SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: COMMISSION FILE NUMBER:
JANUARY 31, 1998 0-3713
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NATIONAL COMPUTER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0850527
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11000 PRAIRIE LAKES DRIVE
EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612/829-3000
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Securities registered pursuant to Section 12(g) of the Act:
Common Shares--par value $.03 a share
(Title of Class)
Rights to Purchase Series A Participating Preferred Stock
(Title of Class)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. _X_
State the aggregate market value of the voting shares held by non-affiliates of
the registrant as of April 17, 1998.
Common Shares, $.03 par value -- $ 644,923,000
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of April 17, 1998.
Common Shares, $.03 par value - 31,044,252 shares
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended January 31,
1998 are incorporated by reference into Parts I, II and IV.
Portions of the definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 21, 1998 are incorporated by reference into Part
III.
<PAGE>
PART I
ITEM 1. BUSINESS
National Computer Systems, Inc. ("NCS" or the "Company") is a global
information services company, which provides quality services, software and
systems for the collection, management and interpretation of data.
The Company's services include data capture and processing, analysis, data
management, reporting, network services, software services, hardware maintenance
and other professional services to meet customer needs.
The Company's application software products are focused on specific
applications within targeted markets, particularly K-12 education, where NCS has
a substantial presence.
NCS systems are used to: capture and aggregate data; create a database or
datastream; process the data using proprietary software; and analyze, interpret
and report results. Data collection systems include optical mark read and image
scanning hardware, other data collection technologies, proprietary software and
pre-printed forms. The Company utilizes its own products, as well as other
technologies, to provide data collection services to those customers who prefer
not to purchase systems for internal use.
NCS markets its data collection, management and reporting services and
systems within two broad markets: Education and Data Management.
EDUCATION
NCS develops and markets data collection services and systems which provide
optical scanning, image-based or electronic data collection and computer
processing services for the high accuracy, large volume, complex processing
needs of major test publishers, state education agencies, universities and
colleges, and local school districts. NCS also develops and markets enterprise
application software for the administration and management of curriculum,
student instruction, and financial data at the classroom, school, school
district and state levels. In addition to its services for training, consulting
and project management NCS, more recently, has offered network services,
including design, hardware and software procurement, Internet utilization,
maintenance and support, network administration and outsourcing for its K-12
customers.
By using the Company's optical scanning and image-based systems and forms,
individual school districts can perform in-house student assessment testing
applications, including teacher created or administration developed norm- or
criterion-referenced tests; administrative applications such as attendance,
scheduling, grade reporting and registration; library and inventory management;
and financial management and payroll.
The Company's information processing services are also provided in support
of federal student financial aid programs for post-secondary education.
DATA MANAGEMENT
NCS develops, markets and manages complex data collection, processing and
reporting services and products targeted for certain key applications in the
data management market. These applications include sales/marketing applications,
such as sales/order entry, billing, quality measurement, product warranty and
customer satisfaction surveys and customer data collection; payroll; human
resource applications, including applicant tracking, organizational development,
employee attitude surveys, benefits enrollment and employee evaluation;
telephone equal access balloting; and general data collection, analysis,
management and reporting.
NCS provides scanners and forms for customers to do their own paper-based
data collection. The Company also provides solutions to more complex information
management needs through services and products that include comprehensive data
collection technologies, software development, telecommunications support and
information dissemination systems. All of these processing, data management and
reporting services are available from NCS in support of customers that prefer to
outsource these services. In addition, NCS offers network design, hardware and
software acquisition, implementation, maintenance and support, and network
administration.
BUSINESS SEGMENT AND OTHER INFORMATION
NCS operates in a single business segment. See Note 10 of Notes to
Consolidated Financial Statements for business segment data, which financial
statements are included in the Annual Report to Stockholders for the fiscal year
ended January 31, 1998, and incorporated herein by reference.
The Company's headquarters are located at 11000 Prairie Lakes Drive, Eden
Prairie, Minnesota 55344, telephone 612/829-3000.
PRIMARY PRODUCT AND SERVICE OFFERINGS
Assessment and Testing Services
NCS is the largest commercial processor of student assessment tests for
grades K-12 in the United States. NCS markets test scoring services to major
test publishers, state education agencies, the federal government, local school
districts and commercial customers. For these customers, NCS service offerings
include program design, item development, program management, software
development, printing, packaging, distribution and collection logistics,
scoring, editing, analysis and final reporting. Scoring services include
selected response scoring and professional scoring of constructed response items
such as essays. Both optical mark reading (OMR) and image scanning technologies
are utilized in the scoring process.
The acquisition of Virtual University Enterprises in fiscal 1997 added a
secure Internet-based electronic testing delivery capability, thereby allowing
NCS to participate in the professional certification market, as well as offer an
electronic testing option to traditional statewide grade K-12 testing programs.
The Company also publishes and distributes test instruments and provides
scoring services to industrial and clinical psychologists, psychiatrists, 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. With the
acquisition of the London House business from The McGraw-Hill Companies in
fiscal 1997, the Company's test and scoring services have expanded to include
assessments for personnel selection, skill assessment and workforce development.
Enterprise Software for Schools
A principal strategy of the Company in servicing the education marketplace
is to concentrate on enterprise software for school administration. Software
products include student administrative software to assist educators in student
management, including such applications as academic reporting, attendance
gathering and scheduling. The Company's instructional and curriculum management
software products manage information about student achievement against
educational objectives. In conjunction with the instructional management
software, NCS offers a Model Curriculum and Assessment Database (MCAD) to assist
schools in establishing stated curriculum objectives with specific test items to
measure progress against those objectives.
NCS software products also include financial management software for schools
and school districts, which includes accounting and financial reporting,
payroll, human resources, inventory and many other financial and administrative
functions. The Company offers teacher-training software specifically aimed at
improving assessment of writing and composition skills.
NCS offers services associated with its enterprise software to assist with
the design and implementation of these installations. Services offered by NCS
include professional consulting; project management; network planning, design
and implementation; systems installation and integration; training; help desk
and ongoing support. The Company also offers outsourcing services to install its
software and third-party computing and network hardware and operate the system
on a day-to-day basis for the school district.
Data Management Services
NCS provides a comprehensive package of services and products that include
systems analysis and design; software development; comprehensive data collection
technologies, including paper based and electronic; telecommunication and
telephone call center support; information management and dissemination; and
network support, including Internet connectivity; and training. These services
and products can be delivered on-site or outsourced off-site to NCS.
The U.S. Department of Education has outsourced to NCS the processing and
eligibility of the free federal application for student aid in post-secondary
education, and is the Company's single largest customer. NCS also manages, under
contract, the wide area network over which this information is distributed to
and from member colleges, universities and other post-secondary institutions.
Scanning Products
NCS manufactures OMR scanners that can read data from specially designed
forms printed by the Company with specifically formulated inks. Computing
capability is built into most scanners. Scanners usually incorporate, or
interface directly with, software developed by the Company. Optical scanning
equipment is most effective for applications where highest accuracy, precise
response definition and cost effective data capture is required.
The Company's lines of OMR hardware include scanners marketed as OpScan(R)
products. These lines of scanners provide a wide range of capabilities to meet
the needs of customers. The OMR scanning systems utilize a proprietary mark
discrimination system to distinguish valid marks, thus providing a very high
degree of accuracy in processing responses. To enhance the usefulness of the
OpScan line, the Company offers optional features, such as bar code reading
capability, a transport printer to print alphanumeric messages on scanned
documents, optional read formats and upgraded computer capability options.
NCS markets image-based data collection systems which represent an extension
of the Company's optical mark reading technology. These are marketed as NCS(R)
products and contain NCS proprietary character recognition technology as well as
integrated third-party technologies. When attached to a workstation computer and
using sophisticated software, these scanners allow customers to efficiently and
accurately collect and interpret a wide range of information from a printed
form, including machine- and hand-printed data.
NCS offers a number of standard software programs for use with NCS systems.
Processing and application software is an important component of its scanning
products and services. The Company also offers non-proprietary data collection
products and technology to address specific customer data collection needs.
Scannable Forms
The Company designs, manufactures and sells scannable forms, including
multiple-page booklets. A variety of custom forms are produced that are tailored
to meet specific customer needs. In addition, standardized forms are used,
especially with microcomputer-based scanners, in such applications as testing,
attendance, scheduling and student evaluation in the education market or
customer surveys or market research in the commercial setting.
The Company believes that the use of a properly designed and printed form is
an essential element in assuring that a scanning system performs with greatest
accuracy and optimum capability. In order to assure a high degree of
consistency, reliability and accuracy, NCS has emphasized the use of its forms
with its equipment. The Company prints its forms to exacting specifications.
MARKETING
NCS markets its data collection hardware and software and its data
collection and computer processing services directly through sales employees,
business partners and original equipment manufacturers and resellers located
throughout the United States. Outside the United States, the Company's systems,
products and services are sold through sales employees, distributors or
independent sales agents. The Company's published test products and related
test-scoring services are marketed principally in North America through
telemarketing, direct mail, professional journal advertising and professional
trade convention attendance and elsewhere through distributors. Each of the
Company's sales organizations are supported by marketing and sales support
personnel.
SOFTWARE SUPPORT, TECHNICAL SUPPORT AND MAINTENANCE
Software support is provided on a contractual basis to customers licensing
application software systems from the Company. NCS assists customers with
installation, training, hardware or software upgrades and development of
specific customer application software on a fee for service basis.
The Company offers technical support and hardware maintenance to customers
purchasing or leasing its equipment either on a contractual basis or through its
national network of customer service and support engineers. NCS emphasizes
prompt, reliable service and close customer relationships. Technical and
maintenance support may include labor, parts, operational training and, where
applicable, programming of the equipment and design of forms.
The Company supports its large scale, complex data management projects with
information processing expertise in areas such as needs assessment, software
development, data collection technologies, data base management, secure Internet
applications, networking, telecommunications, help desk services, system
acquisition and implementation and ongoing training and support.
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, 1998, 1997 and 1996, the Company spent approximately $8.6 million,
$9.9 million and $8.5 million, respectively (including certain internally
developed, capitalized software development costs). The expenditures relate
principally to software product development (primarily focused on applications
software) and scanning software and equipment development. See Note 2 to Notes
to Consolidated Financial Statements for a description of additional new
products and enhancements to existing products acquired through acquisitions,
which financial statements are included in the Annual Report to Stockholders for
the fiscal year ended January 31, 1998, and incorporated herein by reference.
MANUFACTURING
The Company assembles its scanning equipment from electronic components,
metal stampings, molded plastic parts and mechanical sub-assemblies. These parts
are generally available from multiple sources. The Company assembles most of the
scanning systems equipment at its Eagan, Minnesota facility. Computer hardware
is purchased from other manufacturers.
Scannable forms are produced at NCS' printing plants in Columbia,
Pennsylvania; Owatonna, Minnesota; and Rotherham, South Yorkshire, England. The
ink and paper used in forms production are produced to the Company's
specifications by a limited number of suppliers. Although the Company has no
long-term supply contracts with its paper or ink suppliers, the Company has had
long-term relationships with such suppliers and believes that these
relationships are good.
COMPETITION
Competition in the data collection and information management industry is
intense. Numerous companies offer various combinations of data collection and
data management services. Optical scanning and imaging are only two of numerous
data collection methods available and successfully in use in the marketplace
today. The Company continues to focus on the development of education,
government and commercial market niches where scanning technology has advantages
over other data entry technologies.
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 directly compete with
those of the Company.
Enterprise software for the education market is competitive with in-house
systems, national and regional software and service providers, data processing
service bureaus, test publishers and providers of educational curriculum and
instruction management products and services.
The Company's scannable forms compete with those produced by commercial and
specialized forms printers. Principal competitive factors in the scannable forms
printing industry are product quality, service and price.
NCS' test 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 services
provided by manufacturers, other national service companies and local providers
of maintenance services.
PATENTS, TRADEMARKS AND LICENSES
The Company holds certain patents, registered and unregistered trademarks
and copyrights. The Company also has rights under licensing arrangements to a
number of patents, trademarks, copyrights and manufacturing processes and
materials. These licensing arrangements are agreements with publishers of
various copyrighted psychological, aptitude and achievement tests that license
NCS to distribute these tests, to print and sell answer sheets for such tests,
and to score such tests. Payment of royalties is usually based upon the volume
of tests distributed, answer sheets sold, and tests scored. NCS believes that
its business is not dependent upon any one individual patent, trademark,
copyright or license right or group thereof.
"OpScan" and "NCS" appearing herein are registered trademarks of the
Company.
EMPLOYEES
As of February 28, 1998, the Company employed approximately 3,500 full-time
employees. 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, 1998 are listed below along with their business
experience during the past five years.
NAME AGE POSITION
- ------------------- -------- -------------------------------------
Russell A. Gullotti 55 Chairman of the Board,
President and Chief Executive Officer
Robert C. Bowen 56 Senior Vice President
Michael C. Brewer 51 Vice President and General Counsel
Jay V. Clark 56 Vice President
John W. Fenton, Jr. 57 Secretary-Treasurer
Clive M. Hay-Smith 40 Vice President
Robert C. Hickcox 44 Vice President
Gary L. Martini 47 Vice President
Michael A. Morache 47 Vice President
David W. Smith 53 Vice President
Jeffrey W. Taylor 44 Vice President and Chief Financial Officer
Adrienne T. Tietz 51 Vice President
Mr. Gullotti has been President and Chief Executive Officer since October,
1994 and Chairman of the Board since May, 1995. Prior to that he held senior
executive positions in sales and marketing, services and administration with
Digital Equipment Corporation (computer manufacturing and services) for more
than five years.
Mr. Bowen has been a Senior Vice President of NCS for more than five years.
Mr. Brewer has been Vice President and General Counsel of NCS since May,
1995. Prior to that he was General Counsel of NCS from May, 1992 until May, 1995
and Associate General Counsel of NCS from May, 1990 until May, 1992.
Mr. Clark has been a Vice President of NCS for more than five years.
Mr. Fenton has been Secretary-Treasurer of NCS for more than five years.
Mr. Hay-Smith has been a Vice President of NCS since December, 1993. Prior
to that he was a sales and distribution executive with Control Data Systems,
Inc. (computer systems integrator) from March, 1989 to August, 1993.
Mr. Hickcox has been a Vice President of NCS since February, 1997. Prior to
that he was Director, Methods and Tools of NCS from April, 1995 to February,
1997 and prior to that, Manager, Tools and Systems with Digital Equipment
Corporation (computer manufacturing and services) for more than five years.
Mr. Martini has been a Vice President of NCS since August, 1997. Prior to
that he was owner and President of Martini & Associates (organizational
development consulting) for more than five years and was Senior Consultant,
Organization Development with Medtronic, Inc. (manufacturer of implantable
cardiac devices) from April, 1991 to June 1993.
Mr. Morache has been a Vice President of NCS since May, 1996. Prior to that
he was a Vice President of Unisys Corporation (information management company)
from September, 1995 to May, 1996 and prior to that, a Senior Vice President
with ALLTEL Information Services, Inc. (information processing management,
outsourcing services and application software) for more than five years.
