was 38.0%.
CAPITAL RESOURCES AND LIQUIDITY
During fiscal 1994, the Company generated $42.2 million of cash from operations
which represented a return to historical cash generation levels. The special
charges incurred in fiscal 1994 had, after considering tax benefits, a slightly
positive impact on cash from operations. The Company invested $28.3 million in
property, plant and equipment in fiscal 1994, which was unusually high due to
the addition of new buildings in Mesa, Arizona and Iowa City, Iowa. Software
capital additions were down to $6.9 million in fiscal 1994, principally due to
the discontinuation of Ultrust. Also, $3.2 million of cash was invested in two
minor acquisitions. The activities above, and all other cash needs, were
financed with cash from operations and $4.1 million of additional borrowings.
During fiscal 1993, the Company generated $26.0 million of cash from operating
activities. This level was significantly below the prior year's generation of
$54.3 million due to the lower level 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 included the residual of the special
charges, which required cash outlay in the first half of fiscal 1994. Cash was
used for capital expenditures and other investing activities totaling $38.3
million. This investment level is higher than the fiscal 1992 amount of $24.5
million due to higher property, 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 shares of Common Stock during fiscal 1993, using
$15.9 million of cash. All these activities described above were financed with
cash from operations, $9.0 million of cash on hand, and increased borrowings of
$23.0 million during fiscal 1993.
The Company had long-term debt balances, including current maturities of $50.5
million, $47.4 million, and $25.4 million at January 31, 1995, 1994, and 1993,
respectively. The items causing the changes in debt balances are described
above. At January 31, 1995, the Company's debt to total capital ratio was 30.9%
compared to 32.1% a year earlier and 17.3% two years earlier. The Company
believes that the debt to total capital ratio is currently within an acceptable
operating range.
Looking toward fiscal 1995, the Company maintains a $40 million revolving credit
facility, $20.4 million of which was unused at January 31, 1995. The Company
expects cash flow from operations to be at traditional levels in fiscal 1995 and
will use such cash to fund capital expenditures and reduce debt to the extent
possible. In fiscal 1995, capital expenditures are likely to decrease, as there
are no new facilities planned, and software development will approximate 1994
levels. The Company considers the $40 million credit facility and funds from
operations to be adequate to meet foreseeable cash requirements.
<PAGE>
<TABLE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<CAPTION>
ASSETS
JANUARY 31,
----------------------
1995 1994
---------- ---------
<S> <C> <C>
Current Assets
Cash and cash equivalents ........................... $ 1,195 $ 1,724
--------- ---------
Receivables
Trade ....................................... 77,209 70,100
Other ....................................... 1,940 5,328
--------- --------
79,149 75,428
--------- --------
Inventories ......................................... 20,455 17,370
Prepaid expenses and other .......................... 9,925 9,198
--------- --------
Total Current Assets ........................ 110,724 103,720
--------- --------
Property, Plant and Equipment
Land, buildings and improvements .................... 48,202 37,254
Machinery and equipment.............................. 101,336 88,950
Rotable service parts ............................... 9,256 11,085
Equipment held for lease ............................ 7,583 8,205
Accumulated depreciation ............................ (83,648) (75,988)
-------- --------
82,729 69,506
-------- --------
Other Assets, net
Acquired and internally developed software products . 27,234 20,092
Non-current receivables, investments and other assets 17,027 21,896
Goodwill ............................................ 3,043 4,959
-------- ---------
47,304 46,947
-------- ---------
Total Assets ................................ $ 240,757 $ 220,173
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt ................ $ 5,212 $ 2,677
Accounts payable .................................... 20,655 18,777
Accrued expenses .................................... 29,495 27,093
Deferred income ..................................... 18,645 18,956
Income taxes ........................................ 1,103 --
-------- ---------
Total Current Liabilities ................... 75,110 67,503
-------- ---------
Deferred Income Taxes ....................................... 7,211 7,849
Long-Term Debt - less current maturities .................... 45,313 44,674
Commitments and contingencies
Stockholders' Equity
Preferred stock ..................................... -- --
Common stock - issued and outstanding -
15,310 and 14,983 shares, respectively ...... 459 449
Paid-in capital ..................................... 3,795 --
Retained earnings ................................... 114,546 106,771
Deferred compensation ............................... (5,677) (7,073)
-------- ---------
Total Stockholders' Equity ................... 113,123 100,147
--------- ----------
Total Liabilities and Stockholders' Equity.... $ 240,757 $220,173
========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JANUARY 31,
-------------------------------------
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
Revenues
Net sales ............................................. $ 272,305 $ 236,737 $ 231,483
