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 29, 2000 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: 952/829-3000
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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. X
State the aggregate market value of the voting shares held by non-affiliates of
the registrant as of March 31, 2000.
Common Shares, $.03 par value -- $1,523,531,000.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of April 11, 2000.
Common Shares, $.03 par value - 32,531,800 shares
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended January 29,
2000 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 25, 2000 are incorporated by reference into Part
III.
<PAGE>
PART I
ITEM 1. BUSINESS
National Computer Systems, Inc. ("NCS"(R) or the "Company") is a global
information services company, which provides services, software, systems and
Internet-based technologies for the collection, management and interpretation of
data.
The Company's headquarters are located at 11000 Prairie Lakes Drive, Eden
Prairie, Minnesota 55344, telephone 952/829-3000.
MARKETS SERVED
NCS serves two broad markets: Education and Large Scale Data Management.
Education
The Company 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 in support of these
products. In addition, NCS offers network services, including design, hardware
and software procurement, Internet utilization, maintenance and support, and
network administration. NCS offers Internet delivery of electronic testing and
reporting services, teacher resource services and materials, interactive
curriculum and services to link parents with schools.
NCS also 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.
By using the Company's optical scanning and image-based systems and forms,
individual school districts can perform in-house student assessment testing
applications, including teacher created or administration developed norm- or
criterion-referenced tests; administrative applications such as attendance,
scheduling, grade reporting and registration; library and inventory management;
and financial management and payroll.
The Company's information processing services are also provided in support of
federal student financial aid programs for post-secondary education.
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 outsourcing services for complex
information management projects. Its services and products include comprehensive
data collection technologies, database management, software development,
document imaging, telecommunications support and information dissemination
systems. 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 the following five business
segments.
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. This capability 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. During
1999, the Company introduced the ParentCONNECTxp(R) module to allow Internet
access by parents to student academic data. NCS plans to continue to extend the
utility of its systems using Internet capabilities.
With the acquisition of NovaNET Learning, Inc. in fiscal 1999, the Company began
offering an online, comprehensive education and communication private network
that offers self-paced, interactive curriculum for secondary school students and
adults. Acquired in fiscal 1998, NCS' Educational Structures Internet-based
products and services allow educators to access customized lesson plans in
social studies, language arts, mathematics and science with appropriate
student/teacher content resources, teaching strategies and interactive
activities.
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.
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; systems installation, integration
and maintenance; training; and help desk and ongoing support.
NCS Services
NCS provides a comprehensive package of services that include: systems analysis
and design; software development; comprehensive data collection technologies,
including Internet-based systems, paper-based imaging and electronic data
gathering; forms management; telecommunication and telephone call center
support; information management and dissemination; network support, such as
Internet connectivity; and training. These services are principally outsourced
to NCS and performed at NCS sites.
The Company's services also include: quality measurement, product warranty and
customer satisfaction surveys and customer data collection; human resource
applications, such as applicant tracking, organizational development, employee
attitude surveys, benefits enrollment and employee evaluation; medical device
tracking services to help medical manufacturers comply with the 1990 Safe
Medical Devices Act; and general data collection, analysis, management and
reporting.
During fiscal 2000, the Company, working with the U.S. Census Bureau, will
manage and operate one of four census data capture centers. NCS, at its center,
will receive completed English and Spanish-language Census forms, manage all
imaging operations and perform all data capture functions to collect and report
the constitutionally-mandated count of the U.S. population.
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 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, and responds to telephone
calls from applicants at all stages of the financial aid process. Other federal
agencies that are customers of NCS include the U.S. Department of Defense,
Department of Labor, Office of Personnel Management, and the Internal Revenue
Service.
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. These applications center on Internet and
paper-based testing and assessment in the Education market and on telecom
deregulation for commercial or governmental entities.
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 and
information regarding sales to government agencies, see Note 9 of Notes to
Consolidated Financial Statements and Management's Discussion and Analysis of
Results of Operations and Financial Condition that are included in the Annual
Report to Shareholders for the fiscal year ended January 29, 2000, and
incorporated herein by reference.
MARKETING
NCS markets its data collection hardware and software and its data collection
and processing services in the United States directly through sales employees
and indirectly through business partners, original equipment manufacturers and
resellers. 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.
Outside the United States, the Company's products and services are sold through
sales employees, distributors and independent sales agents. 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.
