ITEM 1. BUSINESS
National Computer Systems, Inc. ("NCS" or the "Company") provides integrated information management products and services, designed to collect and interpret data, to four primary markets:
EDUCATION -- NCS develops and markets systems and services which include optical scanning systems, related proprietary software, hardware and software maintenance, scannable documents, proprietary student and financial administrative systems, assessment test processing and other data gathering and processing services.
BUSINESS -- The Company develops and markets optical scanning hardware, image-based data collection systems, related work stations, proprietary software and forms for applications within the commercial marketplace. Using forms-based data entry scanning technology, customers are able to automate labor-intensive data collection and information processes with significantly increased efficiency and accuracy.
ASSESSMENTS -- The Company publishes and markets psychological assessment instruments, scoring systems and scanning products to clinical professionals in the behavioral and mental health markets. Organizational survey and assessment testing and services and vocational counseling tests are marketed to the corporate human resources market.
FINANCIAL SERVICES -- NCS develops and markets computer-based systems with proprietary software and services for automating asset management in the financial services industry, primarily banking.
Applications for NCS' products and services within the education market include administrative applications such as attendance, scheduling, grade reporting and registration/enrollment; library and inventory management; financial management and payroll; and testing applications including test generation, teacher-created tests and norm-referenced and criterion-referenced testing. NCS also provides scanning and computer processing services for the large volume, complex processing needs of major test publishers, state education agencies, the federal government and local school districts.
In the business marketplace, the Company's products and services are directed to sales/marketing applications including sales/order entry and customer satisfaction surveys; operations applications including quality measurement and inventory analysis; administrative applications including billing, collections and payroll; health care administration including the gathering of individual patient information; human resource applications including applicant tracking, benefits enrollment and employee evaluation; aptitude, vocational interest and organizational assessment testing; and surveys or ballots.
The Company provides the financial services marketplace with computer-based systems including proprietary software products and services for automated asset management systems for trust asset management in personal trust, corporate trust, private banking and employee benefits accounting.
NCS operates two business segments: (1) Optical Scanning Products, Services and Related Software and (2) Financial Systems. See Note 10 -- Business Segment Data of Notes to Consolidated Financial Statements included in the Annual Report to Stockholders for the year ended January 31, 1994, incorporated herein by reference.
The Company's headquarters are located at 11000 Prairie Lakes Drive, Eden Prairie, Minnesota 55344, telephone 612/829-3000.
OPTICAL SCANNING PRODUCTS, SERVICES AND RELATED SOFTWARE
SCANNING SYSTEMS
NCS manufactures optical mark reading (OMR) scanners which can read data from specially designed forms printed by the Company with specifically formulated inks. Computing capability is built into most scanners. Scanners usually incorporate or interface directly with software developed by the Company.
Optical scanning equipment is most effective for applications where highest accuracy, precise response definition and cost effective data capture is required. Such applications include multiple choice tests; employee and benefits administration; quality measurement and customer satisfaction surveys; customer order entry; market research and field sales reporting; and personality assessment or psychological diagnostic information.
The Company's major lines of scanning hardware include scanners marketed as Sentry-R- and OpScan-R- products. Recently, new low-cost scanners were introduced to expand the Company's line of scanning products. These lines of scanners provide a wide range of capabilities to meet the needs of all customers. The optical scanning systems utilize a proprietary mark discrimination system to distinguish valid marks, thus providing a very high degree of accuracy in processing responses. To enhance the usefulness of the OpScan line, optional features offered include bar code reading capability, a transport printer to print alphanumeric messages on scanned documents, optional read formats and upgraded computer capability options.
NCS markets the Precept-R- image-based data collection system which represents an extension of the Company's optical mark reading technology. When attached to a workstation computer and using sophisticated software, these scanners allow customers to efficiently and accurately collect and interpret the widest possible range of information from a printed form including printed and handwritten data.
