EXHIBIT 13
PORTIONS OF THE
ANNUAL REPORT TO STOCKHOLDERS
FOR THE FISCAL YEAR ENDED JANUARY 31, 1994
FIVE-YEAR FINANCIAL DATA
YEAR ENDED JANUARY 31,
---------------------------------------------------------------
1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Financial Results
Revenues...................................... $ 305,453 $ 300,067 $ 302,506 $ 315,283 $ 284,203
Income (loss) from operations................. (2,301 (1) 27,258 28,704 28,064 17,472
Income (loss) before income taxes............. (2,859) 26,608 24,174 20,972 11,517
Income taxes.................................. (350) 10,100 8,700 7,950 4,200
Net income (loss)............................. (2,509) 16,508 15,474 13,022 7,317
Net income (loss) per share................... $ (.16) $ 1.03 $ .96 $ .82 $ .46
Average number of shares outstanding.......... 15,535 16,066 16,138 15,891 16,023
Cash dividends per share...................... $ .36 $ .33 $ .29 $ .28 $ .28
Financial Position
Current ratio................................. 1.5 1.6 1.7 2.0 1.8
Working capital............................... $ 36,217 $ 38,792 $ 39,836 $ 51,351 $ 50,574
Total assets.................................. 220,173 214,739 217,578 225,159 250,395
Long-term debt, less current maturities....... 44,674 23,869 37,214 56,034 82,337
Stockholders' equity.......................... $ 100,147 $ 121,317 $ 112,316 $ 100,646 $ 90,192
<FN>
- ------------------------
(1) Includes a $25,000 pre-tax restructuring charge. See Note 2 of Notes to
Consolidated Financial Statements.
59
QUARTERLY MARKET DATA (UNAUDITED)
The Company stock is traded on the NASDAQ National Market System under the
symbol "NLCS." As of January 31, 1994, there were approximately 2,200
stockholders of record.
YEAR ENDED JANUARY 31, 1994
------------------------------------------
QUARTER 1ST 2ND 3RD 4TH
- ------------------------------------------ --------- --------- --------- ---------
Sales prices per share
High.................................... $ 16.00 $ 18.00 $ 17.75 $ 13.25
Low..................................... 13.25 14.87 11.50 10.25
Dividends paid per share.................. $ .09 $ .09 $ .09 $ .09
YEAR ENDED JANUARY 31, 1993
------------------------------------------
QUARTER 1ST 2ND 3RD 4TH
- ------------------------------------------ --------- --------- --------- ---------
Sales prices per share
High.................................... $ 16.75 $ 15.75 $ 19.25 $ 18.75
Low..................................... 13.50 12.50 14.25 14.25
Dividends paid per share.................. $ .08 $ .08 $ .08 $ .09
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
----------------------------------------------
APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
--------- --------- ----------- -----------
Year Ended January 31, 1994
Revenues................................... $ 68,514 $ 75,669 $ 77,645 $ 83,625
Gross profit............................... 26,789 30,996 27,870 33,266
Net income (loss).......................... 1,732 4,233 1,505 (9,979)(1)
Net income (loss) per share................ $ 0.11 $ 0.27 $ 0.10 $ (0.66 )
Year Ended January 31, 1993
Revenues................................... $ 65,543 $ 74,792 $ 73,719 $ 86,013
Gross profit............................... 23,905 30,901 27,331 32,266
Net income................................. 1,574 4,803 3,753 6,378
Net income per share....................... $ 0.10 $ 0.30 $ 0.23 $ 0.40
<FN>
- ------------------------
(1) Includes a $25,000 pre-tax restructuring charge. See Note 2 of Notes to
Consolidated Financial Statements.
60
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INCOME AND EXPENSE ITEMS AS A PERCENTAGE OF REVENUES
FISCAL YEAR
-----------------------------------
1993 1992 1991
----------- ---------- ----------
Revenues
Net sales..................................................... 77.5% 77.1% 76.1%
Maintenance and support....................................... 22.5 22.9 23.9
----- ----- -----
Total revenues.............................................. 100.0 100.0 100.0
Costs and expenses
Cost of sales (1)............................................. 57.4 57.7 58.0
Cost of maintenance and support (2)........................... 73.6 76.1 72.4
----- ----- -----
Total gross margin.......................................... 38.9 38.1 38.5
Sales and marketing............................................. 15.7 13.2 11.9
Research and development........................................ 3.1 3.0 2.7
General and administrative...................................... 12.7 12.9 14.4
Restructuring charge............................................ 8.2 -- --
----- ----- -----
Income (loss) from operations................................... (0.8 ) 9.1 9.5
Income (loss) before taxes...................................... (0.9 ) 8.9 8.0
Net income (loss)............................................... (0.8 )% 5.5 % 5.1 %
----- ----- -----
----- ----- -----
<FN>
- ------------------------
(1) As a percentage of sales revenue.
(2) As a percentage of maintenance and support revenue.
Note: The fiscal years referenced herein are as follows: fiscal 1993 -- year
ended January 31, 1994; fiscal 1992 -- year ended January 31, 1993; fiscal 1991
- -- year ended January 31, 1992.
The Company operates two business segments. The financial systems segment
(NCS Financial) designs, develops and markets asset management software,
primarily for bank trust departments. This includes systems for personal trust
asset management for individuals and corporate trust applications such as stock
and bond transfer systems. The remainder of the Company's business is centered
around its proprietary optical scanning hardware and forms technology. This
segment markets those products and services and related application software to
education, business, and professional markets through the NCS Education, NCS
Technology and NCS Assessment businesses.
In order to provide improved financial reporting, additional expense detail
is being reported in the accompanying fiscal 1993 consolidated statements of
income. Specifically, the sales and marketing and the research and development
lines have been added.
Certain reclassifications, particularly related to isolating research and
development expenses, have been made to the prior years statements to conform to
the current year classification.
RECAP OF 1993 RESULTS
Total revenues in fiscal 1993 were up 1.8% to $305.5 million. Results fell
short of expectations as, despite a sizeable increase in sales and marketing
efforts, significant revenue gains were not achieved. The Company's overall
gross margin percentage on revenues was also slightly improved in fiscal 1993.
