SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: COMMISSION FILE NUMBER:
JANUARY 31, 1997 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 April 10, 1997.
Common Shares, $.03 par value -- $314,968,000
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of April 10, 1997.
Common Shares, $.03 par value - 15,498,634 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended January 31,
1997 are incorporated by reference into Parts I, II and IV.
Portions of the definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 22, 1997 are incorporated by reference into Part
III.
<PAGE>
PART I
ITEM 1. BUSINESS
National Computer Systems, Inc. ("NCS" or the "Company") is a global information
services company which provides quality software and systems for the collection,
management and interpretation of data. This includes capturing and aggregating
data; creating a database or datastream; processing the data using software; and
analyzing, interpreting and reporting results.
NCS services include data processing, analysis, data management, reporting
services, networking, hardware maintenance and other professional services to
meet customer needs. Data collection systems include optical mark read (OMR) and
image scanning hardware, other data collection technologies, proprietary
software, software maintenance and pre-printed forms. Data can be in the form of
marks, machine printed bar codes and text, and/or handprinted alphanumeric
characters. The Company also provides utility and application software to
enhance the capability of NCS customers to manage their information effectively.
Application software products are focused on specific applications within
targeted markets.
NCS markets its mission critical data collection, management and reporting
services and systems within four major markets: education, selected commercial
niches, government, and health care.
EDUCATION -- NCS develops and markets data collection services and systems
which provide optical scanning, image based data collection and computer
processing services for the large volume, complex processing needs of major test
publishers, state education agencies, universities and colleges, and local
school districts. The Company also supplies optical scanning systems and forms
to individual school districts for in-house student assessment testing
applications and administrative applications such as attendance, scheduling,
grade reporting and registration; library and inventory management; financial
management and payroll; and testing applications, including test generation,
teacher created tests and norm- or criterion-referenced testing. NCS develops
and markets application software for the administration and management of
curriculum, student, and financial data at the classroom, school, school
district and state levels. The Company's information processing services are
provided in support of federal student financial aid programs for post-secondary
education.
COMMERCIAL -- NCS develops and markets data collection, processing and
reporting services and products targeted at certain key applications in this
market. These include sales/marketing applications, such as sales/order entry
and quality measurement; inventory control and analysis; customer satisfaction
surveys and customer data collection; training and development in the human
resources area; employee attitude surveys; customer billing; payroll; human
resource applications, including applicant tracking; benefits enrollment and
employee evaluation; and general data collection, analysis and management. NCS
provides scanners and forms for customers to do their own data collection as
well as processing services in support of customers that prefer to outsource
these services.
GOVERNMENT -- The Company provides its services and products to governmental
agencies for many of the same applications as in the commercial marketplace.
Data collection and computer processing services, including image based data
collection systems, are provided for federal and state programs.
HEALTH CARE -- NCS publishes and markets a wide variety of assessment
instruments used by mental and behavioral health and human resource
professionals. When used with NCS' data collection products, these instruments
assist clinical professionals in the diagnosis and treatment of patients plus
track the progress of those patients. NCS scanners and forms, other data capture
devices and proprietary software are also used by hospitals and clinics for
collection of data during patient visits and for administrative management. The
accuracy and cost effectiveness of this approach provides significant benefits
to both health care providers and patients.
NCS operates in a single business segment. See Note 3 - Discontinued Operations
and Special Charges of Notes to Consolidated Financial Statements for
information related to the Company's sale of its Financial Systems segment on
July 10, 1996 and Note 10 - Business Segment Information of Notes to
Consolidated Financial Statements for business segment data, which financial
statements are included in the Annual Report to Stockholders for the fiscal year
ended January 31, 1997, and incorporated herein by reference.
The Company's headquarters are located at 11000 Prairie Lakes Drive, Eden
Prairie, Minnesota 55344, telephone 612/829-3000.
DATA COLLECTION PRODUCTS, SERVICES AND RELATED SOFTWARE
Scanning Systems
NCS manufactures optical mark reading (OMR) scanners which can read data
from specially designed forms printed by the Company with specifically
formulated inks. Computing capability is built into most scanners. Scanners
usually incorporate, or interface directly with, software developed by the
Company. Optical scanning equipment is most effective for applications where
highest accuracy, precise response definition and cost effective data capture is
required.
The Company's lines of scanning hardware include scanners marketed as
OpScan-R products. These lines of scanners provide a wide range of capabilities
to meet the needs of customers. The OMR scanning systems utilize a proprietary
mark discrimination system to distinguish valid marks, thus providing a very
high degree of accuracy in processing responses. To enhance the usefulness of
the OpScan line, the Company offers optional features, such as bar code reading
capability, a transport printer to print alphanumeric messages on scanned
documents, optional read formats and upgraded computer capability options.
NCS markets image-based data collection systems which represent an
extension of the Company's optical mark reading technology. When attached to a
workstation computer and using sophisticated software, these scanners allow
customers to efficiently and accurately collect and interpret the widest
possible range of information from a printed form, including printed and
handwritten data.
Scanning and Related Software
NCS offers a number of standard software programs for use with NCS systems.
Processing and application software is an important component in the Company's
marketing of its scanning products and services. A principal strategy of the
Company in servicing the education marketplace is to concentrate on those
systems that facilitate the measurement of student progress and accountability
in school administration. The Company offers standard integrated software
systems and, on a fee basis, customization services.
Software products include software to assist educators in student
management, including such applications as grade reporting, attendance gathering
and scheduling, as well as financial management; software for obtaining
information about student performance and for analyzing and reporting test
results and student progress; software to enable users to easily develop new
scanning applications; software to assist scanner users with data entry to
statistical analysis or database management systems and other software
applications packages; software packages to statistically analyze survey or
assessment data and produce a wide range of reports designed to meet a variety
of reporting requirements; software for intelligent character recognition (ICR)
and software for health care administration.
Scannable Forms
The Company designs, manufactures and sells scannable forms, including
multiple-page booklets. A variety of custom forms are produced that are tailored
to meet specific customer needs. In addition, standardized forms are used,
especially with microcomputer-based scanners, in such standard applications as
testing, attendance, scheduling and student evaluation at the classroom level or
customer surveys or market research in the commercial setting.
The Company believes that the use of a properly designed and printed form
is an essential element in assuring that a scanning system performs with
greatest accuracy and optimum capability. In order to assure a high degree of
consistency, reliability and accuracy, NCS has emphasized the use of its forms
with its equipment. The Company prints its forms to exacting specifications.
Information Services
NCS markets data collection and data processing services to major test
publishers, state education agencies, the federal government, local school
districts and commercial customers. For these customers, NCS develops and
executes projects including planning, document design, distribution logistics,
data collection, editing, analysis and final reporting.
Examples of high volume processing services include test scoring for major
test publishers, educational assessment testing for states and information
processing for various agencies of the federal government, such as processing
student financial aid information for the U.S. Department of Education. Optical
mark reading and image scanning technologies are utilized in the data collection
process for these customers.
The Company publishes and distributes tests and provides scoring services
and equipment for the professional counseling market; for industrial and
clinical psychologists, psychiatrists and human resource professionals; and
educators. These tests and services include personality assessment and
psychological diagnostic testing, career development, guidance counseling and
human resource organizational assessments.
NCS provides specialized survey and scannable information processing
services to selected niches in the commercial marketplace. In addition to
scoring, analyzing and reporting survey results, the Company assists customers
in designing survey instruments, conducting surveys and interpreting survey
results.
MARKETING
NCS markets its data collection hardware and software and its data
collection and computer processing services directly through sales employees,
business partners and original equipment manufacturers and resellers located
throughout the United States, who direct their efforts to the education,
commercial, government, or health care market-places. Outside the United States,
the Company's systems and associated products and services are sold through
sales employees, distributors or independent sales agents. The Company's
published tests and test scoring services are marketed principally in North
America through telemarketing, direct mail, professional journal advertising and
professional trade convention attendance and elsewhere through distributors.
Each of the Company's sales organizations is supported by marketing and sales
support personnel.
SOFTWARE SUPPORT, TECHNICAL SUPPORT AND MAINTENANCE
Software support is provided on a contractual basis to customers licensing
application software systems from the Company. NCS assists customers with
installation, training, hardware or software upgrades and development of
specific customer application software on a fee for service basis.
The Company offers technical support and hardware maintenance to customers
purchasing or leasing its equipment either on a contractual basis or through its
national network of customer service and support engineers. NCS emphasizes
prompt, reliable service and close customer relationships. Technical and
maintenance support may include labor, parts, operational training and, where
applicable, programming of the equipment and design of forms.
DEVELOPMENT OF PRODUCTS AND SERVICES
The Company's development efforts are directed toward new product
development and enhancements to existing products. During the fiscal years ended
January 31, 1997, 1996 and 1995, the Company spent, including certain
capitalized software development costs, approximately $9.9 million, $8.8 million
and $11.6 million, respectively. The expenditures relate principally to software
product development (primarily focused on application software) and scanning
software and equipment development.
MANUFACTURING
The Company assembles its scanning equipment from electronic components,
metal stampings, molded plastic parts and mechanical sub-assemblies. These parts
are generally available from multiple sources. The Company assembles most of the
scanning systems equipment at its Eagan, Minnesota facility. Computer hardware
is purchased from other manufacturers.
Scannable forms are produced at NCS' printing plants in Columbia,
Pennsylvania; Owatonna, Minnesota; and Rotherham, South Yorkshire, England. The
ink and paper used in forms production are produced to the Company's
specifications by a limited number of suppliers. Although the Company has no
long-term supply contracts with its paper or ink suppliers, the Company has had
long-term relationships with such suppliers and believes that these
relationships are good.
COMPETITION
Competition in the data collection and information management industry is
intense. Optical scanning and imaging are only two of numerous data collection
methods. The Company continues to focus on the development of education,
government, commercial and health care markets where scanning technology has
advantages over other data entry technologies. NCS scanning systems incorporate
optical scanning equipment, and can include computer hardware and proprietary
software, all of which are marketed as turn-key systems.
In addition to the functional competition provided by alternative methods
of data capture, including on-line terminal keyboards and optical character
readers, other scanning vendors supply products that compete with those of the
Company.
The Company's scannable forms compete with those produced by commercial and
specialized forms printers. Principal competitive factors in the scannable forms
printing industry are product quality, service and price.
NCS' data processing, test publishing and computer processing services
compete with several test publishers and data processing service bureaus. The
Company's customer support maintenance organization competes with service
provided by manufacturers, other national service companies and local providers
of maintenance services.
PATENTS, TRADEMARKS AND LICENSES
The Company holds certain patents, registered and unregistered trademarks
and copyrights. The Company also has rights under licensing arrangements to a
number of patents, trademarks, copyrights and manufacturing processes and
materials. Included among these licenses are agreements with publishers of
various copyrighted psychological, aptitude and achievement tests to distribute
these tests, to print and sell answer sheets for such tests, and to score such
tests. Payment of royalties is usually based upon the volume of tests
distributed, answer sheets sold, and tests scored. NCS believes that its
business is not dependent upon any one individual patent, trademark, copyright
or license right or group thereof.
"OpScan", "CIMS", "SASI", "NCS" and "5000i" appearing herein are trademarks
or registered trademarks of National Computer Systems, Inc.
EMPLOYEES
As of February 28, 1997, the Company employed approximately 2,700 full-time
employees. None of the Company's employees are subject to a collective
bargaining agreement, and the Company believes that its employee relations are
excellent.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all of the executive officers of the
Company as of February 28, 1997 are listed below along with their business
experience during the past five years.
