-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, d8H1bgEk/IwCPYggMXTEDKG6P0rm304O1O3SrGfLlMh30P0lqzD0WBVXpHsfPixJ QUxVb0o/RPTJzMJ1oxivAg== 0000069999-95-000005.txt : 19950428 0000069999-95-000005.hdr.sgml : 19950428 ACCESSION NUMBER: 0000069999-95-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19950131 FILED AS OF DATE: 19950427 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL COMPUTER SYSTEMS INC CENTRAL INDEX KEY: 0000069999 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 410850527 STATE OF INCORPORATION: MN FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-03713 FILM NUMBER: 95531899 BUSINESS ADDRESS: STREET 1: 11000 PRAIRIE LAKES DR CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 BUSINESS PHONE: 6128293000 MAIL ADDRESS: STREET 1: P O BOX 9365 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: COMMISSION FILE NUMBER: JANUARY 31, 1995 0-3713 ------------------------ NATIONAL COMPUTER SYSTEMS, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-0850527 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 11000 PRAIRIE LAKES DRIVE EDEN PRAIRIE, MINNESOTA 55344 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 612/829-3000 ------------------------ Securities registered pursuant to Section 12(g) of the Act: Common Shares--par value $.03 a share (Title of Class) Rights to Purchase Series A Participating Preferred Stock (Title of Class) ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. _X_ State the aggregate market value of the voting shares held by non-affiliates of the registrant as of March 31, 1995. Common Shares, $.03 par value -- $212,612,000 ------------ Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 31, 1995. Common Shares, $.03 par value -- 15,342,474 shares ---------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the year ended January 31, 1995 are incorporated by reference into Parts I, II and IV. Portions of the definitive proxy statement dated April 19, 1995 are incorporated by reference into Part III. PART I ITEM 1. BUSINESS National Computer Systems, Inc. ("NCS" or the "Company") provides integrated information management products and services, designed to collect and interpret data, to four primary markets: EDUCATION -- NCS develops and markets systems and services which include optical scanning systems, related proprietary software, hardware and software maintenance, scannable documents, proprietary student and financial administrative systems, assessment test processing and other data gathering and processing services. BUSINESS AND GOVERNMENT -- The Company develops and markets optical scanning hardware, image-based data collection systems, related work stations, proprietary software and scannable documents. Using forms-based data entry scanning technology, customers are able to automate labor-intensive data collection and information processes with significantly increased efficiency and accuracy. Data gathering and processing services are also provided. HEALTH CARE -- The Company publishes and markets psychological assessment instruments, scoring systems and scanning products to clinical professionals in the behavioral and mental health markets. Organizational survey and assessment testing and services and vocational counseling tests are marketed to the corporate human resources market. The Company markets optical scanning hardware and proprietary software for patient data collection and administrative management. BANKING AND FINANCIAL -- NCS develops and markets computer-based systems with proprietary software and services for automating asset management in the financial services industry, primarily banking. Applications for NCS' products and services within the education market include administrative applications such as attendance, scheduling, grade reporting and registration/enrollment; library and inventory management; financial management and payroll; and testing applications including test generation, teacher-created tests and norm- or criterion- referenced testing. NCS also provides scanning and computer processing services for the large volume, complex processing needs of major test publishers, state education agencies, the federal government and local school districts. In the business, government and health care marketplaces, the Company's products and services are directed to sales/marketing applications including sales/order entry, customer satisfaction surveys and customer data collection; operations applications including quality measurement and inventory analysis; administrative applications including billing, collections and payroll; general data collection, analysis and management; health care administration including the gathering of individual patient information; human resource applications including applicant tracking, benefits enrollment and employee evaluation; aptitude, vocational interest and organizational assessment testing; and surveys or ballots. The Company provides the financial services marketplace with computer-based systems including proprietary software products and services for automated asset management systems for trust asset management in personal trust, corporate trust, private banking and employee benefits accounting. NCS operates two business segments: (1) Optical Scanning Products, Services and Related Software and (2) Financial Systems. See Note 11 -- Business Segment Data of Notes to Consolidated Financial Statements included in the Annual Report to Stockholders for the year ended January 31, 1995, incorporated herein by reference. The Company's headquarters are located at 11000 Prairie Lakes Drive, Eden Prairie, Minnesota 55344, telephone 612/829-3000. OPTICAL SCANNING PRODUCTS, SERVICES AND RELATED SOFTWARE SCANNING SYSTEMS NCS manufactures optical mark reading (OMR) scanners which can read data from specially designed forms printed by the Company with specifically formulated inks. Computing capability is built into most scanners. Scanners usually incorporate or interface directly with software developed by the Company. Optical scanning equipment is most effective for applications where highest accuracy, precise response definition and cost effective data capture is required. Such applications include multiple choice tests; employee and benefits administration; quality measurement and customer satisfaction surveys; customer order entry; market research and field sales reporting; and personality assessment or psychological diagnostic information. The Company's major lines of scanning hardware include scanners marketed as Sentry-R- and OpScan-R- products. In the last year, a new family of low-cost scanners, NCS OpScan 2, 3 and 4, was introduced to expand the Company's line of scanning products. These lines of scanners provide a wide range of capabilities to meet the needs of customers. The optical scanning systems utilize a proprietary mark discrimination system to distinguish valid marks, thus providing a very high degree of accuracy in processing responses. To enhance the usefulness of the OpScan line, optional features offered include bar code reading capability, a transport printer to print alphanumeric messages on scanned documents, optional read formats and upgraded computer capability options. NCS markets the Precept-R- image-based data collection system which represents an extension of the Company's optical mark reading technology. When attached to a workstation computer and using sophisticated software, these scanners allow customers to efficiently and accurately collect and interpret the widest possible range of information from a printed form including printed and handwritten data. SCANNING AND APPLICATION SOFTWARE NCS offers a number of standard software programs for use with NCS systems. Application software is an important component in the Company's marketing of its scanning products and services. A principal strategy of the Company in servicing the education marketplace is to concentrate on those systems that facilitate accountability in school administration and in the measurement of student progress. The Company offers standard integrated software systems in lieu of custom design and programming work performed by the customers. This has resulted in the introduction and marketing of new and enhanced software products. The MicroCIMS-TM-product, an advanced student management software system, was released for general distribution in 1994. Software products include software to assist educators in student management including such applications as grade reporting, attendance gathering and scheduling, as well as financial management; software for obtaining information about student performance and for analyzing and reporting test results and student progress; software to enable users to easily develop new scanning applications; software to assist scanner users with data entry to statistical analysis or data base management systems and other software applications packages; software packages to statistically analyze survey or assessment data and produce a wide range of reports designed to meet a variety of reporting requirements; and software for health care administration. SCANNABLE FORMS The design, manufacture and sale of scannable forms, including multiple-page booklets, accounts for a significant portion of the Company's revenues and operating income. A variety of custom forms are produced that are tailored to meet specific customer needs. In addition, standardized forms are increasingly used, especially with microcomputer-based scanners, in such standard applications as testing, attendance, scheduling and student evaluation at the classroom level or customer surveys or market research in the business setting. The Company believes that the use of a properly designed and printed form is an essential element in assuring that a scanning system performs with greatest accuracy and optimum capability. In order to assure a high degree of consistency, reliability and accuracy, NCS has emphasized the use of its forms with its equipment. The Company prints its forms to exacting specifications. MEASUREMENT AND DATA SERVICES NCS markets scanning and computer processing services to major test publishers, state education agencies, the federal government, local school districts and commercial customers. For these customers, NCS develops and executes projects including planning, document design, distribution logistics, data collection, editing, analysis and final reporting. Examples of high volume processing services include test scoring for major test publishers, educational assessment testing for states and information processing for various agencies of the federal government such as processing student financial aid information for the U.S. Department of Education. ASSESSMENT AND SURVEY SERVICES The Company publishes and distributes tests and provides scoring services and equipment for the professional counseling market; for industrial and clinical psychologists, psychiatrists and human resource professionals; and educators. These tests and services include personality assessment and psychological diagnostic testing, career development, guidance counseling and human resource organizational assessments. NCS provides specialized survey and scannable information processing services to selected industries in the commercial marketplace. In addition to scoring, analyzing and reporting survey results, the Company assists customers in designing survey instruments, conducting surveys and interpreting survey results. FINANCIAL SYSTEMS NCS develops, sells and supports systems for asset and investment management reporting and recordkeeping for bank trust departments and other organizations with trust powers. Applications include personal trust, corporate trust and employee benefits. These systems utilize proprietary software developed by NCS and licensed for periods of five years or more as well as hardware manufactured by others. Each system is designed to address the unique needs of customers. NCS supports these installations with customer response centers, trust consultants, system conversion specialists and training staffs. For corporate trust customers, and personal trust departments of smaller banks, the Company offers management of customer systems for offsite processing and computer processing services from its service bureau facility. For the personal trust market, the Company provides trust accounting systems to small to medium sized banks through its Trustware-R- Series 7 product line and to larger banks through the Trustware Series 11 product line. Management of debt securities is provided by the Company's BondMaster-R-software system or CertMaster-R- software for complex debt instruments. These offerings are enhanced with the addition of an optical disk-based system for data storage. NCS provides software support service by periodically issuing software program revisions to improve systems performance and to accommodate changes in the tax law and other regulatory changes. The Company also periodically releases new software applications which it licenses to its customers. MARKETING NCS markets its information systems hardware and software and scanning and computer processing services directly through sales employees located throughout the United States, who direct their efforts to either the education, government, business or health care marketplaces. Outside the United States, the Company's systems and associated products and services are sold through sales employees, distributors or independent sales agents. NCS markets its financial systems through a separate staff of sales employees. The Company's published tests and test scoring services are marketed principally in the United States through telemarketing, direct mail, professional journal advertising and professional trade convention attendance and elsewhere through distributors. Each of the Company's sales organizations is supported by marketing and sales support personnel. SOFTWARE SUPPORT, TECHNICAL SUPPORT AND MAINTENANCE Software support is provided on a contractual basis to customers licensing application software systems. NCS assists customers with installation, training, hardware or software upgrades and development of specific customer application software on a fee for service basis. The Company offers technical support and hardware maintenance to customers purchasing or leasing its equipment either on a contractual basis or through its national network of customer service and support engineers. NCS emphasizes prompt, reliable service and close customer relationships. Technical and maintenance support may include labor, parts, operational training and, where applicable, programming of the equipment and design of forms. DEVELOPMENT OF PRODUCTS AND SERVICES The Company's development efforts are directed toward new product development and enhancements to existing products. During the fiscal years ended January 31, 1995, 1994 and 1993, the Company spent, including certain capitalized software development costs, approximately $20.4 million, $20.8 million and $17.3 million, respectively, principally on software product development (primarily focused on application software) and scanning software and equipment development. MANUFACTURING The Company assembles its scanning equipment from electronic components, metal stampings, molded plastic parts and mechanical sub-assemblies. These parts are generally available from multiple sources. The Company assembles most of the scanning systems equipment at its Eagan, Minnesota facility. Computer hardware, other than scanning equipment, is purchased from other manufacturers. Scannable forms are produced at NCS' printing plants in Columbia, Pennsylvania; Owatonna, Minnesota; and Rotherham, South Yorkshire, England. The ink and paper used in forms production are produced to the Company's specifications by a limited number of suppliers. Although the Company has no long-term supply contracts with its paper or ink suppliers, the Company has had long-term relationships with such suppliers and believes that these relationships are good. COMPETITION Competition in the information management industry is intense. Optical scanning is only one of numerous data input methods. The Company has attempted to develop education, government, business and health care markets where scanning technology has advantages over other data entry technologies. NCS scanning systems incorporate optical scanning equipment, computer hardware and proprietary software which are marketed and sold as turn-key systems. In addition to the functional competition provided by alternative methods of data capture, including on-line terminal keyboards and optical character readers, other scanning vendors supply products that compete with those of the Company. The Company's scannable forms compete with those produced by commercial and specialized forms printers in various localities throughout the United States. Principal competitive factors in the scannable forms printing industry are product quality, service and price. NCS' data processing, test publishing