However, the increase in sales and marketing costs more than offset the sales
and gross margin improvements. These expenses were increased to spur revenue
growth, but those efforts were not as successful as intended. Research and
development expense was up slightly in 1993 and general and administrative
expenses were essentially flat. Interest and other non-operating items were also
comparable on a net basis. In summary, before the effects of the restructuring
charge discussed below, pre-tax income was down 16.8% to $22.1 million
principally due to the higher sales and marketing expenses. The restructuring
charge of $25 million caused a net pre-tax loss of $2.9 million for fiscal 1993.
A more detailed discussion follows.
61
RESTRUCTURING CHARGE
In January, 1994, the Company announced it would incur a $25 million
restructuring charge, principally to terminate the Ultrust product and the
related Cambridge, Massachusetts operations dedicated to the product. Ultrust
was a sophisticated asset management system for the largest trust banks in the
market and included full multi-currency accounting and other features designed
to facilitate global asset management. While Ultrust was intended to be marketed
as packaged software, it became apparent that the Ultrust product could not meet
the level of customized, individualized functionality, on an economically viable
basis, that customers in this market segment demanded. Also, rapid changes in
technology since the commencement of development, while not fatal to its
viability, limited the potential for the product. Further investment in the
product could not be justified and the product was terminated. The related
charge of $22.8 million includes the non-cash write off of the investment in
software of $17.8 million. The remainder of the Ultrust charge consists of $2.7
million for severance and out-placement costs for approximately 80 people, and
$2.3 million in facility costs, customer accommodations and other items. The
restructuring charge also included the restructuring of the administrative
software division of the NCS Education business, principally the closing of the
Company's Salt Lake City software development facility and the consolidation of
product development activities into facilities in Mesa, Arizona. Substantially
all of this $2.2 million charge was related to severance, relocation and other
employee costs.
It is expected that substantially all of the above restructuring actions and
related cash payments will be completed by June, 1994. The elimination of the
Ultrust operating losses will have an immediate positive effect on future
operating results of NCS Financial. The benefits of the NCS Education software
restructuring will be realized more gradually as the operating efficiencies of a
single location are instituted, since the Company is not anticipating a
significant net reduction in its NCS Education business workforce.
REVENUES
FISCAL 1993 VERSUS FISCAL 1992. Total revenues for fiscal 1993 were up 1.8%
to $305.5 million from $300.1 million in fiscal 1992. Total revenue results for
fiscal 1993 as compared to fiscal 1992 by the four major NCS businesses were as
follows:
NCS Technology.................................... +3.3 %
NCS Education..................................... +6.1 %
NCS Assessments................................... +4.4 %
NCS Financial..................................... -12.4 %
Significantly higher volumes of educational assessments and student
financial aid processing at the Company's Iowa City service center resulted in
an overall increase in NCS Education revenues, notwithstanding the loss of
approximately $8 million of Guaranteed Student Loan (GSL) contract revenue. NCS
Financial revenues were down due to the absence of any Ultrust sales in 1993,
versus $5.8 million of such revenues in fiscal 1992. Ultrust has been
discontinued as described above. The results of NCS Financial, and NCS as a
whole, were significantly impacted by the operating losses in the Ultrust
product line, which will not recur in the future.
By revenue category, net sales were up 2.3% in fiscal 1993 over fiscal 1992
due to the higher assessment and processing revenues mentioned above, as well as
increased scannable forms sales. Maintenance and support revenues were up very
slightly from year to year as both software support and hardware maintenance
were up only marginally.
FISCAL 1992 VERSUS FISCAL 1991. Total revenues for fiscal 1992 versus
fiscal 1991 were essentially flat year to year (down less than 1%). Variations
by the four major business units were as follows:
NCS Technology..................................... -8.1 %
NCS Education...................................... +1.0 %
NCS Assessments.................................... +5.1 %
NCS Financial...................................... +6.2 %
62
NCS Technology revenues declined year to year principally due to the
mid-1991 divestiture of certain European operations. NCS Financial showed an
increase in fiscal 1992 over the prior year due to increases in corporate trust
products and Ultrust sales.
By revenue category, net sales were up in 1992 by less than 1% with major
factors being as noted in the previous paragraph. Maintenance and support
revenues were down $3.9 million or 5.3% in fiscal 1992 from the prior year. This
was due to the decline in third party, non-proprietary hardware maintenance and
the European divestiture referred to above. Software support revenues rose
modestly year to year.
COST OF REVENUES AND GROSS MARGINS
FISCAL 1993 VERSUS FISCAL 1992. The Company's overall gross margin
percentage improved to 38.9% in fiscal 1993 from 38.1% in fiscal 1992. The gross
margin on net sales improved 0.3 percentage points year to year as a percentage
of net sales due principally to improved margins on non-GSL student financial
aid processing. Maintenance and support margins improved by 2.5 percentage
points year to year as a percentage of related revenues due to lower parts costs
related to hardware maintenance.
FISCAL 1992 VERSUS FISCAL 1991. The Company's overall gross margin
percentage declined by 0.4 percentage points as a percentage of total revenues
in fiscal 1992 from fiscal 1991. The gross margin percentage on sales improved
slightly as a percentage of sales in fiscal 1992 from fiscal 1991; however, this
was offset by a decline in the gross margin percentage on maintenance and
support year to year as both hardware maintenance and software support margins
declined.
OPERATING EXPENSES
FISCAL 1993 VERSUS FISCAL 1992. Sales and marketing expenses increased by
$8.4 million in fiscal 1993 over fiscal 1992. This was a 21% increase year to
year and was incurred predominantly in NCS Technology, though all the four major
businesses contributed to the increase. The increase in this area was to
increase sales momentum, and while sales did increase slightly in fiscal 1993,
they did not increase as much as anticipated. The Company is currently
evaluating its expenditures in this area to control them to fully productive
levels in fiscal 1994.
Research and development expenses were up slightly in fiscal 1993 from the
prior year. This increase was spread among the four major NCS businesses, with
the largest increase coming in scanning hardware and software engineering.
General and administrative expenses were essentially unchanged overall from
fiscal 1992 to fiscal 1993.