Maintenance and support ............................... 64,638 68,716 68,584
--------- --------- ---------
Total revenues ........................ 336,943 305,453 300,067
Cost of Revenues
Cost of sales ......................................... 163,744 135,943 133,457
Cost of maintenance and support........................ 45,262 50,589 52,207
--------- --------- ---------
Gross profit .......................... 127,937 118,921 114,403
Operating Expenses
Sales and marketing ................................... 44,138 48,104 39,695
Research and development .............................. 13,422 9,364 8,865
General and administrative ............................ 35,892 38,754 38,585
Special charges........................................ 11,339 25,000 --
--------- --------- ---------
Income (Loss) From Operations ................................. 23,146 (2,301) 27,258
Interest expense ...................................... 3,465 2,200 1,889
Other (income) expense ................................ 533 (1,642) (1,239)
--------- --------- ---------
Income (Loss) Before Income Tax Provision (Benefit) ........... 19,148 (2,859) 26,608
Income tax provision (benefit)........................ 5,750 (350) 10,100
--------- --------- ---------
Net Income (Loss) ............................................. $ 13,398 $ (2,509) $ 16,508
========= ========= ========
Net Income (Loss) Per Share ................................... $ 0.88 $ (0.16) $ 1.03
Average Shares Outstanding .................................... 15,225 15,535 16,066
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK
------------------
PAID-IN RETAINED DEFERRED
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION TOTAL
------ ------ ------- -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance January 31, 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 income (loss) ....................... -- -- -- (2,509) -- (2,509)
Cash dividends paid - $.36 per share .... -- -- -- (5,581) -- (5,581)
Foreign currency translation adjustment.. -- -- -- (289) -- (289)
------ ---- ------- ------- ------- --------
Balance January 31, 1994 ........................ 14,983 449 -- 106,771 (7,073) 100,147
Shares issued for employee stock
purchase and option plans ....... 152 5 1,492 -- -- 1,497
Repurchase of common stock .............. (32) (1) (359) -- -- (360)
Restricted stock awards.................. (59) (2) (430) -- 432 --
Shares issued for business acquisition .. 266 8 3,092 -- -- 3,100
ESOP debt payment ....................... -- -- -- -- 1,000 1,000
Restricted stock compensation accrual ... -- -- -- -- (36) (36)
Net income .............................. -- -- -- 13,398 -- 13,398
Cash dividends paid - $.36 per share .... -- -- -- (5,453) -- (5,453)
Foreign currency translation adjustment.. -- -- -- (170) -- (170)
------- ---- ------- -------- -------- ---------
Balance January 31, 1995 ........................ 15,310 $459 $ 3,795 %114,546 $ (5,677) $ 113,123
======= ==== ======= ======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JANUARY 31,
-------------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Operating Activities
Net income (loss) ................................................... $13,398 $ (2,509) $ 16,508
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation ........................................ 15,559 16,289 18,426
Amortization ........................................ 8,412 8,388 10,131
Deferred income taxes and other...................... (400) (2,434) (501)
Non-cash special charges ............................ 10,375 17,805 --
Changes in operating assets and liabilities
(net of acquired amounts):
Accounts receivable ................. (3,392) (12,346) 1,830
Inventory and other current assets .. (4,285) (3,765) 3,100
Accounts payable and accrued expenses 3,183 3,879 552
Deferred income...................... (613) 652 4,278
------- -------- --------
Net Cash Provided By Operating Activities ........... 42,237 25,959 54,324
------- -------- --------
Investing Activities
Divestitures (acquisitions) ......................................... (3,216) (1,198) 154
Purchases of property, plant and equipment .......................... (28,251) (21,935) (12,894)
Purchases of rotable service parts .................................. (934) (1,917) (1,490)
Capitalized software products ....................................... (6,928) (11,474) (8,409)
Other - net ......................................................... (3,245) (1,728) (1,906)
------- -------- --------
Net Cash Used In Investing Activities ............... (42,574) (38,252) (24,545)
Financing Activities
Net increase (decrease) in revolving credit borrowing ............... 1,100 18,500 (15,000)
Net increase in other borrowings .................................... 3,024 4,501 1,599
Issuance (repurchase) of common stock, net .......................... 1,137 (14,170) (2,713)
Dividends paid ...................................................... (5,453) (5,581) (5,261)
------- -------- --------
Net Cash Provided By
(Used In) Financing Activities ................... (192) 3,250 (21,375)
------- -------- --------
Increase (Decrease) In Cash and Cash Equivalents ............................ (529) (9,043) 8,404
Cash and Cash Equivalents - Beginning of Year ............................... 1,724 10,767 2,363
------- -------- --------
Cash and Cash Equivalents - End of Year ..................................... $ 1,195 $ 1,724 $ 10,767
======= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
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 1994 -
year ended January 31, 1995; fiscal 1993 - year ended January 31, 1994; fiscal
1992 - year ended January 31, 1993.
