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, 1999 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)
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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. ____
State the aggregate market value of the voting shares held by non-affiliates of
the registrant as of March 31, 1999.
Common Shares, $.03 par value -- $701,358,000.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of April 20, 1999.
Common Shares, $.03 par value - 31,593,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended January 31,
1999 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 27, 1999 are incorporated by reference into Part
III.
PART I
ITEM 1. BUSINESS
National Computer Systems, Inc. ("NCS" or the "Company") is a global
information services company, which provides services, software and systems for
the collection, management and interpretation of data.
The Company's headquarters are located at 11000 Prairie Lakes Drive, Eden
Prairie, Minnesota 55344, telephone 612/829-3000.
MARKETS SERVED
NCS serves two broad markets: Education and Large Scale Data Management.
Education
NCS develops and markets data collection services and systems for the
Education market. These services and systems provide optical scanning,
image-based or electronic data collection and computer processing services for
the high accuracy, large volume and complex processing needs of major test
publishers, federal and 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. NCS provides
training, consulting, and project management services for the Education market.
In addition, NCS offers network services, including design, hardware, and
software procurement; Internet utilization, maintenance and support; network
administration; and outsourcing for its K-12 customers. The Company's
information processing services are also provided in support of federal student
financial aid programs for post-secondary education.
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.
Large Scale Data Management
NCS develops, markets and manages complex data collection, processing and
reporting services and products targeted for certain key applications in the
Large Scale Data Management market.
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. Its services and products include comprehensive data
collection technologies, database management, software development, document
imaging, 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 services. Finally, NCS' network
administration services include network and system security, help desk, Internet
connectivity and training.
BUSINESS SEGMENTS
NCS delivers its products and services through five business units.
Assessments and Testing Services
NCS is the largest commercial processor of academic 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; test item development; program management; software
development; printing, packaging, distribution and collection logistics; and
scoring, editing, analysis and final reporting. Scoring services include
selected response scoring and professional scoring of constructed response test
items such as essays. Both optical mark reading (OMR) and image scanning
technologies are utilized in the scoring process.
The Company offers a secure Internet-based electronic testing delivery and
reporting capability, which allows NCS to participate in the professional
licensure and certification market. It also permits NCS to offer an electronic
testing option to traditional statewide grade K-12 testing programs.
The Company also publishes and distributes tests and provides scoring
services to industrial and clinical psychologists, psychiatrists, human resource
professionals and educators. These tests and scoring services include
personality assessment and psychological diagnostic testing and career
development, guidance counseling and human resource organizational assessments.
In addition, to provide tools for workforce development, the Company's test
and scoring services have been expanded to include assessments for personnel
selection and skill and career assessment.
Education Software and Services
A principal strategy of the Company in servicing the education marketplace
is to concentrate on enterprise software for school administration. NCS'
software products include student administrative software to assist educators in
student management, including applications such 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 its instructional management
software, NCS offers model curriculum and test item databases to assist schools
in establishing and meeting stated or mandated curriculum objectives.
With the acquisition of American Cybercasting Corporation, also known as
Educational Structures, in fiscal 1998, the Company began offering
Internet-based products that allow educators to access customized lesson plans
in social studies, language arts, mathematics and science with appropriate
student/teacher resources.
NCS products also include financial management software for schools and
school districts. The Company provides software for accounting and financial
reporting, payroll, human resources, inventory and many other financial and
administrative functions. The Company offers teacher desktop tools for
applications such as staff development, gradebook systems, and delivery and
receipt of student information.
NCS offers services related to 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, integration and maintenance; training;
and help desk and ongoing support. The Company also offers outsourcing services
to install its software and third party computing and network hardware and to
operate the system on a day-to-day basis for school districts.
NCS 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 imaging and electronic; forms management;
telecommunication and telephone call center support; information management and
dissemination; and network support, such as Internet connectivity; and training.
These services and products can be delivered on-site or outsourced off-site to
NCS.
The Company's services also 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 such as applicant tracking, organizational development, employee
attitude surveys, benefits enrollment and employee evaluation; telephone equal
access carrier selection; and general data collection, analysis, management and
reporting. More recently, the Company has offered medical device tracking
services to help medical manufacturers comply with the 1990 Safe Medical Devices
Act.
NCS provides its large scale data management services to several federal
government customers. The U.S. Department of Education, which is the Company's
largest single customer, outsources projects to NCS, including the processing
and eligibility calculation of the free federal application for student aid in
post-secondary education. Under contract, NCS also manages the wide area network
over which this information is distributed to and from member colleges,
universities, and other post-secondary institutions. Other federal agencies that
are customers of NCS include the U.S. Department of Labor, the U.S. Department
of Health and Human Services, the Internal Revenue Service, and the U.S. Bureau
of Census.
Data Collection Systems
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 that require the highest accuracy,
precise response definition and cost effective data capture.
The Company's lines of OMR hardware include scanners marketed as OpScan(R)
products. The 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, which provides a very high degree of accuracy
in processing responses. To enhance the usefulness of the OpScan scanners, 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 that represent an extension
of the Company's optical mark reading technology. These products contain NCS
proprietary character recognition technology as well as integrated third-party
technologies. When attached to a computer workstation 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 utility software and standard application programs
for use with NCS data collection 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 needs.
The Company designs, manufactures and sells scannable forms, including
multiple-page booklets. A variety of custom forms are tailored to meet specific
customer needs. In addition, standardized forms are used in applications such as
testing, attendance, scheduling and student evaluation in the Education market
and applications such as customer surveys or market research in the Large Scale
Data Management market.
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, the Company prints its forms to exacting
specifications and recommends them for use with its scanning systems.
International
NCS' products and services are sold internationally.
The Company's OMR and image-based data collection systems and scannable
forms and booklets are utilized outside the United States by ministries of
education for testing and assessment and by commercial or governmental customers
for data collection, data management and reporting applications.
The Company's international business strategy is to focus on certain
countries with services-led applications. The applications center on testing and
assessment in the Education market and on telecom deregulation for commercial or
governmental.
In-country services include professional consulting; project management;
comprehensive data collection technology and processing; forms management;
telecommunication and telephone call center operations and support; data base
management; and information dissemination.
Additional Business Segment Data
For financial information regarding each of the Company's business segments
see Note 10 of Notes to Consolidated Financial Statements that are included in
the Annual Report to Stockholders for the fiscal year ended January 31, 1999,
and incorporated herein by reference.
MARKETING
NCS markets its data collection hardware and software and its data
collection and computer processing services in the United States directly
through sales employees and indirectly through business partners, original
equipment manufacturers and resellers. Outside the United States, the Company's
systems, products, and services are sold through sales employees, distributors
and independent sales agents. The Company's published test products and related
test-scoring services are marketed in North America through telemarketing,
direct mail, professional journal advertising and professional trade convention
attendance and outside North America 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 includes labor, parts and 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 and system
acquisition and implementation. The Company also provides 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, 1999, 1998 and 1997, the Company's product development expenses were
approximately $12.4 million, $8.6 million and $9.9 million, respectively. The
expenditures related principally to software product development (primarily
focused on applications software) and scanning software and equipment
development. For a description of new products acquired through acquisitions,
see Note 2 of Notes to Consolidated Financial Statements that are included in
the Annual Report to Stockholders for the fiscal year ended January 31, 1999,
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 facilities in Columbia,
Pennsylvania; Owatonna, Minnesota; Melbourne, Victoria, Australia; 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 the
numerous data collection methods available and successfully in use in the
marketplace today. The Company continues to focus on the development of market
niches where scanning technology has advantages over other data entry
technologies. In addition to 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 forms produced by commercial and
specialized 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 and maintenance organization competes with services
provided by manufacturers, 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 with publishers of various
copyrighted psychological, aptitude and achievement tests. These publishers
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" are registered trademarks of the Company.
EMPLOYEES
As of February 26, 1999, the Company employed approximately 3,700 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 26, 1999 are listed below along with their business
experience during the past five years.
NAME AGE POSITION
- ------------------------ ----- ------------------------------------
Russell A. Gullotti 56 Chairman of the Board,
President and Chief Executive Officer
Robert C. Bowen 57 Senior Vice President
Michael C. Brewer 52 Vice President and General Counsel
Jay V. Clark 57 Vice President
John W. Fenton, Jr. 58 Secretary-Treasurer
Clive M. Hay-Smith 41 Vice President
Robert C. Hickcox 45 Vice President
Gary L. Martini 48 Vice President
Michael A. Morache 48 Vice President
David W. Smith 54 Vice President
Jeffrey W. Taylor 45 Vice President and Chief Financial Officer
Adrienne T. Tietz 52 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.
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 for more than five years.
Mr. Hickcox has been a Vice President of NCS since February, 1997 and was
Director, Methods and Tools of NCS from April, 1995 to February, 1997. Prior to
that he was 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.
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. Previously, he was 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) 96,000 Education software and services
general offices, sales and
marketing, product development
and support
Foothill Ranch, CA 37,000 Education software and services,
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) 142,000 operations and general offices
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 67,000 Executive general offices;
electronic test processing
operations, general offices,
sales and marketing
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 Assessments and 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 offices,
Australia (1) data processing services, sales
and marketing, documents design
and production
Rotherham, South Yorkshire 34,000 Documents design and production,
England (1) general offices, sales and
marketing
- --------------------------
(1) Denotes owned facility.