FISCAL 1992 VERSUS FISCAL 1991. Sales and marketing expenses increased $3.6
million or 10.1% in fiscal 1992 over fiscal 1991. The majority of this increase
came in NCS Education as that business took on the responsibility for sales of
its CIMS-R- product from IBM.
Research and development increased year to year by $.8 million or 10.0%.
This increase came almost evenly from NCS Assessments and NCS Financial due to
product development initiatives.
General and administrative expenses declined $5.1 million or 11.7% due to
the divestiture of certain European operations in 1991 and through concerted
efforts to control these expenses Company wide.
INTEREST EXPENSE
Interest expense increased by $0.3 million in fiscal 1993 from fiscal 1992.
The increase was due to an increase in the average borrowings outstanding, as
interest rates did not vary significantly. See Capital Resources and Liquidity
below for further discussion of cash flow and debt. Interest expense had
declined $1.5 million in fiscal 1992 from fiscal 1991 due to significantly lower
outstanding borrowing balances during fiscal 1992 when compared to the prior
year. Lower rates also contributed to the year to year decrease.
63
OTHER INCOME AND EXPENSE
Other Income in fiscal 1993 includes a $1.6 million gain from the sale of
assets of the Company's Catalog Card Division. This division's net assets and
results of operations were not material to NCS.
During fiscal 1992, the Company concluded certain litigation with a
resulting net gain of approximately $1.0 million which is included in other
income and expense. This gain predominantly includes the favorable resolution of
certain claims relating to the original procurement of the GSL processing
contract in 1987.
During fiscal 1991, a provision for loss of $750,000 was recorded for the
divestiture of certain European operations and is included in other expense.
INCOME TAXES
The effective income tax benefit rate for fiscal 1993 is 12.2%, which is
significantly lower than the statutory rate and NCS' historical effective rate.
The magnified rate impact of permanent book/tax differences is due to the low
absolute dollar amount of the pre-tax loss. Refer also to Note 6 of the Notes to
Consolidated Financial Statements. The recent U.S. federal income tax law
changes will have only a slight upward impact, if any, on the Company's
effective tax rate in the future, as the Company is anticipating that its
effective tax rate will return to a level commensurate with prior periods.
The effective income tax rates for fiscal 1992 and 1991 were 38.0% and
36.0%, respectively, with the increase in 1992 being due to lower research and
development credits in 1992.
CAPITAL RESOURCES AND LIQUIDITY
During fiscal 1993, the Company generated $26.0 million of cash from
operating activities. This was significantly below the prior year's generation
of $54.3 million due to lower levels of income, lower non-cash expenses, and
growth in receivables. The significant receivables growth was due to heavy
billing activity in the last quarter of the fiscal year as the Company's days of
billings outstanding remained virtually constant with the prior year. The
accrued expense increase in fiscal 1993 includes the residual of the
restructuring charges, which will require cash outlay in the first half of
fiscal 1994. Cash was used for capital expenditures and other investing
activities totalling $38.3 million. This investment level is higher than the
fiscal 1992 amount of $24.5 million due to higher plant and equipment
expenditures, including an additional forms plant in the United Kingdom, and
investments in software development prior to the discontinuation of Ultrust. The
Company also repurchased over one million common shares during fiscal 1993,
using $15.9 million of cash. All these activities described above were financed
with $9.0 million cash on hand and increased borrowings of $23.0 million during
fiscal 1993.
During fiscal 1992, $54.3 million of cash was generated from operating
activities. Cash was used for capital expenditures and other investing
activities totalling $24.5 million, debt reduction of $13.4 million, dividends
of $5.3 million and stock repurchases, net of issuances, of $2.7 million. Since
revolving debt balances were reduced to zero and only term debt remained at
January 31, 1993, the Company's cash and cash equivalents balance increased $8.4
million to $10.8 million.
The Company had long-term debt balances, including current maturities of
$47.4 million, $25.4 million, and $39.8 million at January 31, 1994, 1993, and
1992, respectively. The items causing the changes in debt balances are explained
above. At January 31, 1994, the Company's total debt to equity ratio was .47 to
1, up from .21 to 1 a year earlier and .35 to 1 two years prior. The Company
believes that the current debt to equity ratio is within its acceptable
operating range.
Looking toward fiscal 1994, the Company maintains a $30 million revolving
credit facility, $11.5 million of which was unused at January 31, 1994. The
Company expects cash flow from operations to return to more traditional levels
in fiscal 1994 and will use such cash to fund capital expenditures and reduce
debt to the extent possible. In fiscal 1994, capital expenditures are likely to
increase, principally for plant and office construction projects in Iowa City,
Iowa and Mesa, Arizona, with software development decreasing from 1993 levels.
Remaining Board of Directors' authorization for stock repurchases total 308,000
shares. The Company considers the $30 million credit facility and funds from
operations to be adequate to meet foreseeable cash requirements.
64
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
JANUARY 31,
--------------------
1994 1993
--------- ---------
Current Assets
Cash and cash equivalents............................................ $ 1,724 $ 10,767
--------- ---------
Receivables
Trade.............................................................. 70,100 63,016
Other.............................................................. 5,328 2,354
--------- ---------
75,428 65,370
--------- ---------
Inventories.......................................................... 17,370 14,006
Prepaid expenses and other........................................... 9,198 8,644
--------- ---------
Total Current Assets............................................... 103,720 98,787
--------- ---------
Property, Plant & Equipment
Land, buildings and improvements..................................... 37,254 31,435
Machinery and equipment.............................................. 88,950 82,443
Rotable service parts................................................ 11,085 12,667
Equipment held for lease............................................. 8,205 9,012
Accumulated depreciation............................................. (75,988) (73,424)
--------- ---------
69,506 62,133
--------- ---------
Other Assets, net
Acquired and internally developed software products.................. 20,092 30,166
Non-current receivables, investments and other assets................ 21,896 17,452
Goodwill............................................................. 4,959 6,201
--------- ---------
46,947 53,819
--------- ---------
Total Assets....................................................... $ 220,173 $ 214,739
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt................................. $ 2,677 $ 1,481
Accounts payable..................................................... 18,777 18,006
Accrued expenses..................................................... 27,093 21,403
Deferred income...................................................... 18,956 16,808
Income taxes......................................................... -- 2,297
--------- ---------
Total Current Liabilities.......................................... 67,503 59,995
--------- ---------
Deferred Income Taxes.................................................. 7,849 9,558
Long-Term Debt -- less current maturities.............................. 44,674 23,869
Commitments............................................................ -- --
Stockholders' Equity
Preferred stock...................................................... -- --
Common stock -- issued and outstanding -- 14,983 and 15,899 shares,
respectively........................................................ 449 477
Paid-in capital...................................................... -- 13,390
Retained earnings.................................................... 106,771 115,716
Deferred compensation................................................ (7,073) (8,266)
--------- ---------
Total Stockholders' Equity......................................... 100,147 121,317
--------- ---------
Total Liabilities and Stockholders' Equity......................... $ 220,173 $ 214,739
--------- ---------
--------- ---------
See Notes to Consolidated Financial Statements.