NAME AGE POSITION
- ------------------------ -------- ----------------------------
Russell A. Gullotti 54 Chairman of the Board,
President and Chief Executive
Officer
Robert C. Bowen 55 Senior Vice President
Michael C. Brewer 50 Vice President and General
Counsel
John W. Fenton, Jr. 56 Secretary-Treasurer
Clive M. Hay-Smith 39 Vice President
Michael A. Morache 46 Vice President
Richard L. Poss 51 Senior Vice President
David W. Smith 52 Vice President
Jeffrey W. Taylor 43 Vice President and Chief
Financial Officer
Adrienne T. Tietz 50 Vice President
Mr. Gullotti has been President and Chief Executive Officer since October,
1994 and Chairman of the Board since May, 1995. Prior to that he held senior
executive positions in sales and marketing, services and administration with
Digital Equipment Corporation (computer manufacturing and services) for more
than five years.
Mr. Bowen has been a Senior Vice President of NCS for more than five years.
Mr. Brewer has been Vice President and General Counsel of NCS since May,
1995. Prior to that he was General Counsel of NCS from May, 1992 until May, 1995
and Associate General Counsel of NCS from May, 1990 until May, 1992.
Mr. Fenton has been Secretary-Treasurer of NCS for more than five years.
Mr. Hay-Smith has been a Vice President of NCS since December, 1993. Prior
to that he was a sales and distribution executive with Control Data Systems,
Inc. (computer systems integrator) from March, 1989 to August, 1993.
Mr. Morache has been a Vice President of NCS since May, 1996. Prior to that
he was a Vice President of Unisys Corporation (information management company)
from September, 1995 to May, 1996 and before that, a Senior Vice President with
ALLTEL Information Services, Inc. (information processing management,
outsourcing services and application software) for more than five years.
Mr. Poss has been a Senior Vice President since November, 1995 and a Vice
President of NCS for more than five years.
Mr. Smith has been a Vice President of NCS for more than five years.
Mr. Taylor has been Vice President and Chief Financial Officer since May,
1994 and prior to that Vice President and Corporate Controller of NCS for more
than five years.
Ms. Tietz has been a Vice President of NCS for more than five years.
Officers are elected annually by the Board of Directors. There are no
family relationships among these officers, nor any arrangement or understanding
between any officer and any other person pursuant to which the officer was
selected.
PRIVATE SECURITIES LITIGATION REFORM ACT
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing, as Exhibit 99
hereto, cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in forward
looking statements of the Company made by, or on behalf of, the Company.
ITEM 2. PROPERTIES
The Company's principal facilities are as follows:
SQUARE
LOCATION FOOTAGE GENERAL PURPOSE
- --------------- -------------- ---------------------------
Eden Prairie, MN 45,000 Executive general offices
Mesa, AZ (1) 40,000 Education software and services
general offices, sales and
marketing, product development
and support
Iowa City, IA Assessment and test processing
Building 1 (1) 168,000 and data processing services,
Building 2 (1) 112,000 general offices and operations
Lawrence, KS Data processing services,
Building 1 27,000 general offices and operations
Building 2 12,000
Minnetonka, MN (1) 54,000 Test publishing and scoring
general offices and operations
Eagan, MN (1) 109,000 Scanner hardware development
and manufacturing; NCS
Services general offices,
sales and marketing;
customer support services
general offices and
operations; and
international operations
general offices, sales and
marketing
Edina, MN (1) 101,000 Data Collection Systems
general offices, sales and
marketing; scanner software
development; and forms
general offices
Owatonna, MN (1) 128,000 Forms design and production
Columbia, PA (1) 121,000 Forms design and production
Rotherham, South 34,000 Forms design and production
Yorkshire England (1)
- --------------------------
(1) Denotes NCS owned facility.
The Company believes that its facilities are adequate to meet its current
needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to nor is its property subject to any material
pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal
year ended January 31, 1997 to a vote of security holders through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
"Quarterly Market Data" included in the Annual Report to Stockholders for
the year ended January 31, 1997 is incorporated herein by reference.
On January 21, 1997, NCS issued $7,000,000 of subordinated convertible
debentures (the "Debentures") in a transaction that was not registered under the
Securities Act of 1933, as amended (the "Securities Act"). The Debentures were
issued to certain former shareholders of Macro Educational Systems, Inc.
("Macro") pursuant to a Purchase and Sale Agreement dated January 21, 1997 (the
"Acquisition Agreement") among NCS and the former shareholders of Macro,
providing for the acquisition of all of the issued shares of capital stock of
Macro by NCS. The Debentures are convertible into shares of Common Stock of NCS
at a conversion rate of $24.00 per share, and, accordingly, a total of 291,666
shares of NCS Common Stock may be issued upon conversion of the Debentures.
Pursuant to the Acquisition Agreement and contingent upon the Macro business
unit exceeding certain pre-tax income level targets over the next five years,
NCS agreed to issue up to an additional $3,500,000 of convertible subordinated
debentures (the "Contingent Debentures") to certain former shareholders of
Macro. The Contingent Debentures, if issued, would have substantially the same
terms as the Debentures and would be convertible into up to 145,833 shares of
Common Stock. In addition, NCS agreed to make cash payments of up to $2,500,000
to certain former Macro shareholders over the next five years in the event
certain Macro business unit pre-tax income level targets are exceeded. No
underwriter or placement agent was involved in the transaction described above,
and NCS did not receive any cash consideration for the Debentures, the
Contingent Debentures or the contingent cash payments (which were all part of
the purchase price paid by NCS for Macro.) All securities were or will be issued
by NCS to the former Macro shareholders in transactions exempt pursuant to Rule
506 under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
"Five Year Financial Data" included in the Annual Report to Stockholders
for the year ended January 31, 1997 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, 1997 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, 1997, are incorporated herein by
reference:
Consolidated Balance Sheets -- January 31, 1997 and 1996
Consolidated Statements of Income -- Years ended January 31, 1997, 1996 and
1995
Consolidated Statements of Changes in Stockholders' Equity -- Years ended
January 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows -- Years ended January 31, 1997, 1996
and 1995
Notes to Consolidated Financial Statements -- January 31, 1997
Report of Independent Auditors dated March 2, 1997
Quarterly Results of Operations (Unaudited)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Election of Directors" included in the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 22, 1997 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" sections included in the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held on May 22, 1997 are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Election of Directors" and "Ownership of NCS Common Stock by Certain
Beneficial Owners and Executive Officers" included in the Company's definitive
proxy statement for the Annual Meeting of Stockholders to be held on May 22,
1997 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) List of Financial Statements and Financial Statement Schedules
(1) The following consolidated financial statements of National
Computer Systems, Inc. and subsidiaries, included in the Annual
Report to Stockholders for the year ended January 31, 1997, are
incorporated by reference in Item 8:
Consolidated Balance Sheets -- January 31, 1997 and 1996
Consolidated Statements of Income -- Years ended January
31, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders'
Equity --Years ended January 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows -- Years ended
January 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements -- January 31,
1997
Report of Independent Auditors dated March 2, 1997
(2) Consolidated financial statement schedules of National Computer
Systems, Inc. and subsidiaries required to be filed by Item 14(d):
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(3) Listing of Exhibits:
EXHIBIT
3.1 Restated Articles of Incorporation, as amended, are incorporated
herein by reference to Exhibit 3 to the NCS Form 10-Q for the
quarter ended April 30, 1987.
3.2 Bylaws, as amended and restated, are incorporated herein by
reference to Exhibit 3.2 to the NCS Form 8-K dated March 4, 1996.
4.1 Instruments with respect to long-term debt where the total debt
authorized thereunder does not exceed 10% of the consolidated total
assets of the registrant are not being filed; the registrant will
furnish a copy of any such instrument to the Commission upon
request.
4.2 Amended and Restated Rights Agreement dated as of March 4, 1996
between NCS and Norwest Bank Minnesota, National Association
(including the form of Right Certificate attached as Exhibit B
thereto) is incorporated herein by reference to Exhibit 1 to
Amendment No. 2 to Form 8-A/A dated March 13, 1996.
4.3 Amended and Restated Credit Agreement dated as of July 31, 1991
between NCS and Norwest Bank Minnesota, National Association, The
First National Bank of Chicago and First Bank National Association,
and as further amended by the First Amendment thereto dated as of
January 25, 1994, is incorporated herein by reference to Exhibit 4C
to the Company's Form 10-K for the fiscal year ended January 31,
1994.
4.4 Second Amendment dated as of July 22, 1994, Assignment Agreement
dated as June 1, 1995 and the Third Amendment dated July 24, 1995
to the Amended and Restated Credit Agreement dated as of July 31,
1991 between NCS and Norwest Bank Minnesota, National Association,
The First National Bank of Chicago and First Bank National
Association and as further amended by the First Amendment thereto
dated as of January 25, 1994 is incorporated herein by reference to
Exhibit 4.4 to the Company's Form 10-K for the fiscal year ended
January 31, 1996.
*10.1 Change of Control Agreement dated April 15, 1996, by and between
NCS and certain executives of NCS is incorporated herein by
reference to Exhibit 10.2 to the Company's Form 10-Q for the fiscal
quarter ended April 30, 1996.
*10.2 NCS 1984 Employee Stock Option Plan is incorporated herein by
reference to Exhibit 10 to the Company's Form 10-Q for the quarter
ended July 31, 1984.
*10.3 NCS 1986 Employee Stock Option Plan is incorporated herein by
reference to Exhibit 10D to the Company's Form 10-K for the fiscal
year ended January 31, 1986.
*10.4 NCS Non-Employee Director Stock Option Plan is incorporated herein
by reference to Exhibit 10F to the Company's Form 10-K for the
fiscal year ended January 31, 1989.
*10.5 NCS 1990 Employee Stock Option Plan, as amended, is incorporated
herein by reference to Exhibit 10.1 to the Company's Form 10-Q for
the quarter ended October 31, 1995.
*10.6 NCS 1995 Employee Stock Option Plan, as amended, is incorporated
herein by reference to Exhibit 10.2 to the Company's Form 10-Q for
the quarter ended October 31, 1995.
*10.7 NCS 1990 Long-Term Incentive Plan, as amended, is incorporated
herein by reference to Exhibit 10.3 to the Company's Form 10-Q for
the quarter ended October 31, 1995.
*10.8 NCS 1992 Employee Stock Purchase Plan is incorporated herein by
reference to Exhibit 10I to the Company's Form 10-K for the fiscal
year ended January 31, 1992.
*10.9 Description of Retirement Arrangements with David C. Malmberg is
incorporated herein by reference to Exhibit 19 to the Company's
Form 10-Q for the fiscal quarter ended October 31, 1992.
*10.10 Amended and Restated Severance Agreement dated May 23, 1996, by and
between NCS and Russell A. Gullotti is incorporated herein by
reference to Exhibit 10.1 to the Company's Form 10-Q for the fiscal
quarter ended April 30, 1996.
*10.11 Agreement dated August 22, 1994 between NCS and Charles W. Oswald
is incorporated herein by reference to Exhibit 10(b) to the
Company's Form 10-Q for the fiscal quarter ended October 31, 1994.
*10.12 Oswald Stock Option Plan is incorporated herein by reference to
Exhibit 10O to the Company's Form 10-K for the fiscal year ended
January 31, 1995.
*10.13 NCS 1997 Long-Term Incentive Plan.
*10.14 NCS 1997 Employee Stock Option Plan.
*10.15 NCS Corporate Management Incentive Plan -- 1996 is incorporated
herein by reference to Exhibit 10.14 to the Company's Form 10-K for
the fiscal year ended January 31, 1996.
*10.16 NCS Corporate Management Incentive Plan -- 1997.
11 Statement Re: Computation of Earnings Per Share.
13 Portions of NCS' Annual Report to Stockholders for the fiscal year
ended January 31, 1997.
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, 1997 on behalf of other
officers and directors.
27 Financial Data Schedule.
99 Cautionary statements identifying important factors that could
cause the Company's actual results to differ from those projected
in forward looking statements.