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 29,
2000 and January 31, 1999 and 1998, the Company's product development expenses
were approximately $20.4 million, $12.4 million and $8.6 million, respectively.
The expenditures related principally to education software product development,
test processing technology and service process improvements (with emphasis on
Internet applications). 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 Shareholders for the fiscal year ended January
29, 2000, and incorporated herein by reference.
MANUFACTURING
The Company assembles its scanning equipment from electronic components, metal
stampings, molded plastic parts and mechanical sub-assemblies. 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; and Melbourne, Victoria, Australia. 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 has intense competition from
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. Numerous companies
have recently started using the Internet to deliver educational content and
certain administrative functions.
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.
"NCS", "OpScan" and "ParentCONNECTxp" are registered trademarks of the Company.
EMPLOYEES
As of February 26, 2000, the Company employed approximately 4,600 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, 2000 are listed below along with their business experience
during the past five years.
NAME AGE POSITION
- ------------------- ------- -----------------------------------------
Russell A. Gullotti 57 Chairman of the Board,
President and Chief Executive Officer
Robert C. Bowen 58 Senior Vice President
Michael C. Brewer 53 Vice President and General Counsel
John W. Fenton, Jr. 59 Secretary-Treasurer
Simon N. Garneau 53 Vice President
Clive M. Hay-Smith 42 Vice President
Robert C. Hickcox 46 Vice President
Gary L. Martini 49 Vice President
Michael A. Morache 49 Vice President
David W. Smith 55 Vice President
Jeffrey W. Taylor 46 Vice President and Chief Financial Officer
Adrienne T. Tietz 53 Vice President
Mr. Gullotti has been President and Chief Executive Officer since October, 1994
and Chairman of the Board since May, 1995.
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. Fenton has been Secretary-Treasurer of NCS for more than five years.
Mr. Garneau has been a Vice President of NCS since June, 1999. Prior to that he
was a self-employed business consultant from January, 1998 to June, 1999.
Previously, he was President and Chief Executive Officer of ISI Systems, Inc.
(computer software and services) 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 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, and 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
Building 3 25,000
Champaign, IL 29,000 Education software and services,
product development and support
Rosemont, IL 23,000 Assessments and test publishing
general offices
Lawrence, KS (2) 90,000 Data processing services,
operations and general offices
Eagan, MN (1) 109,000 Scanner hardware development and
manufacturing; NCS services
general offices; customer support
services operations and general
offices; and international
operations and general offices
Eden Prairie, MN 67,000 Executive general offices and
electronic test processing
operations and general offices
Edina, MN (1) 101,000 Data collection systems and
services general offices,
data processing services
and scanner software
development
Minnetonka, MN (1) 54,000 Assessments and test publishing
and scoring operations and
general offices
Owatonna, MN (1) 128,000 Documents design and production
Columbia, PA (1) 121,000 Documents design and production
Austin, TX
Building 1 35,000 Data processing services,
Building 2 41,000 operations and general offices
Building 3 157,000 Data processing services,
documents design and
production, operations and
general offices
Buenos Aires, Argentina 38,000 Data processing services,
operations and general offices
Nunawading, Victoria 30,000 Data processing services,
(Melbourne) documents design and
Australia (1) production, operations and
general offices
Mississauga, Ontario, 59,000 Assessment and test processing
Canada and data processing services,
operations and general offices
Rotherham, South Yorkshire 34,000 Data processing services,
England operations and general offices
Mexico City, Mexico 24,000 Data processing services,
operations and general offices
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(1) Denotes owned facility.
(2) Construction of an additional 60,000 square foot facility at this
location, to be used for the same general purposes, is scheduled for
completion during the second quarter of 2000.
The Company believes that its facilities will be adequate to meet its current
needs.
ITEM 3. LEGAL PROCEEDINGS
On March 10, 2000, the Company entered into a settlement agreement with Edu-Cap,
Inc. (formerly University Support Services, Inc.) ("Edu-Cap") in connection with
the previously disclosed lawsuit against the Company by Edu-Cap in the United
States District Court, District of Minnesota, Fourth Division. Pursuant to the
settlement agreement, all claims that were alleged or could have been alleged
against the Company by Edu-Cap in the lawsuit have been settled. The settlement
did not have a material adverse effect on the Company's consolidated financial
position or results of operations.