65
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JANUARY 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
Revenues
Net sales................................................. $ 236,737 $ 231,483 $ 230,060
Maintenance and support................................... 68,716 68,584 72,446
--------- --------- ---------
Total revenues.......................................... 305,453 300,067 302,506
Costs And Expenses
Cost of sales............................................. 135,943 133,457 133,532
Cost of maintenance and support........................... 50,589 52,207 52,438
--------- --------- ---------
Gross margin............................................ 118,921 114,403 116,536
Sales and marketing....................................... 48,104 39,695 36,065
Research and development.................................. 9,364 8,865 8,057
General and administrative................................ 38,754 38,585 43,710
Restructuring charge...................................... 25,000 -- --
--------- --------- ---------
Income (Loss) From Operations............................... (2,301) 27,258 28,704
Interest expense.......................................... 2,200 1,889 3,361
Other (income) expense, net............................... (1,642) (1,239) 1,169
--------- --------- ---------
Income (Loss) Before Income Taxes........................... (2,859) 26,608 24,174
Income tax provision (benefit)............................ (350) 10,100 8,700
--------- --------- ---------
Net Income (Loss)........................................... $ (2,509) $ 16,508 $ 15,474
--------- --------- ---------
--------- --------- ---------
Net Income (Loss) Per Share................................. $ (0.16) $ 1.03 $ 0.96
Average Shares Outstanding.................................. 15,535 16,066 16,138
--------- --------- ---------
--------- --------- ---------
See Notes to Consolidated Financial Statements.
66
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK
---------------------- PAID-IN RETAINED DEFERRED
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION TOTAL
--------- ----------- --------- --------- ----------- ---------
Balance January 31, 1991................ 15,934 $ 478 $ 15,198 $ 95,142 $ (10,172) $ 100,646
Shares issued for employee stock
purchase and option plans............ 165 5 1,567 1,572
Repurchase of common stock............ (78) (2) (1,049) (1,051)
Restricted stock awards............... 6 130 (130) --
ESOP debt payment..................... 1,000 1,000
Restricted stock compensation
accrual.............................. 139 139
Net income............................ 15,474 15,474
Cash dividends paid -- $.29 per
share................................ (4,641) (4,641)
Foreign currency translation
adjustment........................... (823) (823)
--------- ----- --------- --------- ----------- ---------
Balance January 31, 1992................ 16,027 481 15,846 105,152 (9,163) 112,316
Shares issued for employee stock
purchase and option plans............ 194 6 2,222 2,228
Repurchase of common stock............ (338) (10) (4,931) (4,941)
Restricted stock awards............... 16 253 (253) --
ESOP debt payment..................... 1,000 1,000
Restricted stock compensation
accrual.............................. 150 150
Net income............................ 16,508 16,508
Cash dividends paid -- $.33 per
share................................ (5,261) (5,261)
Foreign currency translation
adjustment........................... (683) (683)
--------- ----- --------- --------- ----------- ---------
Balance January 31, 1993................ 15,899 477 13,390 115,716 (8,266) 121,317
Shares issued for employee stock
purchase and option plans............ 135 4 1,741 1,745
Repurchase of common stock............ (1,053) (32) (15,317) (566) (15,915)
Restricted stock awards............... 2 186 (33) 153
ESOP debt payment..................... 1,000 1,000
Restricted stock compensation
accrual.............................. 226 226
Net loss.............................. (2,509) (2,509)
Cash dividends paid -- $.36 per
share................................ (5,581) (5,581)
Foreign currency translation
adjustment........................... (289) (289)
--------- ----- --------- --------- ----------- ---------
Balance January 31, 1994................ 14,983 $ 449 $ -- $ 106,771 $ (7,073) $ 100,147
--------- ----- --------- --------- ----------- ---------
--------- ----- --------- --------- ----------- ---------
See Notes to Consolidated Financial Statements.
67
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JANUARY 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
Operating Activities
Net income (loss).......................................... $ (2,509) $ 16,508 $ 15,474
Adjustments to reconcile to net cash provided by operating
activities:
Depreciation............................................. 16,289 18,426 17,858
Amortization............................................. 8,388 10,131 7,359
Deferred income taxes and other.......................... (2,434) (501) (978)
Non-cash restructuring charge............................ 17,805 -- --
Changes in operating assets and liabilities (net of
acquired amounts):
Decrease (increase) in accounts receivable............. (12,346) 1,830 (6,685)
Decrease (increase) in inventory and other current
assets................................................ (3,765) 3,100 7,525
Increase in accounts payable and accrued expenses...... 3,879 552 1,797
Increase in deferred income............................ 652 4,278 2,622
--------- --------- ---------
Net Cash Provided By Operating Activities.............. 25,959 54,324 44,972
--------- --------- ---------
Investing Activities
Divestitures (acquisitions)................................ (1,198) 154 (1,527)
Purchases of property, plant and equipment................. (21,935) (12,894) (9,304)
Purchases of rotable service parts......................... (1,917) (1,490) (2,153)
Capitalized software products.............................. (11,474) (8,409) (9,658)
Other -- net............................................... (1,728) (1,906) (1,866)
--------- --------- ---------
Net Cash Used In Investing Activities.................. (38,252) (24,545) (24,508)
--------- --------- ---------
Financing Activities
Net increase (decrease) in revolving credit borrowing...... 18,500 (15,000) 5,000
Repayment of subordinated debenture........................ -- -- (22,497)
Net proceeds of other borrowings........................... 4,501 1,599 257
Issuance (repurchase) of common stock, net................. (14,170) (2,713) 521
Dividends paid............................................. (5,581) (5,261) (4,641)
--------- --------- ---------
Net Cash Provided By (Used In) Financing Activities.... 3,250 (21,375) (21,360)
--------- --------- ---------
Increase (Decrease) In Cash and Cash Equivalents............. (9,043) 8,404 (896)
Cash and Cash Equivalents -- Beginning of Year............... 10,767 2,363 3,259
--------- --------- ---------
Cash and Cash Equivalents -- End of Year..................... $ 1,724 $ 10,767 $ 2,363
--------- --------- ---------
--------- --------- ---------
See Notes to Consolidated Financial Statements.