- ----------------
* Indicates management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
January 31, 1997.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are
not required or are inapplicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONAL COMPUTER SYSTEMS, INC.
Dated: April 23, 1997 By: /s/ J. W. FENTON, JR.
------------------------
J. W. Fenton, Jr.
SECRETARY-TREASURER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By RUSSELL A. GULLOTTI * Chairman of the Board of Directors,
---------------------- President and Chief Executive
Russell A. Gullotti Officer (principal executive officer)
By DAVID C. COX * Director
----------------------
David C. Cox
By MOSES JOSEPH* Director
----------------------
Moses Joseph
By JEAN B. KEFFELER* Director
----------------------
Jean B. Keffeler
By CHARLES W. OSWALD * Director
----------------------
Charles W. Oswald
By STEPHEN G. SHANK * Director
----------------------
Stephen G. Shank
By JOHN E. STEURI * Director
----------------------
John E. Steuri
By JEFFREY E. STIEFLER * Director
----------------------
Jeffrey E. Stiefler
By JOHN W. VESSEY * Director
----------------------
John W. Vessey
By JEFFREY W. TAYLOR * Vice President and Chief
---------------------- Financial Officer (principal
Jeffrey W. Taylor financial officer and
principal accounting officer)
* Executed on behalf of the indicated officers and directors of the registrant
by J. W. Fenton, Jr., Secretary-Treasurer, duly appointed attorney-in-fact.
/s/ J. W. FENTON, JR.
- -------------------------- Dated: April 23, 1997
J. W. Fenton, Jr.
(ATTORNEY-IN-FACT)
<PAGE>
FORM 10-K
NATIONAL COMPUTER SYSTEMS, INC.
FOR THE FISCAL YEAR ENDED JANUARY 31, 1997
EXHIBIT INDEX
EXHIBIT
- -------------
10.13 NCS 1997 Long-Term Incentive Plan.
10.14 NCS 1997 Employee Stock Option Plan.
10.16 NCS Corporate Management Incentive Plan -- 1997.
11 Statement Re: Computation of Earnings per Share.
13 Portions of NCS' Report to Stockholders for the fiscal year ended
January 31, 1997.
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, 1997 on behalf of other
officers and directors.
27 Financial Data Schedule.
99 Cautionary statements identifying important factors that could
cause the Company's actual results to differ from those projected
in forward looking statements.
Exhibit 10.13
NATIONAL COMPUTER SYSTEMS, INC.
1997 LONG-TERM INCENTIVE PLAN
1. Objectives of the Plan.
This Plan shall be known as the "National Computer Systems,
Inc. 1997 Long-Term Incentive Plan (the "Plan"). The objectives of the Plan are
to promote the interests of National Computer Systems, Inc., a Minnesota
corporation (the "Company"), by enhancing its ability to attract, retain and
motivate key employees, including salaried officers and directors, and including
salaried officers and directors of any of the Company's subsidiary corporations
("Affiliates"), to provide incentives for such employees to remain with the
Company of its Affiliates and to increase their identification with the
interests of the Company's shareholders and to afford them an opportunity to
acquire a proprietary interest in the Company through the granting of stock
options, conditional cash bonuses and restricted stock awards as long term
incentives based on the financial success of the Company.
2. Administration of the Plan.
(a) The Plan shall be administered by the Compensation
Committee (the "Committee") of the Board of Directors of the Company. The
Committee shall be comprised of not less than such number of directors as shall
be required to permit the Plan to qualify under Section 16b-3 ("Section 16b-3")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Each
member of the Committee shall be a "disinterested persons" with respect to the
Plan within the meaning of Section l6b-3 and shall be an "outside director"
within the meaning of section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"). The members of the Committee shall be appointed by and
serve at the pleasure of the Board of Directors.
(b) Subject to the other provisions of the Plan and to
applicable law, the Committee shall have full power and authority, in its
discretion: (i) to construe and interpret the Plan and all options, conditional
cash bonuses and restricted stock awards granted under the Plan (collectively,
"Awards"); (ii) to determine the persons to whom Awards shall be granted, the
time or times at which such Awards shall be granted, the number of shares and
the amount of cash to be subject to each Award and the terms, conditions and
restrictions under which each Award is granted; (iii) to determine whether
options granted under the Plan are incentive stock options ("Incentive Stock
Options") within the meaning of section 422 of the Code, or options which do not
qualify as Incentive Stock Options; (iv) to determine the terms of exercise of
each option and to accelerate the time at which all or any part of an option may
be exercised, (v) to amend or modify the terms of any Award with the consent of
the persons receiving the Award, (vi) to prescribe, amend and rescind rules and
regulations relating to the administration of the Plan, (vii) to determine the
terms and provisions of each agreement evidencing an Award under the Plan (which
agreements need not be identical), and (viii) to make all other determinations
necessary or advisable for the administration of the Plan, subject to the
exclusive authority of the Board of Directors under section 13 to amend or
terminate the Plan. The Committee's determinations on the foregoing matters
shall be final and conclusive.
(c) The granting of an Award pursuant to the Plan shall be
effective only if a written agreement shall have been duly executed and
delivered by and on behalf of the Company and the employee to whom such right is
granted.
(d) The Committee may delegate the responsibility for
implementing the decisions made by the Committee under the Plan to one or more
officers of the Company or any Affiliate or a committee of such officers,
subject to such terms, conditions and limitations as the Committee may establish
in its sole discretion; provided, however, that the Committee shall not delegate
any responsibilities or duties under the Plan with regard to officers or
directors of the Company or any Affiliate who are subject to Section 16 of the
Exchange Act.
(e) Each member of the Committee 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 Committee 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.
3. Participants.
Awards may be granted under the Plan to such key full or
part-time employees (which term as used herein includes, but is not limited to,
officers and directors who are also employees) of the Company and of its present
and future Affiliates as shall be determined by the Committee from time to time.
In determining the persons to whom Awards shall be granted and the number of
shares subject to any Award, the Committee may take into account the nature of
services rendered by the proposed grantee, the proposed grantee's present and
potential contributions to the success of the Company and such other factors as
the Committee in its discretion shall deem relevant. A person who has been
granted an Award under the Plan may be granted additional Awards under the Plan
if the Committee shall so determine; provided, however, that to the extent 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 are
exercisable for the first time by optionee during any calendar year (under all
plans described in section 422 of the Code of the Company and its Affiliates)
exceeds $100,000, such options shall be treated as options which 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. Shares Subject to the Plan .
The shares of stock to be subject to Awards under the Plan
shall be shares of the Company's authorized common stock, $.03 par value. Such
shares may be either authorized but unissued shares. Subject to the adjustment
as provided in section 5, the maximum number of shares that may be subject to
Awards under the Plan shall be 300,000. If an Award under the Plan expires, or
for any reason is terminated or unexercised with respect to any shares, such
shares shall again be available for Awards thereafter granted during the term of
the Plan.
5. Adjustments .
If any change occurs in the shares of the Company's common
stock through merger, consolidation, reorganization, recapitalization, stock
dividend (of whatever amount), stock split or other change in the Company's
corporate structure, appropriate adjustments in the Plan and outstanding Awards
shall be made by the Committee. In the event of any such changes, adjustments
shall include, where appropriate, changes in the aggregate number of shares
subject to the Plan, the number of shares and the price per share subject to
outstanding Awards in order to prevent dilution or enlargement of the rights of
the grantees under such Awards.
6. Term .
(a) The Plan was approved by the Company's Board of Directors
on March 3, 1997, and shall be effective as of such date, subject to approval by
the shareholders of the Company within twelve (12) months thereafter.
(b) Unless the Plan has been discontinued as provided in
section 13, the Plan shall terminate on January 31, 2007. No Award may be
granted after such termination, but termination of the Plan shall not, without
the consent of the grantee of any Award, alter or impair any rights or
obligations under any Award theretofore granted. Subject to the foregoing, each
Award and all rights and obligations thereunder shall expire on the date
determined by the Committee and specified in the Award agreement. The Committee
shall be under no duty to provide terms of like duration for Awards granted
under the Plan, but the term of an Incentive Stock Option may not extend more
than ten (10) years from the date of granting of such option, and the term of
any option granted under the Plan which does not qualify as an Incentive Stock
Options may not extend more than fifteen (15) years from the date of granting of
such option.
7. General Terms and Conditions of Awards .
Awards granted hereunder shall be evidenced by a written
notice from the Company to the grantee evidencing the granting of the Award, or
shall be evidenced by an agreement in such form as the Committee shall from time
to time require. Such notice or agreement shall refer to the Plan and shall make
acceptance of the Award by a grantee subject to the provisions of the Plan.
8. Terms and Conditions of Options Granted under the
Plan .
(a) Each agreement evidencing an option granted under the Plan
shall state the number of shares to which it pertains.
(b) The option price for all Incentive Stock Options granted
under the Plan shall be determined by the Committee but shall not be less than
100% of the fair market value of shares of the Company's common stock at the
date of granting of such option. The option price for options granted under the
Plan which do not qualify as Incentive Stock Options shall also be determined by
the Committee. For purposes of this section 8 and for all other valuation
purposes under the Plan, the fair market value of the Company's common stock
shall be as reasonably determined by the Committee, but shall not be less than
(i) the average of the opening and closing prices of such shares of stock on the
date as of which fair market value is being determined, if the Company's common
stock is then traded on a national securities exchange, or (ii) the "last sale
price" of the Company's common stock on the date as of which fair market value
is being determined, if the Company's common stock is then quoted on the NASDAQ
National Market System. If on the date of grant of any option granted under the
Plan, the common stock of the Company is not publicly traded, the Committee
shall make a good faith attempt to satisfy the option price requirement of this
section 8 and in connection therewith shall take such action as it deems
necessary or advisable. Subject to the foregoing, the Committee shall have full
authority and discretion in fixing the option price and shall be fully protected
in doing so.
(c) An optionee electing to exercise an option shall give
written notice to the Company of such election and of the number of shares
subject to such exercise. The option price for the number of shares for which
the option is exercised shall become immediately due and payable in cash;
provided, however, that an optionee may, with the approval of the Committee,
make payment for all or a portion of the option price by tendering to the
Company shares of the Company's common stock owned by the optionee and
registered in the optionee's name, and which has a fair market value equal to
the portion of the purchase price of the shares being acquired which is not
being paid in cash.
(d) No option granted under the Plan shall be transferable by
an optionee, otherwise than by will or the laws of descent or distribution as
provided in subsection 8(g). During the lifetime of an optionee the option shall
be exercisable only by such optionee and no other person shall acquire any
rights therein. Except as provided in subsection 8(e) or 8(g), 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.
(e) In the event that an optionee shall cease to be employed
by the Company or its Affiliates or any reason, other than his gross and willful
misconduct or his death or disability, such optionee shall have the right to
exercise the option at any time within three months (or such longer period as
the Committee in its discretion shall determine to be appropriate) after such
termination of employment to the extent of the full number of shares he was
entitled to purchase under the option on the date of termination to the extent
that the optionee's right to exercise the same had vested on such date and had
not previously been exercised, subject to the condition that no option shall be
exercisable after the expiration of the term of the option. Whether authorized
leaves of absence or absence because of military or governmental service shall
constitute termination of employment for the purposes of the Plan shall be
determined by the Committee, which determination shall be final and conclusive.
(f) In the event that an optionee shall cease to be employed
by the Company or its Affiliates by reason of his gross and willful misconduct
during the course of his employment, including but not limited to wrongful
appropriation of funds of his employer or the commission of a gross misdemeanor
or felony, the option shall be terminated as of the date of the misconduct.