SCANNING AND APPLICATION SOFTWARE
NCS offers a number of standard software programs for use with NCS systems. Application software is an important component in the Company's marketing of its scanning products and services. A principal strategy of the Company in servicing the education marketplace is to concentrate on those systems that facilitate accountability in school administration and in the measurement of student progress. The Company offers standard integrated software systems in lieu of custom design and programming work performed by the customers. This has resulted in the introduction and marketing of new and enhanced software products. The MicroCIMS-TM- product, an advanced student management software system, is in the initial distribution stage following product release.
Software products include software to assist educators in student management including such applications as grade reporting, attendance gathering and scheduling, as well as financial management; software for obtaining information about student performance and for analyzing and reporting test results and student progress; software to enable users to easily develop new scanning applications; software to assist scanner users with data entry to statistical analysis or data base management systems and other software applications packages; software packages to statistically analyze survey or assessment data and produce a wide range of reports designed to meet a variety of reporting requirements; and software for healthcare administration.
SCANNABLE FORMS
The design, manufacture and sale of scannable forms, including multiple-page booklets, represents an important contribution to the Company's revenues and operating income. A variety of custom forms are produced that are tailored to meet specific customer needs. In addition, standardized forms are increasingly used, especially with microcomputer-based scanners, in such standard applications as testing, attendance, scheduling and student evaluation at the classroom level or customer surveys or market research in the business setting.
The Company believes that the use of a properly designed and printed form is an essential element in assuring that a scanning system performs with greatest accuracy and optimum capability. In order to assure a high degree of consistency, reliability and accuracy, NCS has emphasized the use of its forms with its equipment.
The Company prints its forms to exacting specifications. TransOptic-R- paper is used to permit Sentry scanners to read both sides of the form at the same time. Special inks are used in printing all forms.
MEASUREMENT AND DATA SERVICES
NCS markets scanning and computer processing services to major test publishers, state education agencies, the federal government and local school districts. For these customers, NCS develops and executes projects including planning, document design, distribution logistics, data collection, editing, analysis and final reporting.
Examples of high volume processing services include test scoring for major test publishers, educational assessment testing for states and information processing for the federal government such as processing student financial aid information for the U.S. Department of Education.
ASSESSMENT AND SURVEY SERVICES
The Company publishes and distributes tests and provides scoring services and equipment for the professional counseling market; for industrial and clinical psychologists, psychiatrists and human resource professionals; and educators. These tests and services include personality assessment and psychological diagnostic testing, career development, guidance counseling and human resource organizational assessments.
NCS provides specialized survey and scannable information processing services to selected industries in the commercial marketplace. In addition to scoring, analyzing and reporting survey results, the Company assists customers in designing survey instruments, conducting surveys and interpreting survey results.
FINANCIAL SYSTEMS
NCS develops, sells and supports systems for asset and investment management reporting and record keeping for bank trust departments and other organizations with trust powers. Applications include personal trust, corporate trust and employee benefits. These systems utilize proprietary software developed by NCS and licensed for periods of five years or more as well as hardware manufactured by others. Each system is designed to address the unique needs of customers. NCS supports these installations with customer response centers, trust consultants, system conversion specialists and training staffs.
For corporate trust customers and personal trust departments of smaller banks the Company offers outsourcing and computer processing services from its service bureau facility. For the personal trust market, the Company provides trust accounting systems to small to medium sized banks through its Trustware-R- Series 7 product line and to larger banks through the Trustware Series 11 product line. Management of debt securities is provided by the Company's BondMaster-R- software system or CertMaster-R- software for complex debt instruments. These offerings are enhanced with the addition of an optical disk-based system for data storage.
The ULTRUST-R- system, an advanced trust accounting system for money center, super-regional and large international banks, was discontinued during the fourth quarter of fiscal 1993. See Note 2 -- Restructuring Charge of Notes to Consolidated Financial Statements included in the Annual Report to Stockholders for the year ended January 31, 1994, incorporated herein by reference.