68
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- ACCOUNTING POLICIES
FISCAL YEARS: The fiscal years referenced herein are as follows: fiscal
1993 -- year ended January 31, 1994; fiscal 1992 -- year ended January 31, 1993;
fiscal 1991 -- year ended January 31, 1992.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions between consolidated entities have been eliminated.
In order to provide improved financial reporting, additional expense lines
are being reported in the accompanying fiscal 1993 consolidated statement of
income. Specifically, the sales and marketing line and the research and
development line have been added. The prior years statements of income have been
reclassified also, to conform to the current year's presentation.
CASH EQUIVALENTS: The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. Cash equivalents consist of investments in money market funds,
subject to daily withdrawal without limitation.
INVENTORIES: Inventories are stated at the lower of cost (first-in,
first-out method) or market. Components of inventory are summarized as follows:
JANUARY 31,
--------------------
1994 1993
--------- ---------
Finished products................................................................ $ 6,094 $ 5,629
Scoring services and work in process............................................. 6,117 4,017
Raw materials and purchased parts................................................ 5,159 4,360
--------- ---------
$ 17,370 $ 14,006
--------- ---------
--------- ---------
ROTABLE SERVICE PARTS: Rotable service parts (parts continually repaired
and reused) are carried at cost and depreciated over their useful lives, which
range up to seven years, with a weighted average of approximately five years.
Such amounts are reflected as a separate category of property, plant and
equipment.
PROPERTY, PLANT AND EQUIPMENT: Assets are stated at cost. Major
improvements are capitalized while maintenance and repairs are expensed
currently. Rental income from equipment held for lease is recognized as earned
using the operating method of accounting for such leases. Depreciation is
computed using the straight-line method based on the assets' estimated useful
lives.
GOODWILL: The excess of cost over the underlying fair value of net assets
at dates of acquisition is amortized on a straight-line basis over periods
ranging from five to 20 years. Accumulated amortization was $6,253 and $5,212 at
January 31, 1994 and 1993, respectively.
ACQUIRED AND INTERNALLY DEVELOPED SOFTWARE PRODUCTS: Acquired software
product amounts originate from the allocation of purchase prices of acquired
companies. These products (principally BondMaster-R- and CIMS) are large,
complex, mission-critical application software packages with substantial,
well-established market positions. Products in this category have been assigned
lives of five to 10 years. Internally developed software products represent
costs capitalized in accordance with Statement of Financial Accounting Standards
No. 86. Accordingly, software production costs incurred subsequent to the
establishment of technological feasibility, as defined, are capitalized.
Amortization begins once the respective product becomes generally available for
sale. These products are amortized on a product by product basis ratably as a
percentage of expected revenue, subject to minimum straight-line amortization,
over two to five years. The Company's Ultrust software product was discontinued
in fiscal 1993. Refer to Note 2 for further discussion.
69
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
A summary of software activity is as follows:
INTERNALLY ACCUMULATED
ACQUIRED DEVELOPED AMORTIZATION TOTAL
--------- ----------- ------------ ---------
Balance,
January 31, 1991.............................................. $ 16,684 $ 10,998 $ (6,227) $ 21,455
Additions................................................... -- 9,658 -- 9,658
Amortization................................................ -- -- (3,202) (3,202)
--------- ----------- ------------ ---------
Balance,
January 31, 1992.............................................. 16,684 20,656 (9,429) 27,911
Additions................................................... -- 8,409 -- 8,409
Amortization................................................ -- -- (6,154) (6,154)
--------- ----------- ------------ ---------
Balance,
January 31, 1993.............................................. 16,684 29,065 (15,583) 30,166
Additions................................................... 1,165 11,474 -- 12,639
Product discontinuation..................................... (4,522) (18,495) 5,212 (17,805)
Dispositions................................................ -- (1,558) 1,057 (501)
Amortization................................................ -- -- (4,407) (4,407)
--------- ----------- ------------ ---------
Balance,
January 31, 1994.............................................. $ 13,327 $ 20,486 $ (13,721) $ 20,092
--------- ----------- ------------ ---------
--------- ----------- ------------ ---------
ACCRUED EXPENSES: Major components of accrued expenses are summarized as
follows:
JANUARY 31,
--------------------
1994 1993
--------- ---------
Employee compensation and benefits......................................................... $ 10,168 $ 8,069
Restructuring accrual...................................................................... 5,328 --
Scoring.................................................................................... 2,355 2,272
Taxes other than income.................................................................... 3,383 3,728
Royalties.................................................................................. 2,196 2,259
Other...................................................................................... 3,663 5,075
--------- ---------
$ 27,093 $ 21,403
--------- ---------
--------- ---------
REVENUE RECOGNITION: Revenue from product sales and software licensing is
recognized at the time of shipment, except in instances where material
fulfillment obligations exist beyond shipment. In such cases, revenue is not
recognized until such obligations are fulfilled or is recognized in accordance
with specific contract terms. Hardware maintenance and software support revenues
are recognized ratably over the contractual period. Revenue from other services
is recognized when such service is performed.
OTHER (INCOME) EXPENSE: Other income for the year ended January 31, 1994
includes a $1,556 gain on the sale of the assets of the Company's Catalog Card
Division to an entity controlled by the Company's Chairman. The sale was for
cash and notes totalling $2,350, including interest. The disinterested directors
of the Company determined that the terms of the sale were fair and reasonable to
the Company. Notes receivable of $1,525, net, from the acquiring entity are
carried in non-current receivables on the Company's balance sheet. Other income
for the year ended January 31, 1993 includes $1,027, net, related to the
conclusion of certain litigation in the Company's favor. Other expense for the
year ended January 31, 1992 includes $750 representing a provision for loss on
the disposition of certain European operations.