Mr. Smith has been a Vice President of NCS for more than five years.
Mr. Taylor has been Vice President and Chief Financial Officer since May,
1994 and prior to that Vice President and Corporate Controller of NCS for more
than five years.
Ms. Tietz has been a Vice President of NCS for more than five years.
Officers are elected annually by the Board of Directors. There are no
family relationships among these officers, nor any arrangement or understanding
between any officer and any other person pursuant to which the officer was
selected.
PRIVATE SECURITIES LITIGATION REFORM ACT
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing, as Exhibit 99
hereto, cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in forward
looking statements of the Company made by, or on behalf of, the Company.
ITEM 2. PROPERTIES
The Company's principal facilities are as follows:
SQUARE
LOCATION FOOTAGE GENERAL PURPOSE
- --------------- ---------- -------------------------------
Mesa, AZ (1) (2) 40,000 Education software and services
general offices, sales and
marketing, product
development and support
Cedar Rapids, IA 205,000 Data processing services and
warehouse
Iowa City, IA Assessment and test processing
Building 1 (1) 168,000 and data processing services,
Building 2 (1) 112,000 general offices and operations
Lawrence, KS 90,000 Data processing services,
general offices and operations
Eagan, MN (1) 109,000 Scanner hardware development
and manufacturing; NCS
services general offices,
sales and marketing;
customer support services
general offices and
operations; and
international operations
general offices, sales and
marketing
Eden Prairie, MN 45,000 Executive general offices
Edina, MN (1) 101,000 Data collection systems and
services general offices,
data processing services,
sales and marketing; and
scanner software
development
Minnetonka, MN (1) 54,000 Test publishing and scoring
general offices and
operations
Owatonna, MN (1) 128,000 Documents design and
production
Columbia, PA (1) 121,000 Documents design and
production
Austin, TX Data processing services,
Building 1 35,000 general offices and
Building 2 41,000 operations
Nunawading, Victoria 30,000 NCS Australasia Pty. Ltd,
(Melbourne) (joint venture) general
Australia (1) offices, data processing
services, sales and
marketing
Rotherham, South Yorkshire 34,000 Documents design and
England (1) production, general offices,
sales and marketing
- --------------------------
(1) Denotes owned facility.
(2) Construction of a 56,000 square foot addition to be used for the same
general purpose will commence in May, 1998 with completion estimated for
the last quarter of 1998.
The Company believes that its facilities, with the construction of the
addition described above, will be adequate to meet its current needs.
ITEM 3. LEGAL PROCEEDINGS
On April 30, 1997, the Company was served with a Summons and Complaint in a
lawsuit filed against the Company by Edu-Cap, Inc. (formerly University Support
Services, Inc.) ("Edu-Cap") in the United States District Court, District of
Minnesota, Fourth Division. See also Item 5 of the Company's Current Report on
Form 8-K dated April 30,1997. In the lawsuit, Edu-Cap alleges certain claims
against the Company in connection with three student loan processing and
servicing agreements between the Company and Edu-Cap. Edu-Cap seeks
out-of-pocket damages, an undisclosed amount of lost profits, and has tendered
to NCS certain student loans with unpaid principal, interest and late charges,
which loans it claims are or have been in default and were incorrectly
originated or serviced by NCS. The Company tendered the defense of the claims to
its insurer, and the insurer accepted the defense subject to a reservation of
rights. The Company has filed an Answer to Edu-Cap's Complaint denying Edu-Cap's
claims, and the Company intends to vigorously defend against the lawsuit. In
addition, the Company has filed a Counterclaim against Edu-Cap and a claim
against a corporation affiliated with Edu-Cap seeking compensatory damages. The
case is in the early stages of discovery, and Edu-Cap has not set forth the
factual basis for its lost profits claims. The Company does not believe that the
outcome in this litigation would result in a material adverse effect on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal
year ended January 31, 1998 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, 1998 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, 1998 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, 1998 is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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, 1998 are incorporated herein by
reference:
Consolidated Balance Sheets -- January 31, 1998 and 1997
Consolidated Statements of Income -- Years ended January 31, 1998, 1997 and
1996
Consolidated Statements of Changes in Stockholders' Equity -- Years ended
January 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows -- Years ended January 31, 1998, 1997
and 1996
Notes to Consolidated Financial Statements -- January 31, 1998
Report of Independent Auditors dated March 2, 1998
Quarterly Results of Operations (Unaudited)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Election of Directors" included in the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 21, 1998 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 for the Annual Meeting of Stockholders to be held on
May 21, 1998 are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Election of Directors" and "Ownership of NCS Common Stock by Certain
Beneficial Owners and Executive Officers" included in the Company's definitive
proxy statement for the Annual Meeting of Stockholders to be held on May 21,
1998 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Election of Directors" included in the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 21, 1998 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 to
Stockholders for the year ended January 31, 1998, are incorporated by
reference in Item 8:
Consolidated Balance Sheets -- January 31, 1998 and 1997
Consolidated Statements of Income -- Years ended January 31, 1998,
1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity -- Years
ended January 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows -- Years ended January 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements -- January 31, 1998
Report of Independent Auditors dated March 2, 1998
(2) Consolidated financial statement schedules of National Computer
Systems, Inc. and subsidiaries required to be filed by Item 14(d):
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have
been omitted.
(3) Listing of Exhibits:
EXHIBIT
3.1 Restated Articles of Incorporation, as amended.
3.2 Bylaws, as amended and restated, are incorporated herein by
reference to Exhibit 3.2 to the NCS Form 8-K dated March 4, 1996.
4.1 Instruments with respect to long-term debt where the total debt
authorized thereunder does not exceed 10% of the consolidated total
assets of the registrant are not being filed; the registrant will
furnish a copy of any such instrument to the Commission upon
request.
4.2 Amended and Restated Rights Agreement dated as of March 4, 1996
between NCS and Norwest Bank Minnesota, National Association
(including the form of Right Certificate attached as Exhibit B
thereto) is incorporated herein by reference to Exhibit 1 to
Amendment No. 2 to Form 8-A/A dated March 13, 1996.
4.3 Credit Agreement dated as of November 17, 1997 between NCS and The
First National Bank of Chicago (as Agent); Norwest Bank Minnesota,
National Association; Suntrust Bank, Central Florida, National
Association; and The Bank of Tokyo - Mitsubishi Ltd., Chicago
Branch is incorporated herein by reference to Exhibit 4 to the
Company's Form 10-Q for the quarter ended October 31, 1997.
*10.1 Change of Control Agreement dated April 15, 1996, by and between
NCS and certain executives of NCS is incorporated herein by
reference to Exhibit 10.2 to the Company's Form 10-Q for the fiscal
quarter ended April 30, 1996.
*10.2 NCS 1984 Employee Stock Option Plan is incorporated herein by
reference to Exhibit 10 to the Company's Form 10-Q for the quarter
ended July 31, 1984.
*10.3 NCS 1986 Employee Stock Option Plan is incorporated herein by
reference to Exhibit 10D to the Company's Form 10-K for the fiscal
year ended January 31, 1986.
*10.4 NCS Non-Employee Director Stock Option Plan, as amended.
*10.5 NCS 1990 Employee Stock Option Plan, as amended, is incorporated
herein by reference to Exhibit 10.1 to the Company's Form 10-Q for
the quarter ended October 31, 1995.
*10.6 NCS 1995 Employee Stock Option Plan, as amended, is incorporated
herein by reference to Exhibit 10.2 to the Company's Form 10-Q for
the quarter ended October 31, 1995.
*10.7 NCS 1990 Long-Term Incentive Plan, as amended, is incorporated
herein by reference to Exhibit 10.3 to the Company's Form 10-Q for
the quarter ended October 31, 1995.
*10.8 NCS 1992 Employee Stock Purchase Plan is incorporated herein by
reference to Exhibit 10I to the Company's Form 10-K for the fiscal
year ended January 31, 1992.
*10.9 Description of Retirement Arrangements with David C. Malmberg is
incorporated herein by reference to Exhibit 19 to the Company's
Form 10-Q for the fiscal quarter ended October 31, 1992.
*10.10 Amended and Restated Severance Agreement dated May 23, 1996, by and
between NCS and Russell A. Gullotti is incorporated herein by
reference to Exhibit 10.1 to the Company's Form 10-Q for the fiscal
quarter ended April 30, 1996.
*10.11 Agreement dated August 22, 1994 between NCS and Charles W. Oswald
is incorporated herein by reference to Exhibit 10(b) to the
Company's Form 10-Q for the fiscal quarter ended October 31, 1994.
*10.12 Oswald Stock Option Plan is incorporated herein by reference to
Exhibit 100 to the Company's Form 10-K for the fiscal year ended
January 31, 1995.
*10.13 NCS 1997 Long-Term Incentive Plan is incorporated herein by
reference to Exhibit 10.13 to the Company's Form 10-K for the year
ended January 31, 1997.
*10.14 NCS 1997 Employee Stock Option Plan is incorporated herein by
reference to Exhibit 10.14 to the Company's Form 10-K for the year
ended January 31, 1997.
*10.15 NCS Corporate Management Incentive Plan -- 1997 is incorporated
herein by reference to Exhibit 10.16 to the Company's Form 10-K for
the fiscal year ended January 31, 1997.
*10.16 NCS Corporate Management Incentive Plan -- 1998.
*10.17 NCS 1998 Employee Stock Purchase Plan
13 Portions of NCS' Annual Report to Stockholders for the fiscal year
ended January 31, 1998.
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, 1998 on behalf of other
officers and directors.
27 Financial Data Schedules, including Restated Financial Data
Schedules for the fiscal year ended January 31, 1997 and 1996 and
for the quarterly periods ended April 30, July 31 and October 31 in
1997 and 1996.
99 Cautionary statements identifying important factors that could
cause the Company's actual results to differ from those projected
in forward looking statements.
- ----------------
* Indicates management contract or compensatory plan or arrangement required
to be filed as an exhibit to this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
January 31, 1998.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
required or are inapplicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONAL COMPUTER SYSTEMS, INC.
Dated: April 22, 1998 By: /s/ J. W. FENTON, JR.
------------------------
J. W. Fenton, Jr.
SECRETARY-TREASURER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By RUSSELL A. GULLOTTI * Chairman of the Board of Directors,
------------------------ President and Chief Executive
Russell A. Gullotti Officer(principal executive officer)
By DAVID C. COX * Director
------------------------
David C. Cox
By MOSES JOSEPH* Director
------------------------
Moses Joseph
By JEAN B. KEFFELER* Director
------------------------
Jean B. Keffeler
By CHARLES W. OSWALD * Director
------------------------
Charles W. Oswald
By STEPHEN G. SHANK * Director
------------------------
Stephen G. Shank
By JOHN E. STEURI * Director
------------------------
John E. Steuri
By JOHN W. VESSEY * Director
------------------------
John W. Vessey
By JEFFREY W. TAYLOR * Vice President and Chief
------------------------ Financial Office (principal
Jeffrey W. Taylor financial officer and
principal accounting officer)
* Executed on behalf of the indicated officers and directors of the
registrant by J. W. Fenton, Jr., Secretary-Treasurer, duly appointed
attorney-in-fact.
/s/ J. W. FENTON, JR.
- ----------------------------------- Dated: April 22, 1998
J. W. Fenton, Jr.
(ATTORNEY-IN-FACT)
<PAGE>
FORM 10-K
NATIONAL COMPUTER SYSTEMS, INC.
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
EXHIBIT INDEX
EXHIBIT
- --------
3.1 Restated Articles of Incorporation, as amended.
10.4 NCS Non-Employee Director Stock Option Plan, as amended.
10.16 NCS Corporate Management Incentive Plan -- 1998.
10.17 NCS 1998 Employee Stock Purchase Plan.
13 Portions of NCS' Report to Stockholders for the fiscal year ended
January 31, 1998.
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, 1998 on behalf of other officers
and directors.
27 Financial Data Schedules, including Restated Financial Data
Schedules for the fiscal years ended January 31, 1997 and 1996 and
for the quarterly periods ended April 30, July 31 and October 31 in
1997 and 1996.
99 Cautionary statements identifying important factors that could cause
the Company's actual results to differ from those projected in
forward looking statements.
Exhibit 3.1
RESTATED
ARTICLES OF INCORPORATION
OF
NATIONAL COMPUTER SYSTEMS, INC.
(As adopted on January 19, 1968 and
amended through March 3, 1998)
ARTICLE I
The name of this corporation shall be: NATIONAL COMPUTER SYSTEMS, INC.
ARTICLE II
The registered office of this corporation shall be 11000 Prairie Lakes Drive,
Eden Prairie, Minnesota.
ARTICLE III
This corporation shall have general business purposes and shall have unlimited
power to engage in, and to do any lawful act concerning any and all lawful
business for which corporations may be organized under the Minnesota business
corporation act.
This corporation shall have the power to acquire, hold, mortgage, pledge or
dispose of the shares, bonds, securities and other evidences of indebtedness of
any domestic or foreign corporation.
ARTICLE IV
This corporation shall have perpetual duration.
ARTICLE V
(A) The aggregate number of shares which this corporation shall have authority
to issue is 110,000,000 shares, divided into 100,000,000 shares of common stock,
par value $.03 per share, and 10,000,000 shares of preferred stock, par value
$.01 per share.
(i) Common Stock. The holders of the common stock shall be entitled to receive,
when and as declared by the Board of Directors, out of earnings or surplus
legally available therefor, dividends payable either in cash, in property
or in shares of the capital stock of the corporation. Each holder of record
of the common stock shall have one vote for each share of common stock
registered in his name on the books of the corporation and entitled to
vote. The common stock shall have no special powers, preferences, or
rights, or qualification, limitations or restrictions thereof.
(ii) Preferred Stock. Shares of preferred stock may be issued from time to time
in one or more series as the Board of Directors may determine, as
hereinafter provided. The Board of Directors is hereby authorized, by
resolution or resolutions, to provide from time to time for series of
preferred stock out of the unissued series of preferred stock not then
allocated to any series of preferred stock. Before any shares of any such
series of preferred stock are issued, the Board of Directors shall fix and
determine, and is hereby expressly empowered to fix and determine, by
resolution or resolutions, the designations, powers, preferences and
relative, participating, optional and other special rights, and the
qualifications, limitations and restrictions thereof, of the shares of such
series, including, without limiting the generality of the foregoing, any of
the following provisions with respect to which the Board of Directors shall
determine to make affirmative provision:
(1) The designation and name of such series and the number of shares that
shall constitute such series;
(2) The annual dividend rate or rates payable on shares of such series, the
date or dates from which such dividends shall commence to accrue and
the dividend payment dates for such dividends;
(3) Whether dividends on such series are to be cumulative or noncumulative,
and the participating or other special rights, if any, with respect to
the payment dividends;
(4) Whether such series shall be subject to redemption and, if so, the
manner of redemption, the redemption price or prices and the terms and
conditions on which shares of such series may be redeemed;
(5) Whether such series shall have a sinking fund or other retirement
provisions for the redemption or purchase of shares of such series and,
if so, the terms and amount of such sinking fund or other retirement
provisions and the extent to which the charges therefor are to have
priority over the payment of dividends on, or the making of sinking
fund or other like retirement provisions for, shares of any other
series or over dividends on the common stock;
(6) The amounts payable on shares of such series on voluntary or
involuntary dissolution, liquidation or winding up of the affairs of
the corporation and the extent to which such payment shall have
priority over the payment of any amount on voluntary or involuntary
dissolution, liquidation or winding up of affairs of the corporation,
on shares of any other series or on the common stock;
(7) The terms and conditions, if any, on which shares of such series may be
converted into, or exchanged for, shares of any other series or of the
common stock;
(8) The extent of the voting powers, if any , of the shares of such series;
(9) The stated value, if any, for the shares of such series, the
consideration for which shares of such series may be issued and the
amount of such consideration that shall be credited to the capital
account; and
(10) Any other preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions
thereof, of the shares of such series.