and computer processing services compete with several test publishers and data processing service bureaus. The Company's customer support maintenance organization competes with service provided by manufacturers, other national service companies and local providers of maintenance services. NCS' financial systems compete with systems developed by users, service bureaus and other direct competitors offering asset management accounting systems. The Company believes that it is one of the leading suppliers of systems to bank trust departments. PATENTS, TRADEMARKS AND LICENSES The Company holds certain patents, registered and unregistered trademarks and copyrights. The Company also has license rights to a number of patents, trademarks, copyrights and manufacturing processes and materials. Included among these licenses are agreements with publishers of various copyrighted psychological, aptitude and achievement tests to distribute these tests, to print and sell answer sheets for such tests, and to score such tests. Payment of royalties is usually based upon the volume of tests distributed, answer sheets sold, and tests scored. NCS believes that its business is not dependent upon any one individual patent, trademark, copyright or license right or group thereof. "Sentry", "Trustware", "BondMaster", "CertMaster", "OpScan" and "Precept" appearing herein are registered trademarks of National Computer Systems, Inc. EMPLOYEES As of February 28, 1995, the Company employed approximately 2,700 full-time employees. None of the Company's employees are subject to a collective bargaining agreement, and the Company believes that its employee relations are excellent. EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages and positions of all of the executive officers of the Company as of February 28, 1995 are listed below along with their business experience during the past five years. NAME AGE POSITION - -------------------- --- ------------------------------------------ Charles W. Oswald 67 Chairman of the Board Russell A. Gullotti 52 President and Chief Executive Officer Robert C. Bowen 53 Senior Vice President John W. Fenton, Jr. 54 Secretary-Treasurer Donald J. Gibson 64 Senior Vice President Richard L. Poss 49 Vice President David W. Smith 50 Vice President Jeffrey W. Taylor 41 Vice President and Chief Financial Officer Adrienne T. Tietz 48 Vice President Mr. Oswald has been Chairman of the Board since October, 1994 and prior to that Chairman of the Board and Chief Executive Officer of NCS for more than five years. Mr. Gullotti has been President and Chief Executive Officer since October, 1994 and prior to that held senior executive positions in sales and marketing, services and administration with Digital Equipment Corporation (computer manufacturing and services) for more than five years. Mr. Bowen has been a Senior Vice President of NCS for more than five years. Mr. Fenton has been Secretary-Treasurer of NCS for more than five years. Mr. Gibson has been a Senior Vice President of NCS for more than five years. Mr. Poss has been a Vice President of NCS for more than five years. Mr. Smith has been a Vice President of NCS for more than five years. Mr. Taylor has been Vice President and Chief Financial Officer since May, 1994 and prior to that Vice President and Corporate Controller of NCS for more than five years. Ms. Tietz has been a Vice President of NCS for more than five years. Officers are elected annually by the Board of Directors. There are no family relationships among these officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. ITEM 2. PROPERTIES The Company's principal facilities are as follows: SQUARE LOCATION FOOTAGE GENERAL PURPOSE - ------------------- ------- ---------------------------------------- Eden Prairie, MN 76,000 Executive general offices; education and international general offices, sales and marketing Mesa, AZ (1) 40,000 Education software product development and support Iowa City, IA Assessment test processing and data proces- Building 1 (1) 168,000 sing services, general offices and operations Building 2 (1) 112,000 Minnetonka, MN (1) 54,000 Test publishing and scoring general offices and operations Eagan, MN (1) 109,000 Scanner hardware development and manu- facturing; customer support services general offices and operations; and forms general offices Edina, MN (1) 101,000 Business systems and services general offices, sales and marketing; scanner software development Owatonna, MN (1) 128,000 Forms design and production Columbia, PA (1) 121,000 Forms design and production Rotherham, South 34,000 Forms design and production Yorkshire England (1) Huntsville, AL 15,000 Financial systems software development Atlanta, GA 16,000 Financial systems sales offices with support and training Cambridge, MA 33,000 Financial systems software development,sales, support and training offices Wayne, PA 27,000 Corporate trust general offices and operations - --------------------------- (1) Denotes NCS owned facility. The Company believes that its facilities are adequate to meet its current needs. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to nor is its property subject to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted during the fourth quarter of the year ended January 31, 1995 to a vote of security holders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS "Quarterly Market Data" included in the Annual Report to Stockholders for the year ended January 31, 1995 is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA "Five-Year Financial Data" included in the Annual Report to Stockholders for the year ended January 31, 1995 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Results of Operations and Financial Condition" included in the Annual Report to Stockholders for the year ended January 31, 1995 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements and supplementary data of the registrant and its subsidiaries, included in the Annual Report to Stockholders for the year ended January 31, 1995, are incorporated herein by reference: Consolidated Balance Sheets -- January 31, 1995 and 1994 Consolidated Statements of Income -- Years ended January 31, 1995, 1994 and 1993 Consolidated Statements of Changes in Stockholders' Equity -- Years ended January 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows -- Years ended January 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements -- January 31, 1995 Report of Independent Auditors dated March 15, 1995 "Quarterly Results of Operations (Unaudited)" ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT "Election of Directors" included in the Company's definitive proxy statement dated April 19, 1995 and "Executive Officers of the Registrant" in Part I of this report are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION "Summary Compensation Table" and "Stock Options" included in the Company's definitive proxy statement dated April 19, 1995 are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT "Election of Directors" and "Ownership of NCS Common Stock by Certain Beneficial Owners and Executive Officers" included in the Company's definitive proxy statement dated April 19, 1995 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the fourth paragraph which follows the footnotes to the table set forth under the caption "Election of Directors" in the Company's definitive proxy statement dated April 19, 1995 is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) List of Financial Statements and Financial Statement Schedules (1) The following consolidated financial statements of National Computer Systems, Inc. and subsidiaries, included in the annual report of the registrant to its stockholders for the year ended January 31, 1995, are incorporated by reference in Item 8: Consolidated Balance Sheets -- January 31, 1995 and 1994 Consolidated Statements of Income -- Years ended January 31, 1995, 1994 and 1993 Consolidated Statements of Changes in Stockholders' Equity -- Years ended January 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows -- Years ended January 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements -- January 31, 1995 Report of Independent Auditors dated March 15, 1995. (2) The following consolidated financial statement schedules of National Computer Systems, Inc. and subsidiaries are included in Item 14(d): All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (3) -- Listing of Exhibits: EXHIBIT 3A -- Restated Articles of Incorporation, as amended,are incorporated herein by reference to Exhibit 3 to the NCS Form 10-Q for the quarter ended April 30, 1987. 3B -- By-Laws, as amended, are incorporated herein by reference to Exhibit 3(b) to the NCS Form 10-Q for the quarter ended July 31, 1985. 4A -- Instruments with respect to long-term debt where the total debt authorized thereunder does not exceed 10% of the consolidated total assets of the registrant are not being filed; the registrant will furnish a copy of any such instrument to the Commission upon request. 4B -- Rights Agreement dated as of June 23, 1987 between NCS and Norwest Bank Minnesota, N.A. (including the form of Right Certificate attached as Exhibit B thereto) is incorporated herein by reference to Exhibit 4.1 to the NCS Form 8-K -- reporting date: June 23, 1987. 4C -- Amended and Restated Credit Agreement dated as of July 31, 1991 between NCS and First Bank National Association, as agent, and as further amended by the First Amendment thereto dated as of January 25, 1994 is incorporated herein by reference to Exhibit 4C to the Company's Form 10-K for the fiscal year ended January 31, 1994. *10A -- NCS 1982 Employee Stock Option Plan is incorporated herein by reference to Exhibit 28 to Form S-8 Registration Statement and Exhibit 28 to Post Effective Amendment No. 1 to Form S-8 Registration Statement No. 2-80386. *10B -- NCS 1984 Employee Stock Option Plan is incorporated herein by reference to Exhibit 10 to the Company's Form 10-Q for the quarter ended July 31, 1984. *10C -- NCS 1986 Employee Stock Option Plan is incorporated herein by reference to Exhibit 10D to the Company's Form 10-K for the fiscal year ended January 31, 1986. *10D -- NCS Non-Employee Director Stock Option Plan is incorporated herein by reference to Exhibit 10F to the Company's Form 10-K for the fiscal year ended January 31, 1989. *10E -- NCS 1990 Employee Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 10F to the Company's Form 10-K for the fiscal year ended January 31, 1993. *10F -- NCS 1995 Employee Stock Option Plan. *10G -- NCS 1990 Long-Term Incentive Plan is incorporated herein by reference to Exhibit 10H to the Company's Form 10-K for the fiscal year ended January 31, 1990. *10H -- NCS 1992 Employee Stock Purchase Plan is incorporated herein by reference to Exhibit 10I to the Company's Form 10-K for the fiscal year ended January 31, 1992. *10I -- Description of Retirement Arrangements with David C. Malmberg is incorporated herein by reference to exhibit 19 to the Company's Form 10-Q for the fiscal quarter ended October 31, 1992. *10J -- Agreement dated August 4, 1994 between NCS and Russell A. Gullotti, as amended August 8, 1994, is incorporated herein by reference to Exhibit 10(a) to the Company's Form 10-Q for the fiscal quarter ended October 31, 1994. *10K -- Agreement dated August 22, 1994 between NCS and Charles W. Oswald is incorporated herein by reference to Exhibit 10(b) to the Company's Form 10-Q for the fiscal quarter ended October 31, 1994. *10L -- NCS Corporate Management Incentive Plan -- 1993 is incorporated herein by reference to Exhibit 10J to the Company's Form 10-K for the fiscal year ended January 31, 1993. *10M -- NCS Corporate Management Incentive Plan -- 1994 is incorporated herein by reference to Exhibit 10J to the Company's Form 10-K for the fiscal year ended January 31, 1994. *10N -- NCS Corporate Management Incentive Plan -- 1995. *10O -- Oswald Stock Option Plan. 11 -- Statement Re: Computation of Earnings Per Share. 13 -- Portions of NCS' Annual Report to Stockholders for the fiscal year ended January 31, 1995. 21 -- Significant Subsidiaries. 23 -- Consent of Independent Auditors. 24 -- Power of Attorney authorizing J.W. Fenton, Jr. to sign the NCS Form 10-K for the year ended January 31, 1995 on behalf of other officers and directors. 27 -- Financial Data Schedule. - ---------------- * Indicates management contract or compensatory plan or arrangement required to be filed as an exhibit to this report. (b) Reports on Form 8-K There were no reports on Form 8-K filed for the three months ended January 31, 1995. (c) Exhibits The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules Financial Statement Schedules have been omitted because they are not required or are inapplicable. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL COMPUTER SYSTEMS, INC. Dated: April 27, 1995 By: /s/ J. W. FENTON, JR. ------------------------ J. W. Fenton, Jr. SECRETARY-TREASURER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By CHARLES W. OSWALD* Chairman of the Board of Directors --------------------------- Charles W. Oswald By RUSSELL A. GULLOTTI* Director, President and Chief Executive Officer -------------------------- (principal executive officer) Russell A. Gullotti By DR. DAVID P. CAMPBELL* -------------------------- Director Dr. David P. Campbell By DAVID C. COX* -------------------------- Director David C. Cox By JEAN B. KEFFELER* -------------------------- Director Jean B. Keffeler By STEPHEN G. SHANK* -------------------------- Director Stephen G. Shank By JOHN E. STEURI* --------------------------- Director John E. Steuri By JEFFREY E. STIEFLER* --------------------------- Director Jeffrey E. Stiefler By JOHN W. VESSEY* --------------------------- Director John W. Vessey By JEFFREY W. TAYLOR* Vice President and Chief Financial Officer --------------------------- (principal financial officer and principal Jeffrey W. Taylor accounting officer) * Executed on behalf of the indicated officers and directors of the registrant by J. W. Fenton, Jr., Secretary-Treasurer, duly appointed attorney-in-fact. /s/ J. W. FENTON, JR. - ----------------------------------- Dated: April 27, 1995 (ATTORNEY-IN-FACT) FORM 10-K NATIONAL COMPUTER SYSTEMS, INC. FOR THE FISCAL YEAR ENDED JANUARY 31, 1995 EXHIBIT INDEX EXHIBIT - ------------- 10F NCS 1995 Employee Stock Option Plan. 10N NCS Corporate Management Incentive Plan -- 1995. 10O Oswald Stock Option Plan. 11 Statement Re: Computation of Earnings per Share. 13 Portions of the Annual Report to Stockholders for the fiscal year ended January 31, 1995. 21 Significant Subsidiaries. 23 Consent of Independent Auditors. 24 Power of Attorney authorizing a certain person to sign the NCS Form 10-K for the year ended January 31, 1995 on behalf of other officers and directors. 27 Financial Data Schedule. EX-10.1 2 EXHIBIT 10F NATIONAL COMPUTER SYSTEMS, INC. 1995 EMPLOYEE STOCK OPTION PLAN 1. Objectives of Plan. This 1995 Employee Stock Option Plan (the "Plan") has been adopted by the Board of Directors of National Computer Systems, Inc., a Minnesota corporation (herein called the "Company"), to secure the advantages of stock ownership on the part of its present and future key employees, including salaried officers and directors, and including salaried officers and directors of any one or more subsidiary corporations wholly owned by it (herein called "related companies"), to provide incentives for such individuals to remain with the company or related companies and to devote their energies to strengthen and maintain the continued success of the Company through stock ownership. Options granted under this Plan may be either incentive stock options ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options which do not qualify as Incentive Stock Options. 