70
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES: As of the beginning of fiscal year 1993, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 109 (SFAS 109)
"Accounting for Income Taxes". As was previously disclosed, the cumulative
effect of the change in accounting principle was not material and, accordingly,
no cumulative effect of the change is shown in the accompanying financial
statements. Refer to Note 6 also.
PER SHARE DATA: Net income (loss) per share is based on the weighted
average number of shares of Common Stock and common stock equivalents
outstanding during the year.
NOTE 2 -- RESTRUCTURING CHARGE
In the fourth quarter of fiscal 1993, the Company recorded a $25 million
pre-tax restructuring charge. This amount consisted of a $22.8 million charge to
terminate the Ultrust product and related operations, including a non-cash
write-off of $17.8 million of software investment, $2.7 million of severance
costs, and $2.3 million of facility costs, customer accommodations and other
items.
The balance of the charge was for the closing of an NCS Education software
development facility in Salt Lake City and consolidation of those functions into
the Company's Mesa, Arizona facility. Substantially all of this $2.2 million
charge related to severance, relocation, and other employee-related costs.
This charge reduced after-tax earnings by $15.5 million or $1.00 per share.
NOTE 3 -- SIGNIFICANT TRANSACTIONS
During the year ended January 31, 1994 the Company reached an agreement with
Dimensional Medicine Inc. (DMI) to convert notes and accounts receivable from
DMI into 27.5 million shares of DMI common stock (representing 85% of the
outstanding common shares) and a new long-term note in the amount of $1,105. The
NCS carrying value of the DMI shares at January 31, 1994 represents their
estimated fair value. NCS recorded no loss on this conversion since carrying
values had been adequately reserved. NCS has not consolidated the financial
results of DMI since the December, 1993 completion of the transaction, because
it is the Company's intention to divest of the DMI shares, and its control is,
therefore, temporary. DMI's results of operations are immaterial to NCS.
For the years ended January 31, 1994, 1993 and 1992, NCS fees charged to DMI
for installation and servicing of DMI systems were $999, $1,354, and $1,588,
respectively. Rates and prices charged for these services are believed to
generally approximate those which would prevail between unrelated parties. The
Company had a note receivable from DMI included in other assets in the amount of
$3,675 at January 31, 1993. The Company's net receivables from DMI of $68 and
$589 are included in trade receivables at January 31, 1994 and 1993,
respectively.
NOTE 4 -- LEASES
The Company leases office facilities under noncancelable operating leases
which expire in various years through 2001. Rental expense for all operating
leases was as follows: fiscal 1993 -- $11,242; fiscal 1992 -- $10,029; fiscal
1991 -- $10,883. Future minimum rental expense as of January 31, 1994, for
noncancelable operating leases with initial or remaining terms in excess of one
year is $26,455 and is payable as follows: fiscal 1994 -- $7,516; fiscal 1995 --
$5,261; fiscal 1996 -- $4,784; fiscal 1997 -- $4,472; fiscal 1998 -- $3,297 and
$1,125 beyond.
71
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt at January 31, 1994 and 1993 consisted of the following:
JANUARY 31,
--------------------
1994 1993
--------- ---------
Revolving credit borrowings...................................................... $ 18,500 $ --
Secured notes.................................................................... 15,000 15,000
Unsecured note................................................................... 6,175 --
ESOP borrowing................................................................... 6,000 7,000
Other notes and mortgages........................................................ 1,676 3,350
--------- ---------
47,351 25,350
Less current maturities.......................................................... (2,677) (1,481)
--------- ---------
Long-term debt................................................................... $ 44,674 $ 23,869
--------- ---------
--------- ---------
REVOLVING CREDIT BORROWINGS: The Company has a $30,000 unsecured revolving
credit facility which terminates August 1, 1996. Interest on debt outstanding
under this facility is computed, at the Company's discretion, based on the prime
or the London interbank offered rates (LIBOR). During the year ended January 31,
1994, the interest rate approximated 1.5% below the prime rate. The Company pays
a fee at an annual rate of .35% on the unused facility amount. The credit
agreement contains covenants with which the Company is in compliance.
SECURED NOTES: In July, 1990 the Company issued $15,000 of 9.88% Secured
Notes due in 1997. Interest only is paid monthly during the term. The notes are
secured by certain Company-owned real estate. The credit agreement contains
covenants requiring compliance on a continuing basis. The Company is in
compliance with all covenants.
UNSECURED NOTE: During fiscal 1993, the Company opened a Sterling-based
credit facility with a bank to finance plant construction in the United Kingdom.
At January 31, 1994, the outstanding balance under that facility was L4,100 or
$6,175. Subsequently, a commitment was received to convert the balance to an
unsecured term note with five principal payments of L850 per year beginning in
April, 1997, and bearing interest at .95% over the Sterling LIBOR rate.
ESOP BORROWING: The loan, secured by unallocated shares of Common Stock and
guaranteed by the Company, is payable over seven years with annual payments of
$1,000 with the balance at maturity. Interest is payable quarterly at rates
which approximate 3.25% under the prime rate.
SCHEDULED MATURITIES: The aggregate principal amounts of long-term debt
scheduled for repayment in each of the five fiscal years 1994 through 1998 are
$2,677, $1,000, $22,500, $16,280, and $1,280, respectively. In all fiscal years
interest paid approximates interest expense plus interest capitalized of $338 in
1993, $209 in 1992, and $681 in 1991.
NOTE 6 -- INCOME TAXES
Effective February 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by SFAS
109. As permitted under the standard, prior years' financial statements have not
been restated. The cumulative effect of adopting SFAS 109 was not material.