The Board of Directors is expressly authorized to vary the provisions relating
to the foregoing matters among the various series of preferred stock.
All shares of preferred stock of any one series shall be identical in all
respects with all other shares of such series, except that shares of any one
series issued at different times may differ as to the dates from which dividends
thereon shall be payable and, if cumulative, shall cumulate.
Shares of any series of preferred stock that shall be issued and thereafter
acquired by the corporation through purchase, redemption (whether through the
operation of a sinking fund or otherwise), conversion, exchange or otherwise,
shall, upon appropriate filing and recording to the extent required by law, have
the status of authorized and unissued shares of preferred stock and may be
reissued as part of such series or as part of any other series of preferred
stock. Unless otherwise provided in the resolution or resolutions of the Board
of Directors providing for the issue thereof, the number of authorized shares of
stock of any series of preferred stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by resolution or
resolutions of the Board of Directors and appropriate filing and recording to
the extent required by law. In case the number of shares of any such series of
preferred stock shall be decreased, the shares representing such decrease shall,
unless otherwise provided in the resolution or resolutions of the Board of
Directors providing for the issuance thereof, resume the status of authorized
but unissued shares of preferred stock, undesignated as to series.
(B) The Board of Directors shall have authority (i) to accept or reject
subscriptions for shares of any class, (ii) to allot shares of the corporation
from time to time for such considerations in money, property, or both, as may be
authorized by law, and (iii) to fix the terms, provisions and conditions of and
authorize the issuance of (a) rights to convert any securities of this
corporation into shares of any class or classes, including the conversion basis
or bases and (b) options to purchase or subscribe for shares of any class or
classes, including the option price or prices at which shares may be purchased
or subscribed for.
(C) No holder of shares of common stock of this corporation shall have any
pre-emptive or preferential right of subscription to any shares of stock of the
corporation, whether now or hereafter authorized, or to any obligations
convertible into shares of the corporation issued or sold, nor any right of
subscription to any thereof other than such, if any, as the Board of Directors,
in its sole discretion, may from time to time determine, and at such price as
the Board of Directors from time to time may fix.
(D) Cumulative voting by shareholders of this corporation shall not be
permitted.
ARTICLE VI
The amount of stated capital of this corporation at the time of the adoption of
these Restated Articles of Incorporation is $8,217.00.
ARTICLE VII
(A) The management of the business and affairs of the corporation shall be
vested in a Board of Directors whose number and membership shall be determined
as provided in the By-Laws, subject to applicable provisions of law. The names
and addresses of the members of the Board of Directors of this corporation at
the time of the adoption of these Restated Articles of Incorporation are as
follows:
Harlan R. Ward
1015 South Sixth Street
Minneapolis, Minnesota
Gerald F. Koch
1015 South Sixth Street
Minneapolis, Minnesota
Edward E. Strickland, Jr.
1015 South Sixth Street
Minneapolis, Minnesota
Robert F. Zicarelli
1384 Northwestern Bank Building
Minneapolis, Minnesota
Robert J. McNulty
Builders Exchange Building
Minneapolis, Minnesota
George J. Game
3830 Glenhurst Avenue
Minneapolis, Minnesota
(B) The Board of Directors shall have authority to adopt, alter and amend
By-Laws, subject to the power of the shareholders to change or repeal such
By-Laws.
ARTICLE VIII
The holders of a majority of the outstanding shares of this corporation shall,
at any meeting lawfully called for such purpose, have the power to authorize the
sale, lease, exchange or other disposition of all or substantially all of the
property and assets of this corporation, including its good will, to amend,
supplement or restate the Articles of Incorporation of this corporation, and to
adopt or reject an agreement of consolidation or merger.
ARTICLE IX
A director of this corporation shall not be personally liable to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Sections 302A.559 or 80A.23 of the Minnesota Statutes; (iv) for
any transaction from which the director derived an improper personal benefit; or
(v) for any act or omission occurring prior to the date when this Article IX
became effective.
If the Minnesota Business Corporation Act is hereafter amended to authorize the
further elimination or limitation of the liability of a director, then the
liability of a director of the corporation shall be eliminated or limited to the
fullest extent permitted by the Minnesota Business Corporation Act, as so
amended.
Any repeal or modification of the foregoing provisions of this Article IX by the
stockholders of the corporation shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification.
EXHIBIT 10.4
NATIONAL COMPUTER SYSTEMS, INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. Purpose of Plan
This plan shall be known as the "National Computer Systems, Inc.
Non-Employee Director Stock Option Plan" and is hereinafter referred to as the
"Plan." The purpose of the Plan is to promote the interests of National Computer
Systems, Inc., a Minnesota corporation (the "Company"), by enhancing its ability
to attract and retain the services of experienced and knowledgeable non-employee
directors and by providing additional incentive for such directors to increase
their interest in the Company's long-term success and progress. Options granted
under this Plan shall be nonqualified stock options which do not qualify as
incentive stock options within the meaning of Section 422A of the Internal
Revenue Code of 1986, as amended (the "Code").
2. Stock Subject to Plan
Under this Plan, options may be granted for shares of the Company's Common
Stock, $03. par value. The Common Stock subject to options shall be either
authorized but unissued shares or shares reacquired by the Company. Subject to
the adjustment as provided in Section 10 hereof, the maximum number of shares of
Common Stock on which options may be exercised under this Plan shall be 200,000
(after giving effect to the 2-for-1 stock split declared in March, 1998) shares.
If an option under the Plan expires, or for any reason is terminated or
unexercised with respect to any shares, such shares shall again be available for
options thereafter granted during the term of the Plan.
3. Administration of Plan
The Plan shall be administered by the Board of Directors of the Company
(the "Board"). The Board shall have the authority, in its discretion, subject to
the express provisions of this Plan, to interpret the Plan, to prescribe, amend,
and rescind rules and regulations relating to the Plan, and to make all other
determinations necessary or advisable for the administration of the Plan. The
Board's determinations on the foregoing matters shall be final and conclusive.
4. Eligibility
Upon approval of the Plan by the Board of Directors, but subject to
approval of the Plan by shareholders of the Company pursuant to Section 13
hereof, each director of the Company who is not otherwise an employee of the
Company or any subsidiary of the Company (an "Eligible Director") shall
automatically be granted, on each date that he or she is elected or reelected as
a director of the Company, an option to acquire 3,000 shares of Common Stock
under the Plan.
5. Price
The option price for all options granted under the Plan shall be the fair
market value of the shares covered by the option on the date the option is
granted. For purposes of this Plan, the fair market value of the Common Stock on
a given date shall be (i) the last trade price of the Common Stock as reported
on the NASDAQ National Market System on such date, if the Common Stock is then
quoted on the NASDAQ National Market System; or (ii) the closing price of the
Common Stock on such date on a national securities exchange, if the Common Stock
is then being traded on a national securities exchange. If on the date as of
which the fair market value is being determined, the Common Stock is not
publicly traded, then the next preceding date on which there was a trade will be
used.
6. Term
Each option and all rights and obligations thereunder shall, subject to the
provisions of Section 8 herein, expire ten years from the date of granting of
the option.
7. Exercise of Option
(a) Options granted under the Plan shall not be exercisable for a period of
six months after date of grant, or until shareholder approval of the Plan has
been obtained, whichever occurs later, but thereafter will be exercisable in
full at any time or from time to time during the term of the option, subject to
the provisions of Section 8 hereof
(b) The exercise of any option granted hereunder shall only be effective at
such time as counsel to the Company shall have determined that the issuance and
delivery of Common Stock pursuant to such exercise will not violate any state or
federal securities or other laws. An optionee desiring to exercise an option may
be required by the Company, as a condition of the effectiveness of any exercise
of an option granted hereunder, to agree in writing that all Common Stock to be
acquired pursuant to such exercise shall be held for his or her own account
without a view to any further distribution thereof, that the certificates for
such shares shall bear an appropriate legend to that effect and that such shares
will not be transferred or disposed of except in compliance with applicable
federal and state securities laws.
(c) An optionee electing to exercise an option shall give written notice to
the Company of such election and of the number of shares subject to such
exercise. The full purchase price of such shares shall be tendered with such
notice of exercise. Payment shall be made to the Company either (i) in cash
(including check, bank draft or money order), or (ii) by delivering the
Company's Common Stock already owned by the optionee having a fair market value
on the date of exercise equal to the full purchase price of the shares, or (iii)
by any combination of cash and the method specified in (ii) of this sentence;
provided, however, that an optionee shall not be entitled to tender shares of
Common Stock pursuant to successive, substantially simultaneous exercises of
options granted hereunder or in any manner tantamount to the technique commonly
referred to as "pyramiding." For purposes of the preceding sentence, the fair
market value of Common Stock tendered shall be determined as provided in Section
5 hereof as of the date of exercise. Until such person has been issued a
certificate or certificates for the shares subject to such exercise, he or she
shall possess no rights as a shareholder with respect to such shares.
8. Effect of Termination of Directorship or Death
(a) In the event that an optionee shall cease to be a director of the
Company for any reason other than his or her gross and willful misconduct or his
or her death, such optionee shall have the right to exercise the option at any
time within the remaining term of the option.
(b) In the event that an optionee shall cease to be a director of the
Company by reason of his or her gross and willful misconduct during the course
of his or her 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 unexercised option granted pursuant to the Plan shall
be terminated as of the date of the misconduct.
(c) If the optionee shall die and such optionee shall not have fully
exercised any option granted under the Plan, such option may be exercised at any
time within twelve months after his or her death by the personal
representatives, administrators or, if applicable, by any person or persons to
whom the option is transferred by will or the applicable laws of descent and
distribution, to the extent of the full number of shares he or she was entitled
to purchase under the option on the date of death, and subject to the condition
that no option shall be exercisable after the expiration of the term of the
option.
(d) Nothing in this Plan or in any agreement hereunder shall confer on any
optionee 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
such optionee as a director.
9. Non-Transferability
No option granted under the Plan shall be transferable by optionee,
otherwise than by will or the laws of descent or distribution as provided in
Section 8(c) herein. During the lifetime of an optionee, the option shall be
exercisable only by such optionee.
10. Dilution or Other Adjustments
If there shall be any change in the Common Stock through merger,
consolidation, reorganization, recapitalization, stock dividend (of whatever
amount), stock split or other change in the corporate structure, appropriate
adjustments in the Plan and outstanding options shall be made. In the event of
any such changes, adjustments shall include, where appropriate, changes in the
aggregate number of shares subject to the Plan, the number of shares subject to
outstanding options and the exercise prices thereof in order to prevent dilution
or enlargement of option rights.
11. Amendment or Discontinuance of Plan
The Board of Directors may amend or discontinue the Plan at any time
subject to applicable law and regulations. The Board of Directors shall not
alter or impair any option theretofore granted under the Plan without the
consent of the holder of the option.
12. Effective Date and Termination of Plan
(a) The Plan was approved by the Board of Directors on February 27, 1989,
and shall be approved by shareholders of the Company within 12 months
thereafter.
(b) Unless the Plan shall have been discontinued as provided in Section 11
hereof, the Plan shall terminate on January 31, 1999. No option may be granted
after such termination, but termination of the Plan shall not without consent of
the optionee, alter or impair any rights or obligations under any option
theretofore granted.
- ----------------
Plan approved by stockholders on May 25, 1989. Plan amended by directors on
February 1, 1997. Plan amended by directors on March 3, 1998.
EXHIBIT 10.16
NATIONAL COMPUTER SYSTEMS
MANAGEMENT INCENTIVE PLAN
1998
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 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 incentive 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 and approved annually 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 management reports
- Selected other vice presidents
- Selected key employees
Any position or participant exceptions, exclusions, and inclusions to the above
must be documented and approved by the CEO.
TARGET INCENTIVE OPPORTUNITY
Each approved position will be eligible for a specific target incentive award.
This target incentive opportunity will be a percentage of the May 31, 1998
annual base salary for the participant. The target incentive is tied directly to
the participant's business unit financial performance and an overall evaluation
of each individual's performance. Potential earned payouts range from 0% at
threshold minimum, 100% at target performance, up to a pre-defined
overachievement percentage for each participant at maximum.
INCENTIVE COMPONENTS
The potential target incentive opportunity will be based on achievement of
financial goals and the overall evaluation of the participant's performance
during the fiscal year. The overall evaluation will include performance against
defined individual objectives and a subjective evaluation of performance
relative to the following criteria:
1. What have you done to improve shareholder value?
2. How have you improved customer satisfaction and NCS' ability to serve
the customer?
3. What have you done to improve the quality/predictability of your
business?
4. What have you done to develop your organization?
5. How have you demonstrated personal leadership and corporate-wide
perspectives/orientation?
No incentive award payouts will be made to participants for achievement of the
financial performance if the individual's operating unit (NCS Business or
Division or Market Unit) does not meet its minimum profit contribution
objective(s). For example, a division participant can receive an incentive award
payout only if the division achieves its minimum profit contribution threshold.
DETERMINATION OF 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.
PAYOUTS AND PRO-RATA AMOUNTS
Earned award payouts will be made no later than April 15 following the end of
the fiscal plan 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 on the length of
time in such position, however, participants must be in the plan at least six
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
plan participant, 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 considered as an employment contract or
agreement by the participant.
EXHIBIT 10.17
NATIONAL COMPUTER SYSTEMS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
-------------------------------
Section 1. Purpose
1.1 The purpose of the National Computer Systems, Inc. 1998 Employee
Stock Purchase Plan is to give employees an opportunity to share in
the ownership of National Computer Systems, Inc. through a regular
and systematic purchase program from current income by payroll
deduction.