(g) If the optionee shall die while in the employ of the
Company or any Affiliate, or within three months (or such longer period as the
Committee in its discretion shall determine to be appropriate) after termination
of employment for any reason other than gross and willful misconduct, or the
optionee's employment is terminated because optionee has become disabled (within
the meaning of Code section 22(e)(3)) while in the employ of the Company or any
Affiliate, and such optionee shall not have fully exercised the option, such
option may be exercised at any time within twelve months (or such longer period
as the Committee in its discretion shall determine to be appropriate) after the
date of such death or disability by the optionee or the personal representatives
of the optionee, as applicable, or by any person or persons to whom the option
is transferred by will or the applicable laws of descent and distribution, to
the extent of the full number of shares the optionee was entitled to purchase
under the option on the date of death (or termination of employment, if earlier)
and subject to the condition that no option shall be exercisable after the
expiration of the term of the option.
(h) 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)
shares of common stock of the Company possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or its
parent or subsidiary corporations (within the meaning of section 424(e) or
424(f) of the Code), if any, 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, the option price shall be not less than 110% of the fair
market value of the common stock of the Company determined as described herein,
and such option by its terms shall not be exercisable after the expiration of
five (5) years from the date such option is granted.
(i) An optionee or a transferee of an option shall have no
rights as a shareholder with respect to such 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 section 5.
9. Terms and Conditions of Conditional Cash Bonuses and
Restricted Stock Awards .
(a) Each conditional cash bonus and restricted stock Award
granted under the Plan (i) shall be for an amount of cash or a number of common
shares of the Company as shall be determined by the Committee and set forth in
the agreement containing the terms of such Award, and (ii) shall require the
grantee to remain in the continuous employment of the Company in order for the
forfeiture and transfer restrictions relating to such Award to lapse. If the
Committee so determines, the restrictions may lapse during such restricted
period in installments with respect to specified portions of the shares or cash
bonus covered by the Award. The agreement may also, in the discretion of the
Committee, set forth performance or other conditions that will subject the
common shares or cash bonus to forfeiture and transfer restrictions. The
Committee may, at its discretion, waive all or any part of the restrictions
applicable to any or all outstanding Awards, whether or not a restriction period
has expired or other specified conditions have been met.
(b) At the time of a restricted stock Award, a certificate
representing the number of common shares awarded thereunder shall be registered
in the name of the grantee. Such certificate shall be held by the Company or any
custodian appointed by the Company for the account of the grantee subject to the
terms and conditions of the Plan, and shall bear such a legend setting forth the
restrictions imposed thereon as the Committee, in its discretion, may determine.
The grantee shall have all rights of a shareholder with respect to the common
shares, including the right to receive dividends and the right to vote such
shares, subject to the following restrictions: (i) the grantee shall not be
entitled to delivery of the stock certificate until the expiration of the
restriction period and the fulfillment of any other restrictive conditions set
forth in the restricted stock agreement with respect to such common shares; (ii)
none of the common shares may be sold, assigned, transferred, pledged,
hypothecated or otherwise encumbered or disposed of during such restriction
period or until after the fulfillment of any such other restrictive conditions;
and (iii) except as otherwise determined by the Committee and set forth in the
Award agreement, some or all of the common shares subject to the restricted
stock Award shall be forfeited and all rights of the grantee to such common
shares shall terminate, without further obligation on the part of the Company,
if the restrictive conditions relating to such shares (including any conditions
relating to the continuing employment of the grantee by the Company) are not
satisfied. Any common shares, any other securities of the Company and any other
property (except for cash dividends) distributed with respect to the common
shares subject to restricted stock awards shall be subject to the same
restrictions, terms and conditions as such restricted common shares.
(c) Termination of Restrictions. At the end of the restriction
period and provided that any other restrictive conditions of the restricted
stock award are met, or at such earlier time as otherwise determined by the
Committee, all restrictions set forth in the agreement relating to the
restricted stock Award or in the Plan shall lapse as to the restricted common
shares subject thereto, and a stock certificate for the appropriate number of
common shares, free of the restrictions and the restricted stock legend, shall
be delivered to the grantee or his beneficiary or estate, as the case may be.
10. Income Tax Matters; Tax Bonuses .
(a) 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 ensure that all applicable federal or state payroll, withholding,
income or other taxes, which are the sole and absolute responsibility of a
grantee of an Award under the Plan, are withheld or collected from such grantee.
In order to assist a grantee in paying all federal and state taxes to be
withheld or collected upon exercise of an option or award which does not qualify
as an Incentive Stock Option hereunder, the Committee, in its absolute
discretion and subject to such additional terms and conditions as it may adopt,
shall permit the optionee or grantee to satisfy such tax obligation by (i)
electing to have the Company withhold a portion of the shares otherwise to be
delivered upon exercise of such option or award with a fair market value,
determined in accordance with subsection 8(b), equal to such taxes or (ii)
delivering to the Company common shares other than the shares issuable upon
exercise of such option or award with a fair market value, determined in
accordance with subsection 8(b), equal to such taxes.
(b) The Committee shall have the authority, at the time of
grant of an option under the Plan or at any time thereafter, to approve tax
bonuses to designated optionees or grantees to be paid upon their exercise of
options or awards granted hereunder. The amount of any such payments shall be
determined by the Committee. The Committee shall have full authority in its
absolute discretion to determine the amount of any such tax bonus and the terms
and conditions affecting the vesting and payment thereafter.
(c) If an optionee disposes 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 such option
was granted or within one year after the transfer of any such shares to the
optionee upon exercise of such 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.
11. Additional Restrictions .
The Committee shall have full and complete authority to
determine whether all or any part of the shares of common stock of the Company
acquired upon exercise of any of the options granted under the Plan or upon the
granting of an Award shall be subject to restrictions on the transferability
thereof or any other restrictions affecting in any manner the optionee's or
award recipient's rights with respect thereto, but any such restriction shall be
contained in the agreement relating to such Awards.
12. Compliance with Securities Laws .
(a) All certificates for shares or other securities delivered
under the Plan pursuant to any Award or the exercise thereof shall be subject to
such stop transfer orders and other restrictions as the Committee may deem
advisable under the Plan or the rules, regulations and other requirements of the
Securities and Exchange Commission and any applicable federal or state
securities laws, and the Committee may cause a legend or legends to be placed on
any such certificates to make appropriate reference to such restrictions. Until
the shares of common stock that are the subject of Awards granted under the Plan
are registered and listed, if applicable and if required by law, the Committee
may condition the delivery of any certificate for such shares upon the receipt
of a written representation from the grantee that at the time of acquiring such
shares the grantee of the Award intends to acquire the shares being purchased
for investment and not for resale or further distribution. If the shares or
other securities subject to an Award are traded on a securities exchange or
other securities market, the Company shall not be required to deliver any shares
or other securities covered by an Award unless and until such shares or other
securities have been admitted for trading on such securities exchange or market.
(b) The Plan is intended to comply with all applicable
conditions of Section 16b-3 of the Exchange Act, and all transactions involving
persons subject to Section 16b of the Exchange Act ("Insider-Participants") are
subject to such conditions regardless of whether the conditions are expressly
set forth in the Plan. Any provision of the Plan that is contrary to the
conditions of Section 16b-3 shall not apply to Insider-Participants.
13. Amendment or Discontinuance of Plan .
The Company's Board of Directors may amend, suspend or
discontinue the Plan at any time. However, no amendment of the Plan shall,
without shareholder approval: (i) increase the maximum number of shares under
the Plan as provided in section 4, (ii) decrease the minimum option price
provided in section 8, (iii) extend the maximum option term under section 6,
(iv) materially modify the eligibility requirements for participation in the
Plan, or (v) in any other fashion cause any options granted under the Plan which
are intended to be Incentive Stock Options, and which are designated as such by
the Award agreement evidencing the granting of such option, to fail to qualify
as an Incentive Stock Option. The Company shall not alter or impair any Award
theretofore granted under the Plan without the consent of the holder of the
Award.
14. Time of Granting .
Nothing contained in the Plan or in any resolution adopted or
to be adopted by the Board of Directors or by the shareholders of the Company,
and no action taken by the Committee or the Board of Directors (other than the
execution and delivery of an agreement evidencing an Award), shall constitute
the granting of an Award under the Plan.
15. General Provisions .
(a) No Rights to Awards. No person shall have any claim to be
granted any Award under the Plan, and there is no obligation for uniformity of
treatment of holders or beneficiaries of Awards under the Plan. The terms and
conditions of Awards need not be the same with respect to any grantee or with
respect to different grantees.
(b) Award Agreements. No person will have rights under an
Award granted to such person unless and until an Award agreement evidencing such
Award has been duly executed on behalf of the Company.
(c) No Limit on Other Compensation Arrangements. Nothing
contained in the Plan shall prevent the Company or any Affiliate from adopting
or continuing in effect other or additional compensation arrangements, and such
arrangements may be either generally applicable or applicable only in specific
cases.
(d) No Right to Employment. The grant of an Award shall not be
construed as giving the grantee of the Award the right to be retained in the
employ of the Company or any Affiliate, nor will it affect in any way the right
of the Company or such Affiliate to terminate such employment at any time, with
or without cause. In addition, the Company or any Affiliate may at any time
dismiss an Award grantee from employment free from any liability or any claim
under the Plan, unless otherwise expressly provided in the Plan or in any Award
agreement.
(e) Governing Law. The validity, construction and effect of
the Plan or any Award, and any rules and regulations relating to the Plan or any
Award, shall be determined in accordance with the laws of the State of
Minnesota.
(f) Severability. If any provision of the Plan or any Award is
or becomes or is deemed to be invalid, illegal or unenforceable in any
jurisdiction or would disqualify the Plan or any Award under any law deemed
applicable by the Committee, such provision shall be construed or deemed amended
to conform to applicable laws, or if it cannot be so construed or deemed amended
without, in the determination of the Committee, materially altering the purpose
or intent of the Plan or the Award, such provision shall be stricken as to such
jurisdiction or Award, and the remainder of the Plan or any such Award shall
remain in full force and effect.
(g) No Trust or Fund Created. Neither the Plan nor any Award
shall create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and a Participant or
any other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Award, such right
shall be no greater than the right of any unsecured general creditor of the
Company or any Affiliate.
(h) No Fractional Shares. No fractional Shares shall be issued
or delivered pursuant to the Plan or any Award, and the Committee shall
determine whether cash shall be paid in lieu of any fractional Shares or whether
such fractional Shares or any rights thereto shall be canceled, terminated or
otherwise eliminated.
(i) Headings. Headings are given to the sections and
subsections of the Plan solely as a convenience to facilitate reference. Such
headings shall not be deemed in any way material or relevant to the construction
or interpretation of the Plan or any provision thereof.
Original Plan - Approved by the Board on March 3, 1997
- Approved by the Company's Stockholders on ___________
Exhibit 10.14
NATIONAL COMPUTER SYSTEMS, INC.
1997 EMPLOYEE STOCK OPTION PLAN
(300,000 shares authorized)
1. Objectives of Plan.
This 1997 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"), and 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 Compensation Committee ,(the
"Committee") of the Board of Directors of the Company (the
"Board"). The Committee shall be composed of not less than such
number of directors as shall be required to permit the Plan to
qualify under Section 16b-3 ("Section 16b-3") under the Securities
Exchange Act of 1934, as amended (The "Exchange Act"). Each member
of the Committee shall be a "disinterested person" with respect to
the Plan within the meaning of Section 16b-3 and shall be an
"outside director" within the meaning of Section 162(m) of the
Code.
(B) Subject to the provisions of the Plan, the Committee 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 of this Plan 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 Committee.
In determining the persons to whom options shall be granted and the
number of shares subject to each option, the Committee 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 Committee 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 Committee
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 300,000 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 Committee 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,
2007, 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
Committee 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 Committee 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 Committee, 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 Committee,
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 Committee 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 Committee and 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 Committee or 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.