The Company believes that its facilities 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. ("Edu-Cap"), formerly
University Support Services, Inc., in the United States District Court, District
of Minnesota, Fourth Division. 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, lost profits and compensation for extraordinary defaults
and lost interest that it claims resulted from NCS' breaches of such agreements.
In the lawsuit, Edu-Cap also seeks to have NCS acquire from Edu-Cap certain
student loans with unpaid principal, interest, and late charges, which loans it
claims are or have been in default and were incorrectly processed 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 and contribution and
indemnity. The Company does not believe that the outcome of this litigation
would result in a material adverse effect on the Company's consolidated
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, 1999 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, 1999 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, 1999 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, 1999 is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
"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, 1999 is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and supplementary data of
the registrant and its subsidiaries, included in the Annual Report to
Stockholders for the year ended January 31, 1999, are incorporated herein by
reference:
Consolidated Balance Sheets -- January 31, 1999 and 1998
Consolidated Statements of Income -- Years ended January 31, 1999, 1998 and
1997
Consolidated Statements of Changes in Stockholders' Equity -- Years ended
January 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows -- Years ended January 31, 1999, 1998
and 1997
Notes to Consolidated Financial Statements -- January 31, 1999
Report of Independent Auditors dated March 1, 1999
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 27, 1999 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 27, 1999 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 27,
1999 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 27, 1999 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, 1999, are
incorporated by reference in Item 8:
Consolidated Balance Sheets -- January 31, 1999 and 1998
Consolidated Statements of Income -- Years ended January 31, 1999,
1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity --
Years ended January 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows -- Years ended January 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements -- January 31, 1999
Report of Independent Auditors dated March 1, 1999
(2) Consolidated financial statement schedules of National Computer
Systems, Inc. and subsidiaries required to be filed by Item 14(d):
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable and, therefore, have been omitted.
(3) Listing of Exhibits:
EXHIBIT
3.1 Restated Articles of Incorporation, as amended, are incorporated
herein by reference to Exhibit 3.1 to the NCS Form 10-K for the
fiscal year ended January 31, 1998.
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 Second Amended and Restated Rights Agreement dated as of December
8, 1998 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. 3 to Form 8-A/A dated December 15, 1998.
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 Amended and Restated Change In Control Agreement dated as of May
21, 1998, by and between NCS and certain executives of NCS is
incorporated herein by reference to Exhibit 10.1 to the Company's
Form 10-Q for the fiscal quarter ended October 31, 1998.
*10.2 Amended and Restated Severance Agreement dated December 8, 1998, by
and between NCS and Russell A. Gullotti is incorporated herein by
reference to Exhibit 10.2 to the Company's Form 10-Q for the fiscal
quarter ended October 31, 1998.
*10.3 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.
*10.4 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.
*10.5 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.
*10.6 NCS Non-Employee Director Stock Option Plan, as amended, is
incorporated herein by reference to Exhibit 10.4 to the Company's
Form 10-K for the fiscal year ended January 31, 1998.
*10.7 Oswald Stock Option Plan is incorporated herein by reference to
Exhibit 10O to the Company's Form 10-K for the fiscal year ended
January 31, 1995.
*10.8 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.
*10.9 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.
*10.10 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.
*10.11 NCS 1999 Employee Stock Option Plan.
*10.12 NCS 1999 Non-Employee Director Stock Option Plan.
*10.13 NCS 1998 Employee Stock Purchase Plan is incorporated herein by
reference to Exhibit 10.17 to the Company's Form 10-K for the
fiscal year ended January 31, 1998.
*10.14 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.
*10.15 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.
*10.16 NCS Supplemental Deferred Compensation Plan is incorporated herein
by reference to Exhibit 4 to the Company's Form S-8 dated March 26,
1999.
*10.17 NCS Corporate Management Incentive Plan -- 1998 is incorporated
herein by reference to Exhibit 10.16 to the Company's Form 10-K for
the fiscal year ended January 31, 1998.
*10.18 NCS Corporate Management Incentive Plan -- 1999.
13 Portions of NCS' Annual Report to Stockholders for the fiscal year
ended January 31, 1999.
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, 1999 on behalf of other
officers and directors.
27 Financial Data Schedule.
99 Cautionary statements identifying important factors that could
cause the Company's actual results to differ from those projected
in forward looking statements.
- ----------------
* Indicates management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
January 31, 1999.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are
not required or are inapplicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONAL COMPUTER SYSTEMS, INC.
Dated: April 23, 1999 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 William J. Cadogan * Director
---------------------
William J. Cadogan
By DAVID C. COX * Director
---------------------
David C. Cox
By DELORES M. ETTER * Director
---------------------
Delores M. Etter
By MOSES S. JOSEPH * Director
---------------------
Moses S. Joseph
By JEAN B. KEFFELER * Director
---------------------
Jean B. Keffeler
By STEPHEN G. SHANK * Director
---------------------
Stephen G. Shank
By JOHN E. STEURI * Director
---------------------
John E. Steuri
By JEFFREY W. TAYLOR * Vice President and Chief
- ------------------------- Financial Officer (principal
Jeffrey W. Taylor financial officer and principal
accounting officer)
* Executed on behalf of the indicated officers and directors of the
registrant by J. W. Fenton, Jr., Secretary-Treasurer, duly appointed
attorney-in-fact.
/s/ J. W. FENTON, JR.
- ----------------------------------- Dated: April 23,1999
J. W. Fenton, Jr.
(ATTORNEY-IN-FACT)
FORM 10-K
NATIONAL COMPUTER SYSTEMS, INC.
FOR THE FISCAL YEAR ENDED JANUARY 31, 1999
EXHIBIT INDEX
EXHIBIT
- -------------
10.11 NCS 1999 Employee Stock Option Plan.
10.12 NCS 1999 Non-Employee Director Stock Option Plan
10.18 NCS Corporate Management Incentive Plan -- 1999.
13 Portions of NCS' Report to Stockholders for the fiscal year ended
January 31, 1999.
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, 1999 on behalf of other
officers and directors.
27 Financial Data Schedule.
99 Cautionary statements identifying important factors that could
cause the Company's actual results to differ from those projected
in forward looking statements.
EXHIBIT 10.11
NATIONAL COMPUTER SYSTEMS, INC.
1999 EMPLOYEE STOCK OPTION PLAN
(1,400,000 shares authorized)
1. Objectives of Plan.
This 1999 Employee Stock Option Plan (the "Plan") has been adopted by the
Board of Directors of National Computer Systems, Inc., a Minnesota
corporation (herein called the "Company"), to secure the advantages of
stock ownership on the part of its present and future key employees,
including salaried officers and directors, and including salaried
officers and directors of any one or more subsidiary corporations wholly
owned by it (herein called "related companies"), and to provide
incentives for such individuals to remain with the Company or related
companies and to devote their energies to strengthen and maintain the
continued success of the Company through stock ownership. Options granted
under this Plan may be either incentive stock options ("Incentive Stock
Options") within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), or options which do not qualify as
Incentive Stock Options.
2. Administration of Plan.
(A) The Plan shall be administered by the Compensation Committee (the
"Committee") of the Board of Directors of the Company (the
"Board"). The Committee shall be composed of not less than such
number of directors as shall be required to permit the Plan to
qualify under Section 16b-3 ("Section 16b-3") under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Each member
of the Committee shall be a "disinterested person" with respect to
the Plan within the meaning of Section 16b-3 and shall be an
"outside director" within the meaning of Section 162(m) of the
Code.
(B) Subject to the provisions of the Plan, the Committee shall have
authority, in its discretion:
(1) To construe and interpret the Plan and all options granted
hereunder, and to determine the terms and provisions (and
amendments thereof) of the options granted under the Plan
(which need not be identical).
(2) To determine individuals to whom and the time or times at
which options shall be granted, the number of shares to be
subject to each option, the option price, and the duration
of leaves of absence which may be granted to participants
without constituting a termination of their employment for
the purposes of the Plan.
(3) To adopt, amend and rescind rules and regulations relating
to administration of the Plan and make all determinations
necessary or advisable for the administration of the Plan,
which shall be binding and conclusive on all participants in
the Plan and on their legal representatives and
beneficiaries.
(4) To determine and accelerate the time at which all or any
part of an option may be exercised.
3. Participants.
Options may be granted under the Plan to such key full or part time
executive, administrative, supervisory, technical, or professional
employees (including salaried officers and directors) of the Company, or
related companies including related companies which become such after
adoption of the Plan, in such amounts as shall be determined from time to
time by the Committee.
In determining the persons to whom options shall be granted and the
number of shares subject to each option, the Committee may take into
account the nature of services rendered by the proposed grantees, their
past, present and potential contributions to the success of the Company,
and such other factors as the Committee in its discretion shall deem
relevant. A person who has been granted an option under this Plan may be
granted an additional option or options under the Plan if the Committee
shall so determine; provided, however, that to the extent that the
aggregate fair market value, determined at the time an Incentive Stock
Option is granted, of the stock with respect to which all Incentive Stock
Options owned by a Participant are exercisable for the first time by such
optionee during any calendar year under all plans of the employer
corporation and its parent and subsidiary corporations exceeds $100,000,
such options shall be treated as options that do not qualify as Incentive
Stock Options. No person may be granted options under the Plan for more
than 100,000 shares in the aggregate in any calendar year.