Section 2. Definitions
2.1 For the purpose of the Plan, the following terms will have the
meanings set forth below:
a. Plan. The term "Plan" shall mean the National Computer Systems,
Inc. 1998 Employee Stock Purchase Plan, the terms and
provisions of which are set forth herein.
b. NCS. The term "NCS" will mean National Computer Systems, Inc.,
a Minnesota corporation, and all wholly-owned subsidiaries.
c. Stock. The term "Stock" shall mean the common stock of National
Computer Systems, Inc.
d. Participant. The term "Participant" shall mean an employee of
NCS who has authorized payroll deductions in the manner set
forth in the Plan. Each Participant shall have the same rights
and privileges as every other Participant.
e. Current Compensation. The term "Current Compensation" shall
mean gross earnings of each Participant paid by NCS to such
Participant before any withholding deductions have been made.
f. Purchase Period. The term "Purchase Period" shall mean any
fiscal quarter ending on April 30, July 31, October 31 and
January 31.
g. Enrollment Form. The term "Enrollment Form" shall mean the
Employee Stock Purchase Enrollment Form which an eligible
employee uses to elect to participate in the Plan and to
authorize payroll deductions.
h. Fair Market Value. The term "Fair Market Value" shall be the
last sale price on any business day as reported by NASDAQ.
i. Stock Purchase Account. The term "Stock Purchase Account' shall
mean the individual account established by NCS to which payroll
deductions are credited under the Plan.
j. Regular Employee. The term "Regular Employee" means all
employees of NCS (including officers and directors who are also
employees), except employees who are classified by NCS as
temporary employees whose customary employment is for not more
than 5 months in any calendar year.
Section 3. Eligible Employees
3.1 All Regular Employees of NCS shall be eligible to participate in
the Plan on employment by NCS.
3.2 No employee shall be granted any option hereunder if such employee,
immediately after the option is granted, would own stock possessing
5% or more of the total combined voting power or value of all
classes of stock of NCS or of its parent or subsidiary corporation.
Section 4. Election to Participate
4.1 An eligible employee may elect to participate in this Plan by
completing an Enrollment Form and submitting it to the NCS
Corporate Secretary.
4.2 Participation in the Plan will begin as soon as practicable after
receipt of the Enrollment Form by the NCS Corporate Secretary.
4.3 Participation in the Plan on the part of the Participant is
voluntary and such participation is not a condition of employment,
nor does participation in the Plan entitle a Participant to be
retained as an employee.
Section 5. Purchase Price
5.1 The purchase price for each share of Stock will be the lesser of
the following:
a. 85% of Fair Market Value on the first business day of each
Purchase Period; or
b. 85% of Fair Market Value on the last business day of each
Purchase Period.
Section 6. Payroll Deductions
6.1 A Participant may elect payroll deductions in whole percentages
from two to ten percent of Current Compensation.
6.2 A Participant may elect at any time, but only once in any six-month
period, to increase or reduce the amount of the payroll deduction
within the limitations of Section 6.1 by submitting a new
Enrollment Form with the payroll deduction portion completed. The
effective date of the change will be as soon as practicable after
receipt of the Enrollment Form by the NCS Corporate Secretary.
6.3 Payroll deductions will be credited to the Participant's Stock
Purchase Account on each payroll payment date.
Section 7. Stock Purchase Account
7.1 All funds withheld from a Participant's Current Compensation in
accordance with the payroll authorization shall be credited to the
Participant's Stock Purchase Account. A Participant may not make
any separate cash payments into the Participant's Stock Purchase
Account.
7.2 At the end of each Purchase Period, the largest whole number of
shares of Stock that can be purchased will be purchased for each
Participant who has not withdrawn from the Plan. The purchase
amount, calculated in accordance with Section 5.1, will be charged
to the Participant's Stock Purchase Account.
7.3 Excess funds remaining in a Participant's Stock Purchase Account
after purchase of Stock because the amount of such excess is
insufficient to purchase one whole share of Stock will remain in
the Stock Purchase Account. Excess funds remaining in the
Participant's Stock Purchase Account for any other reason will be
returned to the Participant after the end of each Purchase Period,
but in no case more than thirty days after the end of the Purchase
Period.
7.4 Each Participant will be provided an accounting of the
Participant's Stock Purchase Account as soon as practical after the
end of each Purchase Period, but in no case more than thirty days
after the end of the Purchase Period.
7.5 No Participant shall be permitted to purchase Stock under this Plan
(and any other employee stock purchase plan maintained by NCS and
its parent or subsidiary corporations, if any) at a rate which
exceeds $25,000 in Fair Market Value of capital Stock (determined
at the time the option is granted) for each calendar year in which
such option granted to such Participant is outstanding at any time.
Section 8. Stock Certificates
8.1 As soon as practical after the end of each Purchase Period, NCS
will deliver to Participants certificates representing the shares
of Stock purchased.
8.2 NCS will not be required to issue or deliver any certificate for
Stock purchased under this Plan prior to registration under the
Securities Act of 1933, or registration or filing under any state
law, if such registration or filing is required. NCS will use its
best efforts to accomplish such registrations or filings, including
amendments thereto, but delivery of Stock by NCS may be deferred
until required registrations or filings are accomplished.
8.3 A Participant shall have no interest in the Stock until
certificates for such Stock are issued.
8.4 All certificates issued under the Plan shall be registered in the
name of the Participant or jointly in the name of the Participant
and another person, as the Participant may direct by completing the
Enrollment Form.
Section 9. Withdrawal or Termination
9.1 A Participant may at any time by written notice withdraw from the
Plan. Once a Participant withdraws from the Plan, that Participant
shall not be eligible to reenter the Plan for a period of six
months.
9.2 Payroll deductions will cease upon notice of withdrawal except that
a deduction will be made on the next unpaid payroll where the
withdrawal notice is received after the cut-off date for changes to
such payroll.
9.3 Participation under the Plan will cease upon the date of
termination from employment or death.
9.4 Funds accumulated in the Stock Purchase Account of a Participant
who has withdrawn from the Plan or has terminated participation
under the Plan, in accordance with Sections 9.2 and 9.3, will be
held in the Account until the end of the current Purchase Period.
At that time the funds will be paid to the Participant within
thirty days after the end of the Purchase Period; however, if a
Participant's withdrawal or termination is at the end of the
current Purchase Period so that funds were withheld from the last
payroll of the current Purchase Period, Stock will be purchased to
the extent possible in accordance with Section 7.2 before remaining
funds are paid to the Participant.
9.5 Approved leaves of absence shall not be deemed a termination of
employment for purposes of Section 9.
9.6 A Participant may designate in writing to the Corporate Secretary
the Beneficiaries to receive any distribution under the Plan in the
event of the Participant's death. If no beneficiary is named, the
distribution will be paid to the first of the following classes of
persons in which there is anyone living (and if there are more than
one living in such class, then in equal shares to them):
Participant's widow or widower
Participant's surviving issue (per stirpes and not per
capita)
Participant's surviving parents
Participant's surviving brothers and sisters
Executor or administrator of Participant's estate
Section 10. Transferability
10.1 Any and all rights a Participant may have under this Plan may not
be assigned, transferred, pledged or hypothecated (whether by
operation of law or otherwise) and shall not be subject to
execution, attachment or similar process. Any attempted assignment,
transfer, pledge, hypothecation, other disposition of such rights,
or levy or attachment or similar process shall be null and void and
without effect. Only the Participant may purchase stock under the
Plan.
10.2 The funds accumulated in the Stock Purchase Account may not be
assigned, transferred, pledged or hypothecated in any way, and any
attempted assignment, transfer, pledge, hypothecation or other
disposition of the funds accumulated in the Stock Purchase Account
shall be null and void and without effect.
Section 11. Effective Date and Amendment or Termination of Plan
11. The Plan was adopted by the Board of Directors of NCS on March 3,
1998. The Plan must be approved by the Shareholders of NCS at their
Annual Meeting to be held on May 21, 1998. This 1998 Plan will
become effective for the Purchase Period beginning May 1, 1998.
Should approval not be granted this Plan will terminate and all
funds held in Stock Purchase Accounts will be refunded to
Participants.
11.2 The Plan shall automatically terminate on January 31, 2008 unless
extended by the Board of Directors. The Board of Directors may by
resolution extend the Plan for one or more additional periods of
five years each.
11.3 The Board of Directors may at any time terminate or amend the Plan
except that no amendment shall be made without prior approval by
the Shareholders which would authorize the sale of more than an
aggregate of 500,000 shares of Stock, (after giving effect to the
2-for-1 stock split effected in the form of an 100% stock dividend
as approved by the NCS Board of Directors on March 3, 1998), except
as provided in Section 13.
11.4 Upon termination of the Plan, the accumulated funds in each
Participant's Stock Purchase Account will be used to purchase the
largest number of whole shares of Stock as possible. Any balance
remaining after said purchase shall be refunded to the Participant.
Section 12. Administration
12.1 The Plan shall be administered by the NCS Board of Directors. In
administering the Plan, it will be necessary to follow various laws
and regulations. The Board of Directors may from time to time
interpret the Plan to conform with the law, to meet special
circumstances not anticipated or covered in the Plan, or to carry
on successful operations of the Plan. Determinations as to the
interpretation and operation of this Plan shall be final and
conclusive.
12.2 No charge will be made by NCS against the funds received from each
Participant for purchase of Stock under the Plan.
12.3 All expenses and fees incurred by NCS in the administration of this
Plan will be borne by NCS. However, all brokerage fees or other
expenses incurred by a Participant in selling or otherwise
transferring shares of Stock will be borne by the Participant.
Section 13. Adjustment in Shares Available under the Plan, Merger or
Consolidation
13.1 If the outstanding shares of Stock are increased, decreased,
changed into or exchanged for a different number or kind of shares
of securities of NCS, or shares of a different par value or without
par value, through split, amendment to NCS' Articles of
Incorporation, or reverse stock split, an appropriate or
proportionate adjustment shall be made in the maximum number and/or
kind of securities to be sold under this Plan with a corresponding
adjustment in the purchase price to be paid for each share to be
purchased under this Plan.
13.2 If NCS is merged into or consolidated with one or more corporations
during the term of the Plan, appropriate adjustments shall be made
to give effect thereto on an equitable basis in terms of issuance
of shares of the corporation surviving the merger or the
consolidated corporation, as the case may be.
Section 14. Stock to Be Sold
14.1 Stock to be issued and sold under the Plan will be unissued stock.
14.2 The number of shares of Stock to be sold under the Plan shall not
exceed 500,000 shares, except as provided in Section 13. If such
limitation would otherwise be exceeded at the end of a Purchase
Period the remaining shares of Stock will be allocated to
Participants pro-rata on the basis of the funds in each Stock
Purchase Account.
Section 15. Funds in Stock Purchase Account
15.1 The funds in the Participant's Stock Purchase Account, after
receipt by NCS, shall be under the direction of NCS and applied to
the payment of stock purchased or refunded to the Participant in
accordance with the Plan as set forth herein.
15.2 Funds held by NCS in the Stock Purchase Accounts are held for the
benefit of the Participants but may be commingled with other NCS
funds.
15.3 No interest will be accumulated or paid by NCS on funds held in the
Stock Purchase Accounts.
Section 16. Construction; Notices
16.1 NCS intends that the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as
amended, if approved by the NCS Shareholders; therefore, the Plan
shall be construed in a manner consistent therewith if so approved.
All Participants shall have the same rights and privileges
consistent with the terms of the Plan.
16.2 Notices to the Board of Directors shall be addressed as follows:
National Computer Systems, Inc.
Attention: Corporate Secretary
11000 Prairie Lakes Drive
P.O. Box 9365
Minneapolis, MN 55440
<TABLE>
<CAPTION>
EXHIBIT 13
FIVE YEAR FINANCIAL DATA
(Dollars in thousands, except per share amounts)
YEAR ENDED JANUARY 31,
-----------------------------------------------------------
1998 1997(2) 1996 1995(3) 1994(4)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Financial Results
Revenues $406,015 $331,159 $300,883 $284,874 $257,813
Income from operations 43,044 26,646 30,704 20,323 17,318
Income from continuing operations
before income taxes 41,975 26,533 27,760 16,119 16,733
Income from continuing operations 25,175 13,666 16,580 11,281 9,744
Discontinued operations, net of taxes - (2,229) 5,679 2,117 (12,253)
Gain on disposition, net of taxes - 38,143 - - -
Net income (loss) 25,175 49,580 22,259 13,398 (2,509)
Income per share from continuing
operations(1)
Basic earnings per share $ 0.83 $ 0.45 $ 0.54 $ 0.38 $ 0.32
Diluted earnings per share $ 0.80 $ 0.44 $ 0.53 $ 0.37 $ 0.31
Dividends paid per share $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.18
Financial Position
Total assets 315,414 273,920 219,724 209,375 194,833
Long-term debt, including
current maturities 18,844 20,148 27,008 49,864 47,351
Stockholders' equity 193,994 170,034 128,198 113,123 100,147
<FN>
(1) All references to share and per share data have been adjusted to give
retroactive effect to the 2-for-1 stock split declared in March 1998.
(2) Includes an acquisition related charge of $7,895 pre-tax, $6,992 after tax
or $.23 per diluted share.
(3) Includes a special charge of $8,164 pre-tax, $3,252 after-tax or $.11 per
diluted share.
(4) Includes a special charge of $2,200 pre-tax, $1,364 after-tax or $.04 per
diluted share.
</FN>
</TABLE>
<PAGE>
STOCK EXCHANGE LISTING
Common Stock of National Computer Systems, Inc. trades on the Nasdaq Stock
Market(TM) under the symbol "NLCS"and is listed in the newspaper stock tables as
NtCptr or NtlCptrSys.
QUARTERLY MARKET DATA
NCS had approximately 2,000 and 1,900 Common Stockholders of record as of
January 31, 1998 and 1997, respectively.
Fiscal Year 1997
-----------------------------------------
Three Months Ended
-----------------------------------------
Year Ended January 31, 1998 April 30 July 31 October 31 January 31
- --------------------------- -------- ------- ---------- ----------
High $13.37 $14.75 $19.75 $19.50
Low 11.37 12.50 13.75 15.50
Close 12.56 13.75 19.00 17.12
Dividends per share 0.045 0.045 0.045 0.045
Fiscal Year 1996
-----------------------------------------
Three Months Ended
-----------------------------------------
Year Ended January 31, 1997 April 30 July 31 October 31 January 31
- --------------------------- -------- ------- ---------- ----------
High $11.81 $12.62 $11.62 $13.25
Low 9.00 9.62 9.69 10.00
Close 10.87 10.12 10.75 12.22
Dividends per share 0.045 0.045 0.045 0.045
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
----------------------------------------------
April 30 July 31 October 31 January 31
-------- ------- ---------- ----------
Year Ended January 31, 1998
Revenues $78,971 $96,029 $115,387 $115,628
Gross profit 30,811 38,067 40,743 44,817
Income from continuing
operations 4,048 7,011 6,026 8,090
Net income 4,048 7,011 6,026 8,090
Basic earnings per share $ 0.13 $ 0.23 $ 0.20 $ 0.27
Diluted earnings per share $ 0.13 $ 0.22 $ 0.19 $ 0.26
Year Ended January 31, 1997
Revenues $70,507 $80,864 $ 88,783 $ 90,905
Gross profit 26,738 31,288 28,645 32,087
Income from continuing
operations 3,201 5,893 4,950 (378)(2)
Net income 2,831 42,177(1) 4,950 (378)(2)
Basic earnings per share:
Continuing operations $ 0.11 $ 0.19 $ 0.16 $ (0.01)
Discontinued operations (0.01) (0.06) - -
Gain on disposition - 1.26 - -
------- ------- ------- -------
Net income $ 0.10 $ 1.39 $ 0.16 $ (0.01)
======= ======= ======= =======
Diluted earnings per share:
Continuing operations $ 0.10 $ 0.19 $ 0.16 $ (0.01)
Discontinued operations (0.01) (0.06) - -
Gain on disposition - 1.22 - -
------- ------- ------- -------
Net income $ 0.09 $ 1.35 $ 0.16 $ (0.01)
======= ======= ======= =======
(1) Includes a gain on disposition, net of taxes, of $38,143 or $1.22 per
diluted share.