12. Compliance with Section 16b-3.
The Plan is intended to comply with all applicable conditions of Section
16b-3 or its successors, all transactions involving persons subject to
Section 16(b) of the Exchange Act ("Insider-Participants") are subject to
such conditions regardless of whether the conditions are expressly set
forth in the Plan and any provision of the Plan that is contrary to the
condition of Section 16b-3 shall not apply to InsiderParticipants.
- ---------------------------
Original Plan - Approved by the Board on March 3, 1997
- Approved by the Company's Stockholders on ______________
EXHIBIT 10.16
NATIONAL COMPUTER SYSTEMS
CORPORATE
MANAGEMENT INCENTIVE PLAN
1997
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, 1997, 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. The remaining 30% of their potential target bonus will be
based upon an overall evaluation of the participant's performance during the
fiscal year. The 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?
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.)
DETERMINATION OF MIP AWARDS
Generally speaking, actual financial results will not include extraordinary
gains or losses. In any such matters, including acquisitions, the CEO will make
the appropriate approval decisions where needed.
PAYOUTS AND PRO-RATA
Earned award payouts will be made no later than April 15, following the end of
the plan fiscal year. Any participant must be a full-time employee and be
actively employed by NCS on the last day of the fiscal year to be eligible to
receive a payout. In coming into or out of an MIP eligible position,
participants will be given pro-rata earned award payouts based upon the length
of time in such position, however, participants must be in the plan at least six
(6) full months during the fiscal year to be eligible to receive any pro-rata
award. Pro-rata payouts will be subject to review and approval by the CEO.
DISABILITY, DEATH, OR SPECIAL CIRCUMSTANCES
In the case of disability, death or other special circumstances impacting a
participant in the plan, the CEO may approve pro-rata award payouts.
PLAN EXCEPTIONS AND ADMINISTRATION
Exceptions and/or modifications to the plan must be approved by the CEO. All
decisions made are final.
DISCLAIMER
Participation in this plan is not to be construed as an employment contract or
agreement by the participant.
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
NATIONAL COMPUTER SYSTEMS, INC.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------------------
1997 1996 1995 1994 1993
====== ====== ====== ====== ======
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 15,325 15,472 15,164 15,438 15,915
Dilutive stock options -- based
on the treasury stock method
using average market price 230 213 61 97 151
------- ------- ------- ------- -------
TOTAL 15,555 15,685 15,225 15,535 16,066
======= ======= ======= ======= =======
Income from continuing operations $13,666 $16,580 $11,281 $ 9,744 $12,444
Net income (loss) 49,580 22,259 13,398 (2,509) 16,508
======= ======= ======= ======= =======
Income from continuing operations
per share $ 0.88 $ 1.06 $ 0.74 $ 0.63 $ 0.77
Net income (loss) per share $ 3.18 $ 1.42 $ 0.88 $ (0.16) $ 1.03
======= ======= ======= ======= =======
FULLY DILUTED
Average shares outstanding 15,325 15,472 15,164 15,438 15,915
Dilutive stock options -- based on
the treasury stock method using
the higher of year-end market
price or average market price 302 262 148 99 164
Assumed conversion of convertible
subordinated debenture -- -- -- -- --
------- ------- ------- ------- -------
TOTAL 15,627 15,734 15,312 15,537 16,079
======= ======= ======= ======= =======
Income from continuing operations $13,666 $16,580 $11,281 $ 9,744 $12,444
Net income (loss) 49,580 22,259 13,398 (2,509) 16,508
======= ======= ======= ======= =======
Income from continuing operations
per share $ 0.88 $ 1.06 $ 0.74 $ 0.63 $ 0.77
Net income (loss) per share $ 3.18 $ 1.42 $ 0.88 $ (0.16) $ 1.03
======= ======= ======= ======= =======
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The fiscal years referenced herein are as follows:
Fiscal Year Year Ended
----------- ----------
1996 - January 31, 1997
1995 - January 31, 1996
1994 - January 31, 1995
Income and Expense Items as a Percentage of Revenues
<TABLE>
<CAPTION>
Fiscal Year 1996 1995 1994
- ------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Information services 47.6% 43.4% 40.6%
Product sales 40.5 43.4 44.1
Maintenance and support 11.9 13.2 15.3
- ------------------------------------------------------------
Total revenues 100.0 100.0 100.0
Costs of Revenues (1)
Cost of information services 78.5 77.0 77.0
Cost of product sales 46.3 46.9 46.2
Cost of maintenance and support 67.4 69.0 72.0
- ------------------------------------------------------------
Total gross profit 35.9 37.1 37.3
Operating Expenses
Sales and marketing 12.5 12.8 13.5
Research and development 3.0 2.8 2.6
General and administrative 10.0 11.3 11.2
Acquisition and special charges 2.4 -- 2.9
- -------------------------------------------------------------
Income from operations 8.0 10.2 7.1
Income from continuing operations
before income taxes 8.0 9.2 5.7
Income from continuing operations 4.1% 5.5% 4.0%
============================================================
</TABLE>
(1) As a percentage of the respective revenue caption.
National Computer Systems, Inc. (the Company or NCS) is an information services
company, providing services and systems for the collection, management and
interpretation of data. The Company markets these products and services
predominantly in education, but also to business, government and health care
markets through its various operating units.
<PAGE>
RECAP OF 1996 RESULTS
Total revenues from continuing operations in fiscal 1996 increased 10.1% over
the prior year to $331.2 million. The Company's overall gross profit dollars on
those revenues increased by $7.0 million or 6.3%. Total gross margin as a
percentage of revenues declined, principally due to the product/service mix of
those revenues. Operating expenses declined as a percent of revenue, except for
research and development, which reflects additional investments in both hardware
and software products. NCS recorded a pre-tax operating charge of $7.9 million
($.45 per share after tax) principally for acquired in-process research and
development from the purchase of Macro Educational Systems, Inc. (Macro). Before
this charge, income from operations increased 12.5% to $34.5 million, and
improved slightly as a percentage of revenues. Year-to-year favorable changes in
non-operating income and expense primarily reflect the impact of the proceeds
from the sale of the Company's Financial Systems business in July 1996. Net
income for fiscal 1996 from continuing operations was $13.7 million or $.88 per
share. However, excluding the acquisition related charges, net income from
continuing operations would have been $20.7 million compared to $16.6 million in
fiscal 1995, a 24.6% increase. A reconciliation of earnings per share for 1996
and 1995 is as follows:
1996 1995
---- ----
Earnings per share, as reported $3.18 $1.42
Less gain on disposition
and discontinued operations (2.30) (.36)
---- ----
Continuing operations .88 1.06
Plus acquisition related charges .45 -
----- -----
Pro forma earnings per share $1.33 $1.06
===== =====
During fiscal 1996, the Company sold its Financial Systems business.
See Note 3 of Notes to Consolidated Financial Statements for further discussion
on the sale, the gain on disposition and discontinued operations. The following
discussion relates to continuing operations only.
REVENUES
Fiscal 1996 versus Fiscal 1995. Total revenues for fiscal 1996 were up 10.1% to
$331.2 million from $300.9 million in fiscal 1995. By revenue category, fiscal
1996 compares to fiscal 1995 as follows:
Information services + 20.8%
Product sales + 2.7%
Maintenance and support - 0.8%
<PAGE>
The growth in information services revenues is predominantly the result of
significantly higher volumes of educational assessment services and
international service business. During fiscal 1996, the Company invested in two
small international businesses, principally service in nature, and NCS was
awarded a new long-term service contract in Mexico. These transactions fueled
the Company's growth in the international service business. Overall,
international revenues were up 42.1% from fiscal 1995. Product sales increases
were essentially due to higher education administrative software and scannable
forms revenues. These improvements, however were somewhat offset by lower
proprietary hardware revenues. Maintenance and support revenues were down 0.8%
due to lower third-party hardware maintenance revenues, partially offset by
higher software support revenues.
Fiscal 1995 versus Fiscal 1994. Total revenues for fiscal 1995 were up 5.6% to
$300.9 million from $284.9 million in fiscal 1994. By revenue category, fiscal
1995 compares to fiscal 1994 as follows:
Information services + 12.7%
Product sales + 4.1%
Maintenance and support - 8.7%
Information services revenue grew in fiscal 1995 primarily as a result of higher
volumes of educational assessments and student financial aid services. Higher
education software revenue was the principal factor in the year-to-year increase
in product sales. Maintenance and support revenues were down as a result of
lower third-party hardware maintenance revenues, somewhat offset by higher
software support revenues.
COST OF REVENUES AND GROSS PROFITS
Fiscal 1996 versus Fiscal 1995. The Company's overall gross profit dollars
increased $7.0 million or 6.3% with the largest dollar increases being in state
educational assessments, international services and education administrative
software. As a percent of revenue, overall gross profit declined to 35.9% of
total revenues from 37.1% in fiscal 1995, principally reflecting the Company's
revenue growth in information services revenues. Gross profit changes by revenue
category were largely offsetting, however, the gross profit on information
services revenues did decline due to lower first-year margins on multi-year
federal student financial aid contracts.
Fiscal 1995 versus Fiscal 1994. The Company's overall gross profit dollars
increased $5.4 million or 5.1% in fiscal 1995 over the prior year. As a percent
of revenue, the overall gross profit of 37.1% in fiscal 1995 was essentially
unchanged from fiscal 1994. The gross profit on net product sales declined by
0.7 percentage points year-to-year primarily due to lower margins on education
software and international forms revenues. Maintenance and support margins
improved by 3.0 percentage points in fiscal 1995 over the prior year, with the
year-to-year improvement coming from software support margins.
<PAGE>
OPERATING EXPENSES
Fiscal 1996 versus Fiscal 1995. Sales and marketing expenses increased by $2.7
million or 7.0% in fiscal 1996 from the prior year. The year-to-year increase is
primarily the result of additional expenditures in introducing and selling new
image processing systems to the marketplace.
Research and development expenses increased $1.4 million in fiscal 1996 over
fiscal 1995. This increase relates principally to enhancements to the Company's
scanning and imaging technology and school administrative software.
General and administrative expenses decreased by $.9 million or 2.7% in fiscal
1996 from the prior year. As a percent of revenues, these expenses declined by
1.3 percentage points, to 10.0 % of total revenues. The decrease reflects
specific emphasis on reducing general and administrative expenses, and is net of
a $1.0 million increase in expenses to upgrade the Company's internal
information systems.
Fiscal 1995 versus Fiscal 1994. In fiscal 1995, sales and marketing expenses
were essentially unchanged from fiscal 1995 to fiscal 1994. However, as a
percentage of revenues these expenses declined by 0.7 percentage points to 12.8%
of total revenues. This decline was the result of a Company-wide effort to
manage these expenses.
Research and development expenses increased $1.1 million or 15.7% in fiscal 1995
over fiscal 1994, relating principally to enhancements to the Company's scanning
and imaging technology and related software.
General and administrative expenses increased by $1.9 million or 6.0% in fiscal
1995 from the prior year. The increase reflects additional spending of $1.0
million to introduce and install enhanced product and project management methods
and tools. As a percent of revenues, these expenses remained constant
year-to-year.
OTHER SIGNIFICANT TRANSACTIONS
During fiscal 1996, in conjunction with the acquisition of Macro, NCS recorded
one-time charges totaling $7.9 million, including $5.6 million of purchased
research and development plus $2.3 million of acquisition related costs (See
Note 2 of Financial Statements).
In 1994, the Company recorded an $8.2 million pretax charge for the
restructuring of the Company's German operations and write-down of certain
non-operating assets (See Note 3 of Financial Statements).
<PAGE>
INTEREST EXPENSE
Interest expense decreased by $1.6 million in fiscal 1996 from fiscal 1995. The
year-to-year decrease is the result of lower borrowing levels for fiscal 1996.
See Capital Resources and Liquidity below for further discussion of cash flow
and debt.
Interest expense decreased by $0.2 million in fiscal 1995 from the prior year.