NCS provides software support service by periodically issuing software program revisions to improve systems performance and to accommodate changes in the tax law and other regulatory changes. The Company also periodically releases new software applications which it licenses to its customers.
MARKETING
NCS markets its information systems hardware and software and scanning and computer processing services directly through sales employees located throughout the United States, who direct their efforts to either the education or business marketplace. Outside the United States, the Company's systems and associated products and services are sold through sales employees, distributors or independent sales agents. NCS markets its financial systems through a separate staff of sales employees. The Company's published tests and test scoring services are marketed principally in the United States through telemarketing, direct mail, professional journal advertising and professional trade convention attendance and elsewhere through distributors. Each of the Company's sales organizations is supported by marketing and sales support personnel.
SOFTWARE SUPPORT, TECHNICAL SUPPORT AND MAINTENANCE
Software support is provided on a contractual basis to customers licensing application software systems. NCS assists customers with installation, training, hardware or software upgrades and development of specific customer application software on a fee for service basis.
The Company offers technical support and hardware maintenance to customers purchasing or leasing its equipment either on a contractual basis or through its national network of field engineers. NCS emphasizes prompt, reliable service and close customer relationships. Technical and maintenance support may include labor, parts, operational training and, where applicable, programming of the equipment and design of forms. Substantially all customer leased or purchased equipment manufactured by NCS is maintained by Company personnel.
DEVELOPMENT OF PRODUCTS AND SERVICES
The Company's development efforts are directed toward new product development and enhancements to existing products. During the fiscal years ended January 31, 1994, 1993 and 1992, the Company spent, including certain capitalized software development costs, approximately $22.0 million, $17.3 million and $17.7 million, respectively, principally on software product development (primarily focused on application software) and scanning software and equipment development.
MANUFACTURING
The Company assembles its scanning equipment from electronic components, metal stampings, molded plastic parts and mechanical sub-assemblies. These parts are generally available from multiple sources. The Company assembles most of the scanning systems equipment at its Eagan, Minnesota facility. Computer hardware, other than scanning equipment, is purchased from other manufacturers.
Scannable forms are produced at NCS' printing plants in Columbia, Pennsylvania; Owatonna, Minnesota; and Rotherham, South Yorkshire, England. The ink and paper used in forms production are produced to the Company's specifications by a limited number of suppliers. Although the Company has no long-term supply contracts with either its paper or ink suppliers, the Company has had long-term relationships with such suppliers and believes that these relationships are good.
COMPETITION
Competition in the information management industry is intense. Optical scanning is only one of numerous data input methods. The Company has attempted to develop education, business and assessment markets where scanning technology has advantages over other data entry technologies. NCS scanning systems incorporate optical scanning equipment, computer hardware and proprietary software which are marketed and sold as turn-key systems.
In addition to the functional competition provided by alternative methods of data capture, including on-line terminal keyboards and optical character readers, other scanning vendors supply products that compete with those of the Company.
The Company's scannable forms compete with those produced by commercial and specialized forms printers in various localities throughout the United States. Principal competitive factors in the scannable forms printing industry are product quality, service and price.
NCS' data processing, test publishing and computer processing services compete with several test publishers and data processing service bureaus. The Company's customer support maintenance organization competes with service provided by manufacturers, other national service companies and local providers of maintenance services.
NCS' financial systems compete with systems developed by users, service bureaus and other direct competitors offering asset management accounting systems. The Company believes that it is one of the leading suppliers of systems to bank trust departments.
PATENTS, TRADEMARKS AND LICENSES
The Company holds certain patents, registered and unregistered trademarks, and copyrights. The Company also has license rights to a number of patents, trademarks, copyrights and manufacturing processes and materials. Included among these licenses are agreements with publishers of various copyrighted psychological, aptitude and achievement tests to distribute these tests, to print and sell answer sheets for such tests, and to score such tests. Payment of royalties is usually based upon the volume of tests distributed, answer sheets sold, and tests scored. NCS believes that its business is not dependent upon any one individual patent, trademark, copyright or license right or group thereof.