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.
CASH AND CASH EQUIVALENTS: All investments purchased with an original maturity
of three months or less are considered to be cash equivalents.
INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or
market. Components of inventory at January 31 are summarized as follows:
1995 1994
------- -------
Finished goods $ 6,408 $ 6,094
Scoring services and work in process 8,974 6,117
Raw materials and purchased parts 5,073 5,159
------- -------
$20,455 $17,370
======= =======
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost
and depreciated over the estimated useful lives of the assets using principally
the straight-line method for financial reporting purposes and accelerated
methods for income tax purposes. Significant improvements are capitalized to
property, plant and equipment accounts, while maintenance and repairs are
expensed currently. Rental income from equipment held for lease is recognized as
earned using the operating method of accounting for such leases. Depreciation is
computed using the straight-line method based on the assets' estimated useful
lives.
ROTABLE SERVICE PARTS: Parts continually repaired and reused are carried
at cost and depreciated over their estimated useful lives ranging from three to
five years. Such amounts are reflected as a separate category of property, plant
and equipment.
ACQUIRED AND INTERNALLY DEVELOPED SOFTWARE PRODUCTS: Acquired software product
amounts originate from the allocation of purchase prices of acquired companies
and assets. These products are generally large, complex, mission-critical
application software packages with established market positions. Products in
this category are generally assigned lives of five years. Internally developed
software products represent costs capitalized in accordance with Statement of
Financial Accounting Standards No. 86. Accordingly, software production costs
incurred subsequent to establishing technological feasibility, as defined, are
capitalized. Amortization of these products is computed on a product by product
basis ratably as a percentage of expected revenue, subject to minimum
straight-line amortization over the products' estimated useful lives of 2 to 5
years. An employee benefits product and the Ultrust software product were
discontinued in fiscal 1994 and fiscal 1993, respectively. Refer to Note 2 for
further discussion.
<PAGE>
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
A summary of software activity is as follows:
INTERNALLY ACCUMULATED
ACQUIRED DEVELOPED AMORTIZATION TOTAl
-------- ---------- ------------ -------
<S> <C> <C> <C> <C>
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
Additions .............................. 7,868 6,928 -- 14,796
Product discontinuation ................ -- (2,983) 25 (2,958)
Amortization ........................... -- -- (4,696) (4,696)
------- ------- -------- --------
Balance, January 31, 1995 ...................... $21,195 $24,431 $(18,392) $ 27,234
======= ======= ======== ========
</TABLE>
GOODWILL: Goodwill arising from business acquisitions is amortized on a
straight-line basis over periods ranging from 5 to 20 years, generally 10 years.
Amortization expense was $1,179 in fiscal 1994, $1,146 in fiscal 1993 and $1,049
in fiscal 1992. Accumulated amortization was $2,493 and $6,253 as of January 31,
1995 and 1994, respectively.