The year-to-year decrease is primarily the result of lower average borrowing
levels for the latter half of the year, somewhat offset by slightly higher
interest rates.
OTHER INCOME AND EXPENSE
Other income in fiscal 1996 includes interest income of $2.8 million principally
from investment of the proceeds from the sale of the Company's Financial Systems
business, but also from internally generated cash flows.
Other income and expense for 1995 and 1994 included no large or unusual items.
INCOME TAXES
The effective income tax rate for fiscal 1996 was 48.5%, which was higher than
the statutory rate primarily as a result of the one time write-off of
non-deductible purchased research and development and losses from foreign
subsidiaries for which the Company is unable to recognize a benefit in its 1996
tax provision.
The effective income tax rate for fiscal 1995 was 40.3%, which was higher than
the statutory rate as a result of losses from foreign subsidiaries for which the
Company is unable to recognize a benefit in its 1995 tax provision.
The effective income tax rate for fiscal 1994 was 30.0% which was significantly
reduced by the net tax benefits related to the reorganization of the Company's
German operations.
CAPITAL RESOURCES AND LIQUIDITY
With the net proceeds from the sale of the Financial Systems business and cash
generated from ongoing operations, the Company ended fiscal 1996 with $58.1
million of cash and cash equivalents. During fiscal 1996, NCS generated $38.5
million of cash from operating activities. The Company invested $14.9 million in
property, plant and equipment and $11.2 million in acquisitions consisting of
Macro and three additional smaller entities. The Company also repurchased
362,000 shares of Common Stock during fiscal 1996, using $8.1 million of cash.
Other financing activities included the early repayment of the $15.0 million,
9.88% Secured Notes.
During fiscal 1995, the Company generated $51.9 million of cash from operating
activities. Cash was used for capital expenditures and other investing
activities totaling $19.5 million, debt reduction of $21.0 million, dividends of
$5.6 million and stock repurchases, net of issuances, of $1.9 million. The
Company had paid off its revolving debt balances by January 31, 1996, and had
accumulated cash and cash equivalents of $5.2 million, an increase of $4.0
million from a year earlier.
The Company had long-term debt balances, including current maturities, of $20.1
million, $27.0 million and $49.9 million at January 31, 1997, 1996, and 1995,
respectively. The items causing the changes in debt balances are described
above. At January 31, 1997, the Company's debt to total capital ratio was 10.6%
compared to 17.4% a year earlier and 30.6% two years earlier. The Company
believes that the current debt to total capital ratio is at an acceptable level
which will allow the Company flexibility to fund future growth initiatives.
Accounts receivable, accrued expenses and deferred income were impacted by the
acquisitions made in 1996 and by the increased level of operations during the
year.
Looking toward fiscal 1997, the Company maintains a $40.0 million revolving
credit facility, all of which was available at January 31, 1997. The Company
expects its cash flows from operations, the revolving credit facility and cash
on hand to be adequate to meet foreseeable cash requirements, including internal
growth and potential acquisitions.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 58,079 $ 5,154
Receivables 79,056 68,713
Inventories 18,176 18,336
Prepaid expenses and other 5,526 8,460
Investment in discontinued operations - 17,557
-------- --------
Total Current Assets 160,837 118,220
-------- --------
Property, Plant and Equipment
Land, buildings and improvements 51,741 49,350
Machinery and equipment 111,921 105,075
Accumulated depreciation (87,353) (79,596)
-------- --------
76,309 74,829
-------- --------
Other Assets, net
Acquired and internally developed software products 17,578 11,667
Non-current receivables and other assets 11,640 12,582
Goodwill 7,556 2,426
-------- --------
36,774 26,675
-------- --------
Total Assets $273,920 $219,724
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 3,819 $ 2,473
Accounts payable 20,886 16,416
Accrued expenses 28,832 23,137
Deferred income 23,079 16,148
Income taxes 5,556 4,458
-------- --------
Total Current Liabilities 82,172 62,632
-------- --------
Deferred Income Taxes 5,385 4,359
Long-Term Debt - less current maturities 16,329 24,535
Commitments and Contingencies - -
Stockholders' Equity
Preferred stock - -
Common stock - issued and outstanding -
15,235 and 15,365 shares, respectively 457 461
Paid-in capital - 3,427
Retained earnings 173,564 130,007
Deferred compensation (3,987) (5,697)
-------- --------
Total Stockholders' Equity 170,034 128,198
-------- --------
Total Liabilities and Stockholders' Equity $273,920 $219,724
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues
Information services $157,511 $130,432 $115,723
Product sales 134,144 130,648 125,557
Maintenance and support 39,504 39,803 43,594
-------- -------- --------
Total revenues 331,159 300,883 284,874
Cost of Revenues
Cost of information services 123,718 100,459 89,133
Cost of product sales 62,075 61,233 58,034
Cost of maintenance and support 26,608 27,453 31,405
-------- -------- --------
Gross profit 118,758 111,738 106,302
Operating Expenses
Sales and marketing 41,258 38,544 38,397
Research and development 9,883 8,490 7,341
General and administrative 33,076 34,000 32,077
Acquisition related charges:
Purchased research and development 5,637 - -
Other 2,258 - -
Special charges - - 8,164
-------- -------- --------
Income From Operations 26,646 30,704 20,323
Interest expense 1,677 3,276 3,465
Other (income) expense, net (1,564) (332) 739
-------- -------- --------
Income from Continuing Operations Before Income Taxes 26,533 27,760 16,119
Income taxes 12,867 11,180 4,838
-------- -------- --------
Income from Continuing Operations 13,666 16,580 11,281
Income (loss) from discontinued operations,
net of taxes of $(1,360), $3,570 and $912 (2,229) 5,679 2,117
Gain on disposition, net of taxes of $29,031 38,143 - -
-------- -------- --------
Net Income $ 49,580 $ 22,259 $ 13,398
======== ======== ========
Earnings Per Share
Continuing operations $ 0.88 $ 1.06 $ 0.74
Discontinued operations (0.14) 0.36 0.14
Gain on disposition 2.44 - -
-------- -------- --------
Net Income Per Share $ 3.18 $ 1.42 $ 0.88
======== ======== ========
Average Shares Outstanding 15,555 15,685 15,225
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------- PAID-IN RETAINED DEFERRED
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION TOTAL
------ ------ ------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
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 (forfeitures), net (59) (2) (430) - 432 -
Shares issued for business acquisition 266 8 3,092 - - 3,100
ESOP debt payment - - - - 1,000 1,000
Restricted stock compensation accrual - - - - (36) (36)
Net income - - - 13,398 - 13,398
Cash dividends paid - $.36 per share - - - (5,453) - (5,453)
Foreign currency translation adjustment - - - (170) - (170)
------ ------ ------ -------- -------- --------
Balance, January 31, 1995 15,310 459 3,795 114,546 (5,677) 113,123
Shares issued for employee stock
purchase and option plans 208 6 2,446 - - 2,452
Repurchase of common stock (233) (7) (4,445) - - (4,452)
Restricted stock awards 80 3 1,576 - (1,579) -
Shares issued for business acquisition - - 55 - - 55
ESOP debt payment - - - - 1,000 1,000
Restricted stock compensation accrual - - - - 559 559
Net income - - - 22,259 - 22,259
Cash dividends paid - $.36 per share - - - (5,570) - (5,570)
Foreign currency translation adjustment - - - (1,228) - (1,228)
------ ------ ------ -------- ------- --------
Balance, January 31, 1996 15,365 461 3,427 130,007 (5,697) 128,198
Shares issued for employee stock
purchase and option plans 245 7 3,483 - - 3,490
Repurchase of common stock (362) (11) (7,328) (737) - (8,076)
Restricted stock awards (forfeitures), net (13) - 24 - (24) -
ESOP debt payment - - - - 1,000 1,000
Restricted stock compensation accrual - - 394 - 734 1,128
Net income - - - 49,580 - 49,580
Cash dividends paid - $.36 per share - - - (5,521) - (5,521)
Foreign currency translation adjustment - - - 235 - 235
------ ------ ------ -------- -------- --------
Balance, January 31, 1997 15,235 $457 $ - $173,564 $(3,987) $170,034
====== ====== ====== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net income $49,580 $22,259 $13,398
Less gain on disposition (38,143) - -
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation 15,620 15,643 15,559
Amortization 9,647 11,791 8,412
Deferred income taxes and other (2,053) 3,747 (400)
Acquisition related charges 6,637 - -
Non-cash special charges - - 10,375
Changes in operating assets and liabilities
(net of acquired amounts):
Accounts receivable (4,318) (2,133) (3,392)
Inventory and other current assets 2,495 542 (4,285)
Accounts payable and accrued expenses (3,856) 272 3,183
Deferred income 2,912 (190) (613)
------- ------- -------
Net Cash Provided By Operating Activities 38,521 51,931 42,237
------- ------- -------
Investing Activities
Acquisitions, net (11,192) - (3,216)
Purchases of property, plant and equipment (14,909) (14,091) (29,185)
Capitalized software products (1,553) (4,826) (6,928)
Net proceeds from disposition 64,071 - -
Other - net 2,248 (555) (3,245)
------- ------- -------
Net Cash Provided By (Used In)
Investing Activities 38,665 (19,472) (42,574)
Financing Activities
Net increase (decrease) in revolving credit borrowing - (13,065) 1,100
Repayment of secured notes (15,000) - -
Net increase (decrease) in other borrowings 846 (7,920) 3,024
Issuance (repurchase) of common stock, net (4,586) (1,945) 1,137
Dividends paid (5,521) (5,570) (5,453)
------- ------- -------
Net Cash Used In Financing Activities (24,261) (28,500) (192)
------- ------- -------
Increase (Decrease) In Cash and Cash Equivalents 52,925 3,959 (529)
Cash and Cash Equivalents - Beginning of Year 5,154 1,195 1,724
------- ------- -------
Cash and Cash Equivalents - End of Year $58,079 $ 5,154 $ 1,195
======= ======= =======
</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 DATA)
NOTE 1 - ACCOUNTING POLICIES
The fiscal years referenced herein are as follows:
Fiscal Year Year Ended
----------- ----------
1996 - January 31, 1997
1995 - January 31, 1996
1994 - January 31, 1995
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its subsidiaries. All intercompany accounts and
transactions between consolidated entities have been eliminated.
In order to provide improved financial reporting, the revenue and related costs
of the information services operations have been segregated on the accompanying
consolidated statements of income.
USE OF ESTIMATES: The consolidated financial statements have been prepared in
accordance with the generally accepted accounting principles which require
management to make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Those assumptions
and estimates are subject to constant revision, and actual results could differ
from those estimates.
CASH AND EQUIVALENTS: All investments purchased with an original maturity of
three months or less are considered to be cash equivalents. Cash equivalents are
available for sale, are carried at cost which approximates fair market value and
consist principally of corporate commercial paper.
INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or
market. Components of inventory as of January 31, are summarized as follows:
1997 1996
- ----------------------------------------------------------------
Finished goods $ 4,765 $ 6,012
Scoring services and work in process 9,221 8,694
Raw materials and purchased parts 4,190 3,630
- ----------------------------------------------------------------
$18,176 $18,336
================================================================
<PAGE>
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost
and depreciated over the estimated useful lives of the assets, ranging from two
to forty years, 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.
ACQUIRED AND INTERNALLY DEVELOPED SOFTWARE PRODUCTS: Acquired software product
amounts originate from the allocation of purchase prices of acquired companies
and direct acquisition of software, or rights to software. These products are
generally large, complex, mission-critical application software packages with
established market positions. Products in this category are generally assigned
lives of five to ten years. Internally developed software products represent
costs capitalized in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86. Accordingly, software production costs incurred subsequent to
establishing technological feasibility, as defined, are capitalized.