The Company is not a party to nor is its property subject to any material
pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal year
ended January 29, 2000 to a vote of security holders through the solicitation of
proxies or otherwise.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
"Quarterly Market Data" included in the Annual Report to Shareholders for the
year ended January 29, 2000 is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
"Five Year Financial Data" included in the Annual Report to Shareholders for the
year ended January 29, 2000 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 Shareholders for the year ended
January 29, 2000 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 - Capital Resources and Liquidity" included in the Annual Report to
Shareholders for the year ended January 29, 2000 is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and supplementary data of NCS
and its subsidiaries, included in the Annual Report to Shareholders for the year
ended January 29, 2000 are incorporated herein by reference:
Consolidated Balance Sheets -- January 29, 2000 and January 31, 1999
Consolidated Statements of Income -- Years ended January 29, 2000 and January
31, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity -- Years ended
January 29, 2000 and January 31, 1999 and 1998
Consolidated Statements of Cash Flows -- Years ended January 29, 2000 and
January 31, 1999 and 1998
Notes to Consolidated Financial Statements -- January 29, 2000
Report of Independent Auditors dated March 6, 2000
Quarterly Results of Operations (Unaudited)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
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 25, 2000 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 25, 2000 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 25, 2000 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 25, 2000 is incorporated
herein by reference.
<PAGE>
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
Shareholders for the year ended January 29, 2000 are incorporated by
reference in Item 8:
Consolidated Balance Sheets -- January 29, 2000 and January 31, 1999
Consolidated Statements of Income -- Years ended January 29, 2000 and
January 31, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity -- Years
ended January 29, 2000 and January 31, 1999 and 1998
Consolidated Statements of Cash Flows -- Years ended January 29, 2000
and January 31, 1999 and 1998
Notes to Consolidated Financial Statements -- January 29, 2000
Report of Independent Auditors dated March 6, 2000
(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
auth- orized 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 1989 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 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.
*10.8 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.
*10.9 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.
*10.10 NCS 1999 Employee Stock Option Plan is incorporated herein by
reference to Exhibit 10.11 to the Company's Form 10-K for the year
ended January 31, 1999.
*10.11 NCS 1999 Non-Employee Director Stock Option Plan is incorporated
herein by reference to Exhibit 10.12 to the Company's Form 10-K for
the year ended January 31, 1999.
*10.12 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.
*10.13 NCS 1997 Long-Term Incentive Plan is incorporated herein by
reference to Exhibit 10.13 to the Company's Form 10-K for the year
ended January 31, 1997.
*10.14 NCS Supplemental Deferred Compensation Plan is incorporated herein
by reference to Exhibit 4 to the Company's Form S-8 dated March 26,
1999.
*10.15 NCS Corporate Management Incentive Plan -- 1999 is incorporated
herein by reference to Exhibit 10.18 to the Company's Form 10-K for
the fiscal year ended January 31, 1999.
*10.16 NCS Corporate Management Incentive Plan -- 2000.
*10.17 NCS 2000 Long-Term Incentive Program.
13 Portions of NCS' Annual Report to Shareholders for the fiscal year
ended January 29, 2000.
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 29, 2000 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 29, 2000.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
required or are inapplicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATIONAL COMPUTER SYSTEMS, INC.
Dated: April 25, 2000 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 JEAN B. KEFFELER * Director
---------------------
Jean B. Keffeler
By JOHN J. RANDO * Director
---------------------
John J. Rando
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 25, 2000
J. W. Fenton, Jr.
(ATTORNEY-IN-FACT)
<PAGE>
FORM 10-K
NATIONAL COMPUTER SYSTEMS, INC.
FOR THE FISCAL YEAR ENDED JANUARY 29, 2000
EXHIBIT INDEX
EXHIBIT
- -------------
10.16 NCS Corporate Management Incentive Plan - 2000.
10.17 NCS 2000 Long-Term Incentive Program.
13 Portions of NCS' Annual Report to Shareholders for the fiscal year
ended January 29, 2000.
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 29, 2000 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 10.16
National Computer Systems, Inc.
Management Incentive Plan
2000
It is the intent of National Computer System, Inc. (NCS) to compensate its key
employees in a manner that permits the NCS to attract, retain and motivate
outstanding people.
The NCS Management Incentive Plan (MIP) is designed to reward key employees for
achieving specific annual NCS financial goals and for individual performance in
accomplishing these goals. It aligns the interests of NCS senior managers with
NCS business and financial plans.