ACCRUED EXPENSES: Major components of accrued expenses consisted of the
following as of January 31:
1995 1994
------- -------
Employee compensation ............ $12,960 $10,168
Taxes other than income .......... 3,410 3,383
Royalties ........................ 2,241 2,196
Scoring .......................... 2,169 2,355
Special charges .................. 679 5,328
Other ............................ 8,036 3,663
------- -------
$29,495 $27,093
======= =======
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) expense for the year ended January 31,
1994 includes a $1,556 gain on the sale of the assets of the Company's Catalog
Card Division to an entity controlled by the Company's Chairman. The sale was
for cash and notes totaling $2,350, including interest. The disinterested
directors of the Company determined that the terms of the sale were fair and
reasonable to the Company. Notes receivable of $1,454 and $1,525, net, from the
acquiring entity are carried in non-current receivables on the accompanying
consolidated balance sheets at January 31, 1995 and 1994, respectively. Other
(income) expense for the year ended January 31, 1993 includes $1,027, net,
related to the conclusion of certain litigation in the Company's favor.
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 - SPECIAL CHARGES
In the fourth quarter of fiscal 1994, the Company recorded an $11.3 million
pre-tax special charge consisting of three components: the restructuring and
statutory reorganization of the Company's German operations, the discontinuation
of an employee benefits software development project, and the write-down of
certain unconsolidated investments in anticipation of disposition.
The German restructuring and reorganization amounted to a $3.7 million pre-tax
charge to liquidate two of the Company's three operating subsidiaries in Germany
and consolidate all remaining operations, principally distribution and
maintenance, into one remaining subsidiary. The pre-tax charge was principally
to write down goodwill and other assets ($2.9 million) to liquidation values and
the balance of this charge was to accrue exit costs for leased facilities and
other obligations. There were, however, significant tax benefits triggered by
these actions, so the net after-tax effect of this restructuring was only $.5
million. These actions are complete and the liquidation will become official
upon the expiration of the German statutory notice periods.
The discontinuation of the employee benefit software product resulted in a $3.2
million pre-tax charge. The Company will incorporate certain of the functions
originally planned for this new product into its existing products, thereby
reducing development cost and time to market. The charge was principally to
write off internal software development costs and acquired third-party software
licenses ($3.0 million). The balance of the charge was to accrue for severance
(six employees) and other costs. All such actions related to this
discontinuation are complete. The after-tax effect of this action was
approximately $2.0 million.
The balance of the pre-tax special charge ($4.4 million) was to write down
investments in four companies in anticipation of values which will likely be
realized as the Company proceeds with an orderly disposition of these
investments. These investments were, in all but one case, originally made to
promote operating synergies with the Company, however, the Company's intentions
with regard to these investments have changed and they have become
non-strategic. It is intended, but not certain, that these dispositions will be
completed in the next six months. The after-tax effect of the write-down of
these investments was $2.7 million.
The special charges total $11.3 million pre-tax and $5.2 million or 34 cents per
share on an after-tax basis. These actions, as described above, represent
largely asset write-downs with related cash tax benefits and will, therefore,
actually generate cash for the Company before considering disposition proceeds.
In the fourth quarter of fiscal 1993, the Company recorded a $25 million pre-tax
special charge. This amount consisted of a $22.8 million charge to terminate the
Ultrust product and related operations, including a non-cash write-off of $17.8
million of software investment, $2.7 million of severance costs, and $2.3
million of facility exit costs, customer accommodations and other items.
The balance of the charge was for the closing of a software development facility
in Salt Lake City and consolidation of those functions into the Company's Mesa,
Arizona facility. Substantially all of this $2.2 million charge related to
severance, relocation, and other employee-related costs.
This charge reduced fiscal 1993 after-tax earnings by $15.5 million or $1.00 per
share.
NOTE 3 - SIGNIFICANT TRANSACTIONS
During fiscal 1994, the Company completed two minor acquisitions. In July, 1994,
the Company completed the acquisition of Abacus Data Group, Inc., a developer of
Windows-based instructional management software for the education market. The
purchase price was approximately $3.8 million in a combination of cash and
common stock of the Company, plus contingent earn-out payments, and was
allocated principally to software products and goodwill. In October, 1994, the
Company completed the acquisition of an international private banking product,
DECBank APSYS, along with certain related business assets and operations in
Geneva, Switzerland. The purchase price was approximately $2.9 million in cash
plus assumption of certain liabilities, which was allocated principally to
software products. The operating results of these acquired entities were not
material to NCS.