Amortization of these products is computed on a product by product basis ratably
as a percentage of estimated revenue, subject to minimum straight-line
amortization over the products' estimated useful lives of five years or less.
Expected revenues and useful lives are estimates which are subject to changes in
technology and marketplace requirements and are, therefore, subject to revision.
The Company periodically evaluates its software products for impairment by
comparison of the carrying value of the product against anticipated product
margins. The carrying value is adjusted, if necessary. A summary of software
activity is as follows:
Internally Accumulated
Acquired Developed Amortization Total
- ---------------------------------------------------------------------------
Balance, January 31, 1994 $ 7,000 $14,240 $ (8,636) $12,604
Additions 3,475 4,280 - 7,755
Amortization - - (2,944) (2,944)
- ----------------------------------------------------------------------------
Balance, January 31, 1995 10,475 18,520 (11,580) 17,415
Additions - 320 - 320
Product discontinuation (151) (308) 459 -
Amortization - - (6,068) (6,068)
- ----------------------------------------------------------------------------
Balance, January 31, 1996 10,324 18,532 (17,189) 11,667
Additions 13,000 - - 13,000
Write-downs and dispositions - (6,539) 4,517 (2,022)
Amortization - - (5,067) (5,067)
- ----------------------------------------------------------------------------
Balance, January 31, 1997 $23,324 $11,993 $(17,739) $17,578
============================================================================
<PAGE>
GOODWILL: Goodwill arising from business acquisitions is amortized on a
straight-line basis over periods ranging from five to twenty years, generally
ten years. Amortization expense was $703, $624 and $1,179 in fiscal 1996, 1995
and 1994, respectively. Accumulated amortization was $3,843 and $3,109 as of
January 31, 1997 and 1996, respectively. The Company periodically evaluates its
goodwill for impairment by comparison of the carrying value against anticipated
business performance.
ACCRUED EXPENSES: Major components of accrued expenses consisted of the
following as of January 31:
1997 1996
- ------------------------------------------------
Employee compensation $13,376 $12,477
Taxes other than income 2,875 3,078
Royalties 2,065 2,176
Other 10,516 5,406
- ------------------------------------------------
$28,832 $23,137
================================================
REVENUE RECOGNITION: Revenue from product sales and software licensing is
recognized at the time of shipment, except in instances where material
fulfillment obligations exist beyond shipment. In such cases, revenue is not
recognized until such obligations are substantially fulfilled or is recognized
in accordance with specific contract terms. Revenue from information services is
recognized when such service is performed. Hardware maintenance and software
support revenues are recognized ratably over the contractual period.
PER SHARE DATA: Net income per share is based on the weighted average number of
shares of Common Stock and dilutive common stock equivalents outstanding during
the year.
IMPAIRMENT OF LONG-LIVED ASSETS: In March 1995, the Financial Accounting
Standards Board (FASB) issued SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present. The Company adopted the Statement in 1996
and it had no impact on the consolidated financial statements.
STOCK-BASED COMPENSATION: In October, 1995, the FASB issued SFAS No. 123,
Accounting for Stock-Based Compensation. The statement requires adoption of the
new standard or footnote disclosure for all transactions entered into during the
fiscal years ended January 31, 1996 and 1997. As permitted by the statement, the
Company has elected to continue to account for stock options and awards to
employees under the provisions of Accounting Principles Board (APB) Opinion No.
25 and disclose the impact of SFAS No. 123, as if adopted, in Note 7.
<PAGE>
NOTE 2 - ACQUISITIONS
On January 21, 1997, the Company acquired all of the common stock of Macro
Educational Systems, Inc. (Macro), a California-based developer of
administrative software for the K-12 educational market, for approximately $13.9
million, through the issuance of $7.0 million of convertible debentures and
cash. Additional payments up to $6.0 million may be earned between 1997 and
2001, subject to achieving certain earnings levels.
The acquisition was accounted for as a purchase and, accordingly, operating
results of this business subsequent to the date of acquisition were included in
the Company's consolidated financial statements. In accordance with SFAS No.
109, Accounting for Income Taxes, the purchase price has been adjusted by $6.0
million to reflect deferred taxes on the intangible assets, whose amortization
will be nondeductible. The excess purchase price, as adjusted for deferred
taxes, over book value of the net assets acquired was $22.4 million, of which
$13.0 million was allocated to acquired software, $5.6 million to purchased
in-process research and development and $3.8 million to goodwill and other
intangible assets. The purchased in-process research and development was charged
to operations upon acquisition, and the goodwill and other intangible assets are
being amortized over 10 years.
In connection with the acquisition, the Company recorded a $2.3 million pre-tax
charge related to impairments and redundancies in the Company's existing
administrative software business. This included a $1.0 million non-cash charge
to write-down software assets and $1.3 million to cover other costs directly
related to the merger of the two operations.
The Company made three additional acquisitions in fiscal 1996, whose acquisition
prices totaled $5.1 million, of which $1.9 million was allocated to goodwill.
The pro forma impact of all acquisitions on 1996 and comparative results for
1995 and 1994 are not significant, other than the $7.0 million after tax
acquisition charges described above.
NOTE 3 - DISCONTINUED OPERATIONS AND SPECIAL CHARGES
The Company sold its Financial Systems segment on July 10, 1996 to SunGard Data
Systems, Inc. for $95.0 million in cash. The gain on the sale, recorded in the
second quarter 1996, was $38.1 million net of tax, or $2.44 per share. The
results of the Financial Systems segment up to disposition have been classified
as discontinued operations in the accompanying financial statements. The
segment's 1996 revenues through the sale date were $17.1 million; for fiscal
1995 and 1994, revenues were $58.1 and $52.1 million, respectively.
In 1994, the Company recorded an $8.2 million pre-tax special charge for the
restructuring and statutory reorganization of the Company's German operations
and the write-down of certain unconsolidated investments in anticipation of
disposition. The after-tax charge was $3.3 million, or 21 cents per share. The
German restructuring and reorganization was a $3.7 million pre-tax charge,
primarily to write down goodwill and other assets to liquidation values. Because
of significant tax benefits triggered by these actions, however, the net
after-tax effect of this restructuring was only $.5 million. The Company also
recorded a pre-tax special charge of $4.5 million to write down four investments
to their net realizable value upon disposition.
NOTE 4 - LEASES
The Company leases office facilities under noncancelable operating leases which
expire in various years through 2002. Rental expense for all operating leases
was $8,544 in fiscal 1996, $7,987 in fiscal 1995, and $8,818 in fiscal 1994.
Future minimum rental expense as of January 31, 1997, for noncancelable
operating leases with initial or remaining terms in excess of one year is
$11,320 and is payable as follows: fiscal 1997 - $4,274; fiscal 1998 - $2,470;
fiscal 1999 - $1,821; fiscal 2000 - $1,362; fiscal 2001 - $1,026 and $367
beyond.
NOTE 5 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt at January 31, consisted of the following:
1997 1996
- --------------------------------------------------
Revolving credit borrowing $ - $ -
Secured notes - 15,000
Convertible debentures 7,000 -
Unsecured note 6,535 6,535
ESOP borrowing 3,000 4,000
Other borrowings, 3,613 1,473
principally foreign
- --------------------------------------------------
20,148 27,008
Less current maturities (3,819) (2,473)
- --------------------------------------------------
Long-term debt $16,329 $24,535
==================================================
Revolving Credit Borrowings: The Company has a $40,000 unsecured revolving
credit facility that terminates August 1, 1998. Interest on debt outstanding
under this facility is computed, at the Company's discretion, based on the prime
rate or the London Interbank Offered Rate (LIBOR). During the year ended January
31, 1997, the interest rate approximated 1.0 % below the prime rate. The Company
pays a fee at an annual rate of .25% on the unused facility amount. The credit
facility contains covenants with which the Company is in compliance.
Secured Notes: The Secured Notes, which carried an interest rate of 9.88%, were
retired in July 1996.
<PAGE>
Convertible Debentures: In January 1997, the Company issued $7,000 of
Convertible Debentures as consideration for the stock purchase of Macro, see
Note 2. These debentures are due in five equal annual installments, with the
first installment due on February 21, 1998. These debentures carry an interest
rate of 6.1%, and are convertible into common stock at $24.00 per share.
Unsecured Note: This unsecured term note is due in five annual principal
payments of $1,307 per year beginning in April, 1997 and bears interest at .95%
over LIBOR.
ESOP Borrowing: The ESOP loan, secured by unallocated shares of Common Stock and
guaranteed by the Company, is due in May 1999. The loan has annual payments of
$1,000, with interest payable at rates which approximate 2.0% under the prime
rate.
Scheduled Maturities: The aggregate principal amounts of long-term debt
scheduled for repayment in each of the five fiscal years 1997 through 2001 are
$3,819, $5,898, $4,466, $2,781, and $2,707, respectively. In each fiscal year,
interest paid approximates interest expense.
NOTE 6 - INCOME TAXES
The components of the provision for income taxes from continuing operations are
as follows:
Current
-----------------------
Federal State Foreign Deferred Total
- -----------------------------------------------------------------
1996 $16,197 $1,320 $ 864 $(5,514) $12,867
1995 10,079 1,465 70 (434) 11,180
1994 4,905 600 384 (1,051) 4,838
- -----------------------------------------------------------------
The provision for income taxes from discontinued operations is $27,671, $3,570
and $912 in fiscal years 1996, 1995 and 1994, respectively.
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities as of January 31, are as follows:
<PAGE>
1997 1996
------ ------
Deferred tax assets:
Reserves for uncollectibles $2,801 $1,266
Foreign operating loss carryforwards 2,778 2,050
Accrued vacation pay 1,511 1,648
Rotable service parts amortization 1,260 1,510
Intangible amortization 1,198 1,578
Deferred expenses 689 301
Capital loss carryforward - 783
Special charges 61 497
Other 1,370 581
Valuation allowance (2,778) (1,910)
- ------------------------------------------------------------
Total deferred tax assets 8,890 8,304
- ------------------------------------------------------------
Deferred tax liabilities:
Purchased intangible amortization 6,592 1,088
Accelerated depreciation 5,197 5,473
Net capitalized software 1,929 4,787
Production cost amortization 406 1,265
Other 151 50
- ------------------------------------------------------------
Total deferred tax liabilities 14,275 12,663
- ------------------------------------------------------------
Net deferred tax liabilities $ 5,385 $ 4,359
============================================================
A reconciliation of the Company's statutory and effective tax rate from
continuing operations is presented below:
1996 1995 1994
------ ------ ------
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 3.2 3.1 2.1
Intangible amortization 1.7 1.0 3.7
Foreign sales corporation (0.5) (0.1) (0.7)
Research and development credits (0.6) (0.3) (2.0)
Affordable housing credit (1.0) (1.0) (1.7)
Foreign operating losses 3.2 3.2 1.0
Purchased research and development 7.4 - -
Foreign investment loss - - (12.6)
Other, net 0.1 (0.6) 5.2
- ---------------------------------------------------------------
Effective rate 48.5% 40.3% 30.0%
===============================================================
<PAGE>
In fiscal year 1994, 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 3.
The Company made income tax payments of $47,693, $10,335 and $5,549 in fiscal
years 1996, 1995, and 1994, respectively.
NOTE 7 - STOCKHOLDERS' EQUITY
The Company has 10,000,000 shares of $.01 par value Preferred Stock authorized
and issuable in one or more series as the Board of Directors may determine; none
is outstanding. 50,000,000 shares of $.03 par value Common Stock are authorized.
There are no restrictions on retained earnings.