Plan Eligibility
Participation in the MIP is determined by position. Eligible positions and
target incentive amounts are determined each year and may change from year to
year. Eligibility is limited and includes those positions which regularly and
directly make or influence business decisions that significantly impact the
results of the Company or it's operating units. Participants must be regular,
full-time (at least 32 hours per week) employees and must be actively employed
by NCS on the last day of the fiscal year to be eligible to receive an MIP
award.
Position 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 participation exception, exclusions, and inclusions to the above must be
documented and approved by the CEO.
Target Incentive Opportunity
Each approved participant will be eligible for a specific MIP target incentive
award. This target opportunity will be a percentage of the incumbent's base
salary as of May 31, 2000. The target incentive is linked directly to the
participant's business/department's financial and/or program performance and an
overall evaluation of each individual's performance. Eligible Corporate
employees' target bonus is linked to NCS' financial results. Potential earned
awards range from 0% at threshold minimum, to 100% at target, to a pre-defined
over achievement percentage for each participant at maximum.
Financial Objectives
Target financial objectives for NCS and for each NCS business or department are
established annually through a budgeting process. The CEO, Chief Financial
Officer and Vice President, Human Resources establish minimum and maximum
revenue and contribution goals for NCS, and for each major business within NCS.
Similarly, members of the NCS Leadership Team may establish minimum and maximum
financial goals for other business units or programs consistent with the targets
determined for the overall business.
Overall Evaluation
Potential target incentive opportunity will be based on achievement of financial
goals and their overall evaluation of the participant's performance during the
fiscal year. The overall evaluation will include performance against defined
individual objectives and an evaluation of performance relative to:
1. What has the participant done to improve shareholder value?
2. How has the incumbent improved customer satisfaction and NCS' ability
to serve the customer?
3. What has been done to improve the quality and predictability of the
business?
4. What has the incumbent done to develop their organization?
5. How has the participant demonstrated personal leadership and
corporate-wide perspectives/orientation?
Determination of Awards
Awards are determined following the close of the fiscal year. 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 in conjunction with the appropriate NCS
Leadership Team member, the Vice President, Human Resources and the Chief
Financial Officer.
Awards and Pro-rata Awards
Earned incentive awards will be paid out 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 an award.
Participants will receive a pro-rata award based upon the length of time spent
in the MIP-eligible position if they transition into or out of MIP eligible
positions during the year. However, participants must be in the MIP-eligible
position at least six (6) full months during the fiscal year to receive a
pro-rata award. Pro-rata awards are subject to the review and approval of the
CEO and Vice President, Human Resources.
Disability, Death, or Special Circumstances
In the case of a participant's disability, death or other special circumstances,
the CEO may approve a pro-rata incentive award.
Plan Exceptions and Administration
The Chief Executive Officer and the Vice President, Human Resources, will
approve exceptions or modifications to the Plan. All decisions made are final.
Disclaimer
NCS reserves the right to change, eliminate, or replace this Plan or its
components at any time, without prior notice. This document expressly supersedes
any prior, existing policies or guidelines, whether written or unwritten.
Participation in this Plan is not to be considered as an employment contract or
agreement by the participant. No provision in this document is intended to
create a contract between NCS and any employee, or to limit the rights of NCS
and/or its employees to terminate the employment relationship at any time.
Exhibit 10.17
NATIONAL COMPUTER SYSTEMS, INC.
2000 LONG-TERM INCENTIVE PROGRAM
1. Objectives of the Program
This Program shall be known as the "National Computer Systems, Inc. 2000
Long-Term Incentive Program (the "Program"). The objectives of the Program
are to promote the interests of National Computer Systems, Inc. (the
"Company"), by enhancing its ability to attract, retain and motivate key
senior officers, to provide incentives for such officers to remain with the
Company and to increase their identification with the interests of the
Company's shareholders and to afford them an opportunity to acquire a
proprietary interest in the Company through the granting of stock options
and conditional cash bonuses as long-term incentives based on the financial
success of the Company.
2. Administration of the Program
(a) The Program shall be administered by the Compensation Committee (the
"Committee") of the Board of Directors of the Company.