2. Administration of Plan. (A) The Plan shall be administered by the Board of Directors of the Company (the "Board"); provided, however, that all actions of the Board with respect to the Plan shall be approved by the affirmative vote of directors constituting a majority of the members of the Board and all of whom are "disinterested persons" with respect to the Plan within the meaning of Rule 16b-3(d)(3) under the Securities Act of 1934 as presently in effect. (B) Subject to the provisions of the Plan, the Board shall have authority, in its discretion: (1) To construe and interpret the Plan and all options granted hereunder, and to determine the terms and provisions (and amendments thereof) of the options granted under the Plan (which need not be identical). (2) To determine individuals to whom and the time or times at which options shall be granted, the number of shares to be subject to each option, the option price, and the duration of leaves of absence which may be granted to participants without constituting a termination of their employment for the purposes of the Plan. (3) To adopt, amend and rescind rules and regulations relating to administration of the Plan and make all determinations necessary or advisable for the administration of the Plan, which shall be binding and conclusive on all participants in the Plan and on their legal representatives and beneficiaries. (4) To accelerate the time at which all or any part of an option may be exercised. (5) To determine which options (that are not Incentive Stock Options), whether granted before or after the date of adoption or any amendments to this Plan, shall be deemed to be stock options governed by and subject to the terms and conditions of this Plan. 3. Participants. Options may be granted under the Plan to such key full or part time executive, administrative, supervisory, technical, or professional employees (including salaried officers and directors) of the Company, or of subsidiaries of the Company, including subsidiaries which become such after adoption of the Plan, in such amounts as shall be determined from time to time by the Board. In determining the persons to whom options shall be granted and the number of shares subject to each option, the Board may take into account the nature of services rendered by the proposed grantees, their past, present and potential contributions to the success of the Company, and such other factors as the Board in its discretion shall deem relevant. A person who has been granted an option under this Plan may be granted an additional option or options under the Plan if the Board shall so determine; provided, however, that to the extent that the aggregate fair market value, determined at the time an Incentive Stock Option is granted, of the stock with respect to which all Incentive Stock Options owned by a Participant are exercisable for the first time by such optionee during any calendar year under all plans of the employer corporation and its parent and subsidiary corporations exceeds $100,000, such options shall be treated as options that do not qualify as Incentive Stock Options. No person may be granted options under the Plan for more than 100,000 shares in the aggregate in any calendar year. 4. Number of Shares Available for Options. Under this Plan, options may be granted for shares of the Company's Common Stock, $.03 per value. The Common Stock subject to options shall be either authorized but unissued shares or shares reacquired by the Company. Subject to the provisions of paragraph 5 hereof, the number of shares of Common Stock that may be made the subject of options shall not exceed the aggregate of 350,000 shares. In the event that any outstanding option under the Plan for any reason expires or is terminated unexercised, the common shares allocable to the unexercised portion of such option may again be subject to an option under the Plan. 5. Adjustments. If there shall be any change in the Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other change in the capitalization or corporate structure of the Company, the Board shall make appropriate adjustments in the Plan and any options outstanding under the Plan. Such adjustments shall include, where appropriate, changes in the aggregate number of shares subject to the Plan and such changes in the number of shares and the price per share subject to outstanding options as are necessary in order to prevent dilution or enlargement of option rights. 6. Term of Plan. No option shall be granted pursuant to this Plan later than January 31, 2005, but options theretofore granted may extend beyond that date in accordance with their terms. 7. Terms and Conditions of Options. Options granted hereunder shall be evidenced by a written notice from the Company to the participant evidencing the granting of an option hereunder, or shall be evidenced by an agreement in such form as the Board of Directors shall from time to time require. Said notice or agreement shall refer to this Plan, and make acceptance thereof by a participant subject to the provisions hereof. Such option shall comply with and be subject to the following terms and conditions: (A) Number of Shares. Each option shall state the number of shares to which it pertains. (B) Option Price. Each option shall state the option price, which shall not be less than 100% of the fair market value of the shares of the Common Stock of the Company on the date of the granting of the option. During such time as the Common Stock is not listed upon an established stock exchange, the fair market value per share shall be the "last trade price" as reported by the National Association of Security Dealers, Inc. If the Common Stock is listed upon an established stock exchange or exchanges, such fair market value shall be deemed to be the highest closing price of the Common Stock on such stock exchange or exchanges on the date the option is granted, or, if no sale of the Company's Common Stock shall have been made on any stock exchange on that day, on the next preceding day on which there was a sale of such stock. Subject to the foregoing, the Board in fixing the option price shall have full authority and discretion and be fully protected in doing so. (C) Option Period and Exercise of Option. (1) No option period shall exceed ten years, and except as otherwise provided on subdivisions (D) and (E) hereof, no option period shall be for less than one year. (2) Any option granted under the Plan may be exercised by notifying the Company in writing of such exercise prior to the termination of such option. The option price for the number of shares of Common Stock for which the option is exercised shall become immediately due and payable; provided, however, that in lieu of cash an optionee may, with the approval of the Board, exercise an option by tendering to the Company shares of the Common Stock of the Company owned by the optionee and with the certificates therefor registered in the optionee's name, having a fair market value equal to the cash exercise price of the shares being purchased. (3) During the lifetime of the optionee, the option shall be exercisable only by the optionee and shall not be assignable or transferable, and no other person shall acquire any rights therein. Except as provided in Subdivisions (D) and (E) hereof, no option may be exercised at any time unless the holder thereof is then an employee of the Company or a subsidiary of the Company. (D) Termination of Employment Except Death. In the event an optionee shall cease to be employed by the Company or a related company for any reason other than death, then, and in that event, but subject to the condition that no option shall be exercisable after its expiration date, such optionee shall have the right to exercise the option at any time within three months after such termination of employment, to the extent the optionee's right to exercise same had accrued pursuant to Article 7(C) of the Plan and had not previously been exercised at the date of such termination. Whether authorized leaves of absence or absence because of military or governmental service shall constitute termination of employment, for the purpose of the Plan, shall be determined by the Board, which determination shall be final and conclusive. (E) Death of Optionee and Transfer of Option. If any optionee shall die while in the employ of the Company or a related company, or within a period of three months after the termination of employment with the Company or related companies and shall not have fully exercised the option, said option may be exercised (subject to the condition that no option shall be exercisable after its expiration date), to the extent that the optionee's right to exercise such option had accrued pursuant to Article 7(C) of the Plan at the time of death and had not previously been exercised, at any time within one year after the optionee's death, by the executors or administrators of the optionee or by any person or persons who shall have acquired the option directly from the optionee by bequest or inheritance. No option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution. (F) 10 - Percent Shareholder Rule. Notwithstanding any other provision in the Plan, if at the time an Option is otherwise to be granted pursuant to the Plan, the optionee owns directly or indirectly (within the meaning of Section 424 (d) of the Code) Common Stock of the Company possessing more than 10% of the total combined voting power of all classes of stock of the Company or its parent or subsidiary corporations, if any (within the meaning of Section 422(b)(6) of the Code), then any Incentive Stock Option to be granted to such optionee pursuant to the Plan shall satisfy the requirements of Section 422(c)(5) of the Code, and the option price shall be not less than 110% of the fair market value of the Common Stock of the Company on the date of grant, determined as described herein, and such option by its terms shall not be exercisable after the fifth anniversary of the date of grant. (G) Rights as a Shareholder. An optionee or a transferee of an option shall have no rights as a shareholder with respect to any shares covered by an option until the date of the issuance of a stock certificate for such shares. No adjustment shall be made for dividends (ordinary or extraordinary whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Article 5 hereof. (H) Discontinuance and Amendment of the Plan. The Board of Directors may, from time to time, alter, amend, suspend, or discontinue the Plan with respect to any shares as to which options have not been granted, and, with the consent of the participant who is a party thereto, any option agreement may be modified or amended. Unless approved by the stockholders of the Company, no amendment to the Plan shall (a) increase the number of shares subject to the Plan subject to the provisions of paragraph 5 hereof, (b) extend the term of the Plan, (c) extend the term for which options may be granted beyond ten years, (d) reduce the option price at which options may be granted to less than 100% of fair market value at the date of grant, or (e) in any other fashion cause the options granted hereunder which are intended to be Incentive Stock Options, and which are designated as such by the form of agreement evidencing the granting of such option, to fail to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code. (I) Compliance with Laws Relating to Sale of Securities. Notwithstanding any other provisions contained herein, the Company shall have the right, in its exclusive discretion, to withhold the issuance of any certificates for shares of stock in respect of which any option has been exercised until, in the opinion of counsel for the Company, any applicable registration requirements of the Securities Act of 1933, as amended, any applicable listing requirements of any national securities exchange on which the stock may then be listed, and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery, shall have been duly complied with. Pending the receipt of such opinion of counsel for the Company, the Company may issue certificates for such stock provided they contain a legend indicating that said stock represented thereby is not registered and may not be sold except in compliance with applicable law or the release of said restrictions by the Company, and, in such event, the Company shall have the right to instruct the transfer agent and registrar of its common shares to effect "stop-transfer" procedures with respect to such shares. Until the shares reserved for options are registered and/or listed, if required by law, the Committee may condition the delivery of any certificate for option shares upon the receipt of a written representation from the participant that at the time of exercising such option the participant intends to acquire the shares being purchased for investment and not for resale or further distribution. (J) Other Provisions. The option agreements authorized under the Plan shall contain such other provisions as the Board of the Company shall deem advisable. 8. Notification of Disposition. If an optionee shall dispose of any of the shares of Common Stock of the Company acquired pursuant to the exercise of an Incentive Stock Option issued pursuant to the Plan within two years from the date said option was granted or within one year after the transfer of any such shares to the optionee upon exercise of said option, then, in order to provide the Company with the opportunity to claim the benefit of any income tax deduction which may be available to it under the circumstances, the optionee shall promptly notify the Company of the dates of acquisition and disposition of such shares, the number of shares so disposed of, and the consideration, if any, received for such shares. In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to insure (i) notice to the Company of any disposition of the common stock of the Company within the time periods described above and (ii) that, if necessary, all applicable federal or state payroll, withholding, income or other taxes are withheld or collected from the optionee. 9. Reliance on Information. Each member of the Board of Directors and each officer and employee of the Company shall be fully justified in relying or acting upon any information furnished in connection with the administration of the Plan by any other person or persons. In no event shall any person who is or shall have been a member of the Board of Directors or an officer or employee of the Company, be liable for any determination made or other action taken or omission to act in reliance upon any such information or for any action (including the furnishing of information) taken or any failure to act, if in good faith. 10. Application of Funds. The proceeds received by the Company from the sale of its Common Stock pursuant to options will be used for general corporate purposes. 11. No Obligation to Exercise Option. The granting of an option hereunder shall impose no obligation upon the optionee to exercise such option, nor shall it be deemed to or construed to impose any obligation on the Company or any related company to retain the optionee in its employ for any period of time. EX-10.2 3 EXHIBIT 10N NATIONAL COMPUTER SYSTEMS CORPORATE MANAGEMENT INCENTIVE PLAN 1995 It is NCS' intent to compensate its senior management employees in a manner which permits the Corporation to attract, retain, and motivate outstanding people. The NCS Corporate Management Incentive Plan (MIP) is designed to reward key senior managers for achieving specific annual NCS financial goals and for individual performance in accomplishing these goals. It aligns the interests of NCS senior management with NCS business and financial plans. PLAN ELIGIBILITY Participation in the plan is determined by position. Eligible positions and target bonus amounts are determined each year and may change from year to year. Participants must be full-time NCS employees. Eligibility is limited and includes those positions which significantly impact financial results. The eligible positions and participants will be reviewed annually and approved by the CEO. Positions and participants in the plan will be selected from the following: - CEO, - Corporate staff officers, - NCS Business presidents, senior vice presidents and, on a selected basis, their direct management reports, - Selected other vice presidents Any position or participant exceptions, exclusions and inclusions, to the above must be documented and approved by the CEO. TARGET BONUS Each approved position will be eligible for a specific target bonus award percentage level. This target bonus opportunity will be a percentage of the May 31, 1995, annual base salary for the participant. The target bonus is tied directly to the participant's unit financial performance and an overall evaluation of each individual's performance. Potential earned payouts range from 0% at threshold minimum, to 100% at target bonus, to a pre-defined overachievement percentage for each executive at maximum. INCENTIVE COMPONENTS Participants will have 70% of their potential target bonus based on financial goals and objectives (20% Revenue and 50% Contribution or Net Income). The remaining 30% of their potential target bonus will be based upon an overall evaluation of the participant's performance during the fiscal year. This overall evaluation will include performance against defined individual objectives and an overall evaluation of performance relative to: 1) What you have done to improve shareholder value? 2) How you have improved customer satisfaction and NCS' ability to serve the customer? 3) What you have done to improve the quality/predictability of your business? 4) What you have done to develop your organization? 5) How have you demonstrated personal leadership and corporate-wide perspectives/orientation? 