4. Number of Shares Available for Options.
Under this Plan, options may be granted for shares of the Company's
Common Stock, $.03 per value. The Common Stock subject to options shall
be authorized but unissued shares. Subject to the provisions of paragraph
5 hereof, the number of shares of Common Stock that may be made the
subject of options shall not exceed the aggregate of 1,400,000 shares. In
the event that any outstanding option under the Plan for any reason
expires or is terminated unexercised, the common shares allocable to the
unexercised portion of such option may again be subject to an option
under the Plan.
5. Adjustments.
If there shall be any change in the Common Stock through merger,
consolidation, reorganization, recapitalization, stock dividend, stock
split or other change in the capitalization or corporate structure of the
Company, the Committee shall make appropriate adjustments in the Plan and
any options outstanding under the Plan. Such adjustments shall include,
where appropriate, changes in the aggregate number of shares subject to
the Plan and such changes in the number of shares and the price per share
subject to outstanding options as are necessary in order to prevent
dilution or enlargement of option rights.
6. Term of Plan.
No option shall be granted pursuant to this Plan later than January 31,
2009, but options theretofore granted may extend beyond that date in
accordance with their terms.
7. Terms and Conditions of Options.
Options granted hereunder shall be evidenced by a written notice from the
Company to the participant evidencing the granting of an option
hereunder, or shall be evidenced by an agreement in such form as the
Committee shall from time to time require. Said notice or agreement shall
refer to this Plan, and make acceptance thereof by a participant subject
to the provisions hereof. Such option shall comply with and be subject to
the following terms and conditions:
(A) Number of Shares. Each option shall state the number of shares to
which it pertains.
(B) Option Price. Each option shall state the option price, which
shall not be less than 100% of the fair market value of the shares
of the Common Stock of the Company on the date of the granting of
the option. The fair market value per share shall be the "last
trade price" of the Common Stock as reported by The Nasdaq Stock
Market(R). If the Common Stock is listed on a national stock
exchange or exchanges, such fair market value shall be deemed to
be the highest closing price of the Common Stock on such stock
exchange or exchanges on the date the option is granted. 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 day
on which there was a sale of such stock will be used. Subject to
the foregoing, the Committee in fixing the option price shall have
full authority and discretion and be fully protected in doing so.
(C) Option Period and Exercise of Option.
(1) No option period shall exceed ten years, and except as
otherwise provided in sections (D), (E) and (F) hereof, no
option period shall be for less than one year.
(2) Any option granted under the Plan may be exercised by
notifying the Company in writing of such exercise prior to
the termination of such option. The option price for the
number of shares of Common Stock for which the option is
exercised shall become immediately due and payable;
provided, however, that in lieu of cash an optionee may
exercise an option by tendering to the Company shares of the
Common Stock of the Company already owned by the optionee
and with the certificates therefor registered in the
optionee's name, having a fair market value equal to the
cash exercise price of the shares being purchased.
(3) During the lifetime of the optionee, the option shall be
exercisable only by the optionee and shall not be assignable
or transferable, and no other person shall acquire any
rights therein. Except as provided in Subdivisions (D) and
(F) hereof, no option may be exercised at any time unless
the holder thereof is then an employee of the Company or a
related company.
(4) In order to comply with all applicable federal and state
income tax laws or regulations, the Company may take such
action as it deems appropriate to ensure that all applicable
federal and state payroll, withholding, income or other
taxes, which are the sole and absolute responsibility of an
optionee, are withheld or collected from such optionee. In
order to assist an optionee in paying all minimum federal
and state taxes required to be withheld or collected upon
exercise of an option which does not qualify as an Incentive
Stock Option hereunder, the Company shall, in lieu of cash,
permit the optionee to satisfy all or part of such tax
obligation by (i) electing to have the Company withhold a
portion of the shares otherwise to be delivered upon
exercise of the option with a fair market value, determined
in accordance with subsection 7(B), equal to such taxes or
(ii) delivering to the Company common shares, other than the
shares issuable upon exercise of such option, with a fair
market value, determined in accordance with subsection 7
(B), equal to such taxes.
(D) Termination of Employment Except Due to Gross and Willful
Misconduct, Death or Disability. In the event an optionee shall
cease to be employed by the Company or a related company for any
reason other than gross and willful misconduct, death or
disability, then, and in that event, but subject to the condition
that no option shall be exercisable after its expiration date,
such optionee shall have the right to exercise the option at any
time within three months (or such longer period as the Committee
in its discretion shall determine to be appropriate) after such
termination of employment, to the extent the optionee's right to
exercise same shall accrue pursuant to such optionee's option
granted and had not previously been exercised. Whether authorized
leaves of absence or absence because of military or governmental
service shall constitute termination of employment, for the
purpose of the Plan, shall be determined by the Committee, which
determination shall be final and conclusive.
(E) Termination Due to Gross and Willful Misconduct. In the event that
an optionee shall cease to be employed by the Company or a related
company by reason of gross and willful misconduct during the
course of employment, including but not limited to wrongful
appropriation of funds of the Company or a related company or the
commission of a gross misdemeanor or felony, the option shall be
terminated as of the date of the misconduct.
(F) Disability and Death of Optionee and Transfer of Option. If any
optionee shall die while in the employ of the Company or a related
company, or within a period of three months (or such longer period
as the Committee in its discretion shall determine to be
appropriate) after the termination of employment or the optionee's
employment is terminated because optionee has become disabled
(within the meaning of Code Section 22 (e)(3)) while in the employ
of the Company or related companies and shall not have fully
exercised the option, said option may be exercised (subject to the
condition that no option shall be exercisable after its expiration
date), to the extent that the optionee's right to exercise such
option had accrued pursuant to such optionee's option granted (i)
at the time of optionee's disability and had not previously been
exercised, at any time within one year after the optionee's
disability, by the optionee or a duly appointed guardian of the
optionee; or (ii) at the time of death and had not previously been
exercised, at any time within one year after the optionee's death,
by the executors or administrators of the optionee or by any
person or persons who shall have acquired the option directly from
the optionee by bequest or inheritance. No option shall be
transferable by the optionee otherwise than by will or by the laws
of descent and distribution.
(G) 10 - Percent Shareholder Rule. Notwithstanding any other provision
in the Plan, if at the time an Option is otherwise to be granted
pursuant to the Plan, the optionee owns directly or indirectly
(within the meaning of Section 424 (d) of the Code) Common Stock
of the Company possessing more than 10% of the total combined
voting power of all classes of stock of the Company or its parent
or subsidiary corporations, if any (within the meaning of Section
422(b)(6) of the Code), then any Incentive Stock Option to be
granted to such optionee pursuant to the Plan shall satisfy the
requirements of Section 422(c)(5) of the Code, and the option
price shall be not less than 110% of the fair market value of the
Common Stock of the Company on the date of grant, determined as
described herein, and such option by its terms shall not be
exercisable after the fifth anniversary of the date of grant.
(H) Rights as a Shareholder. An optionee or a transferee of an option
shall have no rights as a shareholder with respect to any shares
covered by an option until the date of the issuance of a stock
certificate for such shares. No adjustment shall be made for
dividends (ordinary or extraordinary whether in cash, securities
or other property) or distributions or other rights for which the
record date is prior to the date such stock certificate is issued,
except as provided in Article 5 hereof.
(I) Discontinuance and Amendment of the Plan. The Board may, from time
to time, alter, amend, suspend, or discontinue the Plan; provided,
however, that, notwithstanding any other provision of the Plan or
any award agreement, without the approval of the shareholders of
the Company, no such amendment, alteration, suspension,
discontinuation or termination shall be made that: (i) requires
the approval of the Company's shareholders under any rules or
regulations of the Nation Association of Securities Dealers, Inc.
or any securities exchange that are applicable to the Company; or
(ii) requires the approval of the Company's shareholders under the
Code in order (a) to permit Incentive Stock Options to be granted
under the Plan or (b) to permit any compensation expense resulting
from the grant or exercise of stock options issued hereunder to be
deductible under Section 162(m) of the Code.
(J) Compliance with Laws Relating to Sale of Securities.
Notwithstanding any other provisions contained herein, the Company
shall have the right, in its exclusive discretion, to withhold the
issuance of any certificates for shares of stock in respect of
which any option has been exercised until, in the opinion of
counsel for the Company, any applicable registration requirements
of the Securities Act of 1933, as amended, any applicable listing
requirements of any national securities exchange on which the
stock may then be listed, and any other requirements of law or of
any regulatory bodies having jurisdiction over such issuance and
delivery, shall have been duly complied with. Pending the receipt
of such opinion of counsel for the Company, the Company may issue
certificates for such stock provided they contain a legend
indicating that said stock represented thereby is not registered
and may not be sold except in compliance with applicable law or
the release of said restrictions by the Company, and, in such
event, the Company shall have the right to instruct the transfer
agent and registrar of its common shares to effect "stop-transfer"
procedures with respect to such shares.
Until the shares reserved for options are registered and/or
listed, if required by law, the Committee may condition the
delivery of any certificate for option shares upon the receipt of
a written representation from the participant that at the time of
exercising such option the participant intends to acquire the
shares being purchased for investment and not for resale or
further distribution.
(K) Other Provisions. The option agreements authorized under the Plan
shall contain such other provisions as the Committee shall deem
advisable.
8. Notification of Disposition.
If an optionee shall dispose of any of the shares of Common Stock of the
Company acquired pursuant to the exercise of an Incentive Stock Option
issued pursuant to the Plan within two years from the date said option
was granted or within one year after the transfer of any such shares to
the optionee upon exercise of said option, then, in order to provide the
Company with the opportunity to claim the benefit of any income tax
deduction which may be available to it under the circumstances, the
optionee shall promptly notify the Company of the dates of acquisition
and disposition of such shares, the number of shares so disposed of, and
the consideration, if any, received for such shares. The Company may take
such action as it deems appropriate to insure notice to the Company of
any disposition of the Common Stock of the Company within the time
periods described above.