(b) Subject to the other provisions of the Program and to applicable law,
the Committee shall have full power and authority, in its discretion:
(i) to construe and interpret the Program and all stock options and
conditional cash bonuses granted under the Program (collectively,
"Awards"); (ii) to determine the persons to whom Awards shall be
granted, the time or times at which such Awards shall be granted, the
number of shares and the amount of cash to be subject to each Award
and the terms, conditions and restrictions under which each Award is
granted; (iii) to determine the terms of exercise of each option and
to accelerate the time at which all or any part of an option may be
exercised, (iv) to amend or modify the terms of any Award with the
consent of the persons receiving the Award, (v) to prescribe, amend
and rescind rules and regulations relating to the administration of
the Program, (vi) to determine the terms and provisions of each
agreement evidencing an Award under the Program (which agreements need
not be identical), and (vii) to make all other determinations
necessary or advisable for the administration of the Program, subject
to the exclusive authority of the Board of Directors under section 13
to amend or terminate the Program. The Committee's determinations on
the foregoing matters shall be final and conclusive.
(c) The granting of an Award pursuant to the Program shall be effective
only if written agreements shall have been duly executed and delivered
by and on behalf of the Company and the employee to whom such right is
granted.
(d) The Committee may delegate the responsibility for implementing the
decisions made by the Committee under the Program to one or more
officers of the Company, subject to such terms, conditions and
limitations as the Committee may establish in its sole discretion;
provided, however, that the Committee shall not delegate any
responsibilities or duties under the Program with regard to officers
or directors of the Company who are subject to Section 16 of the
Exchange Act.
(e) Each member of the Committee 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
Program by any other person or persons. In no event shall any person
who is or shall have been a member of the Committee 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.
3. Participants
Awards may be granted under the Program to such key senior full time
officers of the Company as shall be determined by the Committee from time
to time. In determining the persons to whom Awards shall be granted, the
amount of any conditional cash bonus and the number of shares subject to
any Award, the Committee may take into account the nature of services
rendered by the proposed grantee, the proposed grantee's 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 Award under the Program may be granted additional
Awards under the Program if the Committee shall so determine.
4. Shares Subject to the Program
Options for shares of Common Stock subject to Awards under the Program
shall be issued pursuant to one of the Company's Employee Stock Option
Plans (the "Option Plans"). Options issued under the Program are not
intended to qualify as Incentive Stock Options pursuant to Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code").
5. Adjustments
In accordance with the provisions of the Option Plans, if any change occurs
in the shares of the Company's common stock through merger, consolidation,
reorganization, recapitalization, stock dividend (of whatever amount),
stock split or other change in the Company's corporate structure,
appropriate adjustments in the Program and outstanding Awards shall be made
by the Committee. In the event of any such changes, adjustments shall
include, where appropriate, changes in the aggregate number of shares
subject to the Program, the number of shares and the price per share
subject to outstanding Awards in order to prevent dilution or enlargement
of the rights of the grantees under such Awards.
6. Term
The 2000 Program was approved by the Compensation Committee of the
Company's Board of Directors on March 7, 2000, and shall be effective as of
such date and for the 72 months thereafter.
7. General Terms and Conditions of Awards
Awards granted hereunder shall be evidenced by a written notice from the
Company to the grantee evidencing the granting of the Award, or shall be
evidenced by agreements in such form as the Committee shall from time to
time require. Such notice or agreements shall refer to the Program and
shall make acceptance of the Award by a grantee subject to the provisions
of the Program.
8. Terms and Conditions of Options Granted under the Program
(a) Each agreement evidencing an option granted under the Program shall
state the number of shares to which it pertains.
(b) The option price for all options granted under the Program shall be
determined by the Committee but shall not be less than 100% of the
fair market value of shares of the Company's common stock at the date
of granting of such option. For purposes of this section 8 and for all
other valuation purposes under the Program, the fair market value of
the Company's common stock shall be the "last trade price" of the
Company's common stock on the date as of which fair market value is
being determined and as quoted on The Nasdaq National Market
System(R).
(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 date of receipt of such notice by the Company shall
be deemed the date of exercise. The exercise price and the withholding
taxes applicable to the exercise may be paid as follows:
(i) in cash,
(ii) by delivering to the Company previously owned NCS common stock
having a fair market value equal to the exercise price and the
amount of any withholding taxes required to be paid,
(iii) by having NCS withhold from stock to be delivered on exercise
shares which have a fair market value equal to an amount not to
exceed the maximum required statutory supplemental withholding
taxes to be paid, or
(iv) any combination of (i), (ii) and (iii).