(2) Includes an acquisition related charge of $6,992 after tax or $.23 per
diluted share.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The fiscal years referenced herein are as follows:
Fiscal Year Year Ended
----------- ----------
1997 January 31, 1998
1996 January 31, 1997
1995 January 31, 1996
Income and Expense Items as a Percentage of Revenues
Fiscal Year 1997 1996 1995
- ------------------------------------------------------------
Revenues
Information services 48.2% 47.6% 43.4%
Product sales 39.9 40.5 43.4
Maintenance and support 11.9 11.9 13.2
- ------------------------------------------------------------
Total revenues 100.0 100.0 100.0
Costs of Revenues (1)
Cost of information services 76.7 78.5 77.0
Cost of product sales 42.0 46.3 46.9
Cost of maintenance and support 69.5 67.4 69.0
- ------------------------------------------------------------
Total gross profit 38.0 35.9 37.1
Operating Expenses
Sales and marketing 14.0 12.5 12.8
Research and development 2.1 3.0 2.8
General and administrative 11.3 10.0 11.3
Acquisition related charges - 2.4 -
- ------------------------------------------------------------
Income from operations 10.6 8.0 10.2
Income from continuing operations
before income taxes 10.3 8.0 9.2
Income from continuing operations 6.2% 4.1% 5.5%
============================================================
(1) As a percentage of the respective revenue caption.
National Computer Systems, Inc. (the Company or NCS) is an information services
company, providing software, services and systems for the collection, management
and interpretation of data. The Company markets these products and services
predominantly in education, but also to business, government and other markets
through its various operating units.
RECAP OF 1997 RESULTS
Total revenues increased 22.6% in fiscal 1997 to $406.0 million compared to last
year's $331.2 million, with approximately half of the increase attributable to
acquisitions. Refer also to Note 2 of Notes to Consolidated Financial Statements
for further discussion of acquisitions. The Company's overall gross margin on
revenues increased $35.7 million to 38.0% as a percentage of total revenues,
versus last year's gross margin percentage of 35.9%. Operating expenses,
however, increased to 27.4% of revenues in fiscal 1997, compared to 25.5% of
revenues in fiscal 1996, before acquisition related charges. These year-to-year
margin and expense increases were partially caused by the acquired businesses,
as they are predominantly intellectual property businesses (software and
assessment products) with higher gross margins and higher operating expenses,
relative to the remainder of the Company. Nonetheless, overall operating margins
increased to 10.6% of revenue in fiscal 1997 from 10.4% in fiscal 1996 and
operating income in dollars increased 24.6% to $43.0 million. Income tax rates
were consistent with the prior year before the effects of the special items
described below. Income from continuing operations in fiscal 1997 totaled $25.2
million or $0.80 per diluted share outstanding. This compares to a fiscal 1996
pro forma income from continuing operations of $20.7 million and $0.67 per
diluted share. In fiscal 1996, the reported net income of $1.59 included a
significant one-time net gain on the disposition of the Company's Financial
Systems business and a special charge related to the acquisition of Macro
Educational Systems, Inc. (Macro). A reconciliation of diluted earnings per
share follows:
1997 1996 1995
----- ----- -----
Earnings per share, as reported $ .80 $ 1.59 $ .71
Less gain on disposition
and discontinued operations - (1.15) (.18)
----- ----- -----
Continuing operations .80 .44 .53
Plus acquisition related charges - .23 -
----- ----- -----
Pro forma earnings per share $ .80 $ .67 $ .53
===== ===== =====
During fiscal 1996, the Company sold its Financial Systems business. See Note 3
of Notes to Consolidated Financial Statements for further discussion on the
sale, the gain on disposition and discontinued operations. The following
discussion relates to continuing operations only.
REVENUES
Fiscal 1997 versus Fiscal 1996. Total revenues for fiscal 1997 were up 22.6% to
$406.0 million from $331.2 million in fiscal 1996, with approximately half of
the year-on-year revenue growth due to acquisitions. The exact annual growth in
revenues attributable to acquisitions is impracticable to determine due to the
total integration of many of these operations into existing Company operations,
the elimination of duplicate or overlapping product lines, and the packaging of
existing and acquired offerings into new offerings not previously possible.
By revenue category, fiscal 1997 compares to fiscal 1996 as follows:
Information services + 24.3%
Product sales + 20.7%
Maintenance and support + 22.1%
The growth in information services came from several sources, both internal and
acquired, but most significantly from the Company's international business,
where acquisitions in Australia and Canada, as well as significant internal
growth in Mexico, contributed approximately one-third of the total growth.
Testing and assessment services and services related to the Company's education
software also contributed significant year-on-year revenue growth. The growth in
product sales, as well as the related support revenues, were due primarily to
growth in licensing of the Company's enterprise software for schools, which
realized 150% year-on-year growth. Products and technologies acquired during the
past two years made large contributions to this growth. Sales of assessment
instruments also contributed to the growth in product sales, as a result of the
acquisition of the London House product line.
By market, the Company's revenues from the Education market grew approximately
29% in fiscal 1997, and account for over 70% of total revenue. Large Scale Data
Management (non-education) grew just under 10% year-on-year.
Fiscal 1996 versus Fiscal 1995. Total revenues for fiscal 1996 were up 10.1% to
$331.2 million from $300.9 million in fiscal 1995. By revenue category, fiscal
1996 compares to fiscal 1995 as follows:
Information services + 20.8%
Product sales + 2.7%
Maintenance and support - 0.8%
The growth in information services revenues is predominantly the result of
significantly higher volumes of educational assessment services and
international service business. During fiscal 1996, the Company invested in two
small international businesses, principally service in nature, and NCS was
awarded a new long-term service contract in Mexico. These transactions fueled
the Company's growth in the international service business. Overall,
international revenues were up 42.1% from fiscal 1995. Product sales increases
were essentially due to higher education administrative software and scannable
forms revenues. These improvements, however, were somewhat offset by lower
proprietary hardware revenues. Maintenance and support revenues were down 0.8%
due to lower third-party hardware maintenance revenues, partially offset by
higher software support revenues.
COST OF REVENUES AND GROSS PROFITS
Fiscal 1997 versus Fiscal 1996. The Company's overall gross margin as a
percentage of revenue improved to 38.0% in fiscal 1997 compared to 35.9% in
fiscal 1996. The most impactive factor in this fiscal 1997 improvement is the
greater volumes and higher margins of education software products, and, to a
lesser extent, the increase in sales and margins of assessment instruments. In
both instances, the gross margin on incremental sales is quite favorable. Gross
margins on information services also improved slightly in fiscal 1997 due to a
number of contributing factors. Gross margins on maintenance and support
declined slightly in fiscal 1997, due to a greater complement of software
support, carrying a lower margin compared to hardware maintenance.
Fiscal 1996 versus Fiscal 1995. The Company's overall gross profit dollars
increased $7.0 million or 6.3% with the largest increases being in state
educational assessments, international services and education administrative
software. As a percent of revenue, overall gross profit declined to 35.9% of
total revenues from 37.1% in fiscal 1995, principally reflecting the Company's
revenue growth in information services revenues. Gross profit changes by revenue
category were largely offsetting, however the gross profit on information
services revenues did decline due to lower first year margins on multi-year
federal student financial aid contracts.
OPERATING EXPENSES
Fiscal 1997 versus Fiscal 1996. The overall growth in operating expenses in
fiscal 1997 over fiscal 1996 is heavily impacted by the Company's 1997
acquisitions. Beyond the increase in operating expenses due simply to added
volume, these businesses by their nature (intellectual property licensing and
sales, mainly software and assessment instruments) carry higher gross margins
and higher operating expense percentages compared to the rest of the Company.
Therefore, sales and marketing and general and administrative expenses increased
not only in dollars, but as a percentage of revenues in fiscal 1997.
Research and development expenses declined nominally in 1997 as certain of the
acquisitions offset the need for internal research and development spending and
allowed faster time to market.
Fiscal 1996 versus Fiscal 1995. Sales and marketing expenses increased by $2.7
million or 7.0% in fiscal 1996 from the prior year. The year-to-year increase is
primarily the result of additional expenditures in introducing and selling new
image processing systems to the marketplace.
Research and development expenses increased $1.4 million in fiscal 1996 over
fiscal 1995. This increase relates principally to enhancements to the Company's
scanning and imaging technology and school administrative software.
General and administrative expenses decreased by $.9 million or 2.7% in fiscal
1996 from the prior year. As a percent of revenues, these expenses declined by
1.3 percentage points, to 10.0% of total revenues. The decrease reflects
specific emphasis on reducing general and administrative expenses, and is net of
a $1.0 million increase in expenses to upgrade the Company's internal
information systems.
IMPACT OF YEAR 2000
Some of the older software in use today was written using two digits rather than
four to define the applicable year. As a result, those computer programs have
date-sensitive software that recognize a date using "00" as the year 1900 rather
than the year 2000. This could cause a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar normal business activities.
The Company has substantially completed an assessment of both its product
software and internal business systems and will have to modify or replace
portions of that software so that it will function properly with respect to
dates in the year 2000 and thereafter. The Company spent approximately $1.5
million in fiscal 1997 on assessment and modification of this software. It
expects to spend approximately $11.5 million toward this end in fiscal 1998,
which should allow the Company to complete the majority of the estimated effort.
Approximately $4.0 million of this amount is incremental expenditure and the
remainder represents the redirection of existing resources. The Company expects
fiscal 1999 expenditures to be significantly reduced from that of fiscal 1998.
All amounts are being expensed currently, and are included in the Company's
future operating plans and expectations. The Company has also made, and will
continue to make, significant capital investments in its internal administrative
and service delivery systems and infrastructure (see Capital Resources and
Liquidity below), though these investments are not driven principally by year
2000 considerations. The Company has also completed an assessment of its
customers, suppliers and other vendor relationships to identify year 2000
exposures and will be working with these entities to mitigate or eliminate them.
The costs and timing of the project are based on management's best estimates,
which were derived utilizing numerous assumptions of future events; as a result,
there can be no guarantee that these estimates will be achieved. While the
Company believes it can address the year 2000 issues under its control in time
to prevent any material impact on its operations, there can be no guarantee that
the Company's customers and suppliers can do likewise, which in turn could have
an adverse impact on the Company. Contingency plans will be developed, where
necessary, so that the Company's operations will not be materially affected by
the year 2000.
OTHER SIGNIFICANT TRANSACTIONS
During fiscal 1996, in conjunction with the acquisition of Macro, NCS recorded
one-time charges totaling $7.9 million, including $5.6 million of purchased
research and development plus $2.3 million of acquisition related costs.
INTEREST EXPENSE
Interest expense decreased slightly in fiscal 1997 from fiscal 1996 due to
slightly lower average borrowing levels.
Interest expense decreased by $1.6 million in fiscal 1996 from fiscal 1995, also
the result of lower borrowing levels. See Capital Resources and Liquidity below
for further discussion of cash flow and debt.
OTHER INCOME AND EXPENSE
Other income in fiscal 1997 decreased due to lower invested cash balances as
$48.8 million was used to fund the aforementioned acquisitions.
Other income in fiscal 1996 includes interest income of $2.8 million principally
from investment of the proceeds from the sale of the Company's Financial Systems
business, and also from internally generated cash flows.
Other income and expense for 1995 included no large or unusual items.
INCOME TAXES
The effective income tax rate was 40.0%, 48.5% and 40.3% for fiscal 1997, 1996
and 1995, respectively. See Note 6 of Notes to Consolidated Financial Statements
for a reconciliation to the statutory rate. The effective income tax rate for
fiscal 1996 was higher than the statutory rate primarily as a result of the one
time write-off of non-deductible purchased research and development.
CAPITAL RESOURCES AND LIQUIDITY
The Company began fiscal 1997 with $58.1 million of cash and cash equivalents,
due largely to the 1996 divestiture of its Financial Systems business. During
fiscal 1997, the Company further generated $49.5 million of cash from operating
activities. Cash was used for acquisitions of $48.8 million, including $13.6
million to repurchase shares in the open market to offset shares issued to
effect the acquisition of Virtual University Enterprises. Further, $25.2 million
was used for property, plant and equipment acquisitions including a new
Company-owned facility in Melbourne, Australia and the outfitting of new leased
facilities in Cedar Rapids, Iowa and Lawrence, Kansas. Investments totaling $7.1
million were made in internal administrative and service delivery systems during
fiscal 1997. Debt repayments were nominal and the Company paid its normal
dividends of $5.5 million. At January 31, 1998 the Company had $23.3 million in
cash and cash equivalents.
During fiscal 1996, NCS generated $38.5 million of cash from operating
activities and $64.1 million, net, from the sale of its Financial Systems
business. The Company invested $14.9 million in property, plant and equipment
and $11.2 million in acquisitions consisting of Macro and three additional
smaller entities. The Company also repurchased 724,000 shares of Common Stock
during fiscal 1996, using $8.1 million of cash. Other financing activities
included the early repayment of the $15.0 million, 9.88% Secured Notes and $7.0
million of convertible debentures issued in connection with the Macro
acquisition.
The Company had long-term debt balances, including current maturities, of $18.8
million, $20.1 million and $27.0 million at January 31, 1998, 1997, and 1996,
respectively. The items causing the changes in debt balances are described
above. At January 31, 1998, the Company's debt to total capital ratio was 8.9%
compared to 10.6% a year earlier and 17.4% two years earlier. The Company
believes that the current debt to total capital ratio is at a level which will
allow the Company significant flexibility to fund future growth initiatives.
Accounts receivable, goodwill, accounts payable, accrued expenses and deferred
income were impacted by the acquisitions made in 1997 and by the increased level
of operations during the year.
Looking toward fiscal 1998, the Company maintains a $50.0 million revolving
credit facility, all of which was available at January 31, 1998. The Company
expects its cash flows from operations, the revolving credit facility and cash
on hand to be adequate to meet foreseeable cash requirements, including internal
growth and potential acquisitions.
NEW ACCOUNTING STANDARDS
Certain accounting standards have been issued which the Company is not yet
required to adopt. See Notes to Consolidated Financial Statements for a
discussion of the applicable standards.