During fiscal 1993, 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 long-term note. The Company has not consolidated the financial results of
DMI since 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
financial position and results of operations are not material to the Company.
During fiscal 1994, the Company further reduced the carrying value of its
investment in DMI.
Fees charged to DMI for installation and servicing of DMI systems were $518 in
fiscal 1994, $999 in fiscal 1993 and $1,354 in fiscal 1992. Rates and prices
charged for these services approximate those which would prevail between
unrelated parties. The balance of the long-term note, $865 as of January 31,
1995 and $1,105 as of January 31, 1994, is reflected in other assets in the
accompanying consolidated balance sheets. The net receivables from DMI included
in trade receivables were not material as of January 31, 1995 or 1994.
<PAGE>
NOTE 4 - LEASES
The Company leases office facilities under noncancelable operating leases which
expire in various years through 2001. Rental expense for all operating leases
was $11,026 in fiscal 1994, $11,242 in fiscal 1993 and $10,029 in fiscal 1992.
Future minimum rental expense as of January 31, 1995, for noncancelable
operating leases with initial or remaining terms in excess of one year is
$27,277 and is payable as follows: fiscal 1995 - $6,539; fiscal 1996 - $5,673;
fiscal 1997 - $4,608; fiscal 1998 - $3,834; fiscal 1999 - $2,789 and $3,834
beyond.
NOTE 5 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt at January 31, consisted of the following:
1995 1994
------- -------
Revolving credit borrowing ............. $19,600 $18,500
Secured notes .......................... 15,000 15,000
Unsecured note ......................... 6,713 6,175
ESOP borrowing ......................... 5,000 6,000
Other borrowings, principally foreign .. 4,212 1,676
------- -------
50,525 47,351
Less current maturities ................ (5,212) (2,677)
------- -------
Long-term debt ......................... $45,313 $44,674
======= =======
Revolving Credit Borrowings: The Company has a $40,000 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
rate or the London Interbank Offered Rate (LIBOR). During the year ended January
31, 1995, the interest rate approximated 1.5% below the prime rate. The Company
pays a fee at an annual rate of .25% on the unused facility amount. The credit
facility contains covenants with which the Company is in compliance.
Secured Notes: In July, 1990 the Company issued $15,000 of 9.88% Secured Notes
due in 1997. Interest is paid monthly during the term. The notes are secured by
certain Company-owned real estate. The credit facility contains covenants with
which the Company is in compliance.
Unsecured Note: During fiscal 1993, the Company opened a Sterling-based credit
facility with a bank to finance plant construction in the United Kingdom. During
fiscal 1994, the credit facility was converted to an unsecured term note due in
five principal payments of (pound)850 per year beginning in April, 1997 and
bearing interest at .95% over the Sterling LIBOR rate. The outstanding balance
on the note at January 31, 1995 was (pound)4,250 or $6,713.
ESOP Borrowing: The ESOP loan, secured by unallocated shares of Common Stock and
guaranteed by the Company, is payable over seven years in annual payments of
$1,000 with the balance due May 1996. Interest is payable quarterly at rates
which approximate 3.5% under the prime rate.
Scheduled Maturities: The aggregate principal amounts of long-term debt
scheduled for repayment in each of the five fiscal years 1995 through 1999 are
$5,212, $23,600, $16,343, $1,343, and $1,343, respectively. In each fiscal year,
interest paid approximates interest expense plus capitalized interest of $175 in
1994, $338 in 1993 and $209 in 1992.