6) How well did you deal with issues/problems? No bonus award payouts will be made to participants for achievement of the 70% financial performance if the individual's operating unit (NCS Business or Division or Market Unit) does not accomplish its minimum profit contribution objective(s). (i.e., a division participant requires that the division achieve its minimum profit contribution threshold.) OVERALL EVALUATION Each participant will have 30% of their target bonus award based upon an overall evaluation of the participant's performance. These will be completed for all MIP participants. DETERMINATION OF MIP AWARDS Generally speaking, actual financial results will not include extraordinary gains or losses. In any such matters, including acquisitions, the CEO will make the appropriate approval decisions where needed. PAYOUTS AND PRO-RATA Earned award payouts will be made no later than April 15, following the end of the plan fiscal year. Any participant must be a full-time employee and be actively employed by NCS on the last day of the fiscal year to be eligible to receive a payout. In coming into or out of an MIP eligible position, participants will be given pro-rata earned award payouts based upon the length of time in such position, however, participants must be in the plan at least six (6) full months during the fiscal year to be eligible to receive any pro-rata award. Pro-rata payouts will be subject to review and approval by the CEO. DISABILITY, DEATH, OR SPECIAL CIRCUMSTANCES In the case of disability, death or other special circumstances impacting a participant in the plan, the CEO may approve pro-rata award payouts. PLAN EXCEPTIONS AND ADMINISTRATION Exceptions and/or modifications to the plan must be approved by the CEO. All decisions made are final. DISCLAIMER Participation in this plan is not to be construed as an employment contract or agreement by the participant. EX-10.3 4 EXHIBIT 100 NATIONAL COMPUTER SYSTEMS, INC. OSWALD STOCK OPTION PLAN 89,000 Shares of National Computer Systems, Inc. Common Stock, Par Value $.03 The Oswald Stock Option Plan is set forth through the following: Resolution unanimously adopted (with Mr. Oswald abstaining) by the Board of Directors of National Computer Systems, Inc. on August 22, 1994, with no subsequent amendment or recision, as set forth below: BE IT RESOLVED, That the terms and conditions of the CEO Transition Package which has been recommended by the Compensation Committee shall be attached to the minutes of this meeting as an Exhibit A and is hereby approved, that Mr. Cox and General Vessey are directed to communicate the terms and conditions of the Package to Mr. Oswald and that Mr. Cox is hereby directed to execute on behalf of the Company whatever documents are, in his judgment, necessary to evidence the Package and Mr. Oswald's acceptance thereof; and FURTHER RESOLVED, That upon receipt of evidence of the cancellation of the 39,000 Incentive Stock Options currently owned by Mr. Oswald, any officer of the Company is hereby authorized to execute and deliver on behalf of the Company Stock Option Agreements with respect to the issuance of 89,000 shares of the Company's Common Stock to Mr. Oswald with the following exercise prices and option terms and on such other terms and conditions as are set forth in the form of stock option agreement attached to these minutes as Exhibit B: Optionee - Charles W. Oswald Option Terms - Option Exercise Expiration Shares Price Date ------ -------- ---------- 15,000 $ 15.68 5-23-96 12,000 16.50 5-21-97 12,000 17.60 5-20-98 50,000 13.13 8-22-99 ------- 89,000 ======= Exercisability - 100% six months after date of grant or upon Shareholder approval, whichever is later FURTHER RESOLVED, That these resolutions and the stock option agreements referred to above are intended to be a "plan" for purposes of Rule 16b-3 under the Securities and Exchange Act of 1934; and FURTHER RESOLVED, That the Common Stock, when issued upon the exercise of the options granted to Mr. Oswald, shall be duly and validly issued, fully paid and non-assessable shares of the Common Stock of the Company; and FURTHER RESOLVED, That the authority of the Norwest Bank Minnesota, N.A. as transfer agent and registrar of the Company's Common Stock is hereby enlarged to reflect the issuance of these shares and the proper officers of the Company are hereby directed to inform the transfer agent and registrar and to execute any instruments required in connection therewith; and FURTHER RESOLVED, That the officers of the Company are authorized to do or cause to be done any and all acts and deeds and to execute and deliver on behalf of the Company all such documents as are deemed necessary and proper to effect the intent of these resolutions. National Computer Systems, Inc. By: /s/ J. W. Fenton, Jr. Its: Secretary-Treasurer EXHIBIT A CHARLES W. OSWALD RETIREMENT PACKAGE QUESTIONS/ISSUES CONCLUSIONS/RECOMMENDATIONS - ---------------- --------------------------- Continue as an employee? -Until 5/31/95, when he relinquishes Chairman- ship, at his current base salary of $390K annually -No bonus eligibility from 1/31/95 - 5/31/95 -Charles W. Oswald will move to new location by 12/31/94. Supplemental Retirement Benefit? No Consulting Contract? No Vest LTIP? Yes Options? -Charles Oswald will exercise 5/24/90 Option Grant -Replace 5/23/91, 5/21/92, 5/20/93 ISO grants with non-qualified options at the same price, vesting, and net 5-year term remaining. -Grant an additional 50,000 non-qualified shares today with 5-year term (8/99). On-Going Cash Compensation? None beyond 5/31/95. Maintain Healthcare? Yes, for three years beyond 5/31/95(to 5/31/98) pay Charles W.Oswald's premium costs for Medicare and Medicare supplemental coverage to provide total coverage comparable to NCS' group plan. Office and Secretary? Yes, for 5 years reimburse up to $65,000 annually for actual office and secretarial costs incurred. EXHIBIT B Projected Stock Option Valuation For Charles Oswald August 1994
Qualified Incentive Non-Qualified Stock Projected Net Gain Value Stock Options Granted Option Grant (Based on Stock Prices below) ----------------------- -------------- ----------------------------- Salary Date Price Shares Shares Price $20 $25 $30 ________ ____ _____ ______ ______ _____ _____ _____ _____ $295,000 5-24-90 $ 9.08 12500 --- --- --- --- --- $325,000 5-23-91 $ 15.68 15000 15000 $ 15.68 $ 64800 $139800 $ 214800 $375,000 5-21-92 $ 16.50 12000 12000 $ 16.50 $ 42000 $102000 $ 162000 $390,000 5-20-93 $ 17.60 12000 12000 $ 17.60 $ 28800 $ 88800 $ 148800 $390,000 8-22-94 --- --- 50000 $ 13.00 $350000 $600000 $ 850000 ------- ------- -------- Total Net $485600 $930000 $1375600 ======= ======= ========
*Assumptions: -Replace existing ISO grants (except 5/24/90) with Non- Qualified grants with remaining years of 5-year term -Same grant prices -Actual remaining years of total 5-year term NATIONAL COMPUTER SYSTEMS, INC. Stock Option Agreement Date of Grant: August 22, 1994 Charles W. Oswald (50,000 shares @ $13.13 expiring 08/22/99) Dear Charley: In recognition of the valuable services which you have rendered to National Computer Systems, Inc. (the "Company") and to induce you to continue to effectively serve the Company, the Company has, conditioned upon execution of this Agreement, granted to you a non-revocable option to acquire 50,000 shares ("Option Shares") of the Company's common stock at an option price of $13.13 per share. The Incentive Stock Option outstanding for a similar number of shares, option price and expiration date is hereby forfeited. Your option is subject to Shareholder approval and the terms outlined below. In order for the Company to maintain its growth and vitality by preventing its sensitive product and business information from being misused, and in consideration of its grant, your acceptance of this option includes the following undertakings as a condition to its grant: Confidential Information: You agree not to utilize or divulge to others any information concerning the Company or its business which you have been told or reasonably know to be information: (i) not generally known or readily ascertainable by others; (ii) providing a competitive advantage to NCS; (iii) acquired by NCS at its expense; and (iv) maintained by NCS in confidence. Competitive Employment: You agree not to, while you are a director of the Company or for a period of one (1) year thereafter, be employed by, be a director of, or work for a direct competitor of the Company, or yourself compete directly with the Company. GENERAL TERMS: 1. This option shall be for the period beginning on date of grant and ending on August 22, 1999 ("Option Period"). Commencing six (6) months after the date of grant or upon Shareholder approval, whichever is later, this option may be exercised in part or full for the total number of Option Shares, except as provided in paragraphs 3 and 4 below. No Option Shares may be purchased following termination of the Option Period. 2. The Option Shares shall be the Company's common stock, par value $.03 per share ("Common Stock"), and shall be subject to adjustment if the outstanding shares of the Common Stock are changed in number (such as a stock split) or are substituted for a different number or kind of securities of the Company. In such case, a corresponding adjustment shall be made in your number of unexercised Option Shares but with a corresponding adjustment in the price for each unexercised Option Share. If the outstanding Common Stock of the Company should be exchanged for other securities of the Company or of another corporation which is a party to a reorganization, consolidation, or merger with a company, the unexercised portion of this option shall apply to the substitute securities. 3. If, prior to the end of the Option Period, you cease to be a director of the Company by reason of your gross and wilfull misconduct during the course of your service as a director of the Company, including but not limited to wrongful appropriation of funds of the Company, or the commission of a gross misdemeanor or felony, any non-exercised option right will be terminated as of the date of the misconduct. 4. If you should die during the Option Period, your personal representatives, administrators or, if applicable, any person or persons to whom the option is transferred by will or the applicable laws of descent and distribution shall have twelve (12) months from the date of your death, but in no event beyond the last day of the Option Period, to exercise any non-exercised option right that had accrued up through your date of death according to paragraph 1. 5. Any Option Shares purchased by you shall be subject to the following restrictions, and the certificates for any Option Shares purchased by you shall be impressed with a legend making such reference thereto as shall be necessary or appropriate in the opinion of counsel for the Company: "The securities represented by this certificate have not been registered under the Federal Securities Act of 1933, as amended, or applicable state securities laws and may not be sold, transferred, assigned, pledged, offered, or otherwise disposed of in the absence of an effective registration statement under applicable securities laws or an opinion from counsel acceptable to the company stating that such registration is not required." 6. This option shall be exercised by delivering to the Company the following: A. A notice of your intention to exercise your option.Such notice shall state: 1. The number of shares in respect of which the option is to be exercised. 2. The price to be paid, including an agreement and understanding on your part to pay in addition to the purchase price of the Option Shares a sum equal to the amount of any Federal and State tax due in respect to said purchase as computed by the Treasurer of the Company and an acknowledgment that with respect to any income tax liability created by the contemplated purchase, you will indemnify the Company at all times. B. Payment of an amount equal to the total purchase price of the Option Shares either (i) in cash, including check, or (ii) by delivering Common Stock already owned by you having a fair market value on the date of exercise equal to the full purchase price of the Option Shares, or (iii) by any combination of cash and the method specified in (ii). C. Payment of an amount sufficient to pay any issue or transfer taxes which may be applicable plus an amount equal to the withholding tax liability allocable to the Option Shares being purchased, all as determined by the Treasurer of the Company. D. A letter containing representations, in form and content acceptable to counsel for the Company, reflecting your understanding of and access to Company finances and business records, your appreciation of the risks inherent in the investment, your acknowledgment that the sale is being made in reliance upon certain exemptive provisions available under the Securities Act of 1933, your acknowledgment that the purchase is not being made to share participation with others, or to participate in any distribution of the shares, and your acknowledgment that the certificate for such shares may be impressed with an appropriate legend restricting transferability, making such reference to this option and to the rights of the Company hereunder as may be necessary, and agreeing that "Stop-Transfer" procedures may be effected with the Transfer Agent of the Company's Common Stock. On receipt of the foregoing, the Transfer Agent will be instructed to prepare and deliver certificates for the shares impressed with such legend. 7. The Company reserves a right to withhold the issuance of any certificates for Option Shares until, in the opinion of counsel for the Company, any applicable registration requirements and any other requirements of law shall have been duly complied with. 8. You have no rights as a stockholder with respect to any Option Shares until the date of issuance of a stock certificate to you for such shares. 9. Each member of the Board of Directors of the Company and each officer and employee of the Company shall be fully justified in relying or acting upon any information furnished in connection with the administration of this option, by you, and none of such persons shall be liable for any determination made or any action taken hereunder, nor for any failure to act, if done or omitted in good faith. 10. The proceeds received by the Company from the sale of Option Shares to you hereunder will be used for general corporate purposes. 11. The grant of this option shall not impose any obligation on you to exercise the option at any time. 12. Nothing contained herein shall be deemed or construed to confer on you any right to continue as a director of the Company or affect in any way any legal rights with respect to termination of such directorship or removal of you as a director. 13. This Option Agreement is not assignable by you except as is provided in paragraph 4. The option right may only be exercised by you and you hereby agree that any controversy concerning interpretation of the option right shall be resolved solely by the Company's Executive Committee, and their determination shall be binding. If the above terms of this Agreement are acceptable to you, please signify your agreement by executing one copy of this Agreement and returning it to the Company. Very truly yours, NATIONAL COMPUTER SYSTEMS, INC. By: /S/J. W. FENTON, JR. --------------------------------- J. W. Fenton, Jr. Secretary/Treasurer The foregoing Agreement is acceptable to, and is hereby accepted by, me. /S/ CHARLES W. OSWALD - ------------------------------ EX-11 5 EXHIBIT 11 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE NATIONAL COMPUTER SYSTEMS, INC.
YEAR ENDED JANUARY 31 ---------------------------------------------------------------------- 1995 1994 1993 1992 1991 =========== =========== =========== =========== =========== (In Thousands, Except Per Share Amounts) PRIMARY Average shares outstanding 15,164 15,438 15,915 16,002 15,891 Dilutive stock options -- based on the treasury stock method using average market price 61 97 151 136 -- ----------- ----------- ----------- ---------- ----------- TOTAL 15,225 15,535 16,066 16,138 15,891 =========== =========== =========== ========== =========== Net income (loss) $ 13,398 $ (2,509) $ 16,508 $ 15,474 $ 13,022 =========== =========== =========== =========== =========== Net income (loss) per share $ 0.88 $ (0.16) $ 1.03 $ 0.96 $ 0.82 =========== =========== =========== =========== =========== FULLY DILUTED (1) Average shares outstanding 15,164 15,438 15,915 16,002 15,891 Dilutive stock options -- based on the treasury stock method using the higher of year-end market price or average market price 148 99 164 199 78 Assumed conversion of convertible subordinated debenture -- -- -- 361 1,937 ----------- ----------- ----------- ----------- ----------- TOTAL 15,312 15,537 16,079 16,562 17,906 =========== =========== =========== =========== =========== Net income (loss) $ 13,398 $ (2,509) $ 16,508 $ 15,474 $ 13,022 Add interest on convertible subordinated debenture, net of the income tax effect -- -- -- 363 1,795 =========== =========== =========== =========== =========== $ 13,398 $ (2,509) $ 16,508 $ 15,837 $ 14,817 =========== =========== =========== =========== =========== Net income (loss) per share $ 0.88 $ (0.16) $ 1.03 $ 0.96 $ 0.83 =========== =========== =========== =========== =========== (1) - Fully converted in the year ended January 31, 1991, which is anti-dilutive.