The statements which are not historical or current facts or are "goals" or
"expectations" contained in this annual report constitute `forward looking'
statements, as defined in the Private Securities Litigation Reform Act of 1995
and are subject to certain risks and uncertainties that could cause actual
results to differ materially. The cautionary statements filed by the Company as
Exhibit 99 to a filing made with the SEC on Form 10-K for the fiscal year ended
January 31, 1998, are incorporated herein by reference and investors are
specifically referred to such cautionary statements for a discussion of factors
which could affect the Company's operations and forward-looking statements
contained herein.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31 (in thousands) 1998 1997
-------- --------
Assets
Current Assets
Cash and cash equivalents $ 23,267 $ 58,079
Receivables 101,334 79,056
Inventories 16,239 18,176
Prepaid expenses and other 6,562 5,526
-------- --------
Total Current Assets 147,402 160,837
-------- --------
Property, Plant and Equipment
Land, buildings and improvements 57,281 51,741
Machinery and equipment 141,949 120,395
Accumulated depreciation (105,206) (92,722)
-------- --------
94,024 79,414
-------- --------
Intellectual Properties, net
Acquired and internally developed software products 14,967 17,578
Assessment instruments 10,317 2,340
-------- --------
25,284 19,918
-------- --------
Other Assets, net
Goodwill 45,634 7,556
Other assets 3,070 6,195
-------- --------
48,704 13,751
-------- --------
Total Assets $315,414 $273,920
======== ========
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31 (in thousands) 1998 1997
-------- --------
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt $ 6,448 $ 3,819
Accounts payable 26,767 20,886
Accrued expenses 36,237 28,832
Deferred income 29,026 23,079
Income taxes 4,156 5,556
-------- --------
Total Current Liabilities 102,634 82,172
-------- --------
Long-Term Debt - less current maturities 12,396 16,329
Deferred Income Taxes 6,390 5,385
Commitments and Contingencies - -
Stockholders' Equity
Preferred stock - -
Common stock - issued and outstanding -
30,846 and 30,469 shares, respectively 925 914
Paid-in capital 4,518 -
Retained earnings 192,005 173,107
Deferred compensation (3,454) (3,987)
-------- --------
Total Stockholders' Equity 193,994 170,034
-------- --------
Total Liabilities and Stockholders' Equity $315,414 $273,920
======== ========
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Fiscal Year (in thousands, except per share amounts) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues
Information services $195,793 $157,511 $130,432
Product sales 161,977 134,144 130,648
Maintenance and support 48,245 39,504 39,803
-------- -------- --------
Total revenues 406,015 331,159 300,883
Costs of Revenues
Cost of information services 150,106 123,718 100,459
Cost of product sales 67,950 62,075 61,233
Cost of maintenance and support 33,521 26,608 27,453
-------- -------- --------
Gross profit 154,438 118,758 111,738
Operating Expenses
Sales and marketing 56,675 41,258 38,544
Research and development 8,628 9,883 8,490
General and administrative 46,091 33,076 34,000
Acquisition related charges:
Purchased research and development - 5,637 -
Other - 2,258 -
-------- -------- --------
Income from Operations 43,044 26,646 30,704
Interest expense 1,353 1,677 3,276
Other (income) expense, net (284) (1,564) (332)
-------- -------- --------
Income from Continuing Operations Before Income Taxes 41,975 26,533 27,760
Income taxes 16,800 12,867 11,180
-------- -------- --------
Income from Continuing Operations 25,175 13,666 16,580
Income (loss) from discontinued operations,
net of taxes of $(1,360) in 1996 and
$3,570 in 1995 - (2,229) 5,679
Gain on disposition, net of taxes of $29,031 in 1996 - 38,143 -
-------- -------- --------
Net Income $ 25,175 $ 49,580 $ 22,259
======== ======== ========
Basic Earnings per share
Continuing operations $ .83 $ .45 $ .54
Discontinued operations - (0.07) .19
Gain on disposition - 1.26 -
-------- -------- --------
Net Income per share $ .83 $ 1.64 $ .73
======== ======== ========
Average Shares Outstanding 30,391 30,257 30,565
Diluted Earnings per share
Continuing operations $ .80 $ .44 $ .53
Discontinued operations - (0.07) .18
Gain on disposition - 1.22 -
-------- -------- --------
Net Income per share $ .80 $ 1.59 $ .71
======== ======== ========
Average Shares Outstanding and
Dilutive Potential Common Shares 31,864 31,069 31,319
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------- Paid-In Retained Deferred
(in thousands, except per share amounts) Shares Amount Capital Earnings Compensation Total
------ ------ ------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1995 30,621 $ 919 $ 3,335 $114,546 $(5,677) $113,123
Shares issued for employee stock
purchase and option plans 413 12 2,440 - - 2,452
Repurchase of common stock (466) (14) (4,438) - - (4,452)
Restricted stock awards 161 5 1,574 - (1,579) -
Shares issued for business acquisition - - 55 - - 55
ESOP debt payment - - - - 1,000 1,000
Restricted stock compensation accrual - - - - 559 559
Net income - - - 22,259 - 22,259
Cash dividends paid - $.18 per share - - - (5,570) - (5,570)
Foreign currency translation adjustment - - - (1,228) - (1,228)
------ ----- ------- -------- ------- --------
Balance, January 31, 1996 30,729 922 2,966 130,007 (5,697) 128,198
Shares issued for employee stock
purchase and option plans 490 15 3,475 - - 3,490
Repurchase of common stock (724) (22) (6,860) (1,194) - (8,076)
Restricted stock awards (forfeitures), net (26) (1) 25 - (24) -
ESOP debt payment - - - - 1,000 1,000
Restricted stock compensation accrual - - 394 - 734 1,128
Net income - - - 49,580 - 49,580
Cash dividends paid - $.18 per share - - - (5,521) - (5,521)
Foreign currency translation adjustment - - - 235 - 235
------ ----- ------- -------- ------- --------
Balance, January 31, 1997 30,469 914 - 173,107 (3,987) 170,034
Shares issued for employee stock
purchase and option plans 283 8 1,725 - - 1,733
Repurchase of common stock (1,082) (32) (13,467) - - (13,499)
Restricted stock awards 91 3 1,758 - (1,761) -
Shares issued for business acquisition 1,085 32 13,534 - - 13,566
ESOP debt payment - - - - 1,000 1,000
Restricted stock compensation accrual - - - - 1,294 1,294
Net income - - - 25,175 - 25,175
Cash dividends paid - $.18 per share - - - (5,512) - (5,512)
Foreign currency translation adjustment
and other - - 968 (765) - 203
------ ----- ------- -------- ------- --------
Balance, January 31, 1998 30,846 $ 925 $ 4,518 $192,005 $(3,454) $193,994
====== ===== ======= ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year (in thousands) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Operating Activities
Net income $25,175 $49,580 $22,259
Less - gain on disposition - (38,143) -
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation 16,825 15,620 15,643
Amortization 13,291 9,647 11,791
Deferred income taxes and other (661) (2,053) 3,747
Non-cash charges - 6,637 -
Changes in operating assets and liabilities
(net of acquired amounts):
Accounts receivable (15,361) (4,318) (2,133)
Inventory and other current assets 1,712 2,495 542
Accounts payable and accrued expenses 8,087 (3,856) 272
Deferred income 424 2,912 (190)
------- ------- -------
Net Cash Provided By Operating Activities 49,492 38,521 51,931
------- ------- -------
Investing Activities
Acquisitions, net of cash acquired (35,216) (11,192) -
Purchases of property, plant and equipment (25,174) (14,909) (14,091)
Purchases of business systems (7,108) (1,048) (1,897)
Capitalized software products - (1,553) (4,826)
Net proceeds from disposition - 64,071 -
Other - net 1,148 3,296 1,342
------- ------- -------
Net Cash Provided By (Used In)
Investing Activities (66,350) 38,665 (19,472)
------- ------- -------
Financing Activities
Decrease in revolving credit borrowing - - (13,065)
Repayment of secured notes - (15,000) -
Net increase (decrease) in other borrowings (676) 846 (7,920)
Repurchase of common stock, net (11,766) (4,586) (1,945)
Dividends paid (5,512) (5,521) (5,570)
------- ------- -------
Net Cash Used In Financing Activities (17,954) (24,261) (28,500)
------- ------- -------
Increase (Decrease) In Cash and Cash Equivalents (34,812) 52,925 3,959
Cash and Cash Equivalents - Beginning of Year 58,079 5,154 1,195
------- ------- -------
Cash and Cash Equivalents - End of Year $23,267 $58,079 $ 5,154
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 1 - ACCOUNTING POLICIES
The fiscal years referenced herein are as follows:
Fiscal Year Year Ended
----------- ----------
1997 January 31, 1998
1996 January 31, 1997
1995 January 31, 1996
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its subsidiaries. All intercompany accounts and
transactions between consolidated entities have been eliminated. Certain
reclassifications have been made to prior year presentations to conform to
current year presentation.
USE OF ESTIMATES: The consolidated financial statements have been prepared in
accordance with the generally accepted accounting principles which require
management to make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Those assumptions
and estimates are subject to constant revision, and actual results could differ
from those estimates.
CASH AND EQUIVALENTS: All investments purchased with an original maturity of
three months or less are considered to be cash equivalents. Cash equivalents are
available for sale, are carried at cost which approximates fair market value and
consist principally of corporate commercial paper.
INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or
market. Components of inventory as of January 31, are summarized as follows:
1998 1997
- ----------------------------------------------------------------
Finished goods $ 5,166 $ 4,765
Scoring services and work in process 8,218 9,221
Raw materials and purchased parts 2,855 4,190
- ----------------------------------------------------------------
$16,239 $18,176
================================================================
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost
and depreciated over the estimated useful lives of the assets, ranging from two
to forty years, using principally the straight-line method for financial
reporting purposes and accelerated methods for income tax purposes. Significant
improvements are capitalized to property, plant and equipment accounts, while
maintenance and repairs are expensed currently. Rental income from equipment
held for lease is recognized as earned using the operating method of accounting
for such leases.
ACQUIRED AND INTERNALLY DEVELOPED SOFTWARE PRODUCTS: Acquired software product
amounts originate from the allocation of purchase prices of acquired companies
and direct acquisition of software, or rights to software. These products are
generally large, complex, mission-critical application software packages with
established market positions. Products in this category are generally assigned
lives of five to ten years. Internally developed software products represent
costs capitalized in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86. Accordingly, software production costs incurred subsequent to
establishing technological feasibility, as defined, are capitalized.
Amortization of these products is computed on a product by product basis ratably
as a percentage of estimated revenue, subject to minimum straight-line
amortization over the products' estimated useful lives of five years or less.
Expected revenues and useful lives are estimates which are subject to changes in
technology and marketplace requirements and are, therefore, subject to revision.
The Company periodically evaluates its software products for impairment by
comparison of the carrying value of the product against anticipated product
margins. The carrying value is adjusted, if necessary. A summary of software
activity is as follows:
Internally Accumulated
Acquired Developed Amortization Total
- ----------------------------------------------------------------------------
Balance, January 31, 1995 $10,475 $18,520 $(11,580) $17,415
Additions - 320 - 320
Product Discontinuation (151) (308) 459 -
Amortization - - (6,068) (6,068)
- ----------------------------------------------------------------------------
Balance, January 31, 1996 10,324 18,532 (17,189) 11,667
Additions 13,000 - - 13,000
Write-downs and dispositions - (6,539) 4,517 (2,022)
Amortization - - (5,067) (5,067)
- ----------------------------------------------------------------------------
Balance, January 31, 1997 23,324 11,993 (17,739) 17,578
Additions 1,010 - - 1,010
Amortization - - (3,621) (3,621)
- ----------------------------------------------------------------------------
Balance, January 31, 1998 24,334 11,993
Accumulated Amortization (10,768) (10,592) $(21,360)
- ----------------------------------------------------------------------------
Net Balance, January 31, 1998 $13,566 $ 1,401 $14,967
============================================================================
ASSESSMENT INSTRUMENTS: These amounts originate from the allocation of purchase
prices of acquired companies and direct acquisition of assessment instruments.
These products gain prominence over time and generally have relatively long
market lives once established. Products in this category are assigned
amortizable lives of ten years or less. Expected revenues and amortizable lives
are subject to revision and balances are periodically evaluated for possible
impairment. Accumulated amortization at January 31, 1998 and 1997 was $3,849 and
$2,754, respectively.
GOODWILL: Goodwill arising from business acquisitions is amortized on a
straight-line basis over periods ranging from five to twenty years, generally
ten years. Amortization expense was $3,047, $703 and $624 in fiscal 1997, 1996
and 1995, respectively. Accumulated amortization was $7,130 and $3,843 as of
January 31, 1998 and 1997, respectively. The Company periodically evaluates its
goodwill for impairment by comparison of the carrying value against anticipated
business performance.
ACCRUED EXPENSES: Major components of accrued expenses consisted of the
following as of January 31:
1998 1997
- ------------------------------------------------
Employee compensation $17,604 $13,376
Taxes other than income 3,558 2,875
Royalties 2,630 2,065
Other 12,445 10,516
- ------------------------------------------------
$36,237 $28,832
================================================
REVENUE RECOGNITION: Revenue from product sales and software licensing is
recognized at the time of shipment, except in instances where material
fulfillment obligations exist beyond shipment. In such cases, revenue is not
recognized until such obligations are substantially fulfilled or is recognized
in accordance with specific contract terms. Revenue from information services is
recognized when such service is performed. Hardware maintenance and software
support revenues are recognized ratably over the contractual period.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, Software Revenue Recognition, which requires
that each element of a software licensing arrangement be separately identified
and accounted for based on the relative fair values of each element. The SOP is
effective for transactions that the Company will enter into beginning February
1, 1998 and, based upon current revenue recognition policies, management
believes that the effect of the adoption will not be material.
PER SHARE DATA: In 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings per Share. SFAS 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the SFAS 128
requirements.
The following table is a reconciliation of the earnings numerator and the
weighted-average shares denominator used in the calculations of basic and
diluted earnings per share for the last three fiscal years:
1997 1996 1995
------- -------- -------
Earnings:
Income from Continuing Operations -
Basic earnings per share $25,175 $13,666 $16,580
Adjustments for dilutive securities:
Interest expense on convertible debentures,
net of tax 256 7 -
------- ------- -------
Adjusted income for diluted earnings per share $25,431 $13,673 $16,580
======= ======= =======
Weighted Average Shares:
Basic weighted-average shares 30,391 30,257 30,565
Adjustments for dilutive securities:
Employee stock options, net of tax proceeds 620 402 382
Contingent stock awards, net of tax proceeds 270 394 372
Convertible debentures 583 16 -
------- ------- -------
Dilutive potential common shares 1,473 812 754
------- ------- -------
Diluted weighted-average shares 31,864 31,069 31,319
======= ======= =======
Basic earnings per share $ 0.83 $ 0.45 $ 0.54
======= ======= =======
Diluted earnings per share $ 0.80 $ 0.44 $ 0.53
======= ======= =======
IMPAIRMENT OF LONG-LIVED ASSETS: The Company evaluates its long-lived assets for
impairment losses when indicators of impairment are present by comparing the
undiscounted cash flows to the assets' carrying amount. An impairment loss is
recorded if necessary.