9. Reliance on Information.
Each member of the Committee and the Board and each officer and employee
of the Company shall be fully justified in relying or acting upon any
information furnished in connection with the administration of the Plan
by any other person or persons. In no event shall any person who is or
shall have been a member of the Committee or of the Board or an officer
or employee of the Company, be liable for any determination made or other
action taken or omission to act in reliance upon any such information or
for any action (including the furnishing of information) taken or any
failure to act, if in good faith.
10. Application of Funds.
The proceeds received by the Company from the sale of its Common Stock
pursuant to options will be used for general corporate purposes.
11. No Obligation to Exercise Option.
The granting of an option hereunder shall impose no obligation upon the
optionee to exercise such option, nor shall it be deemed to or construed
to impose any obligation on the Company or any related company to retain
the optionee in its employ for any period of time.
12. Compliance with Section 16b-3.
The Plan is intended to comply with all applicable conditions of Section
16b-3 or its successors. All transactions involving persons subject to
Section 16(b) of the Exchange Act ("Insider-Participants") are subject to
such conditions regardless of whether the conditions are expressly set
forth in the Plan and any provision of the Plan that is contrary to the
conditions of Section 16b-3 shall not apply to Insider-Participants.
- ---------------------------
Original Plan - Approved by the Board on March 2, 1999
- Approved by the Company's Shareholders on ______________
EXHIBIT 10.12
NATIONAL COMPUTER SYSTEMS, INC.
1999 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. Purpose of Plan
This plan shall be known as the "National Computer Systems,
Inc. 1999 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 authorized but unissued shares. 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 100,000 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 Compensation Committee
(the "Committee") of the Board of Directors of the Company (the "Board"). The
Committee 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 Committee's
determinations on the foregoing matters shall be final and conclusive.
4. Eligibility
Upon approval of the Plan by the Board, but subject to
approval of the Plan by shareholders of the Company pursuant to Section 12
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 (beginning with the date of the annual
meeting of shareholders in May, 2000), that he or she is elected or reelected as
a director of the Company, an option to acquire 3,500 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 Stock Market on such date, if the Common Stock
is then quoted on The Nasdaq Stock Market; 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. 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. Transferability
(a) No options granted under the Plan shall be transferable by
optionee, other than as provided in Section 8(c) or in Section 9(b) herein.
(b) During the lifetime of an optionee, an outstanding option
may be transferred to (i) the spouse, children, grandchildren, nieces or nephews
of the optionee ("Immediate Family Members"), (ii) a trust or trusts for the
exclusive benefit of such Immediate Family Members, or (iii) a partnership in
which such Immediate Family Members are the only partners, provided that (a)
there may be no consideration for any such transfer and (b) subsequent transfers
of transferred options shall be prohibited except for transfers required by will
or the laws of descent and distribution. Following transfer, such options shall
continue to be subject to the same terms and conditions as were applicable
immediately prior to transfer; provided that for purposes of each option
agreement, the term "optionee" shall be deemed to refer to the transferee.
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 may amend, alter, suspend, discontinue or terminate
the Plan; provided, however, that, notwithstanding any other provision of the
Plan or any award agreement, without the approval of the shareholders of the
Company, no such amendment, alteration, suspension, discontinuation or
termination shall be made that requires the approval of the Company's
shareholders under any rules or regulations of the National Association of
Securities Dealers, Inc. or any securities exchange that are applicable to the
Company. The Board 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 on March 2, 1999, 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, 2009. 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 __, 1999.
EXHIBIT 10.18
NATIONAL COMPUTER SYSTEMS, INC
MANAGEMENT INCENTIVE PLAN
1999
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:
o CEO
o Corporate staff officers
o NCS Business presidents, senior vice presidents and, on a selected
basis, their management reports
o Selected other vice presidents
o 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, 1999
annual base salary for the participant. The target incentive is tied directly to
corporate or a participant's business unit financial performance (revenue and
contribution or EPS) 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?
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 three
(3) 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
The CEO must approve exceptions and/or modifications to the plan. Exceptions
and/or modifications to the plan must be in writing. 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 13
<TABLE>
<CAPTION>
FIVE YEAR FINANCIAL DATA
(Dollars in thousands, except per share amounts)
YEAR ENDED JANUARY 31,
-----------------------------------------------------------
1999 1998 1997(2) 1996 1995(3)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Financial Results
Revenues $505,372 $406,015 $331,159 $300,883 $284,874
Income from operations 55,271 43,044 26,646 30,704 20,323
Income from continuing operations
before income taxes 54,111 41,975 26,533 27,760 16,119
Income from continuing operations 32,511 25,175 13,666 16,580 11,281
Discontinued operations, net of taxes - - (2,229) 5,679 2,117
Gain on disposition, net of taxes - - 38,143 - -
Net income (loss) 32,511 25,175 49,580 22,259 13,398
Net income per share from continuing
operations(1)
Basic earnings per share $ 1.05 $ 0.83 $ 0.45 $ 0.54 $ 0.38
Diluted earnings per share $ 1.00 $ 0.80 $ 0.44 $ 0.53 $ 0.37
Dividends paid per share $ 0.20 $ 0.18 $ 0.18 $ 0.18 $ 0.18
Financial Position
Total assets 362,471 315,414 273,920 219,724 209,375
Long-term debt, including
current maturities 9,355 18,844 20,148 27,008 49,864
Stockholders' equity 226,866 193,994 170,034 128,198 113,123
<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.
</FN>
</TABLE>
<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, 1999
Revenues $97,915 $128,128 $135,408 $143,921
Gross profit 37,522 51,276 47,375 54,241
Net income 5,095 9,742 7,758 9,916
Basic earnings per share $ 0.17 $ 0.31 $ 0.25 $ 0.32
Diluted earnings per share $ 0.16 $ 0.30 $ 0.24 $ 0.30
Year Ended January 31, 1998
Revenues $78,971 $ 96,029 $115,387 $115,628
Gross profit 30,811 38,067 40,743 44,817
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
<PAGE>
STOCK EXCHANGE LISTING
Common Stock of National Computer Systems, Inc. trades on The Nasdaq Stock
Market(R) under the symbol "NLCS".
QUARTERLY MARKET DATA
NCS had 2,128 and 1,957 Common Stockholders of record as of January 31, 1999 and
1998, respectively.
Fiscal 1998
-----------------------------------------
Three Months Ended
-----------------------------------------
Year Ended January 31, 1999 April 30 July 31 October 31 January 31
- --------------------------- -------- ------- ---------- ----------
High $25.25 $27.00 $31.38 $38.25
Low 16.88 20.00 20.50 28.13
Close 25.00 22.25 28.00 38.25
Dividends per share $ 0.05 $ 0.05 $ 0.05 $ 0.05
Fiscal 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
<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
----------- ----------
1998 January 31, 1999
1997 January 31, 1998
1996 January 31, 1997
Income and Expense Items as a Percentage of Revenues
Fiscal Year 1998 1997 1996
- ------------------------------------------------------------
Revenues
Information services 53.9% 48.2% 47.6%
Product sales 35.7 39.9 40.5
Maintenance and support 10.4 11.9 11.9
- ------------------------------------------------------------
Total revenues 100.0 100.0 100.0
Costs of Revenues (1)
Cost of information services 76.1 76.7 78.5
Cost of product sales 40.8 42.0 46.3
Cost of maintenance and support 65.0 69.5 67.4
- ------------------------------------------------------------
Total gross profit 37.7 38.0 35.9
Operating Expenses
Sales and marketing 12.8 14.0 12.5
Research and development 2.5 2.1 3.0
General and administrative 11.5 11.3 10.0
Acquisition related charges - - 2.4
- ------------------------------------------------------------
Income from operations 10.9 10.6 8.0
Income from continuing operations
before income taxes 10.7 10.3 8.0
Income from continuing operations 6.4% 6.2% 4.1%
============================================================
(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 to the education market, but also provides large scale data
collection and management services and products to business, government and
other markets.
RECAP OF 1998 RESULTS
Total revenues increased 24.5% in fiscal 1998 to $505.4 million compared to last
year's $406.0 million. The Company's overall gross margin on revenues increased
$36.0 million. Total gross margin as a percentage of revenues declined to 37.7%
in fiscal 1998 from 38.0% in fiscal 1997, due to the product mix of revenues
although gross margins in each of the three primary revenue lines improved.
Operating expenses decreased to 26.7% of revenues in fiscal 1998, compared to
27.4% of revenues in fiscal 1997. Overall operating margins increased to 10.9%
of revenue in fiscal 1998 from 10.6% in fiscal 1997 and operating income in
dollars increased 28.4% to $55.3 million. Income tax rates were consistent with
the prior year. Net income in fiscal 1998 totaled $32.5 million or $1.00 per
diluted share outstanding. This compares to the fiscal 1997 net income of $25.2
million and $0.80 per diluted share. In fiscal 1996, the reported net income of
$1.59 per share included a significant one-time net gain on the disposition of
the Company's Financial Systems business and special charges related to the
acquisition of Macro Educational Systems, Inc. (Macro). A reconciliation of
diluted earnings per share follows:
1998 1997 1996
----- ----- -----
Earnings per share, as reported $1.00 $ .80 $ 1.59
Less gain on disposition
and discontinued operations - - (1.15)
----- ----- -----
Continuing operations 1.00 .80 .44
Plus acquisition related charges - - .23
----- ----- -----
Pro forma earnings per share $1.00 $ .80 $ .67
===== ===== =====
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 1998 versus Fiscal 1997. Total revenues for fiscal 1998 were up 24.5% to
$505.4 million from $406.0 million in fiscal 1997.