EX-13 6 EXHIBIT 13 PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED JANUARY 31, 1995 FIVE-YEAR FINANCIAL DATA (Unaudited) (Dollars in thousands, except per share amounts)
YEAR ENDED JANUARY 31, ----------------------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- Financial Results Revenues ...................... $336,943 $305,453 $300,067 $302,506 $315,283 Income (loss) from operations . 23,146(1) (2,301)(2) 27,258 28,704 28,064 Income (loss) before income tax provision (benefit) ......... 19,148 (2,859) 26,608 24,174 20,972 Income tax provision (benefit). 5,750 (350) 10,100 8,700 7,950 Net income (loss).............. 13,398 (2,509) 16,508 15,474 13,022 Net income (loss) per share.... $ .88 $ (.16) $ 1.03 $ .96 $ .82 Average number of shares outstanding ................. 15,225 15,535 16,066 16,138 15,891 Dividends paid per share ...... $ .36 $ .36 $ .33 $ .29 $ .28 Financial Position Current ratio ................. 1.5 1.5 1.6 1.7 2.0 Working capital ............... $ 35,614 $ 36,217 $ 38,792 $ 39,836 $ 51,351 Total assets .................. 240,757 220,173 214,739 217,578 225,159 Long-term debt, including current maturities ........... 50,525 47,351 25,350 39,751 57,991 Stockholders' equity .......... 113,123 100,147 121,317 112,316 100,646 (1) Includes a $11,339 pre-tax special charge. (2) Includes a $25,000 pre-tax special charge.
QUARTERLY MARKET DATA (Unaudited) The Company's stock is traded on the NASDAQ National Market System under the symbol "NLCS." As of January 31, 1995, there were approximately 2,000 stockholders of record.
YEAR ENDED JANUARY 31, 1995 ------------------------------------- Quarter 1st 2nd 3rd 4th - --------------------------------- -------- -------- -------- ------- Sales prices per share High .................... $ 13.50 $ 13.25 $ 14.75 $ 17.25 Low ..................... 10.88 10.50 11.50 12.13 Dividends paid per share ........ $ .09 $ .09 $ .09 $ .09
YEAR ENDED JANUARY 31, 1994 ------------------------------------- Quarter 1st 2nd 3rd 4th - --------------------------------- -------- -------- -------- ------- Sales prices per share High .................... $ 16.00 $ 18.00 $ 17.75 $ 13.25 Low ..................... 13.25 14.88 11.50 10.25 Dividends paid per share ........ $ .09 $ .09 $ .09 $ .09
QUARTERLY RESULTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts)
THREE MONTHS ENDED ------------------------------------------- April 30 July 31 October 31 January 31 -------- ------- ---------- ---------- Year Ended January 31, 1995 Revenues ...................... $68,750 $80,131 $94,608 $93,454 Gross profit .................. 27,081 31,165 31,239 38,452 Net income .................... 1,950 4,715 4,578 2,155 (1) Net income per share .......... $ 0.13 $ 0.31 $ 0.30 $ 0.14 Year Ended January 31, 1994 Revenues ...................... $68,514 $75,669 $77,645 $83,625 Gross profit .................. 26,789 30,996 27,870 33,266 Net income (loss) ............. 1,732 4,233 1,505 (9,979) (2) Net income (loss) per share ... $ 0.11 $ 0.27 $ 0.10 $ (0.66) (1) Includes a $11,339 pre-tax special charge. (2) Includes a $25,000 pre-tax special charge.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION INCOME AND EXPENSE ITEMS AS A PERCENTAGE OF REVENUES
FISCAL YEAR ----------------------------- 1994 1993 1992 ------ ------ ------ Revenues Net sales ............................ 80.8% 77.5% 77.1% Maintenance and support .............. 19.2 22.5 22.9 ----- ----- ----- Total revenues ............... 100.0 100.0 100.0 Cost of Revenues Cost of sales(1) ..................... 60.1 57.4 57.7 Cost of maintenance and support(2) ... 70.0 73.6 76.1 ----- ----- ----- Total gross profit ........... 38.0 38.9 38.1 Operating Expenses Sales and marketing .................. 13.1 15.7 13.2 Research and development ............. 4.0 3.1 3.0 General and administrative ........... 10.6 12.7 12.9 Special charges ...................... 3.4 8.2 -- ----- ----- ----- Income (loss) from operations ................ 6.9 (0.8) 9.1 Income (loss) before taxes ................... 5.7 (0.9) 8.9 ----- ----- ----- Net income (loss) ............................ 4.0% (0.8)% 5.5% ===== ===== ===== (1) As a percentage of sales revenue. (2) As a percentage of maintenance and support revenue.
Note: The fiscal years referenced herein are as follows: fiscal 1994 - year ended January 31, 1995; fiscal 1993 - year ended January 31, 1994; fiscal 1992 - year ended January 31, 1993. National Computer Systems, Inc. (the Company or NCS) operates two business segments. The predominance of the Company's business is centered around its proprietary optical scanning hardware and forms technology. This segment markets those products and related application software and services predominantly in education, but also to business, government, and healthcare markets through its various operating units. The financial systems segment designs, develops and markets asset management software, primarily for bank trust departments. This includes systems for personal trust asset management for individuals and corporate trust applications such as stock and bond transfer systems. RECAP OF 1994 RESULTS Total revenues in fiscal 1994 were a record $336.9 million, up 10.3% from the prior year. The Company's overall gross profit percentage on revenues declined slightly (.9 of one percent) from last year, however, total gross profit dollars exceeded the prior year by $9.0 million or 7.6%. The revenue growth was achieved with $4.0 million less sales and marketing expense than in the prior year, with those expenses declining to 13.1% of revenues in fiscal 1994 from 15.7% in fiscal 1993. Research and development expenses increased by $4.1 million in fiscal 1994, principally directed at new products. General and administrative expenses declined by $2.9 million from the prior year. The Company's income from operations, before the special charges discussed below, grew to $34.5 million or 10.2% of revenues in fiscal 1994 from $22.7 million or 7.4% of revenues in fiscal 1993. Interest expense was $1.3 million higher in fiscal 1994 than the prior fiscal year, due to higher average borrowing levels and higher interest rates. A $1.6 million disposition gain realized in fiscal 1993 and reflected in other income and expense did not recur in fiscal 1994. Income, before the special charges described below, totaled $18.6 million or $1.22 per share compared with $13.0 million or $.84 per share in fiscal 1993. After pre-tax special charges described below of $11.3 million in fiscal 1994 and $25.0 million in fiscal 1993, net income was $13.4 million or $.88 per share in fiscal 1994 compared to a net loss of $2.5 million or $.16 per share in fiscal 1993. SPECIAL CHARGES In fiscal 1994, the Company recorded an $11.3 million special charge consisting of three components: the restructuring and statutory reorganization of the Company's German operations, the discontinuation of an employee benefits software development project, and the write-down of certain investments in anticipation of disposition. These actions should reduce ongoing operating expenses by approximately $1 million annually. See Note 2 of Notes to Consolidated Financial Statements for further discussion. In fiscal 1993, the Company recorded a $25 million special charge, $22.8 million of which was to terminate the Ultrust product and the related Cambridge, Massachusetts operations dedicated to the product. Ultrust was a sophisticated asset management system for the largest trust banks in the market and included full multi-currency accounting and other features designed to facilitate global asset management. While Ultrust was intended to be marketed as packaged software, it became apparent that the Ultrust product could not meet the level of customized, individualized functionality, on an economically viable basis, that customers in this market segment demanded. Also, rapid changes in technology since the commencement of development, while not fatal to its viability, limited the potential for the product. Further investment in the product could not be justified and the product was terminated. The charge also included $2.2 million for the restructuring of the administrative software division of the NCS Education business, principally the closing of the Company's Salt Lake City software development facility and the consolidation of product development activities into facilities in Mesa, Arizona. See Note 2 of Notes to Consolidated Financial Statements for further discussion. REVENUES Fiscal 1994 versus Fiscal 1993. Total revenues for fiscal 1994 were up 10.3% to $336.9 million from $305.5 million in fiscal 1993. Total revenues for fiscal 1994 as compared to fiscal 1993, by major NCS business area, were as follows: Education +19.5% Business, Government, Healthcare and other +1.4% Financial Systems +9.3% Significantly higher volumes of educational assessment and student financial aid processing at the Company's Iowa City service center were the principal factors in the growth in revenues in education. Approximately half of the revenue growth in financial systems was due to a minor acquisition in the third quarter of fiscal 1994. See Note 3 of Notes to Consolidated Financial Statements for further discussion. Going forward, the financial systems business faces challenges related to certain industry trends, such as consolidation by financial institutions. However, the Company believes opportunities exist to expand its offerings of products and services and to pursue asset management organizations other than banks. By revenue category, net sales were up 15.0% in fiscal 1994 over fiscal 1993 due to the higher education and student financial aid revenues mentioned above, among other increases. Maintenance and support revenues were down 5.9% due to lower third-party hardware maintenance revenues, offset somewhat by increases in proprietary services and software support. FISCAL 1993 VERSUS FISCAL 1992. Total revenues for fiscal 1993 were up 1.8% to $305.5 million from $300.1 million in fiscal 1992. Total revenue results for fiscal 1993 as compared to fiscal 1992 by major NCS business area were as follows: Education +6.1% Business, Government, Healthcare and other +4.5% Financial Systems -12.4% Significantly higher volumes of educational assessment and student financial aid processing at the Company's Iowa City service center resulted in an overall increase in education revenues, notwithstanding the loss of approximately $8 million of Guaranteed Student Loan (GSL) contract revenue. Financial system's revenues were down due to the absence of any Ultrust sales in 1993, versus $5.8 million of such revenues in fiscal 1992. Ultrust has been discontinued as described above. The results of financial systems, and NCS as a whole, were significantly impacted by the operating losses in the Ultrust product line, which will not recur in the future. By revenue category, net sales were up 2.3% in fiscal 1993 over fiscal 1992 due to the higher assessment and processing revenues mentioned above, as well as increased scannable forms sales. Maintenance and support revenues were up very slightly from year to year as both software support and hardware maintenance were up only marginally. COST OF REVENUES AND GROSS PROFITS Fiscal 1994 versus Fiscal 1993. In fiscal 1994, the Company's overall gross profit declined slightly to 38.0% of total revenues from 38.9% in fiscal 1993. By revenue category, the gross profit on net sales declined by 2.7 percentage points in fiscal 1994 from the prior year, due in large measure to lower relative margins on certain of the incremental revenues at the Iowa City service center. This was offset by gross profit on the maintenance and support revenues, which improved by 3.6 percentage points in fiscal 1994, due principally to higher margins on hardware maintenance services and improved software support margins owing largely to the discontinuance of Ultrust. The Company is experiencing significant price increases for the type of paper most commonly used in its scannable forms product. This is consistent with paper price movements in the general marketplace and the Company will attempt to offset these increases, to the extent possible, with increases in productivity and, where necessary, with price increases to its customers. It is the Company's current belief that these price increases will unfavorably impact gross profit to some extent, but should not materially impact overall profitability. Fiscal 1993 versus Fiscal 1992. The Company's overall gross profit percentage improved to 38.9% in fiscal 1993 from 38.1% in fiscal 1992. The gross profit on net sales improved 0.3 percentage points year to year as a percentage of net sales due principally to improved margins on non-GSL student financial aid processing. Maintenance and support gross profit improved by 2.5 percentage points year to year as a percentage of related revenues due to lower parts costs related to hardware maintenance. OPERATING EXPENSES Fiscal 1994 versus Fiscal 1993. In fiscal 1994, sales and marketing expenses decreased $4.0 million from the prior fiscal year. This, coupled with increased revenues, decreased these expenses as a percentage of total revenues by 2.6 percentage points. This improvement over fiscal 1993 is due to a concerted Company-wide effort to reduce these expenses and make sales and marketing efforts more productive. Research and development expenses increased $4.1 million or 43.3% in fiscal 1994 over fiscal 1993 due directly to new software product initiatives across the Company, particularly in financial systems and education. General and administrative expenses declined by $2.9 million or 7.4% in fiscal 1994 from the prior fiscal year. This decrease year-to-year is due to Company-wide efforts to reduce these expenses. Fiscal 1993 versus Fiscal 1992. Sales and marketing expenses increased by $8.4 million in fiscal 1993 over fiscal 1992. This was a 21.2% increase year to year and was incurred in all the major business areas. The increase was intended to increase sales momentum, and while sales did increase slightly in fiscal 1993, they did not increase as much as anticipated. Research and development expenses were up slightly in fiscal 1993 from the prior year. This increase was spread among all NCS businesses, with the largest increase coming in scanning hardware and software engineering. Total general and administrative expenses were essentially unchanged from fiscal 1992 to fiscal 1993. INTEREST EXPENSE Interest expense increased $1.3 million in fiscal 1994 over fiscal 1993. This was due to higher average borrowing levels in fiscal 1994, as debt levels increased significantly in the latter part of fiscal 1993 and modestly in fiscal 1994. Interest rates also increased in fiscal 1994 from the prior year. See Capital Resources and Liquidity below for further discussion of cash flow and debt. Interest expense increased by $0.3 million in fiscal 1993 from fiscal 1992. The increase was due to an increase in the average borrowings outstanding, as interest rates did not vary significantly. OTHER INCOME AND EXPENSE Other income and expense in fiscal 1994 included no large or unusual items and was, therefore, insignificant. Other income in fiscal 1993 includes a $1.6 million gain from the sale of assets