(d) No option granted under the Program shall be transferable by an
optionee, otherwise than by will or the laws of descent or
distribution as provided in subsection 8(g). During the lifetime of an
optionee the option shall be exercisable only by such optionee and no
other person shall acquire any rights therein. Except as provided in
subsection 8(e) or 8(g), no option may be exercised at any time unless
the holder thereof is then an employee of the Company or a subsidiary
of the Company.
(e) If, prior to termination of the option, the optionee stops being an
employee of NCS for any reason other than serious misconduct or death,
disability or retirement, the optionee shall have up to three (3)
months from the last day worked, but in no event beyond the last day
of the term of the option period, to exercise the option to the extent
it was exercisable on the last day worked (which does not include any
period during which severance payments, lay off income benefits, or
salary continuation amounts are in effect).
(f) In the event that an optionee shall cease to be employed by the
Company by reason of the optionee's gross and willful misconduct
during the course of employment, including but not limited to wrongful
appropriation of funds of the Company or the commission of a gross
misdemeanor or felony, the option shall be terminated as of the date
of the misconduct.
(g) In the event the optionee should die while an employee of the Company,
the optionee's executor or administrator or any person acquiring
rights directly by bequest or inheritance shall have up to three (3)
months, but in no event beyond the date of termination of the option,
to exercise any non-exercised option right that had vested on the
optionee's death. In the event the optionee's death occurs during the
prescribed period of time during which specified financial performance
results of the Company are to be achieved ("Measurement Period"), the
optionee's beneficiaries or heirs will receive a pro-rata vesting of
the option based on actual months served to total months during the
Measurement Period and shall have up to three (3) months following the
commencement of the option exercise period to exercise such vested
shares. Any non-vested shares will be forfeited.
(h) In the event the optionee should retire or become disabled while an
employee of the Company, the optionee shall have up to three (3)
months, but in no event beyond the date of termination of the option,
to exercise any non-exercised option right that had vested as of the
date of disability or retirement. In the event of the optionee's
retirement or disability during the Measurement Period, the optionee
will receive a pro-rata vesting of the option based on actual months
served to total months during the Measurement Period and shall have up
to three (3) months following the commencement of the option exercise
period to exercise such vested shares. Any non-vested shares will be
forfeited.
For purposes of the Program, retirement means the optionee voluntarily
withdraws from active employment with NCS and meets the following
criteria:
(i) 55 years of age or older,
(ii) at least 5 years of service to the Company, and
(iii) the optionee's age plus years of service with the Company equal
or exceed 65 years.
For purposes of this Program, disability means the optionee cannot
perform the normal duties of the optionee's regular occupation for any
employer and is not engaged in any other occupation or employment for
wage or profit.
(i) An optionee or a transferee of an option shall have no rights as a
shareholder with respect to such 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 section 5.
9. Terms and Conditions of Conditional Cash Bonuses
(a) Each conditional cash bonus Award granted under the Program shall be
for an amount of cash as shall be determined by the Committee and set
forth in the agreement containing the terms of such Award. The
agreement will also, in the discretion of the Committee, set forth
performance or other conditions that will subject the cash bonus to
forfeiture and transfer restrictions. The Committee may, at its
discretion, waive all or any part of the restrictions applicable to
any or all outstanding Awards, whether or not a restriction period has
expired or other specified conditions have been met.
(b) In the event of a grantee's death, disability or retirement prior to
the end of any Measurement Period, the amount of any cash bonus will
be pro-rata based on the actual months served to the total months
during the Measurement Period.
(c) Retirement and disability for cash bonus purposes will have the same
definition as set forth in subsection 8(h).
10. Income Tax Matters
In order to comply with all applicable federal or state income tax laws or
regulations, the Company may take such action as it deems appropriate to
ensure that all applicable federal or state payroll, withholding, income or
other taxes, which are the sole and absolute responsibility of a grantee of
an Award under the Program, are withheld or collected from such grantee.
11. Additional Restrictions
The Committee shall have full and complete authority to determine whether
all or any part of the shares of common stock of the Company acquired upon
exercise of any of the options granted under the Program or upon the
granting of an Award shall be subject to restrictions on the
transferability thereof or any other restrictions affecting in any manner
the optionee's or award recipient's rights with respect thereto, but any
such restriction shall be contained in the agreement relating to such
Awards.