STOCK-BASED COMPENSATION: In October, 1995, the FASB issued SFAS No. 123,
Accounting for Stock-Based Compensation. The statement requires adoption of the
new standard or footnote disclosure for all transactions entered into during the
fiscal year ending January 31, 1996 and thereafter. As permitted by the
statement, the Company has elected to continue to account for stock options and
awards to employees under the provisions of Accounting Principles Board (APB)
Opinion No. 25 and disclose the impact of SFAS No. 123, as if adopted, in Note
7.
SEGMENT DISCLOSURES: In June 1997, the FASB issued SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information, which requires
disclosure of certain information of a company's internal operating segments.
This Statement is effective for the Company's fiscal 1998 yearend, and will have
no effect on its basic financial statements, but will require additional
disclosures.
COMMON STOCK SPLIT: On March 3, 1998, the Board of Directors declared a
two-for-one stock split of the Company's Common Stock. The stock split is in the
form of a 100 percent stock dividend payable March 26, 1998 to shareholders of
record on March 16, 1998. The number of shares issued and outstanding at January
31, 1998, after giving retroactive effect to the split was 30,846,000. All share
and per share information, including stock option, stock purchase and stock
ownership plan information, has been restated for all years presented to reflect
the split.
NOTE 2 - ACQUISITIONS
During fiscal 1997, the Company made several individually small acquisitions. In
April 1997, the Company acquired all of the common and preferred stock of
Virtual University Enterprises (VUE), an electronic course registration and
training administration company. The purchase price was approximately $14.6
million and consisted of stock of the Company (1,085,264 shares at $12.50 per
share) and cash. In accordance with SFAS No. 109, Accounting for Income Taxes,
the purchase price has been adjusted by $1.7 million to reflect deferred taxes
on the intangible assets, whose amortization will be nondeductible. The excess
purchase price, as adjusted for deferred taxes, over book value of the net
assets acquired was $16.4 million, of all of which was allocated to goodwill and
is being amortized over 20 years.
In July 1997, the Company acquired the assets of two businesses from The
McGraw-Hill Companies for $29.5 million in cash. The acquisition included London
House, a pre-employment assessment business, and McGraw Hill School Systems, a
school administrative software business. The purchase price was allocated
primarily to goodwill, $20.4 million, and assessment instruments, $9.1 million,
which are being amortized over 10 years.
The Company made two additional acquisitions in fiscal 1997 whose acquisition
prices totaled $5.0 million, of which $4.2 million was allocated to goodwill.
All of the fiscal 1997 acquisitions described above were accounted for as
purchases and, accordingly, operating results of these businesses subsequent to
the date of acquisition were included in the Company's consolidated financial
statements.
The following is a summary of pro forma operating results as if the acquisitions
had taken place at the beginning of fiscal 1996:
Fiscal Year (unaudited) 1997 1996
-------- --------
Total revenues $420,843 $384,923
Income from continuing operations
before income taxes 39,497 18,158
Income from continuing operations 23,698 8,641
Basic earnings per share $ 0.78 $ 0.29
Diluted earnings per share $ 0.75 $ 0.28
The pro forma information is provided for informational purposes only. It is
based on historical information and does not purport to be indicative of the
results that would have occurred had the acquisitions been made at the beginning
of fiscal 1996,or of future results, as significant changes to their operations,
products and cost and expense structures have taken place since acquisition.
On January 21, 1997, the Company acquired all of the common stock of Macro
Educational Systems, Inc. (Macro), a California-based developer of
administrative software for the K-12 educational market, for approximately $13.9
million, through the issuance of $7.0 million of convertible debentures and
cash. Additional payments up to $6.0 million may be earned between 1998 and
2001, subject to achieving certain earnings levels.
The acquisition was accounted for as a purchase and, accordingly, operating
results of this business subsequent to the date of acquisition were included in
the Company's consolidated financial statements. In accordance with SFAS No.
109, Accounting for Income Taxes, the purchase price has been adjusted by $6.0
million to reflect deferred taxes on the intangible assets, whose amortization
will be nondeductible. The excess purchase price, as adjusted for deferred
taxes, over book value of the net assets acquired was $22.4 million, of which
$13.0 million was allocated to acquired software, $5.6 million to purchased
in-process research and development and $3.8 million to goodwill and other
intangible assets. The purchased in-process research and development was charged
to operations upon acquisition, and the goodwill and other intangible assets are
being amortized over 10 years.
In connection with the acquisition, the Company recorded a $2.3 million pre-tax
charge related to impairments and redundancies in the Company's existing
administrative software business. This included a $1.0 million non-cash charge
to write-down software assets and $1.3 million to cover other costs directly
related to the merger of the two operations.
The Company made three additional acquisitions in fiscal 1996, whose acquisition
prices totaled $5.1 million, of which $1.9 million was allocated to goodwill.
NOTE 3 - DISCONTINUED OPERATIONS
The Company sold its Financial Systems segment on July 10, 1996 to SunGard Data
Systems, Inc. for $95.0 million in cash. The gain on the sale, recorded in the
second quarter 1996, was $38.1 million net of tax. The results of the Financial
Systems segment up to disposition have been classified as discontinued
operations in the accompanying financial statements. The segment's 1996 revenues
through the date of sale were $17.1 million and revenues for fiscal 1995 were
$58.1 million.
NOTE 4 - LEASES
The Company leases office facilities under noncancelable operating leases which
expire in various years through 2003. Rental expense for all operating leases
was $9,167 in fiscal 1997, $8,544 in fiscal 1996, and $7,987 in fiscal 1995.
Future minimum rental expense as of January 31, 1998, for noncancelable
operating leases with initial or remaining terms in excess of one year is
$17,262 and is payable as follows: fiscal 1998 - $5,979; fiscal 1999 - $4,327;
fiscal 2000 - $3,315; fiscal 2001 - $2,530; fiscal 2002 - $1,040 and $71 beyond.
In August 1997, the Company entered into a five-year operating lease agreement
for a facility in Cedar Rapids, Iowa. The total cost of the assets covered by
the lease as of January 31, 1998 was $11,751. The lease provides for a
substantial residual value guarantee by the Company at the end of the initial
term and includes purchase and renewal options at fair market values. The
amounts of future minimum operating lease payments listed above excludes any
payment related to the residual value guarantee which is due upon termination of
the lease. The Company has the right to exercise a purchase option with respect
to the leased building or the building can be sold to a third party. The Company
expects the fair market value of the building, subject to the purchase option or
sale to a third party, to substantially reduce or eliminate the Company's
payment under the residual value guarantee. The Company is obligated to pay the
difference between the maximum amount of the residual value guarantee and the
fair market value of the building at the termination of the lease. At January
31, 1998 the maximum amount of the residual value guarantee relative to the
assets under lease at January 31, 1998 is approximately $9,871.
NOTE 5 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt at January 31, consisted of the following:
1998 1997
- --------------------------------------------------
Revolving credit borrowing $ - $ -
Convertible debentures 7,000 7,000
Unsecured note 5,228 6,535
ESOP borrowing 2,000 3,000
Other borrowings,
principally foreign 4,616 3,613
- --------------------------------------------------
18,844 20,148
Less current maturities (6,448) (3,819)
- --------------------------------------------------
Long-term debt $12,396 $16,329
==================================================
Revolving Credit Borrowings: The Company has a $50,000 unsecured revolving
credit facility that terminates November 1, 2002. 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). The Company pays a fee at an
annual rate of .15% on the facility amount. The credit facility contains
covenants with which the Company is in compliance.
Convertible Debentures: In January 1997, the Company issued $7,000 of
Convertible Debentures as partial consideration for the stock purchase of Macro,
see Note 2. These debentures are due in five equal annual installments, with the
first installment due on February 21, 1998. These debentures carry an interest
rate of 6.1%, and are convertible into common stock at $12.00 per share.
Unsecured Note: This unsecured term note is due in April 2001. The note has
annual principal payments of $1,307, and bears interest at .95% over LIBOR.
ESOP Borrowing: The ESOP loan, secured by unallocated shares of Common Stock and
guaranteed by the Company, is due in May 1999. The loan has annual payments of
$1,000, with an interest rate of .75% over LIBOR.
Scheduled Maturities: The aggregate principal amounts of long-term debt
scheduled for repayment in each of the five fiscal years 1998 through 2002 are
$6,448, $4,611, $2,991, $2,789, and $0, respectively, with $2,005 due
thereafter. In each fiscal year, interest paid approximates interest expense.
NOTE 6 - INCOME TAXES
The components of the provision for income taxes from continuing operations are
as follows:
Current
-----------------------
Fiscal Year Federal State Foreign Deferred Total
- -----------------------------------------------------------------
1997 $14,540 $2,806 $1,300 $(1,846) $16,800
1996 16,197 1,320 864 (5,514) 12,867
1995 10,079 1,465 70 (434) 11,180
- -----------------------------------------------------------------
The provision for income taxes from discontinued operations is $27,671 and
$3,570 in fiscal years 1996 and 1995, respectively.
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities as of January 31, are as follows:
1998 1997
------ ------
Deferred tax assets:
Reserves for uncollectibles $2,561 $2,801
Foreign operating loss carryforwards 2,826 2,778
Accrued vacation pay 1,792 1,511
Rotable service parts amortization 980 1,260
Intangible amortization 1,453 1,198
Deferred expenses 783 689
Other 602 1,431
Valuation allowance (2,826) (2,778)
- ------------------------------------------------------------
Total deferred tax assets 8,171 8,890
- ------------------------------------------------------------
Deferred tax liabilities:
Acquired intangible amortization 7,688 6,592
Accelerated depreciation 4,542 5,197
Net capitalized software 1,921 1,929
Other 410 557
- ------------------------------------------------------------
Total deferred tax liabilities 14,561 14,275
- ------------------------------------------------------------
Net deferred tax liabilities $ 6,390 $ 5,385
============================================================
A reconciliation of the Company's statutory and effective tax rate from
continuing operations is presented below:
1997 1996 1995
------ ------ ------
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 4.4 3.2 3.1
Intangible amortization 1.0 1.7 1.0
Foreign sales corporation (0.2) (0.5) (0.1)
Research and development credits (0.1) (0.6) (0.3)
Affordable housing credit (0.6) (1.0) (1.0)
Foreign operating losses 1.1 3.2 3.2
Purchased research and development - 7.4 -
Other (0.6) 0.1 (0.6)
- ---------------------------------------------------------------
Effective rate 40.0% 48.5% 40.3%
===============================================================
The Company made income tax payments of $18,991, $47,693 and $10,335 in the
fiscal years 1997, 1996, and 1995, 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. 100,000,000 shares of $.03 par value Common Stock are authorized
(post-split). There are no restrictions on retained earnings.
In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the
Company continues to elect to utilize APB Opinion No. 25 and related
interpretations in accounting for its stock option plans, restricted stock plans
and its employee stock purchase plan. If the Company had elected to recognize
compensation cost based on the fair value of the options granted, restricted
shares awarded and shares sold pursuant to the purchase plan as prescribed by
SFAS No. 123, net income and earnings per share would have been reduced to the
pro forma amounts indicated in the table below for the fiscal years 1997, 1996
and 1995:
1997 1996 1995
------- ------- ------
Net income - as reported $25,175 $49,580 $22,259
Net income - pro forma 23,988 49,069 21,925
Earnings per share - as reported:
Basic $ 0.83 $ 1.64 $ 0.73
Diluted 0.80 1.59 0.71
Earnings per share - pro forma:
Basic $ 0.79 $ 1.62 $ 0.72
Diluted 0.76 1.58 0.70
SFAS No. 123 is applicable only to options granted after December 31, 1994; as a
result, its pro forma effect will not be fully impacted until these options
become fully exercisable. The fair value of each option grant is estimated on
the date of the grant using the Black-Scholes option-pricing model with the
following assumptions for the fiscal years shown:
1997 1996 1995
------ ------ ------
Expected dividend yield .58% .78% .78%
Expected stock price volatility 30% 45% 45%
Risk-free interest rate 6.23% 6.18% 6.18%
Expected life of options 5 years 5 years 5 years
The weighted-average fair value of the options granted during fiscal years 1997,
1996 and 1995 were $4.40, $5.16 and $4.20, respectively.
The Company has five Employee Stock Option Plans (1984, 1986, 1990, 1995 and
1997). Options to purchase Common Stock of the Company are granted to employees
at 100% of fair market value on the date of grant and are exercisable over a 60
or 63 month period. Shares available for grant under the Plans totaled 669,700,
454,000 and 760,500 at January 31, 1998, 1997 and 1996, respectively.
Outstanding options under all plans, including non-qualified options discussed
below, are summarized as follows:
Weighted
Average Price
Shares Per Share
------- -------------
Balance, January 31, 1995 1,895,000 $ 6.85
Granted 459,500 9.26
Cancelled (131,900) 7.57
Exercised (328,700) 5.62
--------- -----
Balance, January 31, 1996 1,893,900 7.60
Granted 451,700 11.37
Cancelled (188,900) 8.27
Exercised (462,580) 7.43
--------- -----
Balance, January 31, 1997 1,694,120 8.57
Granted 862,148 13.13
Cancelled (92,908) 9.51
Exercised (309,246) 7.57
--------- ------
Balance, January 31, 1998 2,154,114 $10.50
========= ======
Options for 679,182; 627,140 and 746,500 shares were exercisable at January 31,
1998, 1997 and 1996, with weighted average exercise prices of $8.07, $7.43 and
$7.24, respectively. Exercise prices for options outstanding as of January 31,
1998 are summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Remaining Average
Range of Number Exercise Contractual Number Exercise
Exercise Prices of Shares Price Life of Shares Price
- --------------- --------- --------- ----------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 4.02 - 8.00 647,334 $ 6.72 1.7 years 437,828 $ 6.78
8.38 -12.00 664,580 10.44 3.4 years 198,654 10.14
12.25 -18.75 842,200 13.52 5.1 years 42,700 12.99
--------- ------ ------- ------
2,154,114 $10.50 679,182 $ 8.07
========= ====== ======= ======
</TABLE>
The Company has two Long-Term Incentive Plans (L-TIP) approved by the
shareholders, (1990 and 1997). During fiscal 1990, pursuant to the 1990 L-TIP,
342,800 shares were issued to participants on a restricted basis. At January 31,
1998, 30,690 shares remained restricted, 83,210 shares distributed and the
balance having been forfeited. The shares distributed and the remaining
restricted shares which vest on January 31, 1999, contingent on continued
employment, were earned by participants during fiscal 1996.
During fiscal 1995 and 1996, pursuant to the 1990 L-TIP, 199,800 shares were
issued to participants on a restricted basis; 129,828 shares have been earned
and distributed with the balance having been forfeited.
During fiscal 1997, pursuant to the 1990 L-TIP, 150,000 shares were issued on a
restricted basis. At January 31, 1998, 93,750 shares remain restricted with the
balance having been earned and distributed. The restricted shares are earned
upon attainment of specified Common Stock market prices and are contingent on
continued employment.