By revenue category, fiscal 1998 compares to fiscal 1997 as follows:
Information services + 39.1%
Product sales + 11.5%
Maintenance and support + 8.8%
Three-fourths of the $99.4 million of overall revenue increases in fiscal 1998
was attributed to growth in information services, which grew 39.1% year on year.
The information services growth came from several sources, but approximately
half was attributable to assessment and testing services, which achieved over
$16 million of growth through one new state assessment program. Government and
commercial outsourcing and professional services related to education software
also contributed to information services growth.
Fiscal 1998 increases in product sales came principally from education software
licensing and related network hardware. Increased maintenance and support
revenue were the result of increased support revenues related to education
software. By major market, for fiscal 1998, revenues grew 28.8% from the
education market and 12.2% from the large scale data management (non-education)
market. For fiscal 1998 the education market accounted for 75% of total NCS
revenues. Less than 2% of the Company's overall revenue growth in fiscal 1998
came from acquisitions.
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 maintenance and 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.
COST OF REVENUES AND GROSS PROFITS
Fiscal 1998 versus Fiscal 1997. The Company's overall gross profit dollars
increased $36.0 million, or 23.3%. As a percentage of revenue, gross margin
declined .3 percentage points to 37.7% from 38.0%. This modest decline is due
entirely to revenue mix, as gross margins on each revenue line (information
services, product sales, and maintenance and support) improved. The rapid growth
of information services influenced the overall gross margin percentage decline.
Maintenance and support margins improved most significantly, owing to better
margins on education software support revenues.
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.
OPERATING EXPENSES
Fiscal 1998 versus Fiscal 1997. Sales and marketing expense increased $8.1
million or 14.3% in fiscal 1998 over the prior fiscal year. As a percentage of
revenues, sales and marketing declined by 1.2 percentage points, due to
relatively lower selling costs on information services revenues. Research and
development costs increased $3.8 million, increasing only slightly as a percent
revenue, in fiscal 1998. The increase in research and development reflects the
Company's investment in software products and test processing technology.
General and administrative expenses for fiscal 1998 increased by $11.9 million,
and were up slightly as a percentage of revenue over fiscal 1997. These expenses
increased due to several factors, including amortization of goodwill,
information technology costs (including Y2K), and accruals established for
variable compensation plans due to favorable operating results.
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.
IMPACT OF YEAR 2000
Many currently installed computer systems and software are coded to accept only
two-digit entries in the date code fields. These date code fields will need to
accept four-digit entries to distinguish 21st century dates from 20th century
dates. This problem could result in system failures or miscalculations causing
disruptions of business operations (including, among other things, a temporary
inability to process transactions, send invoices or engage in other similar
business activities). As a result, many companies' computer systems and software
will need to be upgraded or replaced in order to comply with Year 2000
requirements. The potential global impact of the Year 2000 problem is not known,
and, if not corrected in a timely manner, could affect the Company and the U.S.
and world economy generally.
The Company's product development processes currently contain steps to include
Year 2000 compliance verification for all current and future products. Most of
the Company's products are currently Year 2000 compliant, and all continuing
products will be compliant before December 31, 1999.
The Company named a full-time Year 2000 program leader and a team (consisting
of representatives from each of its business units) to address internal and
external Year 2000 issues. The Company's internal financial and other "IT"
computer systems have been reviewed to assess and remediate Year 2000 problems,
as have other "non-IT" systems such as security, HVAC, and telephone systems. In
addition, executive management regularly monitors the status of the Company's
Year 2000 remediation plans. The Company's Year 2000 compliance program includes
the following phases: identifying systems with date sensitive points that will
need to be addressed; carrying out remediation work to modify those systems or
convert to new systems; conducting validation testing of systems and
applications to ensure compliance; and transition preparedness activities. As of
January 31, 1999, the Company believes it was approximately 75% completed with
its total Year 2000 effort. The Company expects to be substantially complete by
July, 1999, with the exception of transition activities described later.
Through January 31, 1999, the Company has spent approximately $4.8 million
addressing Year 2000 issues ($1.5 million in fiscal 1997 and $3.3 million in
fiscal 1998.) The Company expects to incur approximately $2.0 million of Year
2000 expenses in fiscal 1999. These costs are below the costs that were
originally estimated and consist of primarily the use of internal resources,
with relatively minor external costs. All amounts are being expensed currently
and are included in the Company's future operating plans and expectations. In
addition, the Company has also made, and will continue to make, significant
capital investments to enhance its internal business and service delivery
systems. However, these investments are not driven principally by Year 2000
considerations.
In addition, the Company is requesting assurances from its major suppliers that
they are addressing the Year 2000 issue and that products purchased by the
Company from such suppliers will function properly in the Year 2000. Also,
contacts are being made with the Company's major customers. These actions are
intended to help mitigate the possible external impact of the Year 2000 problem.
However, it is impossible to fully assess the potential consequences to the
Company of the Year 2000 problem in the event service interruptions from
suppliers occur or in the event that there are disruptions in such
infrastructure areas as utilities, communications, transportation, banking and
government.
Based on its assessments to date, the Company believes it will not experience
any material disruption as a result of Year 2000 problems in internal processes,
information processing or interfaces with major customers, or with processing
orders and billing. However, if certain critical third-party providers, such as
those providers supplying electricity, water or telephone service, experience
difficulties resulting in disruption of service to the Company, a shutdown of
the Company's operations at individual facilities could occur for the duration
of the disruption. While the Company currently believes such disruptions of
basic services and facility shutdowns are unlikely, there can be no absolute
assurance that they will not occur.
It is the Company's current belief that the more likely worst case Year 2000
scenario will be that NCS products do not operate properly for customers who
have not installed Year 2000 compliant versions of NCS products or have not
updated their own computing platform or network infrastructure to be operational
in the Year 2000. The Company has developed, and continues to refine, transition
preparedness plans to respond to a significantly increased number of customer
calls at all its support locations to address these problems. The Company is
also developing contingency plans to provide for continuity of processing in
Year 2000 based on the outcome of its validation phase of its Year 2000
compliance program and the results of surveying its major suppliers and
customers. Assuming no major disruption in service from utility companies or
other critical third-party providers, the Company believes that it will be able
to manage its total Year 2000 transition without any material effect on the
Company's consolidated results of operations or financial condition.
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 1998 from fiscal 1997, and in
fiscal 1997 from fiscal 1996. These decreases are due to slightly lower average
borrowing levels. See Capital Resources and Liquidity below for further
discussion of cash flow and debt.
OTHER INCOME AND EXPENSE
Other income and expense, net, was insignificant for fiscal 1998.
Other income in fiscal 1997 decreased $1.3 million, due to lower invested cash
balances as $48.8 million was used to fund 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.
INCOME TAXES
The effective income tax rate was 39.90%, 40.0%, and 48.5% for fiscal 1998, 1997
and 1996, 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 1998 with $23.3 million of cash and cash equivalents.
During fiscal 1998, NCS generated $58.7 million of cash from operating
activities. Cash was used for acquisitions of $17.2 million, principally
American Cybercasting Corporation (Education Structures), and $27.1 million was
used for investments in property, plant, and equipment, including a significant
expansion of facilities in Mesa, Arizona, and consolidation of three southern
California facilities into one. Financing activities included the repayment of
the $5.3 million unsecured note and $2.3 million (net) of convertible
debentures. The Company paid dividends of $6.2 million during fiscal 1998.
During fiscal 1997, the Company 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. $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,
and the Company paid dividends of $5.5 million.
The Company had long-term debt balances, including current maturities, of $9.4
million, $18.8 million and $20.1 million at January 31, 1999, 1998, and 1997,
respectively. The items causing the changes in debt balances are described
above. At January 31, 1999, the Company's debt to total capital ratio was 4.0%
compared to 8.9% a year earlier and 10.6% 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 acquisitions made in 1997 and by the increased level of
operations during fiscal 1998 and 1997.
The market risk inherent in the Company's market risk sensitive instruments is
the potential loss arising from adverse changes in foreign currency exchange
rates due to amounts permanently invested in foreign subsidiaries. The amount
permanently invested in foreign subsidiaries and affiliates translated to
dollars using the year end exchange rates is $16 million at January 31, 1999.
The potential loss in fair value resulting from a hypothetical 10% adverse
change in quoted foreign currency exchange rates is $1.6 million. Actual results
may differ. The Company's exposure to interest rate changes upon the fair value
of long term debt is immaterial.