<PAGE>
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.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
CURRENT
--------------------------
YEAR ENDED JANUARY 31, FEDERAL STATE FOREIGN DEFERRED TOTAL
- ---------------------- ------- ----- ------- -------- --------
<C> <C> <C> <C> <C> <C>
1995 (Liability method) ....... $6,175 $ 691 $ 384 $(1,500) $5,750
1994 (Liability method) ....... 1,566 398 40 (2,354) (350)
1993 (Deferred method)......... 8,535 1,088 426 51 10,100
</TABLE>
Deferred income taxes reflect the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities at January 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
------ ------
Deferred tax assets:
Reserves for uncollectibles ................ $ 3,223 $ 1,470
Rotable service parts amortization ......... 1,612 1,787
Accrued vacation pay ....................... 1,572 1,515
Special charges ............................ 1,395 534
Intangible amortization .................... 1,047 767
Foreign operating loss carryforwards ....... 831 1,966
Other ...................................... 877 742
Valuation allowance ........................ (831) (1,966)
-------- --------
Total deferred tax assets .................. 9,726 6,815
-------- --------
Deferred tax liabilities:
Net capitalized software ................... 7,183 6,300
Accelerated depreciation ................... 5,847 4,951
Purchased software amortization ............ 2,016 1,617
Installment sales .......................... 894 987
Other ...................................... 997 809
-------- --------
Total deferred tax liabilities ............. 16,937 14,664
-------- --------
Net deferred tax liabilities ............... $ 7,211 $ 7,849
======== ========
</TABLE>
<PAGE>
NOTE 6 - INCOME TAXES (CONTINUED)
A reconciliation of the Company's statutory and effective tax rate is presented
below:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory rate ............................... 35.0% (35.0)% 34.0%
State income taxes net of federal benefit .... 2.3 9.2 2.7
Intangible amortization ...................... 3.0 12.9 2.0
Foreign sales corporation .................... (0.6) (4.7) (0.2)
Research and development credits ............. (2.5) (24.2) (1.0)
Affordable housing credit .................... (1.4) -- --
Foreign operating losses ..................... 0.8 27.1 0.6
Foreign investment loss ...................... (10.2) -- --
Federal rate adjustment ...................... -- 9.8 --
Other, net ................................... 3.6 (7.3) (0.1)
----- ------ ------
Effective rate ............................... 30.0% (12.2)% 38.0%
===== ====== ======
</TABLE>
In the year ended January 31, 1995, the tax rate benefit from the foreign
investment losses principally reflects U.S. tax benefits triggered by the
restructuring and reorganization of the Company's German operations discussed in
Note 2.
In the year ended January 31,1994, the Federal rate adjustment item above is due
to the Statement of Financial Accounting Standards No. 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 benefited, and,
therefore, unfavorably impacted the effective tax benefit rate. None of the
remaining items in the year ended January 31, 1994 rate reconciliation above
were unusual in nature or amount in comparison to prior years, however, the rate
effects are magnified due to the low absolute dollar amount of the pre-tax loss.
The Company made tax payments of $5,549, $7,132 and $7,638 during the fiscal
years ended January 31, 1995, 1994 and 1993, respectively.
<PAGE>
NOTE 7 - STOCKHOLDER'S 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 31,1993 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
Granted 272,250 12.50 to 15.00
Cancelled (300,200) 7.75 to 17.60
Exercised (76,900) 7.75 to 15.00
------- -----------------
Balance, January 31,1995 804,500 $ 7.75 to $16.75
======= =================
Options for 188,050 and 194,050 shares became exercisable during fiscal 1994 and
1993, respectively, and options for 235,750 and 275,800 shares were exercisable
at January 31, 1995 and 1994, respectively. Shares available for grant under the
Plans totaled 209,600 and 260,552 at January 31, 1995 and 1994, respectively.
At January 31, 1995, non-qualified options not covered by the Plans to purchase
107,000 shares at $8.25 to $17.10 per share were outstanding. 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, 1995, there were 36,000 outstanding options under the
Non-Employee Director Stock Option Plan with per share prices from $8.25 to
$16.00. At January 31, 1994, there were 30,000 outstanding options under the
Plan with per share prices from $8.25 to $16.00.
The Company has an Employee Stock Purchase Plan. There were 192,603 shares
available for purchase under the Plan at January 31, 1995.
NOTE 8 - EMPLOYEE BENEFIT PLANS
EMPLOYEE SAVINGS PLAN: The Company has a qualified 401(k) Employee Savings Plan
covering substantially all employees. Company contributions are discretionary.