of the Company's Catalog Card Division. This division's net assets and results of operations were not material to NCS. During fiscal 1992, the Company concluded certain litigation with a resulting net gain of approximately $1.0 million which is included in other income and expense. This gain reflects the favorable resolution of certain claims relating to the original procurement of the GSL processing contract in 1987. INCOME TAXES The effective income tax rate for fiscal 1994 was 30.0% which was significantly reduced by the net tax benefit related to the reorganization of the Company's German operations. See Note 6 of the Notes to Consolidated Financial Statements. The effective income tax benefit rate for fiscal 1993 was 12.2%, which was significantly lower than the statutory rate and the Company's historical effective rate. The rate impact of permanent book/tax differences is magnified due to the low absolute dollar amount of the pre-tax loss. The effective income tax rate for fiscal 1992 was 38.0%. CAPITAL RESOURCES AND LIQUIDITY During fiscal 1994, the Company generated $42.2 million of cash from operations which represented a return to historical cash generation levels. The special charges incurred in fiscal 1994 had, after considering tax benefits, a slightly positive impact on cash from operations. The Company invested $28.3 million in property, plant and equipment in fiscal 1994, which was unusually high due to the addition of new buildings in Mesa, Arizona and Iowa City, Iowa. Software capital additions were down to $6.9 million in fiscal 1994, principally due to the discontinuation of Ultrust. Also, $3.2 million of cash was invested in two minor acquisitions. The activities above, and all other cash needs, were financed with cash from operations and $4.1 million of additional borrowings. During fiscal 1993, the Company generated $26.0 million of cash from operating activities. This level was significantly below the prior year's generation of $54.3 million due to the lower level of income, lower non-cash expenses, and growth in receivables. The significant receivables growth was due to heavy billing activity in the last quarter of the fiscal year as the Company's days of billings outstanding remained virtually constant with the prior year. The accrued expense increase in fiscal 1993 included the residual of the special charges, which required cash outlay in the first half of fiscal 1994. Cash was used for capital expenditures and other investing activities totaling $38.3 million. This investment level is higher than the fiscal 1992 amount of $24.5 million due to higher property, plant and equipment expenditures, including an additional forms plant in the United Kingdom, and investments in software development prior to the discontinuation of Ultrust. The Company also repurchased over one million shares of Common Stock during fiscal 1993, using $15.9 million of cash. All these activities described above were financed with cash from operations, $9.0 million of cash on hand, and increased borrowings of $23.0 million during fiscal 1993. The Company had long-term debt balances, including current maturities of $50.5 million, $47.4 million, and $25.4 million at January 31, 1995, 1994, and 1993, respectively. The items causing the changes in debt balances are described above. At January 31, 1995, the Company's debt to total capital ratio was 30.9% compared to 32.1% a year earlier and 17.3% two years earlier. The Company believes that the debt to total capital ratio is currently within an acceptable operating range. Looking toward fiscal 1995, the Company maintains a $40 million revolving credit facility, $20.4 million of which was unused at January 31, 1995. The Company expects cash flow from operations to be at traditional levels in fiscal 1995 and will use such cash to fund capital expenditures and reduce debt to the extent possible. In fiscal 1995, capital expenditures are likely to decrease, as there are no new facilities planned, and software development will approximate 1994 levels. The Company considers the $40 million credit facility and funds from operations to be adequate to meet foreseeable cash requirements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
ASSETS JANUARY 31, ---------------------- 1995 1994 ---------- --------- Current Assets Cash and cash equivalents ........................... $ 1,195 $ 1,724 --------- --------- Receivables Trade ....................................... 77,209 70,100 Other ....................................... 1,940 5,328 --------- -------- 79,149 75,428 --------- -------- Inventories ......................................... 20,455 17,370 Prepaid expenses and other .......................... 9,925 9,198 --------- -------- Total Current Assets ........................ 110,724 103,720 --------- -------- Property, Plant and Equipment Land, buildings and improvements .................... 48,202 37,254 Machinery and equipment.............................. 101,336 88,950 Rotable service parts ............................... 9,256 11,085 Equipment held for lease ............................ 7,583 8,205 Accumulated depreciation ............................ (83,648) (75,988) -------- -------- 82,729 69,506 -------- -------- Other Assets, net Acquired and internally developed software products . 27,234 20,092 Non-current receivables, investments and other assets 17,027 21,896 Goodwill ............................................ 3,043 4,959 -------- --------- 47,304 46,947 -------- --------- Total Assets ................................ $ 240,757 $ 220,173 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt ................ $ 5,212 $ 2,677 Accounts payable .................................... 20,655 18,777 Accrued expenses .................................... 29,495 27,093 Deferred income ..................................... 18,645 18,956 Income taxes ........................................ 1,103 -- -------- --------- Total Current Liabilities ................... 75,110 67,503 -------- --------- Deferred Income Taxes ....................................... 7,211 7,849 Long-Term Debt - less current maturities .................... 45,313 44,674 Commitments and contingencies Stockholders' Equity Preferred stock ..................................... -- -- Common stock - issued and outstanding - 15,310 and 14,983 shares, respectively ...... 459 449 Paid-in capital ..................................... 3,795 -- Retained earnings ................................... 114,546 106,771 Deferred compensation ............................... (5,677) (7,073) -------- --------- Total Stockholders' Equity ................... 113,123 100,147 --------- ---------- Total Liabilities and Stockholders' Equity.... $ 240,757 $220,173 ========= ==========
See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED JANUARY 31, ------------------------------------- 1995 1994 1993 ---------- ---------- --------- Revenues Net sales ............................................. $ 272,305 $ 236,737 $ 231,483 Maintenance and support ............................... 64,638 68,716 68,584 --------- --------- --------- Total revenues ........................ 336,943 305,453 300,067 Cost of Revenues Cost of sales ......................................... 163,744 135,943 133,457 Cost of maintenance and support........................ 45,262 50,589 52,207 --------- --------- --------- Gross profit .......................... 127,937 118,921 114,403 Operating Expenses Sales and marketing ................................... 44,138 48,104 39,695 Research and development .............................. 13,422 9,364 8,865 General and administrative ............................ 35,892 38,754 38,585 Special charges........................................ 11,339 25,000 -- --------- --------- --------- Income (Loss) From Operations ................................. 23,146 (2,301) 27,258 Interest expense ...................................... 3,465 2,200 1,889 Other (income) expense ................................ 533 (1,642) (1,239) --------- --------- --------- Income (Loss) Before Income Tax Provision (Benefit) ........... 19,148 (2,859) 26,608 Income tax provision (benefit)........................ 5,750 (350) 10,100 --------- --------- --------- Net Income (Loss) ............................................. $ 13,398 $ (2,509) $ 16,508 ========= ========= ======== Net Income (Loss) Per Share ................................... $ 0.88 $ (0.16) $ 1.03 Average Shares Outstanding .................................... 15,225 15,535 16,066
See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) COMMON STOCK ------------------ PAID-IN RETAINED DEFERRED SHARES AMOUNT CAPITAL EARNINGS COMPENSATION TOTAL ------ ------ ------- -------- ------------ ----- Balance January 31, 1992 ........................ 16,027 $481 $15,846 $105,152 $ (9,163) $112,316 Shares issued for employee stock purchase and option plans ....... 194 6 2,222 -- -- 2,228 Repurchase of common stock .............. (338) (10) (4,931) -- -- (4,941) Restricted stock awards.................. 16 -- 253 -- (253) -- ESOP debt payment ....................... -- -- -- -- 1,000 1,000 Restricted stock compensation accrual ... -- -- -- -- 150 150 Net income .............................. -- -- -- 16,508 -- 16,508 Cash dividends paid - $.33 per share .... -- -- -- (5,261) -- (5,261) Foreign currency translation adjustment.. -- -- -- (683) -- (683) ------ ---- ------- -------- ------- -------- Balance January 31, 1993 ........................ 15,899 477 13,390 115,716 (8,266) 121,317 Shares issued for employee stock purchase and option plans ....... 135 4 1,741 -- -- 1,745 Repurchase of common stock .............. (1,053) (32) (15,317) (566) -- (15,915) Restricted stock awards.................. 2 -- 186 -- (33) 153 ESOP debt payment ....................... -- -- -- -- 1,000 1,000 Restricted stock compensation accrual ... -- -- -- -- 226 226 Net income (loss) ....................... -- -- -- (2,509) -- (2,509) Cash dividends paid - $.36 per share .... -- -- -- (5,581) -- (5,581) Foreign currency translation adjustment.. -- -- -- (289) -- (289) ------ ---- ------- ------- ------- -------- Balance January 31, 1994 ........................ 14,983 449 -- 106,771 (7,073) 100,147 Shares issued for employee stock purchase and option plans ....... 152 5 1,492 -- -- 1,497 Repurchase of common stock .............. (32) (1) (359) -- -- (360) Restricted stock awards.................. (59) (2) (430) -- 432 -- Shares issued for business acquisition .. 266 8 3,092 -- -- 3,100 ESOP debt payment ....................... -- -- -- -- 1,000 1,000 Restricted stock compensation accrual ... -- -- -- -- (36) (36) Net income .............................. -- -- -- 13,398 -- 13,398 Cash dividends paid - $.36 per share .... -- -- -- (5,453) -- (5,453) Foreign currency translation adjustment.. -- -- -- (170) -- (170) ------- ---- ------- -------- -------- --------- Balance January 31, 1995 ........................ 15,310 $459 $ 3,795 %114,546 $ (5,677) $ 113,123 ======= ==== ======= ======== ======== =========
See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED JANUARY 31, ------------------------------------- 1995 1994 1993 -------- -------- ------- Operating Activities Net income (loss) ................................................... $13,398 $ (2,509) $ 16,508 Adjustments to reconcile to net cash provided by operating activities: Depreciation ........................................ 15,559 16,289 18,426 Amortization ........................................ 8,412 8,388 10,131 Deferred income taxes and other...................... (400) (2,434) (501) Non-cash special charges ............................ 10,375 17,805 -- Changes in operating assets and liabilities (net of acquired amounts): Accounts receivable ................. (3,392) (12,346) 1,830 Inventory and other current assets .. (4,285) (3,765) 3,100 Accounts payable and accrued expenses 3,183 3,879 552 Deferred income...................... (613) 652 4,278 ------- -------- -------- Net Cash Provided By Operating Activities ........... 42,237 25,959 54,324 ------- -------- -------- Investing Activities Divestitures (acquisitions) ......................................... (3,216) (1,198) 154 Purchases of property, plant and equipment .......................... (28,251) (21,935) (12,894) Purchases of rotable service parts .................................. (934) (1,917) (1,490) Capitalized software products ....................................... (6,928) (11,474) (8,409) Other - net ......................................................... (3,245) (1,728) (1,906) ------- -------- -------- Net Cash Used In Investing Activities ............... (42,574) (38,252) (24,545) Financing Activities Net increase (decrease) in revolving credit borrowing ............... 1,100 18,500 (15,000) Net increase in other borrowings .................................... 3,024 4,501 1,599 Issuance (repurchase) of common stock, net .......................... 1,137 (14,170) (2,713) Dividends paid ...................................................... (5,453) (5,581) (5,261) ------- -------- -------- Net Cash Provided By (Used In) Financing Activities ................... (192) 3,250 (21,375) ------- -------- -------- Increase (Decrease) In Cash and Cash Equivalents ............................ (529) (9,043) 8,404 Cash and Cash Equivalents - Beginning of Year ............................... 1,724 10,767 2,363 ------- -------- -------- Cash and Cash Equivalents - End of Year ..................................... $ 1,195 $ 1,724 $ 10,767 ======= ======== ========
See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1 - ACCOUNTING POLICIES FISCAL YEARS: The fiscal years referenced herein are as follows: fiscal 1994 - year ended January 31, 1995; fiscal 1993 - year ended January 31, 1994; fiscal 1992 - year ended January 31, 1993. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions between consolidated entities have been eliminated. CASH AND CASH EQUIVALENTS: All investments purchased with an original maturity of three months or less are considered to be cash equivalents. INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or market. Components of inventory at January 31 are summarized as follows: 1995 1994 ------- ------- Finished goods $ 6,408 $ 6,094 Scoring services and work in process 8,974 6,117 Raw materials and purchased parts 5,073 5,159 ------- ------- $20,455 $17,370 ======= ======= PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost and depreciated over the estimated useful lives of the assets using principally the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Significant improvements are capitalized to property, plant and equipment accounts, while maintenance and repairs are expensed currently. Rental income from equipment held for lease is recognized as earned using the operating method of accounting for such leases. Depreciation is computed using the straight-line method based on the assets' estimated useful lives. ROTABLE SERVICE PARTS: Parts continually repaired and reused are carried at cost and depreciated over their estimated useful lives ranging from three to five years. Such amounts are reflected as a separate category of property, plant and equipment. ACQUIRED AND INTERNALLY DEVELOPED SOFTWARE PRODUCTS: Acquired software product amounts originate from the allocation of purchase prices of acquired companies and assets. These products are generally large, complex, mission-critical application software packages with established market positions. Products in this category are generally assigned lives of five years. Internally developed software products represent costs capitalized in accordance with Statement of Financial Accounting Standards No. 86. Accordingly, software production costs incurred subsequent to establishing technological feasibility, as defined, are capitalized. Amortization of these products is computed on a product by product basis ratably as a percentage of expected revenue, subject to minimum straight-line amortization over the products' estimated useful lives of 2 to 5 years. An employee benefits product and the Ultrust software product were discontinued in fiscal 1994 and fiscal 1993, respectively. Refer to Note 2 for further discussion. NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