12. Compliance with Securities Laws
(a) All certificates for shares or other securities delivered under the
Program pursuant to any Award or the exercise thereof shall be subject
to such stop transfer orders and other restrictions as the Committee
may deem advisable under the Program or the rules, regulations and
other requirements of the Securities and Exchange Commission and any
applicable federal or state securities laws, and the Committee may
cause a legend or legends to be placed on any such certificates to
make appropriate reference to such restrictions.
(b) The Program is intended to comply with all applicable conditions of
Section 16b-3 of the Exchange Act, and all transactions involving
persons subject to Section 16b of the Exchange Act
("Insider-Participants") are subject to such conditions regardless of
whether the conditions are expressly set forth in the Program. Any
provision of the Program that is contrary to the conditions of Section
16b-3 shall not apply to Insider-Participants.
13. Amendment or Discontinuance of Program
The Company's Board of Directors may amend, suspend or discontinue the
Program at any time. The Company shall not alter or impair any Award
theretofore granted under the Program without the consent of the holder of
the Award.
14. Time of Granting
Nothing contained in the Program or in any resolution adopted or to be
adopted by the Board of Directors or by the shareholders of the Company,
and no action taken by the Committee or the Board of Directors (other than
the execution and delivery of an agreement evidencing an Award), shall
constitute the granting of an Award under the Program.
15. General Provisions
(a) No Rights to Awards. No person shall have any claim to be granted any
Award under the Program, and there is no obligation for uniformity of
treatment of holders or beneficiaries of Awards under the Program. The
terms and conditions of Awards need not be the same with respect to
any grantee or with respect to different grantees.
(b) Award Agreements. No person will have rights under an Award granted to
such person unless and until an Award agreement evidencing such Award
has been duly executed on behalf of the Company.
(c) No Limit on Other Compensation Arrangements. Nothing contained in the
Program shall prevent the Company from adopting or continuing in
effect other or additional compensation arrangements, and such
arrangements may be either generally applicable or applicable only in
specific cases.
(d) No Right to Employment. The grant of an Award shall not be construed
as giving the grantee of the Award the right to be retained in the
employ of the Company, nor will it affect in any way the right of the
Company to terminate such employment at any time, with or without
cause. In addition, the Company may at any time dismiss an Award
grantee from employment free from any liability or any claim under the
Program, unless otherwise expressly provided in the Program or in any
Award agreement.
(e) Governing Law. The validity, construction and effect of the Program or
any Award, and any rules and regulations relating to the Program or
any Award, shall be determined in accordance with the laws of the
State of Minnesota.
(f) Severability. If any provision of the Program or any Award is or
becomes or is deemed to be invalid, illegal or unenforceable in any
jurisdiction or would disqualify the Program or any Award under any
law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform to applicable laws, or if it
cannot be so construed or deemed amended without, in the determination
of the Committee, materially altering the purpose or intent of the
Program or the Award, such provision shall be stricken as to such
jurisdiction or Award, and the remainder of the Program or any such
Award shall remain in full force and effect.
(g) No Trust or Fund Created. Neither the Program nor any Award shall
create or be construed to create a trust or separate fund of any kind
or a fiduciary relationship between the Company and any other Person.
To the extent that any Person acquires a right to receive payments
from the Company pursuant to an Award, such right shall be no greater
than the right of any unsecured general creditor of the Company.
(h) No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Program or any Award, and the Committee
shall determine whether cash shall be paid in lieu of any fractional
Shares or whether such fractional Shares or any rights thereto shall
be canceled, terminated or otherwise eliminated.
(i) Headings. Headings are given to the sections and subsections of the
Program solely as a convenience to facilitate reference. Such headings
shall not be deemed in any way material or relevant to the
construction or interpretation of the Program or any provision
thereof.