The Company's contributions to the Plan, representing 401(k) matching
contributions only, were $1,700, $1,674 and $1,438 in fiscal years 1994, 1993,
and 1992, 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. The Company's contribution to the Plan was $1,000 in
fiscal 1994 and fiscal 1993 and interest, which was totally offset by dividends
on unallocated shares, was $206 in fiscal 1994 and $168 in fiscal 1993. In
fiscal 1992, the Company's contribution to the Plan was $1,000, and interest
totaled $240, which was offset by dividends on unallocated shares of $220. There
were 396,000 and 475,200 unallocated shares at January 31, 1995 and 1994,
respectively.
The ESOP Trust Borrowing, which is guaranteed by the Company, is reflected in
long-term debt and the Company's obligation to make future contributions to the
ESOP for debt repayment is reflected as a reduction of Stockholders' Equity in
the consolidated financial statements.
LONG-TERM INCENTIVE PLAN: During fiscal 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. At January 31, 1995, 87,900 shares remain
outstanding due to forfeitures by original participants. The shares will be
earned by, and released to, the participants at the end of 10 years, but release
can be accelerated by attainment of 20% return on equity in a fiscal year, as
defined in the Plan. The cost of the Plan is being accrued over the 10-year
earning period and will be accelerated if so earned. The Plan also contains a
cash award element which is earned only upon attainment of the 20% return on
equity.
NOTE 9 - CONTINGENCY
The Company has received a claim from a customer for expenses, alleged loan
defaults, and other damages related to performance under a loan processing and
servicing contract. The Company has tendered the defense of this claim to its
insurer and the insurer has accepted that defense subject to a reservation of
rights. The Company and its insurer intend to vigorously contest this claim.
While the claim has not yet been fully articulated, the Company believes that
any such claim would be substantially covered by insurance and would not have a
material effect on the Company's financial position.
NOTE 10 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires 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.
At January 31, 1995 and 1994, the Company had non-current investments and notes
receivable (non-trade) with carrying values of $3,514 and $8,608 respectively,
which approximate fair value at those respective dates.
At January 31, 1995 and 1994, the Company's $15,000, 9.88% Secured Notes had a
fair value of approximately $15,500 and $16,100, respectively, based on the
Company's current borrowing rate for comparable borrowing arrangements. The
Company's ESOP and other long-term debt approximates market due to the variable
interest rate features of the obligations.
<PAGE>
NOTE 11 - BUSINESS SEGMENT DATA
The Company operates two business segments. The predominance 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, government, and healthcare markets through the various operating
units. The financial systems segment designs, develops and markets asset
management software, primarily for bank trust departments. This includes systems
for personal trust asset management for individuals and corporate trust
applications such as stock and bond transfer systems. Below is a summary of
certain financial information related to the two segments for fiscal years ended
January 31.
<TABLE>
<CAPTION>
OPTICAL SCANNING PRODUCTS,
SERVICES AND FINANCIAL
RELATED SOFTWARE SYSTEMS TOTAL
------------------------------ ---------------------------- ------------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $284,875 $257,813 $245,709 $52,068 $47,640 $54,358 $336,943 $305,453 $300,067
======== ======== ======== ======= ======= ======= ======== ======== ========
Operating income (loss) 37,316 25,447 28,802 2,820 (19,621) 6,564 40,136 5,826 35,366
Special charges included above 3,718 2,200 3,175 22,800 6,893 25,000
Corporate expense 16,990(1) 8,127 8,108
Interest and other expense, net 3,998 558 650
-------- -------- --------
Total income (loss) before
income taxes 19,148 (2,859) 26,608
======== ======== ========
Identifiable assets 201,312 177,664 151,252 31,382 25,340 40,787 232,694 203,004 192,039
Corporate assets 8,063 17,169 22,700
-------- -------- --------
Total assets 240,757 220,173 214,739
======== ======== ========
Depreciation and amortization 19,579 20,263 22,920 3,553 3,507 5,002 23,132 23,770 27,922
Corporate depreciation
and amortization 839 907 635
-------- -------- --------
Total depreciation and
amortization 23,971 24,677 28,557
======== ======== ========
Capital expenditures 31,317 24,425 17,286 4,374 9,391 5,089 35,691 33,816 22,375
Corporate capital expenditures 422 1,510 418
-------- -------- -------
Total capital expenditures $ 36,113 $ 35,326 $ 22,793
======== ======== =======
<FN>
(1) Includes special charge of $4,446.