72
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INCOME TAXES (CONTINUED)
The components of the provision for income taxes are as follows:
CURRENT DEFERRED TOTAL
--------------------------------- --------- ---------
YEAR ENDED JANUARY 31, FEDERAL STATE FOREIGN
- ------------------------------------------------- --------- --------- -----------
1994 (Liability method).......................... $ 1,566 $ 398 $ 40 $ (2,354) $ (350)
1993 (Deferred method)........................... 8,535 1,088 426 51 10,100
1992 (Deferred method)........................... 11,597 990 174 (4,061) 8,700
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
JANUARY 31,
1994
---------------
Deferred tax assets:
Rotable service parts amortization................................................... $ 1,787
Accrued vacation pay................................................................. 1,515
Reserves for uncollectibles.......................................................... 1,470
Foreign operating loss carryforwards................................................. 1,966
Intangible amortization.............................................................. 767
Restructuring costs.................................................................. 534
Other................................................................................ 742
Valuation allowance.................................................................. (1,966)
-------
Total deferred tax assets............................................................ 6,815
-------
Deferred tax liabilities:
Net capitalized software............................................................. 6,300
Accelerated depreciation............................................................. 4,951
Purchased software amortization...................................................... 1,617
Installment sales.................................................................... 987
Benefit plan expense................................................................. 546
Other................................................................................ 263
-------
Total deferred tax liabilities....................................................... 14,664
-------
Net deferred tax liabilities......................................................... $ 7,849
-------
-------
The components of the provision for deferred income taxes for the years
ended January 31, 1993 and 1992 are as follows:
YEAR ENDED JANUARY 31,
------------------------
1993 1992
----------- -----------
Accelerated depreciation...................................................... $ (352) $ (253)
Installment sales............................................................. 665 (29)
Rotable service parts amortization............................................ (262) (6,749)
Software expense.............................................................. 1,291 3,524
Alternative minimum tax....................................................... (1,162) --
Other......................................................................... (129) (554)
----------- -----------
$ 51 $ (4,061)
----------- -----------
----------- -----------
73
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INCOME TAXES (CONTINUED)
A reconciliation of the Company's statutory and effective tax rate is
presented below:
YEAR ENDED JANUARY 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
Statutory rate................................................................. (35.0)% 34.0% 34.0%
State income taxes net of federal benefit...................................... 9.2 2.7 2.7
Intangible amortization........................................................ 12.9 2.0 2.2
Foreign sales corporation...................................................... (4.7) (0.2) (0.3)
Research and development credits............................................... (24.2) (1.0) (2.6)
Foreign operating losses....................................................... 27.1 0.6 0.8
Federal rate adjustment........................................................ 9.8 -- --
Other.......................................................................... (7.3) (0.1) (0.8)
--------- --------- ---------
Effective rate................................................................. (12.2)% 38.0% 36.0%
--------- --------- ---------
--------- --------- ---------
The Federal rate adjustment item above is due to the SFAS 109 requirement to
increase deferred tax liabilities to reflect current statutory income tax rates.
During fiscal 1993, after the Company's adoption of this standard, the U.S.
Federal statutory rate increased from 34% to 35%. This adjustment reflects the
resulting increase in the deferred tax liability of $280. The Company also
incurred foreign operating losses of approximately $2.7 million for the year
ended January 31, 1994, which could not currently be tax benefitted, and
therefore unfavorably impacted the effective tax benefit rate. None of the
remaining items in the current year's rate reconciliation above were unusual in
nature or amount in comparison to prior years.
The Company made income tax payments of $7,132, $7,638, and $12,053 in the
fiscal years ended January 31, 1994, 1993 and 1992, respectively.
NOTE 7 -- STOCKHOLDERS' EQUITY
The Company has 10,000,000 shares of $.01 par value Preferred Stock
authorized and issuable in one or more series as the Board of Directors may
determine; none is outstanding. 50,000,000 shares of $.03 par value Common Stock
are authorized. There are no restrictions on retained earnings.
The Company has four Employee Stock Option Plans (1982, 1984, 1986, and
1990). Options to purchase Common Stock of the Company are granted to employees
at 100% of fair market value on the date of grant and are exercisable over a
five-year period. Outstanding options under all Plans are summarized as follows:
SHARES PRICE PER SHARE
---------- --------------------
Balance, January 31, 1992....................................................... 736,350 $7.75 to $15.68
Granted....................................................................... 239,500 15.00 to 16.50
Cancelled..................................................................... (45,500) 7.75 to 15.00
Exercised..................................................................... (130,500) 7.75 to 14.25
---------- --------------------
Balance, January 31, 1993....................................................... 799,850 7.75 to 16.50
Granted....................................................................... 230,500 12.00 to 17.60
Cancelled..................................................................... (50,870) 8.00 to 16.25
Exercised..................................................................... (70,130) 7.75 to 15.00
---------- --------------------
Balance, January 31, 1994....................................................... 909,350 $7.75 to $17.60
---------- --------------------
---------- --------------------
74
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- STOCKHOLDERS' EQUITY (CONTINUED)
Options for 194,050 and 157,550 shares became exercisable during fiscal 1993
and 1992, respectively, and options for 275,800 and 176,000 shares were
exercisable at the end of the respective years. Shares available for grant under
the Plans totalled 260,552 and 101,852 at January 31, 1994 and 1993,
respectively.
At January 31, 1994, non-qualified options not covered by the Plans to
purchase 13,000 shares at $12.88 to $16.00 per share were outstanding. At
January 31, 1993, non-qualified options not covered by the Plans to purchase
11,000 shares at $12.88 to $15.00 per share were outstanding.
At January 31, 1994, there were 30,000 outstanding options under the
Non-Employee Director Stock Option Plan with per share prices from $8.25 to
$16.00. At January 31, 1993, there were 24,000 outstanding options under the
Plan with per share prices from $8.25 to $15.00.
The Company has an Employee Stock Purchase Plan. There were 274,333 shares
available for purchase under the Plan at January 31, 1994.
NOTE 8 -- EMPLOYEE BENEFIT PLANS
Employee Savings Plan: The Company has a qualified 401k Employee Savings
Plan covering substantially all employees. Company contributions are
discretionary. The Company's contributions to the plan, representing 401k
matching contributions only, were $1,674, $1,438 and $1,253 in fiscal years
1993, 1992, and 1991, respectively.