"Trans-Optic", "Sentry", "Trustware", "ULTRUST", "BondMaster", "CertMaster", "OpScan" and "Precept" appearing herein are registered trademarks of National Computer Systems, Inc.
EMPLOYEES
As of February 28, 1994, the Company employed approximately 2,700 full-time employees. None of the Company's employees are subject to a collective bargaining agreement, and the Company believes that its employee relations are excellent.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all of the executive officers of the Company as of February 28, 1994 are listed below along with their business experience during the past five years.
Mr. Oswald has been Chairman of the Board and Chief Executive Officer of NCS for more than five years.
Mr. Malmberg has been Vice Chairman of the Board since August, 1992 and prior to that was President and Chief Operating Officer of NCS for more than five years.
Mr. Bowen has been a Senior Vice President of NCS since November 1989 and a Vice President of NCS since August 1989. From June 1988 to July 1989 he was President of Science Research Associates, Inc. (publishing/communications).
Mr. Cocke has been Senior Vice President and Chief Financial Officer of NCS since March 1992. From March 1987 to November 1991 he was Vice President, Finance and Administration of the United States Group of AT&T Global Information Solutions (formerly NCR Corporation) (information processing systems).
Mr. Fenton has been Secretary-Treasurer of NCS for more than five years.
Mr. Gibson has been a Senior Vice President of NCS since November 1989 and prior to that was a Vice President for more than five years.
Mr. Poss has been a Vice President of NCS for more than five years.
Mr. Smith has been a Vice President of NCS for more than five years.
Mr. Taylor has been Vice President and Corporate Controller of NCS for more than five years.
Ms. Tietz has been a Vice President of NCS since November 1989. From March 1989 to October 1989 she was Director of Strategic Planning for NCS.
Mr. Weisberg has been a Senior Staff Officer of NCS since May 1989 and prior to that was a lawyer with the law firm of Dorsey & Whitney for more than five years.
Officers are elected annually by the Board of Directors. There are no family relationships among these officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal facilities are as follows:
The Company believes that its facilities are adequate to meet its current needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to nor is its property subject to any material pending legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the year ended January 31, 1994 to a vote of security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
"Quarterly Market Data" included in the Annual Report to Stockholders for the year ended January 31, 1994 is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
"Five-Year Financial Data" included in the Annual Report to Stockholders for the year ended January 31, 1994 is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Results of Operations and Financial Condition" included in the Annual Report to Stockholders for the year ended January 31, 1994 is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and supplementary data of the registrant and its subsidiaries, included in the Annual Report to Stockholders for the year ended January 31, 1994, are incorporated herein by reference:
Consolidated Balance Sheets -- January 31, 1994 and 1993
Consolidated Statements of Income -- Years ended January 31, 1994, 1993 and
Consolidated Statements of Changes in Stockholders' Equity --Years ended January 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows -- Years ended January 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements -- January 31, 1994
Report of Independent Auditors dated March 16, 1994
"Quarterly Results of Operations (Unaudited)"
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Election of Directors" included in the Company's definitive proxy statement dated April 20, 1994 and "Executive Officers of the Registrant" in Part I of this report are incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
"Summary Compensation Table" and "Stock Options" included in the Company's definitive proxy statement dated April 20, 1994 are incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Election of Directors" and "Ownership of NCS Common Stock by Certain Beneficial Owners and Executive Officers" included in the Company's definitive proxy statement dated April 20, 1994 is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in footnote 7 to the "Summary Compensation Table" included under the caption "Executive Compensation" in the Company's definitive proxy statement dated April 20, 1994 is incorporated herein by reference.