</FN>
</TABLE>
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, 1995, 1994 and 1993 were
$129,832, $97,198, and $95,232 of which $28,100, $23,001, and $26,134,
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.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
National Computer Systems, Inc.
We have audited the accompanying consolidated balance sheets of National
Computer Systems, Inc. and subsidiaries as of January 31, 1995 and 1994, 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, 1995.
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, 1995 and 1994,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended January 31, 1995, in conformity with
generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Minneapolis, Minnesota
March 15, 1995
EXHIBIT 21
SIGNIFICANT SUBSIDIARIES
NATIONAL COMPUTER SYSTEMS, INC.
STATE OR
OTHER
JURISDICTION
OF NAME UNDER WHICH SUBSIDIARY
NAME OF SUBSIDIARY INCORPORATION DOES 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 Minnesota NCS Assessments
Systems, 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.
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 15, 1995,
included in the 1994 Annual Report to Stockholders of National Computer Systems,
Inc. and subsidiaries.
We also consent to the incorporation by reference in Post Effective
Amendment Number 2 to Registration Statement Number 2-80386 on Form S-8 (1982
Employee Stock Option Plan), Post Effective Amendment Number 1 to Registration
Statement Number 2-96965 on Form S-8 (1984 Employee Stock Option Plan),
Registration Statement Number 33-9830 on Form S-3 (Selling Shareholder),
Registration Statement Number 33-21511 on Form S-8 (1986 Employee Stock Option
Plan), Registration Statement Number 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 15, 1995 with respect
to the consolidated financial statements incorporated herein by reference in
this Annual Report (Form 10-K) of National Computer Systems, Inc.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
April 25, 1995
EXHIBIT 24
POWER OF ATTORNEY
FORM 10-K FOR YEAR ENDED JANUARY 31, 1995
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, 1995, 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 6th
day of March, 1995.
/s/ CHARLES W. OSWALD /s/ STEPHEN G. SHANK
- ------------------------------------- --------------------------------------
Charles W. Oswald Stephen G. Shank
/s/ RUSSELL A. GULLOTTI /s/ JOHN E. STEURI
- ------------------------------------- -------------------------------------
Russell A. Gullotti John E. Steuri
/s/ DAVID P. CAMPBELL /s/ JEFFREY E. STIEFLER
- ------------------------------------- -------------------------------------
David P. Campbell Jeffrey E. Stiefler
/s/ DAVID C. COX /s/ JOHN W. VESSEY
- ------------------------------------- --------------------------------------
David C. Cox John W. Vessey
/s/ JEAN B. KEFFELER /s/ JEFFREY W. TAYLOR
- ------------------------------------- ---------------------------------------
Jean B. Keffeler Jeffrey W. Taylor
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for National Computer Systems, Inc. and Subsidiaries, for
the fiscal year ended January 31, 1995, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000069999
<NAME> NATIONAL COMPUTER SYSTEMS, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-END> JAN-31-1995
<CASH> 1,195
<SECURITIES> 0
<RECEIVABLES> 77,209
<ALLOWANCES> 0
<INVENTORY> 20,455
<CURRENT-ASSETS> 110,724
<PP&E> 166,377
<DEPRECIATION> (83,648)
<TOTAL-ASSETS> 240,757
<CURRENT-LIABILITIES> 75,110
<BONDS> 45,313
<COMMON> 459
0
0
<OTHER-SE> 111,805
<TOTAL-LIABILITY-AND-EQUITY> 240,757
<SALES> 272,305
<TOTAL-REVENUES> 336,943
<CGS> 163,744
<TOTAL-COSTS> 209,006
<OTHER-EXPENSES> 104,791
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,465
<INCOME-PRETAX> 19,148
<INCOME-TAX> 5,750
<INCOME-CONTINUING> 13,398
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,398
<EPS-PRIMARY> .88
<EPS-DILUTED> .88
</TABLE>