During fiscal 1997, pursuant to the 1997 L-TIP, non-qualified options to
purchase 336,000 shares of Common Stock of the Company were granted to
participants at 100% of fair market value on date of grant and are exercisable
over 67 to 72 month periods. Vesting can be accelerated to January 31, 2000 on
achievement of specified cumulative earnings per share amounts during the three
fiscal years then ended. At January 31, 1998, there were 336,000 options shares
outstanding at a weighted average exercise price per share of $12.54.
The Company has an Employee Stock Purchase Plan. There were 57,784 shares
available for purchase under the Plan at January 31, 1998.
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 $2,195, $1,638 and $1,900 in fiscal years 1997, 1996
and 1995, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN: The Company has an Employee Stock Ownership Plan
(ESOP) covering substantially all employees. Benefits, to the extent vested,
become available upon retirement or termination of employment. During 1989, the
ESOP Trust borrowed $10,000 to purchase 1,584,000 shares of Common Stock. Each
year, the Company makes contributions to the ESOP which are charged to
compensation expense, and used by the ESOP Trust to make loan interest and
principal payments. With each principal payment, a portion of the Common Stock
is allocated to participating employees. In fiscal 1997, the Company's
contribution to the Plan was $1,000 plus interest of $61, which is net of
dividends on unallocated shares of $87. The Company's contribution to the Plan
was $1,000 in fiscal 1996 and fiscal 1995, and interest, which was totally
offset by dividends on unallocated shares, was $77 in fiscal 1996 and $63 in
fiscal 1995. There were 316,800 and 475,200 unallocated shares at January 31,
1998 and 1997, respectively.
The ESOP Trust borrowing, which is guaranteed by the Company, is reflected in
long-term debt, and the Company's obligation to make future contributions to the
ESOP for debt repayment is reflected as a reduction of Stockholders' Equity in
the consolidated financial statements.
NOTE 9 - CONTINGENCY
Certain claims asserted against the Company by a former customer and discussed
in prior years were reduced to a formal complaint served on the Company on April
30, 1997. The lawsuit alleges certain claims against the Company in connection
with three loan processing and servicing agreements; the claims are for
expenses, an undisclosed amount of lost profits and damages associated with loan
defaults. The Company has tendered the defense of this claim to its insurer, and
the insurer accepted the defense subject to a reservation of rights. The Company
has filed an answer to the complaint denying the claims and the Company will
vigorously defend this litigation. In addition, the Company has filed a
counterclaim against the former customer and its' corporate affiliate seeking
compensatory damages in an amount to be determined at trial. The Company does
not believe the outcome of this litigation would result in a material adverse
effect on the Company's financial position or results of operations.
NOTE 10 - BUSINESS SEGMENT INFORMATION
The Company operates in a single business segment, providing software, services
and systems for the collection, management and interpretation of data. The
Company markets these products and services to the education, commercial and
government markets, through its various units.
The Company's foreign operations and export sales are individually less than 10%
of total revenues. Sales to all government agencies for the fiscal years ended
January 31, 1998, 1997 and 1996 were $185,186, $180,993 and $148,313 of which
$63,005, $62,278, and $42,664, respectively, were to U.S. government agencies,
principally the U.S. Department of Education, with the remainder to state and
local government agencies, predominantly school districts and state departments
of education. The Company considers its credit risk in trade receivables to be
minimal with regard to the governmental customers described above. With regard
to the Company's non-governmental customers, credit investigations are performed
to minimize credit losses, which historically have been insignificant.
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of National
Computer Systems, Inc. and subsidiaries as of January 31, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 1998, in conformity with generally
accepted accounting principles.
/s/ERNST & YOUNG LLP
Minneapolis, Minnesota
March 2, 1998
EXHIBIT 21
SIGNIFICANT SUBSIDIARIES
NATIONAL COMPUTER SYSTEMS, INC.
STATE OR
OTHER
JURISDICTION
OF NAME UNDER WHICH
NAME OF SUBSIDIARY INCORPORATION SUBSIDIARY DOES BUSINESS
- ------------------ ------------- ------------------------
Interpretive Scoring Minnesota National Computer Systems, Inc.
Systems, Inc. NCS Assessments
Professional Assessment
Services Division of
National Computer
Systems, Inc.
Macro Educational California National Computer Systems, Inc.
Systems, Inc. Education Systems and
Services Division
of National Computer
Systems, Inc.
Note: No other subsidiary of National Computer Systems, Inc. meets the
conditions to be deemed a significant subsidiary.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of National Computer Systems, Inc. of our report dated March 2, 1998,
included in the 1997 Annual Report to Stockholders of National Computer Systems,
Inc. and subsidiaries.
We also consent to the incorporation by reference in Post Effective
Amendment Number 1 to Registration Statement Number 2-96965 on Form S-8 (1984
Employee Stock Option Plan), Registration Statement Number 33-9830 on Form S-3
(Selling Shareholder), Registration Statement Number 33-21511 on Form S-8 (1986
Employee Stock Option Plan), Registration Statement Number 333-00377 on Form S-8
(1989 Non-Employee Director Stock Option Plan), Registration Statements Number
33-48509 and 333-00381 on Form S-8 (1990 Employee Stock Option Plan),
Registration Statement Number 333-00379 on Form S-8 (1990 Long-Term Incentive
Plan), Registration Statement Number 33-48510 on Form S-8 (1992 Employee Stock
Purchase Plan), Registration Statement Number 33-68854 on Form S-8 (option held
by former director), Registration Statement Number 333-00383 on Form S-8 (1995
Employee Stock Option Plan), Registration Statement Number 333-25523 on Form S-3
(VUE Selling shareholders) and Registration Statement Number 333-25343 on Form
S-8 (NCS/VUE Stock Option Plan) of our report dated March 2, 1998 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 22, 1998
EXHIBIT 24
POWER OF ATTORNEY
FORM 10-K FOR YEAR ENDED JANUARY 31, 1998
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, 1998, which is to be filed with the
Securities and Exchange Commission, with all exhibits thereto, and any and all
documents in connection therewith, hereby granting unto said attorney-in-fact
and agent full power and authority to do and perform any and all acts and things
requisite and necessary to be done, and hereby ratifying and confirming all that
said attorney-in-fact and agent may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands this 3rd
day of March, 1998.
/s/ Russell A. Gullotti /s/ Stephen G. Shank
- ------------------------- -------------------------
Russell A. Gullotti Stephen G. Shank
/s/ David C. Cox /s/ John E. Steuri
- ------------------------- -------------------------
David C. Cox John E. Steuri
/s/ Jean B. Keffeler /s/ John W. Vessey
- ------------------------- -------------------------
Jean B. Keffeler John W. Vessey
/s/ Moses Joseph /s/ Jeffrey W. Taylor
- ------------------------- -------------------------
Moses Joseph Jeffrey W. Taylor
/s/ Charles W. Oswald
- -------------------------
Charles W. Oswald
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for National Computer Systems, Inc. and Subsidiaries, for
the fiscal year ended January 31, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000069999
<NAME> NATIONAL COMPUTER SYSTEMS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<EXCHANGE-RATE> 1.0
<CASH> 23,267
<SECURITIES> 0
<RECEIVABLES> 102,334
<ALLOWANCES> 0
<INVENTORY> 16,239
<CURRENT-ASSETS> 148,402
<PP&E> 199,230
<DEPRECIATION> (105,206)
<TOTAL-ASSETS> 315,414
<CURRENT-LIABILITIES> 102,634
<BONDS> 12,396
0
0
<COMMON> 925
<OTHER-SE> 193,069
<TOTAL-LIABILITY-AND-EQUITY> 315,414
<SALES> 161,977
<TOTAL-REVENUES> 406,015
<CGS> 67,950
<TOTAL-COSTS> 251,577
<OTHER-EXPENSES> 111,394
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,353
<INCOME-PRETAX> 41,975
<INCOME-TAX> 16,800
<INCOME-CONTINUING> 25,175
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,175
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.80
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for National Computer Systems, Inc. and Subsidiaries, for
the fiscal year ended January 31, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<RESTATED>
<CIK> 0000069999
<NAME> NATIONAL COMPUTER SYSTEMS, INC
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1998 JAN-31-1998
<PERIOD-START> FEB-01-1997 MAY-01-1997 AUG-01-1997
<PERIOD-END> APR-30-1997 JUL-31-1997 OCT-31-1997
<EXCHANGE-RATE> 1.0 1.0 1.0
<CASH> 27,436 8,518 22,084
<SECURITIES> 0 0 0
<RECEIVABLES> 79,321 91,753 80,854
<ALLOWANCES> 0 0 0
<INVENTORY> 23,149 21,950 21,844
<CURRENT-ASSETS> 135,688 128,107 131,986
<PP&E> 168,618 173,907 176,862
<DEPRECIATION> (90,901) (94,637) (95,902)
<TOTAL-ASSETS> 267,231 291,377 295,812
<CURRENT-LIABILITIES> 71,830 89,651 89,546
<BONDS> 14,974 14,163 13,954
0 0 0
0 0 0
<COMMON> 918 920 922
<OTHER-SE> 172,619 179,975 184,745
<TOTAL-LIABILITY-AND-EQUITY> 267,231 291,377 295,812
<SALES> 34,037 38,857 45,846
<TOTAL-REVENUES> 78,971 96,029 115,387
<CGS> 15,235 17,804 18,256
<TOTAL-COSTS> 48,160 57,962 74,644
<OTHER-EXPENSES> 23,511 26,194 30,736
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 325 310 330
<INCOME-PRETAX> 6,748 11,611 10,126
<INCOME-TAX> 2,700 4,600 4,100
<INCOME-CONTINUING> 4,048 7,011 6,026
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,048 7,011 6,026
<EPS-PRIMARY> 0.13 0.23 0.20
<EPS-DILUTED> 0.13 0.22 0.19
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for National Computer Systems, Inc. and Subsidiaries, for
the fiscal years ended January 31, 1996 and 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<CIK> 0000069999
<NAME> NATIONAL COMPUTER SYSTEMS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S.Dollars
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> JAN-31-1996 JAN-31-1997 JAN-31-1997 JAN-31-1997 JAN-31-1997
<PERIOD-START> FEB-01-1995 FEB-01-1996 FEB-01-1996 MAY-01-1996 AUG-01-1996
<PERIOD-END> JAN-31-1996 JAN-31-1997 APR-30-1996 JUL-31-1996 OCT-31-1996
<EXCHANGE-RATE> 1.0 1.0 1.0 1.0 1.0
<CASH> 5,154 58,079 7,316 84,165 72,532
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 68,713 79,056 57,912 64,721 64,811
<ALLOWANCES> 0 0 0 0 0
<INVENTORY> 18,336 18,176 23,112 18,692 20,417
<CURRENT-ASSETS> 118,220 160,837 115,939 175,692 165,968
<PP&E> 154,425 172,136 155,031 158,974 161,598
<DEPRECIATION> (79,596) (92,722) (81,286) (84,640) (86,501)
<TOTAL-ASSETS> 219,724 273,920 214,906 275,636 264,682
<CURRENT-LIABILITIES> 62,632 82,172 56,924 94,688 80,650
<BONDS> 24,535 16,329 23,228 7,228 8,098
0 0 0 0 0
0 0 0 0 0
<COMMON> 922 914 927 920 916
<OTHER-SE> 127,276 169,120 129,912 168,934 171,662
<TOTAL-LIABILITY-AND-EQUITY> 219,724 273,920 214,906 275,636 264,682
<SALES> 130,648 134,144 60,812 71,113 78,578
<TOTAL-REVENUES> 300,883 331,159 70,507 80,964 88,783
<CGS> 61,233 62,075 37,140 43,204 53,302
<TOTAL-COSTS> 189,145 212,401 43,769 49,676 60,138
<OTHER-EXPENSES> 81,034 92,112 20,157 21,412 20,863
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 3,276 1,677 568 625 232
<INCOME-PRETAX> 27,760 26,533 5,361 9,783 8,400
<INCOME-TAX> 11,180 12,867 2,160 3,890 3,450
<INCOME-CONTINUING> 16,580 13,666 3,201 5,893 4,950
<DISCONTINUED> 5,679 (2,229) (370) (1,859) 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 22,259 49,580 2,831 42,177 4,950
<EPS-PRIMARY> 0.73 1.64 0.10 1.39 0.16
<EPS-DILUTED> 0.71 1.59 0.09 1.35 0.16
</TABLE>
Exhibit 99
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT
National Computer Systems, Inc. (the "Company") desires to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
and is filing this Exhibit to its Annual Report on Form 10-K in order to do so.
When used in this Annual Report on Form 10-K and in future filings by the
Company with the Securities and Exchange Commission, in the Company's annual
report, quarterly reports and press releases and in oral statements made with
the approval of an authorized executive officer, the words or phases `will
likely result', `look for', `may result', `will continue', `is anticipated',
`expectations', `project', `goals' or similar expressions are intended to
identify `forward-looking statements' within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. The
Company cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. In addition, the Company
cautions readers that the following important factors, among others, could
affect the Company's financial performance and could cause the Company's actual
results for future periods to differ materially from any forward-looking
statements made by, or on behalf of, the Company:
Difficulties in obtaining and retaining sufficient numbers of
adequately skilled technical employees to fulfill the Company's
internal systems, product development and service delivery
requirements, including, but not limited to, the Company's need to
modify or replace software to properly function in the year 2000.
Difficulties or delays in the development, production, testing and
marketing of the Company's products, including, but not limited to, a
failure to ship new products and technologies when anticipated, (e.g.,
school administrative software products or new data collections
services and systems) or delays or failures of acquired businesses in
meeting projected business cases.
The effects of, and changes in, trade, monetary and fiscal policies,
laws and regulations, other activities of government agencies,
particularly the U.S. Department of Education and local taxing
authorities which fund education, and similar organizations; changes in
social and economic conditions, such as trade restrictions or
prohibitions, inflation and monetary fluctuations, import and other
charges or taxes; the ability or inability of the Company to obtain, or
hedge against, foreign currency, foreign exchange rates and
fluctuations in those rates; unstable governments and legal systems,
and intergovernmental disputes.
Occurrences affecting the slope or speed of the life cycle curve for
many of the Company's existing products, or affecting the Company's
ability to reduce product and other costs, and to increase
productivity.
Difficulties in, and cost of, obtaining raw materials, supplies,
electronic components and any other items needed for the production of
the Company's scanning devices, scannable forms, and other products;
and capacity constraints limiting the amounts of orders for these items
causing effects on the Company's ability to ship its products.
The costs and other effects of legal and administrative cases and
proceedings; claims of customers, both current and former; settlements
and investigations; and changes in those items; developments or
assertions by or against the Company relating to intellectual property
rights and licenses; adoption of new, or changes in, accounting
policies and practices and the application of such policies and
practices.
The amount, and rate of growth in, the Company's selling, general and
administrative expenses; and the impact of unusual items resulting from
the Company's ongoing evaluation of its business strategies, asset
valuations and organizational structures.
The Company does NOT undertake and specifically declines any obligations to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