In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the
Company continues to elect to utilize APB Opinion No. 25 and related
interpretations in accounting for its stock option plans, restricted stock plans
and its employee stock purchase plan. If the Company had elected to recognize
compensation cost based on the fair value of the options granted, restricted
shares awarded and shares sold pursuant to the purchase plan as prescribed by
SFAS No. 123, net income and earnings per share would have been reduced to the
pro forma amounts indicated in the table below for fiscal years 1996 and 1995:
1996 1995
------- -------
Net income - as reported $49,580 $22,259
Net income - pro forma 49,069 21,925
Earnings per share - as reported $ 3.18 $ 1.42
Earnings per share - pro forma 3.15 1.40
SFAS No. 123 is applicable only to options granted after December 31, 1994; as a
result, its pro forma effect will not be fully impacted until these options
become fully exercisable. The fair value of each option grant is estimated on
the date of the grant using the Black-Scholes option-pricing model with the
following assumptions:
Expected dividend yield. .78%
Expected stock price volatility 45%
Risk-free interest rate 6.18%
Expected life of options 5 years
The weighted-average fair value of the options granted during the fiscal years
1996 and 1995 were $10.33 and $8.40, respectively.
The Company has four Employee Stock Option Plans (1984, 1986, 1990 and 1995).
Options to purchase Common Stock of the Company are granted to employees at 100%
of fair market value on the date of grant and are exercisable over a 60 or 63
month period. Shares available for grant under the Plans totaled 227,000 and
380,250 at January 31, 1997 and 1996, respectively.
<PAGE>
Outstanding options under all plans are summarized as follows:
Weighted
Average Price
Shares Per Share
------- -------------
Balance, January 31, 1994 952,350 $13.75
Granted 375,250 13.24
Cancelled (76,900) 14.36
Exercised (303,200) 14.30
-------- -----
Balance, January 31, 1995 947,500 13.70
Granted 229,750 18.52
Cancelled (65,950) 15.15
Exercised (164,350) 11.25
-------- -----
Balance, January 31, 1996 946,950 15.20
Granted 225,850 22.75
Cancelled (94,450) 16.55
Exercised (231,290) 14.86
-------- ------
Balance, January 31, 1997 847,060 $17.15
======== ======
Options for 313,570 shares, 373,250 shares and 378,750 shares were exercisable
at January 31, 1997, 1996 and 1995, with weighted average exercise prices of
$14.86, $14.48 and $13.54, respectively. Exercise prices for options outstanding
as of January 31, 1997 ranged from $8.25 to $24.50. The weighted-average
remaining life of those options is 3.1 years.
The Company has an Employee Stock Purchase Plan. There were 80,848 shares
available for purchase under the Plan at January 31, 1997.
During fiscal 1990, pursuant to the Long-Term Incentive Plan approved by the
shareholders (L-TIP), 171,400 shares were issued to participants on a restricted
basis. At January 31, 1997, 65,650 shares remained outstanding with the balance
having been forfeited. The shares were earned by the participants during fiscal
1996 and will be vested at a rate of 40% following January 31, 1997, and 30% on
each of January 31, 1998 and January 31, 1999, contingent upon continued
employment.
During fiscal 1996 and 1995, pursuant to the L-TIP, a total of 99,900 shares
were issued to participants on a restricted basis; 95,563 shares of which were
outstanding at January 31, 1997. During 1996, the award was amended by reducing
the term from three to two years and reducing the award by approximately
one-third. The remaining shares were earned by and will be vested: two-thirds
following January 31, 1997, and one-third on January 31, 1998, contingent upon
continued employment.
<PAGE>
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 $1,638, $1,900 and $1,700 in fiscal years 1996, 1995
and 1994, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN: The Company has an Employee Stock Ownership Plan
(ESOP) covering substantially all employees. Benefits, to the extent vested,
become available upon retirement or termination of employment. During 1989, the
ESOP Trust borrowed $10,000 to purchase 792,000 shares of Common Stock. Each
year, the Company makes contributions to the ESOP which are charged to
compensation expense, and used by the ESOP Trust to make loan interest and
principal payments. With each principal payment, a portion of the Common Stock
is allocated to participating employees. In fiscal 1996, the Company's
contribution to the Plan was $1,000 plus interest of $77, which is net of
dividends on unallocated shares of $114. The Company's contribution to the Plan
was $1,000 in fiscal 1995 and fiscal 1994, and interest, which was totally
offset by dividends on unallocated shares, was $63 in fiscal 1995 and $206 in
fiscal 1994. There were 237,600 and 316,800 unallocated shares at January 31,
1997 and 1996, 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.
NOTE 9 - CONTINGENCY
The Company has received a claim from a former customer for expenses, alleged
loan defaults, and other damages related to performance under a loan processing
and servicing contract. The Company has tendered the defense of this claim to
its insurer, and the insurer has accepted that defense subject to a reservation
of rights. The Company and its insurer intend to vigorously contest this claim.
While the claim has not yet been fully articulated, the Company believes that
any such claim would be substantially covered by insurance and would not have a
material effect on the Company's financial position or results of operations.
NOTE 10 - BUSINESS SEGMENT INFORMATION
The Company operates in a single business segment, providing information
services and systems for the collection, management and interpretation of data.
The Company markets these products and services to the education, business,
government and health care markets through various operating units.
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, 1997, 1996 and 1995 were $180,993, $148,313, and $143,187 of which $62,278,
$42,664, and $41,455, respectively, were to U.S. government agencies,
principally the U.S. Department of Education, with the remainder to state and
local government agencies, predominantly school districts and state departments
of education. The Company considers its credit risk in trade receivables to be
minimal with regard to the governmental customers described above. With regard
to the Company's non-governmental customers, credit investigations are performed
to minimize credit losses, which historically have been insignificant.
EXHIBIT 21
SIGNIFICANT SUBSIDIARIES
NATIONAL COMPUTER SYSTEMS, INC.
STATE OR
OTHER
JURISDICTION
OF NAME UNDER WHICH
NAME OF SUBSIDIARY INCORPORATION SUBSIDIARY DOES BUSINESS
- -------------------- --------------- ----------------------------
Interpretive Scoring Minnesota National Computer Systems, Inc.
Systems, Inc. NCS Assessments
Professional Assessment
Services Division of
National Computer Systems, Inc.
Macro Educational California National Computer Systems, Inc.
Systems, Inc. Education Systems and 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 2, 1997,
included in the 1996 Annual Report to Stockholders of National Computer Systems,
Inc. and subsidiaries.
We also consent to the incorporation by reference in Post Effective
Amendment Number 2 to Registration Statement Number 2-80386 on Form S-8 (1982
Employee Stock Option Plan), Post Effective Amendment Number 1 to Registration
Statement Number 2-96965 on Form S-8 (1984 Employee Stock Option Plan),
Registration Statement Number 33-9830 on Form S-3 (Selling Shareholder),
Registration Statement Number 33-21511 on Form S-8 (1986 Employee Stock Option
Plan), Registration Statement Number 333-00377 on Form S-8 (1989 Non-Employee
Director Stock Option Plan), Registration Statements Number 33-48509 and
333-00381 on Form S-8 (1990 Employee Stock Option Plan), Registration Statement
Number 333-00379 on Form S-8 (1990 Long-Term Incentive Plan), Registration
Statement Number 33-48510 on Form S-8 (1992 Employee Stock Purchase Plan),
Registration Statement Number 33-68854 on Form S-8 (option held by former
director), and Registration Statement Number 333-00383 on Form S-8 (1995
Employee Stock Option Plan) Registration Statement Number 333-00000 on Form S-3
(VUE Selling shareholders) and Registration Statement Number 333-25343 on Form
S-8 (NCS/VUE Stock Option Plan) of our report dated March 2, 1997 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 23, 1997
EXHIBIT 24
POWER OF ATTORNEY
FORM 10-K FOR YEAR ENDED JANUARY 31, 1997
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, 1997, 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 3rd
day of March, 1997.
/s/ Russell A. Gullotti /s/ Stephen G. Shank
- --------------------------------- --------------------------------
Russell A. Gullotti Stephen G. Shank
/s/ David C. Cox /s/ John E. Steuri
- --------------------------------- --------------------------------
David C. Cox John E. Steuri
/s/ Jean B. Keffeler /s/ Jeffrey E. Stiefler
- --------------------------------- --------------------------------
Jean B. Keffeler Jeffrey E. Stiefler
/s/ Moses Joseph /s/ John W. Vessey
- --------------------------------- --------------------------------
Moses Joseph John W. Vessey
/s/ Charles W. Oswald /s/ Jeffrey W. Taylor
- --------------------------------- --------------------------------
Charles W. Oswald Jeffrey W. Taylor
Exhibit 99
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
National Computer Systems, Inc. (the "Company") desires to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
and is filing this Exhibit to its Annual Report on Form 10-K in order to do so.
When used in this Annual Report on Form 10-K and in future filings by the
Company with the Securities and Exchange Commission, in the Company's annual
report, quarterly reports and press releases and in oral statements made with
the approval of an authorized executive officer, the words or phases `will
likely result', `look for', `may result', `will continue', `is anticipated',
`expect', `project' or similar expressions are intended to identify
`forward-looking statements' within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. In addition, the Company
cautions readers that the following important factors, among others, could
affect the Company's financial performance and could cause the Company's actual
results for future periods to differ materially from any forward-looking
statements made by, or on behalf of, the Company:
Difficulties or delays in the development, production, testing and
marketing of the Company's products, including, but not limited to, a
failure to ship new products and technologies when anticipated, (e.g.,
school administrative software products such as CIMS-R-G/T or
SASI-TM-xp, and new data collections services and systems such as
NCS-R-5000i) or delays or failures of acquired businesses in meeting
projected business cases.
Occurrences affecting the slope or speed of the life cycle curve for
many of the Company's existing products, or affecting the Company's
ability to reduce product and other costs, and to increase
productivity;
Difficulties in, and cost of, obtaining raw materials, supplies,
electronic components and any other items needed for the production of
the Company's scanning devices, scannable forms, and other products;
and capacity constraints limiting the amounts of orders for these items
causing effects on the Company's ability to ship its products;
The costs and other effects of legal and administrative cases and
proceedings; claims of customers, both current and former; settlements
and investigations; and changes in those items; developments or
assertions by or against the Company relating to intellectual property
rights and licenses; adoption of new, or changes in, accounting
policies and practices and the application of such policies and
practices;
The amount, and rate of growth in, the Company's selling, general and
administrative expenses; and the impact of unusual items resulting from
the Company's ongoing evaluation of its business strategies, asset
valuations and organizational structures;
The effects of, and changes in, trade, monetary and fiscal policies,
laws and regulations, other activities of government agencies,
particularly the U.S. Department of Education and local taxing
authorities which fund education, and similar organizations; changes in
social and economic conditions, such as trade restrictions or
prohibitions, inflation and monetary fluctuations, import and other
charges or taxes; the ability or inability of the Company to obtain, or
hedge against, foreign currency, foreign exchange rates and
fluctuations in those rates; unstable governments and legal systems,
and intergovernmental disputes.
The Company does NOT undertake and specifically declines any obligations to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
<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, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> JAN-31-1997
<CASH> 58,079
<SECURITIES> 0
<RECEIVABLES> 79,056
<ALLOWANCES> 0
<INVENTORY> 18,176
<CURRENT-ASSETS> 160,837
<PP&E> 163,662
<DEPRECIATION> (87,353)
<TOTAL-ASSETS> 273,920
<CURRENT-LIABILITIES> 82,172
<BONDS> 16,329
0
0
<COMMON> 457
<OTHER-SE> 169,577
<TOTAL-LIABILITY-AND-EQUITY> 273,920
<SALES> 134,144
<TOTAL-REVENUES> 331,159
<CGS> 62,075
<TOTAL-COSTS> 212,401
<OTHER-EXPENSES> 92,112
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,677
<INCOME-PRETAX> 26,533
<INCOME-TAX> 12,867
<INCOME-CONTINUING> 13,666
<DISCONTINUED> (2,229)
<EXTRAORDINARY> 0
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