The information contained in the third and sixth paragraphs which follow the footnotes to the table set forth under the caption "Election of Directors" in the Company's definitive proxy statement dated April 20, 1994 is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) List of Financial Statements and Financial Statement Schedules
(1) The following consolidated financial statements of National Computer Systems, Inc. and subsidiaries, included in the annual report of the registrant to its stockholders for the year ended January 31, 1994, are incorporated by reference in Item 8:
Consolidated Balance Sheets -- January 31, 1994 and 1993
Consolidated Statements of Income -- Years ended January 31, 1994, 1993 and 1992
Consolidated Statements of Changes in Stockholders' Equity -- Years ended January 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows -- Years ended January 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements -- January 31, 1994
Report of Independent Auditors dated March 16, 1994.
(2) The following consolidated financial statement schedules of National Computer Systems, Inc. and subsidiaries are included in Item 14(d):
Schedule II -- Amounts receivable from related parties and underwriters, promoters, and employees other than related parties
Schedule V -- Property, plant and equipment
Schedule VI -- Accumulated depreciation, depletion and amortization of property, plant and equipment
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(3) -- Listing of Exhibits:
(b) Reports on Form 8-K
In a report filed on Form 8-K dated January 5, 1994, the Company reported a fourth quarter fiscal 1993 charge for product discontinuance and restructuring. See Note 2 -- Restructuring Charge of Notes to Consolidated Financial Statements included in the Annual Report to Stockholders for the year ended January 31, 1994, incorporated herein by reference.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate section of this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL COMPUTER SYSTEMS, INC.
Dated: April 26, 1994 By /s/ J. W. FENTON, JR.
----------------------------------- J. W. Fenton, Jr. SECRETARY-TREASURER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By CHARLES W. OSWALD* Chairman of the Board of ------------------------------ Directors Charles W. Oswald (principal executive officer) By DAVID C. MALMBERG* ------------------------------ Director David C. Malmberg By DR. DAVID P. CAMPBELL* ------------------------------ Director Dr. David P. Campbell By WILLIAM W. CHORSKE* ------------------------------ Director William W. Chorske By DAVID C. COX* ------------------------------ Director David C. Cox By JEAN B. KEFFELER* ------------------------------ Director Jean B. Keffeler By STEPHEN G. SHANK* ------------------------------ Director Stephen G. Shank By JOHN E. STEURI* ------------------------------ Director John E. Steuri By JEFFREY E. STIEFLER* ------------------------------ Director Jeffrey E. Stiefler By JOHN W. VESSEY* ------------------------------ Director John W. Vessey
By ROBERT F. ZICARELLI* ------------------------------ Director Robert F. Zicarelli By NORMAN A. COCKE* Senior Vice President and ------------------------------ Chief Financial Officer Norman A. Cocke (principal financial officer) By JEFFREY W. TAYLOR* Vice President and ------------------------------ Controller (principal Jeffrey W. Taylor accounting officer)
* Executed on behalf of the indicated officers and directors of the registrant by J. W. Fenton, Jr., Secretary-Treasurer, duly appointed attorney-in-fact.
/s/ J. W. FENTON, JR. - ----------------------------------- Dated: April 26, 1994 (ATTORNEY-IN-FACT)
FORM 10-K NATIONAL COMPUTER SYSTEMS, INC. FOR THE FISCAL YEAR ENDED JANUARY 31, 1994
INDEX TO CONSOLIDATED FINANCIAL SCHEDULES
All other schedules have been omitted because they are not required or are inapplicable.
SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
NATIONAL COMPUTER SYSTEMS, INC.
SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT
NATIONAL COMPUTER SYSTEMS, INC.
SCHEDULE VI -- ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
NATIONAL COMPUTER SYSTEMS, INC.
FORM 10-K NATIONAL COMPUTER SYSTEMS, INC. FOR THE FISCAL YEAR ENDED JANUARY 31, 1994
EXHIBIT INDEX