Looking toward fiscal 1999, the Company maintains a $50.0 million revolving
credit facility, all of which was available at January 31, 1999. 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) 1999 1998
-------- --------
Assets
Current Assets
Cash and cash equivalents $ 16,310 $ 23,267
Receivables 128,751 101,334
Inventories 21,791 16,239
Prepaid expenses and other 7,225 6,562
-------- --------
Total Current Assets 174,077 147,402
-------- --------
Property, Plant and Equipment
Land, buildings and improvements 63,018 57,281
Machinery and equipment 152,414 141,949
Accumulated depreciation (109,416) (105,206)
-------- --------
106,016 94,024
-------- --------
Intellectual Properties, net
Acquired and internally developed software products 12,170 14,967
Assessment instruments 8,835 10,317
-------- --------
21,005 25,284
-------- --------
Other Assets, net
Goodwill 52,840 45,634
Other assets 8,533 3,070
-------- --------
61,373 48,704
-------- --------
Total Assets $362,471 $315,414
======== ========
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31 (in thousands) 1999 1998
-------- --------
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt $ 3,758 $ 6,448
Accounts payable 35,809 26,767
Accrued expenses 51,779 36,237
Deferred income 32,209 29,026
Income taxes 3,883 4,156
-------- --------
Total Current Liabilities 127,438 102,634
-------- --------
Long-Term Debt - less current maturities 5,597 12,396
Deferred Income Taxes 2,570 6,390
Commitments and Contingencies - -
Stockholders' Equity
Preferred stock - -
Common stock - issued and outstanding -
31,467 and 30,846 shares, respectively 944 925
Paid-in capital 10,760 4,518
Retained earnings 220,625 194,348
Accumulated other comprehensive income -
Foreign currency translation adjustment (3,880) (2,343)
Deferred compensation (1,583) (3,454)
-------- --------
Total Stockholders' Equity 226,866 193,994
-------- --------
Total Liabilities and Stockholders' Equity $362,471 $315,414
======== ========
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) 1998 1997 1996
<S> <C> <C> <C>
-------- -------- --------
Revenues
Information services $272,252 $195,793 $157,511
Product sales 180,634 161,977 134,144
Maintenance and support 52,486 48,245 39,504
-------- -------- --------
Total revenues 505,372 406,015 331,159
Costs of Revenues
Cost of information services 207,151 150,106 123,718
Cost of product sales 73,696 67,950 62,075
Cost of maintenance and support 34,110 33,521 26,608
-------- -------- --------
Gross profit 190,415 154,438 118,758
Operating Expenses
Sales and marketing 64,797 56,675 41,258
Research and development 12,388 8,628 9,883
General and administrative 57,959 46,091 33,076
Acquisition related charges:
Purchased research and development - - 5,637
Other - - 2,258
-------- -------- --------
Income from Operations 55,271 43,044 26,646
Interest expense 936 1,353 1,677
Other (income) expense, net 224 (284) (1,564)
-------- -------- --------
Income from Continuing Operations Before Income Taxes 54,111 41,975 26,533
Income taxes 21,600 16,800 12,867
-------- -------- --------
Income from Continuing Operations 32,511 25,175 13,666
Income (loss) from discontinued operations,
net of taxes of $(1,360) in 1996 - - (2,229)
Gain on disposition, net of taxes of $29,031 in 1996 - - 38,143
-------- -------- --------
Net Income $ 32,511 $ 25,175 $ 49,580
======== ======== ========
Basic Earnings per share
Continuing operations $ 1.05 $ .83 $ .45
Discontinued operations - - (0.07)
Gain on disposition - - 1.26
-------- -------- --------
Net Income per share $ 1.05 $ .83 $ 1.64
======== ======== ========
Weighted Average Shares Outstanding 31,022 30,391 30,257
Diluted Earnings per share
Continuing operations $ 1.00 $ .80 $ .44
Discontinued operations - - (0.07)
Gain on disposition - - 1.22
-------- -------- --------
Net Income per share $ 1.00 $ .80 $ 1.59
======== ======== ========
Weighted Average Shares Outstanding and
Dilutive Potential Common Shares 32,589 31,864 31,069
</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 Accumulated
--------------- Paid-In Retained Comprehensive Deferred
(in thousands, except per share amounts) Shares Amount Capital Earnings Income Compensation Total
------ ------ ------- -------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1996 30,729 $ 922 $ 2,966 $131,820 $(1,813) $(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
Cash dividends paid - $.18 per share - - - (5,521) - - (5,521)
Net income - - - 49,580 - - 49,580
Foreign currency translation adjustment - - - - 235 - 235
-------
Subtotal - Comprehensive Income - - - - - - 49,815
--------------------------------------------------------------------------
Balance, January 31, 1997 30,469 914 - 174,685 (1,578) (3,987) 170,034
Shares issued for employee stock
purchase and option plans 283 8 2,693 - - - 2,701
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
Cash dividends paid - $.18 per share - - - (5,512) - - (5,512)
Net income - - - 25,175 - - 25,175
Foreign currency translation adjustment - - - - (765) - (765)
-------
Subtotal - Comprehensive Income - - - - - - 24,410
--------------------------------------------------------------------------
Balance, January 31, 1998 30,846 925 4,518 194,348 (2,343) (3,454) 193,994
Shares issued for employee stock
purchase and option plans 512 15 3,656 - - - 3,671
Restricted stock awards (forfeitures), net (66) (1) (209) - - (1,410) (1,620)
Shares issued for convertible debenture 175 5 2,795 - - - 2,800
ESOP debt payment - - - - - 1,000 1,000
Restricted stock compensation accrual - - - - - 2,281 2,281
Cash dividends paid - $.20 per share - - - (6,234) - - (6,234)
Net income - - - 32,511 - - 32,511
Foreign currency translation adjustment - - - - (1,537) - (1,537)
-------
Subtotal - Comprehensive Income - - - - - - 30,974
---------------------------------------------------------------------------
Balance, January 31, 1999 31,467 $ 944 $10,760 $220,625 $(3,880) $(1,583) $226,866
====== ===== ======= ======== ======= ======= ========
</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) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Operating Activities
Net income $32,511 $25,175 $49,580
Less - gain on disposition - - (38,143)
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation 20,755 16,825 15,620
Amortization 12,049 13,291 9,647
Deferred income taxes and other (2,237) (661) (2,053)
Non-cash charges - - 6,637
Changes in operating assets and liabilities
(net of acquired amounts):
Accounts receivable (26,967) (15,361) (4,318)
Inventory and other current assets (6,249) 1,712 2,495
Accounts payable and accrued expenses 26,341 8,087 (3,856)
Deferred income 2,461 424 2,912
------- ------- -------
Net Cash Provided By Operating Activities 58,664 49,492 38,521
------- ------- -------
Investing Activities
Acquisitions, net (17,246) (35,216) (11,192)
Purchases of property, plant and equipment (27,145) (25,174) (14,909)
Purchases of business systems (8,928) (7,108) (1,048)
Capitalized software products - - (1,553)
Net proceeds from disposition - - 64,071
Other - net 719 1,148 3,296
------- ------- -------
Net Cash Provided By (Used In)
Investing Activities (52,600) (66,350) 38,665
------- ------- -------
Financing Activities
Repayment of secured notes - - (15,000)
Net increase (decrease) in other borrowings (6,413) (676) 846
Repurchase of common stock, net (374) (11,766) (4,586)
Dividends paid (6,234) (5,512) (5,521)
------- ------- -------
Net Cash Used In Financing Activities (13,021) (17,954) (24,261)
------- ------- -------
Increase (Decrease) In Cash and Cash Equivalents (6,957) (34,812) 52,925
Cash and Cash Equivalents - Beginning of Year 23,267 58,079 5,154
------- ------- -------
Cash and Cash Equivalents - End of Year $16,310 $23,267 $58,079
======= ======= =======
</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
----------- ----------
1998 - January 31, 1999
1997 - January 31, 1998
1996 - January 31, 1997
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:
1999 1998
- ----------------------------------------------------------------
Finished goods $ 5,096 $ 5,166
Scoring services and work in process 14,442 8,218
Raw materials and purchased parts 2,253 2,855
- ----------------------------------------------------------------
$21,791 $16,239
================================================================
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.
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 Net
- -------------------------------------------------------------------------------
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 (21,360) 14,967
Additions 900 - - 900
Write-downs and dispositions (225) (555) 566 (214)
Amortization - - (3,483) (3,483)
- -------------------------------------------------------------------------------
Balance, January 31, 1999 25,009 11,438
Accumulated Amortization (12,839) (11,438) (24,277)
- -------------------------------------------------------------------------------
Net Balance, January 31, 1999 $12,170 $ - $12,170
===============================================================================
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
amortizeable lives of ten years or less. Expected revenues and amortizeable
lives are subject to revision and balances are periodically evaluated for
possible impairment. Accumulated amortization at January 31, 1999 and 1998 was
$5,331 and $3,849, respectively.
GOODWILL: Goodwill arising from business acquisitions is amortized on a
straight-line basis over periods ranging from five to twenty years. Amortization
expense was $4,489, $3,047, and $703 in fiscal 1998, 1997 and 1996,
respectively. Accumulated amortization was $11,480 and $7,130 as of January 31,
1999 and 1998, 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:
1999 1998
- ------------------------------------------------
Employee compensation $27,899 $17,604
Taxes other than income 4,473 3,558
Other 19,407 15,075
- ------------------------------------------------
$51,779 $36,237
================================================
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
Company's software revenue recognition policies and related procedures were in
compliance with the SOP, therefore, the effect of adoption as of February 1,
1998 on transactions occurring in fiscal 1998 was not material.
PER SHARE DATA: Earnings per share are calculated in accordance with Statement
of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share".