A summary of software activity is as follows: INTERNALLY ACCUMULATED ACQUIRED DEVELOPED AMORTIZATION TOTAl -------- ---------- ------------ ------- Balance, January 31, 1992 ...................... $16,684 $20,656 $ (9,429) $ 27,911 Additions .............................. -- 8,409 -- 8,409 Amortization ........................... -- -- (6,154) (6,154) ------- ------- -------- -------- Balance, January 31, 1993 ...................... 16,684 29,065 (15,583) 30,166 Additions .............................. 1,165 11,474 -- 12,639 Product discontinuation ................ (4,522) (18,495) 5,212 (17,805) Dispositions ........................... -- (1,558) 1,057 (501) Amortization ........................... -- -- (4,407) (4,407) ------- ------- -------- -------- Balance, January 31, 1994 ...................... 13,327 20,486 (13,721) 20,092 Additions .............................. 7,868 6,928 -- 14,796 Product discontinuation ................ -- (2,983) 25 (2,958) Amortization ........................... -- -- (4,696) (4,696) ------- ------- -------- -------- Balance, January 31, 1995 ...................... $21,195 $24,431 $(18,392) $ 27,234 ======= ======= ======== ========
GOODWILL: Goodwill arising from business acquisitions is amortized on a straight-line basis over periods ranging from 5 to 20 years, generally 10 years. Amortization expense was $1,179 in fiscal 1994, $1,146 in fiscal 1993 and $1,049 in fiscal 1992. Accumulated amortization was $2,493 and $6,253 as of January 31, 1995 and 1994, respectively. ACCRUED EXPENSES: Major components of accrued expenses consisted of the following as of January 31: 1995 1994 ------- ------- Employee compensation ............ $12,960 $10,168 Taxes other than income .......... 3,410 3,383 Royalties ........................ 2,241 2,196 Scoring .......................... 2,169 2,355 Special charges .................. 679 5,328 Other ............................ 8,036 3,663 ------- ------- $29,495 $27,093 ======= ======= REVENUE RECOGNITION: Revenue from product sales and software licensing is recognized at the time of shipment, except in instances where material fulfillment obligations exist beyond shipment. In such cases, revenue is not recognized until such obligations are fulfilled or is recognized in accordance with specific contract terms. Hardware maintenance and software support revenues are recognized ratably over the contractual period. Revenue from other services is recognized when such service is performed. OTHER (INCOME) EXPENSE: Other (income) expense for the year ended January 31, 1994 includes a $1,556 gain on the sale of the assets of the Company's Catalog Card Division to an entity controlled by the Company's Chairman. The sale was for cash and notes totaling $2,350, including interest. The disinterested directors of the Company determined that the terms of the sale were fair and reasonable to the Company. Notes receivable of $1,454 and $1,525, net, from the acquiring entity are carried in non-current receivables on the accompanying consolidated balance sheets at January 31, 1995 and 1994, respectively. Other (income) expense for the year ended January 31, 1993 includes $1,027, net, related to the conclusion of certain litigation in the Company's favor. Per Share Data: Net income (loss) per share is based on the weighted average number of shares of Common Stock and common stock equivalents outstanding during the year. NOTE 2 - SPECIAL CHARGES In the fourth quarter of fiscal 1994, the Company recorded an $11.3 million pre-tax special charge consisting of three components: the restructuring and statutory reorganization of the Company's German operations, the discontinuation of an employee benefits software development project, and the write-down of certain unconsolidated investments in anticipation of disposition. The German restructuring and reorganization amounted to a $3.7 million pre-tax charge to liquidate two of the Company's three operating subsidiaries in Germany and consolidate all remaining operations, principally distribution and maintenance, into one remaining subsidiary. The pre-tax charge was principally to write down goodwill and other assets ($2.9 million) to liquidation values and the balance of this charge was to accrue exit costs for leased facilities and other obligations. There were, however, significant tax benefits triggered by these actions, so the net after-tax effect of this restructuring was only $.5 million. These actions are complete and the liquidation will become official upon the expiration of the German statutory notice periods. The discontinuation of the employee benefit software product resulted in a $3.2 million pre-tax charge. The Company will incorporate certain of the functions originally planned for this new product into its existing products, thereby reducing development cost and time to market. The charge was principally to write off internal software development costs and acquired third-party software licenses ($3.0 million). The balance of the charge was to accrue for severance (six employees) and other costs. All such actions related to this discontinuation are complete. The after-tax effect of this action was approximately $2.0 million. The balance of the pre-tax special charge ($4.4 million) was to write down investments in four companies in anticipation of values which will likely be realized as the Company proceeds with an orderly disposition of these investments. These investments were, in all but one case, originally made to promote operating synergies with the Company, however, the Company's intentions with regard to these investments have changed and they have become non-strategic. It is intended, but not certain, that these dispositions will be completed in the next six months. The after-tax effect of the write-down of these investments was $2.7 million. The special charges total $11.3 million pre-tax and $5.2 million or 34 cents per share on an after-tax basis. These actions, as described above, represent largely asset write-downs with related cash tax benefits and will, therefore, actually generate cash for the Company before considering disposition proceeds. In the fourth quarter of fiscal 1993, the Company recorded a $25 million pre-tax special charge. This amount consisted of a $22.8 million charge to terminate the Ultrust product and related operations, including a non-cash write-off of $17.8 million of software investment, $2.7 million of severance costs, and $2.3 million of facility exit costs, customer accommodations and other items. The balance of the charge was for the closing of a software development facility in Salt Lake City and consolidation of those functions into the Company's Mesa, Arizona facility. Substantially all of this $2.2 million charge related to severance, relocation, and other employee-related costs. This charge reduced fiscal 1993 after-tax earnings by $15.5 million or $1.00 per share. NOTE 3 - SIGNIFICANT TRANSACTIONS During fiscal 1994, the Company completed two minor acquisitions. In July, 1994, the Company completed the acquisition of Abacus Data Group, Inc., a developer of Windows-based instructional management software for the education market. The purchase price was approximately $3.8 million in a combination of cash and common stock of the Company, plus contingent earn-out payments, and was allocated principally to software products and goodwill. In October, 1994, the Company completed the acquisition of an international private banking product, DECBank APSYS, along with certain related business assets and operations in Geneva, Switzerland. The purchase price was approximately $2.9 million in cash plus assumption of certain liabilities, which was allocated principally to software products. The operating results of these acquired entities were not material to NCS. During fiscal 1993, the Company reached an agreement with Dimensional Medicine Inc. (DMI) to convert notes and accounts receivable from DMI into 27.5 million shares of DMI common stock (representing 85% of the outstanding common shares) and a long-term note. The Company has not consolidated the financial results of DMI since completion of the transaction, because it is the Company's intention to divest of the DMI shares, and its control is, therefore, temporary. DMI's financial position and results of operations are not material to the Company. During fiscal 1994, the Company further reduced the carrying value of its investment in DMI. Fees charged to DMI for installation and servicing of DMI systems were $518 in fiscal 1994, $999 in fiscal 1993 and $1,354 in fiscal 1992. Rates and prices charged for these services approximate those which would prevail between unrelated parties. The balance of the long-term note, $865 as of January 31, 1995 and $1,105 as of January 31, 1994, is reflected in other assets in the accompanying consolidated balance sheets. The net receivables from DMI included in trade receivables were not material as of January 31, 1995 or 1994. NOTE 4 - LEASES The Company leases office facilities under noncancelable operating leases which expire in various years through 2001. Rental expense for all operating leases was $11,026 in fiscal 1994, $11,242 in fiscal 1993 and $10,029 in fiscal 1992. Future minimum rental expense as of January 31, 1995, for noncancelable operating leases with initial or remaining terms in excess of one year is $27,277 and is payable as follows: fiscal 1995 - $6,539; fiscal 1996 - $5,673; fiscal 1997 - $4,608; fiscal 1998 - $3,834; fiscal 1999 - $2,789 and $3,834 beyond. NOTE 5 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS Long-term debt at January 31, consisted of the following: 1995 1994 ------- ------- Revolving credit borrowing ............. $19,600 $18,500 Secured notes .......................... 15,000 15,000 Unsecured note ......................... 6,713 6,175 ESOP borrowing ......................... 5,000 6,000 Other borrowings, principally foreign .. 4,212 1,676 ------- ------- 50,525 47,351 Less current maturities ................ (5,212) (2,677) ------- ------- Long-term debt ......................... $45,313 $44,674 ======= ======= Revolving Credit Borrowings: The Company has a $40,000 unsecured revolving credit facility which terminates August 1, 1996. Interest on debt outstanding under this facility is computed, at the Company's discretion, based on the prime rate or the London Interbank Offered Rate (LIBOR). During the year ended January 31, 1995, the interest rate approximated 1.5% below the prime rate. The Company pays a fee at an annual rate of .25% on the unused facility amount. The credit facility contains covenants with which the Company is in compliance. Secured Notes: In July, 1990 the Company issued $15,000 of 9.88% Secured Notes due in 1997. Interest is paid monthly during the term. The notes are secured by certain Company-owned real estate. The credit facility contains covenants with which the Company is in compliance. Unsecured Note: During fiscal 1993, the Company opened a Sterling-based credit facility with a bank to finance plant construction in the United Kingdom. During fiscal 1994, the credit facility was converted to an unsecured term note due in five principal payments of (pound)850 per year beginning in April, 1997 and bearing interest at .95% over the Sterling LIBOR rate. The outstanding balance on the note at January 31, 1995 was (pound)4,250 or $6,713. ESOP Borrowing: The ESOP loan, secured by unallocated shares of Common Stock and guaranteed by the Company, is payable over seven years in annual payments of $1,000 with the balance due May 1996. Interest is payable quarterly at rates which approximate 3.5% under the prime rate. Scheduled Maturities: The aggregate principal amounts of long-term debt scheduled for repayment in each of the five fiscal years 1995 through 1999 are $5,212, $23,600, $16,343, $1,343, and $1,343, respectively. In each fiscal year, interest paid approximates interest expense plus capitalized interest of $175 in 1994, $338 in 1993 and $209 in 1992. NOTE 6 - INCOME TAXES Effective February 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by SFAS 109. As permitted under the standard, prior years' financial statements have not been restated. The cumulative effect of adopting SFAS 109 was not material. The components of the provision for income taxes are as follows:
CURRENT -------------------------- YEAR ENDED JANUARY 31, FEDERAL STATE FOREIGN DEFERRED TOTAL - ---------------------- ------- ----- ------- -------- -------- 1995 (Liability method) ....... $6,175 $ 691 $ 384 $(1,500) $5,750 1994 (Liability method) ....... 1,566 398 40 (2,354) (350) 1993 (Deferred method)......... 8,535 1,088 426 51 10,100
Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at January 31 are as follows:
1995 1994 ------ ------ Deferred tax assets: Reserves for uncollectibles ................ $ 3,223 $ 1,470 Rotable service parts amortization ......... 1,612 1,787 Accrued vacation pay ....................... 1,572 1,515 Special charges ............................ 1,395 534 Intangible amortization .................... 1,047 767 Foreign operating loss carryforwards ....... 831 1,966 Other ...................................... 877 742 Valuation allowance ........................ (831) (1,966) -------- -------- Total deferred tax assets .................. 9,726 6,815 -------- -------- Deferred tax liabilities: Net capitalized software ................... 7,183 6,300 Accelerated depreciation ................... 5,847 4,951 Purchased software amortization ............ 2,016 1,617 Installment sales .......................... 894 987 Other ...................................... 997 809 -------- -------- Total deferred tax liabilities ............. 16,937 14,664 -------- -------- Net deferred tax liabilities ............... $ 7,211 $ 7,849 ======== ========
NOTE 6 - INCOME TAXES (CONTINUED) A reconciliation of the Company's statutory and effective tax rate is presented below:
YEAR ENDED JANUARY 31, -------------------------- 1995 1994 1993 ---- ---- ---- Statutory rate ............................... 35.0% (35.0)% 34.0% State income taxes net of federal benefit .... 2.3 9.2 2.7 Intangible amortization ...................... 3.0 12.9 2.0 Foreign sales corporation .................... (0.6) (4.7) (0.2) Research and development credits ............. (2.5) (24.2) (1.0) Affordable housing credit .................... (1.4) -- -- Foreign operating losses ..................... 0.8 27.1 0.6 Foreign investment loss ...................... (10.2) -- -- Federal rate adjustment ...................... -- 9.8 -- Other, net ................................... 3.6 (7.3) (0.1) ----- ------ ------ Effective rate ............................... 30.0% (12.2)% 38.0% ===== ====== ======
In the year ended January 31, 1995, the tax rate benefit from the foreign investment losses principally reflects U.S. tax benefits triggered by the restructuring and reorganization of the Company's German operations discussed in Note 2. In the year ended January 31,1994, the Federal rate adjustment item above is due to the Statement of Financial Accounting Standards No. 109 requirement to increase deferred tax liabilities to reflect current statutory income tax rates. During fiscal 1993, after the Company's adoption of this standard, the U.S. Federal statutory rate increased from 34% to 35%. This adjustment reflects the resulting increase in the deferred tax liability of $280. The Company also incurred foreign operating losses of approximately $2.7 million for the year ended January 31, 1994, which could not currently be tax benefited, and, therefore, unfavorably impacted the effective tax benefit rate. None of the remaining items in the year ended January 31, 1994 rate reconciliation above were unusual in nature or amount in comparison to prior years, however, the rate effects are magnified due to the low absolute dollar amount of the pre-tax loss. The Company made tax payments of $5,549, $7,132 and $7,638 during the fiscal years ended January 31, 1995, 1994 and 1993, respectively. NOTE 7 - STOCKHOLDER'S EQUITY The Company has 10,000,000 shares of $.01 par value Preferred Stock authorized and issuable in one or more series as the Board of Directors may determine; none is outstanding. 50,000,000 shares of $.03 par value Common Stock are authorized. There are no restrictions on retained earnings. The Company has four Employee Stock Option Plans (1982, 1984, 1986, and 1990). Options to purchase Common Stock of the Company are granted to employees at 100% of fair market value on the date of grant and are exercisable over a five-year period. Outstanding options under all Plans are summarized as follows: SHARES PRICE PER SHARE -------- ----------------- Balance, January 31,1993 799,850 $ 7.75 to $16.50 Granted 230,500 12.00 to 17.60 Cancelled (50,870) 8.00 to 16.25 Exercised (70,130) 7.75 to 15.00 ------- ----------------- Balance, January 31,1994 909,350 7.75 to 17.60 Granted 272,250 12.50 to 15.00 Cancelled (300,200) 7.75 to 17.60 Exercised (76,900) 7.75 to 15.00 ------- ----------------- Balance, January 31,1995 804,500 $ 7.75 to $16.75 ======= ================= Options for 188,050 and 194,050 shares became exercisable during fiscal 1994 and 1993, respectively, and options for 235,750 and 275,800 shares were exercisable at January 31, 1995 and 1994, respectively. Shares available for grant under the Plans totaled 209,600 and 260,552 at January 31, 1995 and 1994, respectively. At January 31, 1995, non-qualified options not covered by the Plans to purchase 107,000 shares at $8.25 to $17.10 per share were outstanding. At January 31, 1994, non-qualified options not covered by the Plans to purchase 13,000 shares at $12.88 to $16.00 per share were outstanding. At January 31, 1995, there were 36,000 outstanding options under the Non-Employee Director Stock Option Plan with per share prices from $8.25 to $16.00. At January 31, 1994, there were 30,000 outstanding options under the Plan with per share prices from $8.25 to $16.00. The Company has an Employee Stock Purchase Plan. There were 192,603 shares available for purchase under the Plan at January 31, 1995. NOTE 8 - EMPLOYEE BENEFIT PLANS EMPLOYEE SAVINGS PLAN: The Company has a qualified 401(k) Employee Savings Plan covering substantially all employees. Company contributions are discretionary. The Company's contributions to the Plan, representing 401(k) matching contributions only, were $1,700, $1,674 and $1,438 in fiscal years 1994, 1993, and 1992, respectively. EMPLOYEE STOCK OWNERSHIP PLAN: The Company has an Employee Stock Ownership Plan (ESOP) covering substantially all employees. Benefits, to the extent vested, become available on retirement or termination of employment. During fiscal 1989, the ESOP Trust borrowed $10,000 to purchase 792,000 shares of Common Stock. Each year, the Company makes contributions to the ESOP which are then used to make loan interest and principal payments. With each principal payment, which is charged to compensation expense, a portion of the Common Stock is allocated to participating employees. The Company's contribution to the Plan was $1,000 in fiscal 1994 and fiscal 1993 and interest, which was totally offset by dividends on unallocated shares, was $206 in fiscal 1994 and $168 in fiscal 1993. In fiscal 1992, the Company's contribution to the Plan was $1,000, and interest totaled $240, which was offset by dividends on unallocated shares of $220. There were 396,000 and 475,200 unallocated shares at January 31, 1995 and 1994, respectively. The ESOP Trust Borrowing, which is guaranteed by the Company, is reflected in long-term debt and the Company's obligation to make future contributions to the ESOP for debt repayment is reflected as a reduction of Stockholders' Equity in the consolidated financial statements. LONG-TERM INCENTIVE PLAN: During fiscal 1990, pursuant to a Long-Term Incentive Plan approved by the stockholders, 171,400 shares of Common Stock were issued to participants on a restricted basis. At January 31, 1995, 87,900 shares remain outstanding due to forfeitures by original participants. The shares will be earned by, and released to, the participants at the end of 10 years, but release can be accelerated by attainment of 20% return on equity in a fiscal year, as defined in the Plan. The cost of the Plan is being accrued over the 10-year earning period and will be accelerated if so earned. The Plan also contains a cash award element which is earned only upon attainment of the 20% return on equity. NOTE 9 - CONTINGENCY The Company has received a claim from a customer for expenses, alleged loan defaults, and other damages related to performance under a loan processing and servicing contract. The Company has tendered the defense of this claim to its insurer and the insurer has accepted that defense subject to a reservation of rights. The Company and its insurer intend to vigorously contest this claim. While the claim has not yet been fully articulated, the Company believes that any such claim would be substantially covered by insurance and would not have a material effect on the Company's financial position. NOTE 10 - FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. At January 31, 1995 and 1994, the Company had non-current investments and notes receivable (non-trade) with carrying values of $3,514 and $8,608 respectively, which approximate fair value at those respective dates. At January 31, 1995 and 1994, the Company's $15,000, 9.88% Secured Notes had a fair value of approximately $15,500 and $16,100, respectively, based on the Company's current borrowing rate for comparable borrowing arrangements. The Company's ESOP and other long-term debt approximates market due to the variable interest rate features of the obligations. NOTE 11 - BUSINESS SEGMENT DATA The Company operates two business segments. The predominance of the Company's business consists of several interdependent business units, centered around its proprietary optical scanning hardware and forms technology. This segment markets those products and services and related application software to education, business, government, and healthcare markets through the various operating units. The financial systems segment designs, develops and markets asset management software, primarily for bank trust departments. This includes systems for personal trust asset management for individuals and corporate trust applications such as stock and bond transfer systems. Below is a summary of certain financial information related to the two segments for fiscal years ended January 31.
OPTICAL SCANNING PRODUCTS, SERVICES AND FINANCIAL RELATED SOFTWARE SYSTEMS TOTAL ------------------------------ ---------------------------- ------------------------------ 1995 1994 1993 1995 1994 1993 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- ---- ---- Revenues $284,875 $257,813 $245,709 $52,068 $47,640 $54,358 $336,943 $305,453 $300,067 ======== ======== ======== ======= ======= ======= ======== ======== ======== Operating income (loss) 37,316 25,447 28,802 2,820 (19,621) 6,564 40,136 5,826 35,366 Special charges included above 3,718 2,200 3,175 22,800 6,893 25,000 Corporate expense 16,990(1) 8,127 8,108 Interest and other expense, net 3,998 558 650 -------- -------- -------- Total income (loss) before income taxes 19,148 (2,859) 26,608 ======== ======== ======== Identifiable assets 201,312 177,664 151,252 31,382 25,340 40,787 232,694 203,004 192,039 Corporate assets 8,063 17,169 22,700 -------- -------- -------- Total assets 240,757 220,173 214,739 ======== ======== ======== Depreciation and amortization 19,579 20,263 22,920 3,553 3,507 5,002 23,132 23,770 27,922 Corporate depreciation and amortization 839 907 635 -------- -------- -------- Total depreciation and amortization 23,971 24,677 28,557 ======== ======== ======== Capital expenditures 31,317 24,425 17,286 4,374 9,391 5,089 35,691 33,816 22,375 Corporate capital expenditures 422 1,510 418 -------- -------- ------- Total capital expenditures $ 36,113 $ 35,326 $ 22,793 ======== ======== ======= (1) Includes special charge of $4,446.
Capital expenditures include property, plant and equipment additions as well as rotable service parts and capitalized software. The Company's foreign operations and export sales are less than 10% of total revenues. Sales to all government agencies for the fiscal years ended January 31, 1995, 1994 and 1993 were $129,832, $97,198, and $95,232 of which $28,100, $23,001, and $26,134, respectively, were to U.S. government agencies, principally the U.S. Department of Education, with the remainder to state and local government agencies, predominantly school districts and state departments of education. REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors National Computer Systems, Inc. We have audited the accompanying consolidated balance sheets of National Computer Systems, Inc. and subsidiaries as of January 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended January 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Computer Systems, Inc. and subsidiaries at January 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 1995, in conformity with generally accepted accounting principles. /S/ ERNST & YOUNG LLP Minneapolis, Minnesota March 15, 1995 EX-21 7 EXHIBIT 21 SIGNIFICANT SUBSIDIARIES NATIONAL COMPUTER SYSTEMS, INC. STATE OR OTHER JURISDICTION OF NAME UNDER WHICH SUBSIDIARY NAME OF SUBSIDIARY INCORPORATION DOES BUSINESS - -------------------------- --------------- ------------------------------- NCS Holdings, Inc. Minnesota NCS Holdings, Inc. NCS Financial Systems, Inc. Minnesota NCS Financial Services Financial Systems Division of National Computer Systems, Inc. NCS Data Forms, Inc. Minnesota Data Forms Division of National Computer Systems, Inc. Interpretive Scoring Minnesota NCS Assessments Systems, Inc. Professional Assessment Services Division of National Computer Systems, Inc. Note: All other subsidiaries of National Computer Systems, Inc. are not significant subsidiaries taken as a whole. EX-23 8 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of National Computer Systems, Inc. of our report dated March 15, 1995, included in the 1994 Annual Report to Stockholders of National Computer Systems, Inc. and subsidiaries. We also consent to the incorporation by reference in Post Effective Amendment Number 2 to Registration Statement Number 2-80386 on Form S-8 (1982 Employee Stock Option Plan), Post Effective Amendment Number 1 to Registration Statement Number 2-96965 on Form S-8 (1984 Employee Stock Option Plan), Registration Statement Number 33-9830 on Form S-3 (Selling Shareholder), Registration Statement Number 33-21511 on Form S-8 (1986 Employee Stock Option Plan), Registration Statement Number 33-48509 on Form S-8 (1990 Employee Stock Option Plan), Registration Statement Number 33-48510 on Form S-8 (1992 Employee Stock Purchase Plan) and Registration Statement Number 33-68854 on Form S-8 (option held by former director) of our report dated March 15, 1995 with respect to the consolidated financial statements incorporated herein by reference in this Annual Report (Form 10-K) of National Computer Systems, Inc. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota April 25, 1995 EX-24 9 EXHIBIT 24 POWER OF ATTORNEY FORM 10-K FOR YEAR ENDED JANUARY 31, 1995 The undersigned directors and officers of NATIONAL COMPUTER SYSTEMS, INC. hereby constitute and appoint J. W. Fenton, Jr., their true and lawful attorney-in-fact and agent, for each of them and in their name, place and stead, in any and all capacities (including without limitation, as Director and/or principal Executive Officer, principal Financial Officer, principal Accounting Officer or any other officer of the Company), to sign its Annual Report on Form 10-K for the year ended January 31, 1995, which is to be filed with the Securities and Exchange Commission, with all exhibits thereto, and any and all documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done, and hereby ratifying and confirming all that said attorney-in-fact and agent may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands this 6th day of March, 1995. /s/ CHARLES W. OSWALD /s/ STEPHEN G. SHANK - ------------------------------------- -------------------------------------- Charles W. Oswald Stephen G. Shank /s/ RUSSELL A. GULLOTTI /s/ JOHN E. STEURI - ------------------------------------- ------------------------------------- Russell A. Gullotti John E. Steuri /s/ DAVID P. CAMPBELL /s/ JEFFREY E. STIEFLER - ------------------------------------- ------------------------------------- David P. Campbell Jeffrey E. Stiefler /s/ DAVID C. COX /s/ JOHN W. VESSEY - ------------------------------------- -------------------------------------- David C. Cox John W. Vessey /s/ JEAN B. KEFFELER /s/ JEFFREY W. TAYLOR - ------------------------------------- --------------------------------------- Jean B. Keffeler Jeffrey W. Taylor EX-27 10
5 This schedule contains summary financial information extracted from the financial statements for National Computer Systems, Inc. and Subsidiaries, for the fiscal year ended January 31, 1995, and is qualified in its entirety by reference to such financial statements. 0000069999 NATIONAL COMPUTER SYSTEMS, INC. 1000 YEAR JAN-31-1995 JAN-31-1995 1,195 0 77,209 0 20,455 110,724 166,377 (83,648) 240,757 75,110 45,313 459 0 0 111,805 240,757 272,305 336,943 163,744 209,006 104,791 0 3,465 19,148 5,750 13,398 0 0 0 13,398 .88 .88
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