Employee Stock Ownership Plan: The Company has an Employee Stock Ownership
Plan (ESOP) covering substantially all employees. Benefits, to the extent
vested, become available on retirement or termination of employment. During
fiscal 1989, the ESOP Trust borrowed $10,000 to purchase 792,000 shares of
Common Stock. Each year, the Company makes contributions to the ESOP which are
then used to make loan interest and principal payments. With each principal
payment, which is charged to compensation expense, a portion of the Common Stock
is allocated to participating employees. In fiscal 1993, the Company's
contribution to the Plan was $1,000, and interest was totally offset by
dividends of $168 on unallocated shares. In fiscal 1992, the Company's
contribution to the Plan was $1,000 plus interest of $20, which is net of
dividends on unallocated shares of $220. The Company's contribution to the Plan
in fiscal 1991 was $1,000 plus interest of $269, which is net of dividends on
unallocated shares of $194.
The ESOP Trust borrowing, which is guaranteed by the Company, is reflected
in long-term debt and the Company's obligation to make future contributions to
the ESOP for debt repayment is reflected as a reduction of Stockholders' Equity
in the consolidated financial statements.
Long-Term Incentive Plan: During fiscal 1990, pursuant to a Long-term
Incentive Plan approved by the stockholders, 171,400 shares of Common Stock were
issued to participants on a restricted basis. The shares will be earned by, and
released to, the participants at the end of 10 years, but release can be
accelerated by attainment of 20% return on equity in a fiscal year, as defined
in the Plan. The cost of the Plan is being accrued over the 10-year earning
period and will be accelerated if so earned. The Plan also contains a cash award
element which is earned only upon attainment of the 20% return on equity.
NOTE 9 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of fair value information about financial
instruments, for which it is practicable to estimate that value. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows.
75
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
At January 31, 1994 and 1993, the Company had non-current investments and
notes receivable (non-trade) with carrying values of $8,608 and $7,042,
respectively, which approximate fair value at those respective dates.
At January 31, 1994 and 1993, the Company's $15,000, 9.88% Secured Notes had
a fair value of approximately $16,100 and $16,700, respectively, due to lower
interest rates currently prevailing. The Company's ESOP and other long-term debt
approximates market due to the variable interest rate features of the
obligations.
NOTE 10 -- BUSINESS SEGMENT DATA
The Company operates two business segments. The financial systems segment
(NCS Financial) designs, develops and markets asset management software,
primarily for bank trust departments. This includes systems for personal trust
asset management for individuals and corporate trust applications such as stock
and bond transfer systems. The remainder of the Company's business consists of
several interdependent business units, centered around its proprietary optical
scanning hardware and forms technology. This segment markets those products and
services and related application software to education, business and
professional markets through the NCS Education, NCS Technology, and NCS
Assessments businesses. Below is a summary of certain financial information
related to the two segments for fiscal years ended January 31.
76
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- BUSINESS SEGMENT DATA (CONTINUED)
OPTICAL SCANNING PRODUCTS,
SERVICES AND RELATED SOFTWARE FINANCIAL SYSTEMS TOTAL
---------------------------------------- ------------------------------------ ---------------
1994 1993 1992 1994 1993 1992 1994
-------------- ----------- ----------- -------------- --------- --------- ---------------
Revenues........................ $ 257,813 $ 245,709 $ 251,317 $ 47,640 $ 54,358 $ 51,189 $ 305,453
-------------- ----------- ----------- -------------- --------- --------- ---------------
-------------- ----------- ----------- -------------- --------- --------- ---------------
Operating income (loss)......... 25,447(1) 28,802 32,691 (19,621 )(2) 6,564 5,149 5,826(3)
Corporate expense............... 8,127
Interest and other expense,
net............................ 558
---------------
Total income (loss) before
income taxes................. (2,859)
---------------
---------------
Identifiable assets............. 177,664 151,252 169,667 25,340 40,787 31,914 203,004
Corporate assets................ 17,169
---------------
Total assets.................. 220,173
---------------
---------------
Depreciation and amortization... 20,263 22,920 20,974 3,507 5,002 3,604 23,770
Corporate depreciation and
amortization................... 907
---------------
Total depreciation and
amortization................. 24,677
---------------
---------------
Capital expenditures............ 24,425 17,286 13,111 9,391 5,089 7,519 33,816
Corporate capital
expenditures................... 1,510
---------------
Total capital expenditures.... $ 35,326
---------------
---------------
1993 1992
----------- -----------
Revenues........................ $ 300,067 $ 302,506
----------- -----------
----------- -----------
Operating income (loss)......... 35,366 37,840
Corporate expense............... 8,108 9,136
Interest and other expense,
net............................ 650 4,530
----------- -----------
Total income (loss) before
income taxes................. 26,608 24,174
----------- -----------
----------- -----------
Identifiable assets............. 192,039 201,581
Corporate assets................ 22,700 15,997
----------- -----------
Total assets.................. 214,739 217,578
----------- -----------
----------- -----------
Depreciation and amortization... 27,922 24,578
Corporate depreciation and
amortization................... 635 639
----------- -----------
Total depreciation and
amortization................. 28,557 25,217
----------- -----------
----------- -----------
Capital expenditures............ 22,375 20,630
Corporate capital
expenditures................... 418 485
----------- -----------
Total capital expenditures.... $ 22,793 $ 21,115
----------- -----------
----------- -----------
<FN>
- ------------------------
(1) Includes restructuring charge of $2,200.
(2) Includes restructuring charge of $22,800.
(3) Includes restructuring charge of $25,000.
77
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- BUSINESS SEGMENT DATA (CONTINUED)
Capital expenditures include property, plant and equipment additions as well
as rotable service parts and capitalized software. The Company's foreign
operations and export sales are less than 10% of total revenues. Sales to all
government agencies for the fiscal years ended January 31, 1994, 1993 and 1992
were $97,198, $95,232 and $96,498 of which $23,001, $26,134 and $31,172,
respectively, were to U.S. government agencies, principally the U.S. Department
of Education, with the remainder to state and local government agencies,
predominantly school districts and state departments of education.
78
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
National Computer Systems, Inc.
We have audited the accompanying consolidated balance sheets of National
Computer Systems, Inc. and Subsidiaries as of January 31, 1994 and 1993, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended January 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of National
Computer Systems, Inc. and Subsidiaries at January 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 1994, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG
Minneapolis, Minnesota
March 16, 1994
79