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 (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Earnings:
Income from continuing operations
Basic earnings per share $32,511 $25,175 $13,666
Adjustments for dilutive securities:
Interest expense on convertible debentures,
net of tax 222 256 7
------- ------- -------
Adjusted income from continuing operations
for diluted earnings per share $32,733 $25,431 $13,673
======= ======= =======
Weighted Average Shares:
Basic average shares 31,022 30,391 30,257
Adjustments for dilutive securities:
Employee stock options, net of tax proceeds 981 620 402
Contingent stock awards, net of tax proceeds 81 270 394
Convertible debentures 505 583 16
------- ------- -------
Diluted average shares 32,589 31,864 31,069
------- ------- -------
Basic earnings per share from continuing operations $ 1.05 $ 0.83 $ 0.45
======= ======= =======
Diluted earnings per share from continuing operations $ 1.00 $ 0.80 $ 0.44
======= ======= =======
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS: The Company is in compliance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present.
STOCK-BASED COMPENSATION: 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.
INTERNAL USE SOFTWARE: In March, 1998, the AICPA issued Statement of Position
(SOP) 98-1 Accounting for the Costs of Computer Software Developed for or
Obtained for Internal Use. The SOP requires the capitalization of certain costs
incurred in connection with developing or obtaining software for internal use.
The Company already complies with the provisions of the SOP.
DERIVATIVES AND HEDGING: In June, 1998, the FASB issued SFAS No. 133 Accounting
for Derivative Instruments and Hedging Activities, which requires the Company to
recognize all derivatives on the balance sheet at fair value effective February
1, 2000. The Company does not anticipate that the adoption of this Statement
will have a significant effect on its result of operations or financial
position.
NOTE 2 - ACQUISITIONS
In September 1998, the Company acquired all of the common and preferred stock of
American Cybercasting Corporation (ACC), also known as Educational Structures, a
business specializing in customized K-12 teacher support tools for lesson
planning and curriculum support. The purchase price was approximately $12.6
million. The excess of the purchase price over book value of the net assets
acquired, as adjusted for deferred taxes, was $10.8 million, all of which was
allocated to goodwill and is being amortized over 20 years. The acquisition was
accounted for as a purchase and, accordingly, operating results of Educational
Structures are included in the Company's consolidated financial statements
subsequent to the date of acquisition.
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. The excess of the 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
fiscal 1997 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 fiscal 1996 consolidated financial statements. The excess of the
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.
NOTE 4 - LEASES
The Company leases office facilities under noncancelable operating leases which
expire in various years through 2004. Rental expense for all operating leases
was $12,921 in fiscal 1998, $9,167 in fiscal 1997, and $8,544 in fiscal 1996.
Future minimum rental expense as of January 31, 1999, for noncancelable
operating leases with initial or remaining terms in excess of one year is
$27,031 and is payable as follows: fiscal 1999 - $6,920; fiscal 2000 - $6,038;
fiscal 2001 - $5,726; fiscal 2002 - $4,441; fiscal 2003 - $2,125 and $1,781
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, 1999 was $12,403. 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, 1999 the maximum amount of the residual value guarantee relative to the
assets under lease is approximately $10,500.
NOTE 5 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt at January 31, consisted of the following:
1999 1998
- --------------------------------------------------
Revolving credit borrowing $ - $ -
Convertible debentures 4,700 7,000
Unsecured note - 5,228
ESOP borrowing 1,000 2,000
Other borrowings 3,655 4,616
- --------------------------------------------------
9,355 18,844
Less current maturities (3,758) (6,448)
- --------------------------------------------------
Long-term debt $ 5,597 $12,396
==================================================
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 Convertible
Debentures as partial consideration for the stock purchase of Macro, see Note 2.
These debentures are due in annual installments, carry an interest rate of
approximately 6.1%, and are convertible into common stock at $12.00 per share.
Unsecured Note: This unsecured term note was repaid in full in May 1998.
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 1999 through 2003 are
$3,758, $1,986, $1,708, $106 and $101, respectively, with $1,696 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
- -----------------------------------------------------------------
1998 $18,495 $3,003 $1,682 $(1,580) $21,600
1997 14,540 2,806 1,300 (1,846) 16,800
1996 16,197 1,320 864 (5,514) 12,867
- -----------------------------------------------------------------
The provision for income taxes from discontinued operations was $27,671 for the
fiscal year 1996.
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:
1999 1998
------ ------
Deferred tax assets:
Reserves for uncollectibles $ 3,513 $2,561
Foreign operating loss carryforwards 3,659 2,826
Accrued vacation pay 2,051 1,792
Rotable service parts amortization 700 980
Intangible amortization 1,552 1,453
Other 2,900 602
Deferred expenses 794 783
Valuation allowance (3,659) (2,826)
- ------------------------------------------------------------
Total deferred tax assets 11,510 8,171
- ------------------------------------------------------------
Deferred tax liabilities:
Acquired intangible amortization 5,132 7,688
Accelerated depreciation 5,070 4,542
Net capitalized software 3,706 1,921
Other 172 410
- ------------------------------------------------------------
Total deferred tax liabilities 14,080 14,561
- ------------------------------------------------------------
Net deferred tax liabilities $ 2,570 $ 6,390
============================================================
A reconciliation of the Company's statutory and effective tax rate from
continuing operations is presented below:
1998 1997 1996
------ ------ ------
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 3.6 4.4 3.2
Intangible amortization 0.5 1.0 1.7
Affordable housing and other credits (0.8) (0.9) (2.1)
Foreign operating losses 1.6 1.1 3.2
Purchased research and development - - 7.4
Other - (0.6) 0.1
- ----------------------------------------------------------------
Effective rate 39.9% 40.0% 48.5%
================================================================
The Company made income tax payments of $19,623, $18,991 and $47,693 in the
fiscal years 1998, 1997, and 1996, respectively.
<PAGE>
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. 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 1998, 1997,
and 1996:
1998 1997 1996
------- ------- -------
Net income - as reported $32,511 $25,175 $49,580
Net income - pro forma 30,041 23,988 49,069
Earnings per share - as reported:
Basic $ 1.05 $ .83 $ 1.64
Diluted 1.00 .80 1.59
Earnings per share - pro forma:
Basic $ .97 $ .79 $ 1.62
Diluted .93 .76 1.58
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:
1998 1997 1996
------- ------- -------
Expected dividend yield .26% .58% .78%
Expected stock price volatility 35% 30% 45%
Risk-free interest rate 5.16% 6.23% 6.18%
Expected life of options 5 years 5 years 5 years
The weighted-average fair value of the options granted during fiscal years 1998,
1997, and 1996 were $8.53, $4.40, and $5.16, respectively.
<PAGE>
The Company has four Employee Stock Option Plans (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 278,780,
669,700, and 454,000 at January 31, 1999, 1998 and 1997, 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, 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
Granted 600,900 23.23
Cancelled (64,380) 14.44
Exercised (417,320) 7.87
--------- ------
Balance, January 31, 1999 2,273,314 $14.15
========= ======
Options for 633,537; 679,182; and 627,140 shares were exercisable at January 31,
1999, 1998 and 1997, with weighted average exercise prices of $9.76, $8.07, and
$7.43, respectively. Exercise prices for options outstanding as of January 31,
1999 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>
$ 4.02 - 8.00 308,434 $ 6.20 1.5 years 226,737 $ 6.17
8.38 - 12.00 579,740 10.45 2.3 years 271,460 10.26
12.25 - 18.75 797,740 13.48 4.0 years 117,340 13.78
20.00 - 35.19 587,400 22.89 4.9 years 18,000 21.50
--------- ------ ------- ------
2,273,314 $14.15 633,537 $ 9.76
========= ====== ======= ======
</TABLE>
<PAGE>
During fiscal 1998 and 1997, pursuant to the 1997 Long-Term Incentive Plan
(L-TIP), non-qualified options to purchase 129,000 and 336,000 shares of Common
Stock of the Company were granted to participants at 100% of fair market value
on date of grant. These options are exercisable 67 months after date of grant
and expire 72 months after date of grant. Vesting can be accelerated to 36
months from date of grant on achievement of specified cumulative earnings per
share and stock price targets during the three fiscal years then ended. At
January 31, 1999, there were 465,000 options shares outstanding at a weighted
average exercise price per share of $14.61.
The Company also has a long term cash incentive program, which pays for
performance in excess of the three year earnings per share and stock price
targets.
The Company has an Employee Stock Purchase Plan. There were 422,267 shares
available for purchase under the Plan at January 31, 1999.
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 $3,011, $2,195, and $1,638 in fiscal years 1998, 1997
and 1996, 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 1998, the Company's
contribution to the Plan was $1,000 plus interest of $17, which is net of
dividends on unallocated shares of $63. The Company's contribution to the Plan
was $1,000 in fiscal 1997 and fiscal 1996, and interest, which was totally
offset by dividends on unallocated shares, was $61 in fiscal 1997 and $77 in
fiscal 1996. There were 158,400 and 316,800 unallocated shares at January 31,
1999 and 1998, 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
On April 30, 1997, the Company was served with a summons and complaint in a
lawsuit filed against the Company by a former customer. The lawsuit alleges
certain claims against the Company in connection with certain loan processing
and servicing agreements and seeks out-of-pocket damages, lost profits and
compensation for extraordinary defaults and lost interest that it claims
resulted from breaches by the Company. The customer also seeks to have the
Company acquire certain student loans with unpaid principal, interest and late
charges, which loans it claims are or have been in default and were incorrectly
processed or serviced by the Company. The Company has 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 the complaint denying
the claims, and the Company intends to vigorously defend against the lawsuit. In
addition, the Company has filed a counterclaim against the former customer and a
corporate affiliate seeking compensatory damages and contribution and indemnity.
The Company does not believe that the outcome of this litigation would result in
a material adverse effect on the Company's consolidated financial position or
results of operations.
NOTE 10 - BUSINESS SEGMENT INFORMATION
The Company has five reportable segments as follows:
o Assessments and Testing Services - provides comprehensive K-12 academic
testing services to states, and test scoring services in support of major
test publishers. This segment also provides clinical psychology and
workforce development assessment instruments and electronic certification
and licensure examinations.
o Education Software and Services - provides student, curriculum,
instructional management, and financial management software, software
support, and professional implementation services, and network design and
installation services.
o NCS Services - delivers principally outsourcing services for large-scale
data management projects for government and business.
o Data Collection Systems - manufactures and sells optical mark and image
scanning systems and scannable forms.
o International - provides many of the same products and services mentioned
above, but sells and serves customers outside the United States through
subsidiaries in Australia, Canada, Mexico, Hong Kong, and the U.K.
and through distributors in other geographies.
The Company's reportable segments are business units that offer different, but
related, products and services to customer sets which can overlap. The
reportable segments are managed separately by corporate officers who report
directly to the CEO. The Company evaluates performance and allocates resources
based on profit or loss from operations before interest and income taxes. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.
The table below presents information by reportable segment.
<PAGE>
<TABLE>
<CAPTION>
Assessments Education Data
& Testing Software & NCS Collection
Services Services Services Systems International Totals
---------- ----------- ---------- ----------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
For the Period Ended 1/31/99
Revenues $160,958 $116,214 $99,371 $84,239 $44,590 $505,372
Income from operations 25,365 11,917 11,594 23,250 3,182 75,308
Depreciation and Amortization 10,022 8,563 2,572 4,794 2,649 28,600
Segment assets 106,996 88,857 47,934 41,950 28,924 314,661
For the Period Ended 1/31/98
Revenues $118,661 $ 88,474 $76,212 $82,692 $39,976 $406,015
Income from operations 20,289 9,266 7,375 21,767 1,912 60,609
Depreciation and Amortization 8,546 7,475 2,876 5,289 1,833 26,019
Segment assets 94,731 75,337 40,559 41,087 28,497 280,211
For the Period Ended 1/31/97
Revenues $ 98,959 $ 52,025 $70,679 $80,299 $29,197 $331,159
Income from operations 18,601 5,290 7,489 19,311 (723) 49,968
Acquisition Related Charges - (7,895) - - - (7,895)
Depreciation and Amortization 5,855 6,077 2,361 5,057 1,583 20,933
Segment assets 48,134 55,295 39,619 38,162 24,980 206,190
</TABLE>
<PAGE>
The following table is a reconciliation of reportable segment information to the
Company's consolidated totals.
Fiscal
--------------------------------
1998 1997 1996
-------- -------- --------
Total Consolidated Revenue: $505,372 $406,015 $331,159
======== ======== ========
Income From Operations:
Total for reportable segments $ 75,308 $ 60,609 $ 49,968
Acquisition Related Charges - - 7,895
Unallocated amounts:
Central G & A Expenses 20,037 17,565 15,427
Interest Expense 936 1,353 1,677
Other (Income) Expense 224 (284) (1,564)
-------- -------- --------
Income from continuing operations
before income taxes $ 54,111 $ 41,975 $ 26,533
======== ======== ========
Depreciation and Amortization:
Total for reportable segments $ 28,600 $ 26,019 $ 20,933
Corporate 4,204 4,097 4,334
-------- -------- --------
Total Depreciation and Amortization $ 32,804 $ 30,116 $ 25,267
======== ======== ========
Assets:
Total for reportable segments $314,661 $280,211 $206,190
Corporate Assets 47,810 35,203 67,730
-------- -------- --------
Total Consolidated Assets $362,471 $315,414 $273,920
======== ======== ========
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, 1999, 1998 and 1997 were $262,511; $185,186; and $180,993, of which
$67,601; $63,005; and $62,278, 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.
Note 11 - ACCUMULATED OTHER COMPREHENSIVE INCOME
As of February 1, 1998, the Company adopted Statement of Financial Accounting
Standard (SFAS) 130, Reporting Comprehensive Income. SFAS 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's net
income or stockholders' equity. SFAS 130 requires the Company's foreign currency
translation adjustments, which prior to adoption were reported in retained
earnings to be separately classified as other comprehensive income. Prior year
financial statements have been reclassified to conform to the current
requirements.
The earnings associated with the Company's investment in its' foreign subsidiary
are considered to be permanently invested and no provision for U.S. federal and
state income taxes on those earnings or translation adjustment has been
provided.
EXHIBIT 21
SIGNIFICANT SUBSIDIARIES
NATIONAL COMPUTER SYSTEMS, INC.
STATE OR
OTHER
JURISDICTION
OF NAME UNDER WHICH
NAME OF SUBSIDIARY INCORPORATION SUBSIDIARY DOES BUSINESS
- ---------------------------- ------------- ------------------------
NCS Assessments, Inc. Minnesota National Computer Systems, Inc.
NCS Assessments
Professional Assessment
Services Division of
National Computer
Systems, Inc.
Macro Educational Systems, Inc. California National Computer Systems, Inc.
Education Software 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 1, 1999,
included in the 1998 Annual Report to Stockholders of National Computer Systems,
Inc. and subsidiaries.
We also consent to the incorporation by reference in:
Registration Statement No. 33-9830 on Form S-3 (Selling Shareholder),
Registration Statement No. 33-21511 on Form S-8 (1986 Employee Stock Option
Plan),
Registration Statement No.333-00377 on Form S-8 (1989 Non-Employee Director
Stock Option Plan),
Registration Statements No.33-48509 and 333-00381 on Form S-8 (1990 Employee
Stock Option Plan),
Registration Statement No. 333-00379 on Form S-8 (1990 Long-Term Incentive
Plan),
Registration Statement No. 33-48510 on Form S-8 (1992 Employee Stock Purchase
Plan),
Registration Statement No. 33-68854 on Form S-8 (Option held by former
director),
Registration Statement No. 333-00383 on Form S-8 (1995 Employee Stock Option
Plan),
Registration Statement No. 333-25523 on Form S-3 (VUE Selling shareholders),
Registration Statement No. 333-25343 on Form S-8 (NCS/VUE Stock Option Plan),
Registration Statement No. 333-51053 on Form S-8 (Oswald Stock Option Plan),
Registration Statement No. 333-58947 on Form S-8 (1997 Long-Term Incentive
Plan),
Registration Statement No. 333-58949 on Form S-8 (1998 Employee Stock Purchase
Plan),
Registration Statement No. 333-58951 on Form S-8 (1997 Employee Stock Option
Plan), and
Registration Statement No. 333-75165 on Form S-8 (Supplemental Deferred
Compensation Plan)
of our report dated March 1, 1999 with respect to the consolidated financial
statements incorporated herein by reference in this Annual Report (Form 10-K) of
National Computer Systems, Inc.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
April 23, 1999
EXHIBIT 24
POWER OF ATTORNEY
FORM 10-K FOR YEAR ENDED JANUARY 31, 1999
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, 1999, 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 2nd
day of March, 1999.
/s/ Russell A. Gullotti /s/ Moses S. Joseph
- ------------------------- ------------------------
Russell A. Gullotti Moses S. Joseph
/s/ /s/ Stephen G. Shank
- ------------------------- ------------------------
William J. Cadogan Stephen G. Shank
/s/ David C. Cox /s/ John E. Steuri
- ------------------------- ------------------------
David C. Cox John E. Steuri
/s/ Delores M. Etter /s/ Jeffrey W. Taylor
- ------------------------- ------------------------
Delores M. Etter Jeffrey W. Taylor
/s/ Jean B. Keffeler
- -------------------------
Jean B. Keffeler
POWER OF ATTORNEY
FORM 10-K FOR YEAR ENDED JANUARY 31, 1999
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, 1999, 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 2nd
day of March, 1999.
- ------------------------- ------------------------
Russell A. Gullotti Moses S. Joseph
/s/ William J. Cadogan
- ------------------------- ------------------------
William J. Cadogan Stephen G. Shank
- ------------------------- ------------------------
David C. Cox John E. Steuri
- ------------------------- ------------------------
Delores M. Etter Jeffrey W. Taylor
- -------------------------
Jean B. Keffeler
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the financial
statements for National Computer Systems, Inc. and Subsidiaries, for the fiscal
year ended January 31, 1999, 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-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<EXCHANGE-RATE> 1.0
<CASH> 16,310
<SECURITIES> 0
<RECEIVABLES> 128,751
<ALLOWANCES> 0
<INVENTORY> 21,791
<CURRENT-ASSETS> 174,077
<PP&E> 215,432
<DEPRECIATION> (109,416)
<TOTAL-ASSETS> 362,471
<CURRENT-LIABILITIES> 127,438
<BONDS> 0
0
0
<COMMON> 944
<OTHER-SE> 225,922
<TOTAL-LIABILITY-AND-EQUITY> 362,471
<SALES> 180,634
<TOTAL-REVENUES> 505,372
<CGS> 73,696
<TOTAL-COSTS> 314,957
<OTHER-EXPENSES> 135,144
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 936
<INCOME-PRETAX> 54,111
<INCOME-TAX> 21,600
<INCOME-CONTINUING> 32,511
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,511
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.00
</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.