EXHIBIT 13
FIVE YEAR FINANCIAL DATA
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
January 29, January 31,
----------- -----------------------------------------------
Year ended 2000 1999 1998 1997(2) 1996
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Financial Results
Revenues $629,545 $505,372 $406,015 $331,159 $300,883
Income from operations 69,588 55,271 43,044 26,646 30,704
Income from continuing operations
before income taxes 68,430 54,111 41,975 26,533 27,760
Income from continuing operations 42,930 32,511 25,175 13,666 16,580
Discontinued operations, net of taxes - - - (2,229) 5,679
Gain on disposition, net of taxes - - - 38,143 -
Net income 42,930 32,511 25,175 49,580 22,259
Net income per share from continuing
operations(1)
Basic earnings per share 1.35 1.05 0.83 0.45 0.54
Diluted earnings per share 1.30 1.00 0.80 0.44 0.53
Dividends paid per share 0.20 0.20 0.18 0.18 0.18
Financial Position
Total assets 449,880 362,471 315,414 273,920 219,724
Long-term debt, including
current maturities 1,786 9,355 18,844 20,148 27,008
Stockholders' equity $276,388 $226,866 $193,994 $170,034 $128,198
<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) Continuing operations include an acquisition related charge of $7,895
pre-tax, $6,992 after tax or $.23 per diluted share.
</FN>
</TABLE>
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Thirteen weeks ended May 1 July 31 October 30 January 29
-------- -------- ---------- ----------
Year Ended January 29, 2000
<S> <C> <C> <C> <C>
Revenues $125,817 $167,664 $162,920 $173,144
Gross profit 48,131 70,164 61,023 61,748
Net income 6,653 13,160 9,568 13,549
Basic earnings per share $ 0.21 $ 0.42 $ 0.30 $ 0.42
Diluted earnings per share $ 0.20 $ 0.40 $ 0.29 $ 0.41
</TABLE>
<TABLE>
<CAPTION>
Three months ended April 30 July 31 October 31 January 31
-------- -------- ---------- ----------
Year Ended January 31, 1999
<S> <C> <C> <C> <C>
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
</TABLE>
<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 2,438 and 2,128 Common Shareholders of record as of January 29, 2000 and
January 31, 1999, respectively.
Fiscal 1999
-----------------------------------------
Thirteen Weeks Ended
-----------------------------------------
May 1 July 31 October 30 January 29
------- ------- ---------- ----------
High $39.13 $35.88 $40.38 $41.75
Low 23.00 27.13 31.63 32.50
Close 28.00 34.25 37.81 36.06
Dividends per share $ 0.05 $ 0.05 $ 0.05 $ 0.05
Fiscal 1998
-----------------------------------------
Three Months Ended
-----------------------------------------
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
<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
----------- ----------
1999 January 29, 2000
1998 January 31, 1999
1997 January 31, 1998
Income and Expense Items as a Percentage of Revenues
Fiscal Year 1999 1998 1997
- ------------------------------------------------------------
Revenues
Services 69.7% 64.3% 60.1%
Product sales 30.3 35.7 39.9
- ------------------------------------------------------------
Total revenues 100.0 100.0 100.0
Costs of Revenues (1)
Cost of services 71.7 74.3 75.2
Cost of product sales 38.7 40.8 42.0
- ------------------------------------------------------------
Total gross profit 38.3 37.7 38.0
Operating Expenses
Sales and marketing 11.0 12.8 14.0
Research and development 3.2 2.5 2.1
General and administrative 13.0 11.5 11.3
- ------------------------------------------------------------
Income from operations 11.1 10.9 10.6
Income before income taxes 10.9 10.7 10.3
Net income 6.8% 6.4% 6.2%
============================================================
(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 1999 RESULTS. Total revenues increased 24.6% in fiscal 1999 to $629.5
million compared to the prior year's $505.4 million. The Company's overall gross
margin on revenues increased 26.6% to $50.7 million, and as a percentage of
revenues, gross margin increased to 38.3% in fiscal 1999 from 37.7% in the prior
year. Operating expenses increased to 27.2% of revenues in fiscal 1999, compared
to 26.7% of revenues in fiscal 1998. Operating margins increased to 11.1% of
revenue in fiscal 1999 from 10.9% in fiscal 1998 and operating income in dollars
increased 25.9% to $69.6 million. Income tax rates were consistent with the
prior year, except for a one-time $2.0 million tax benefit described below. Net
income in fiscal 1999 totaled $42.9 million or $1.30 per diluted share
outstanding ($1.24 before the one-time tax benefit). This compares to the fiscal
1998 net income of $32.5 million and $1.00 per diluted share.
REVENUES
Fiscal 1999 versus Fiscal 1998. Total revenues for fiscal 1999 were up 24.6% to
$629.5 million from $505.4 million in fiscal 1998. Revenues increased in all
five business segments.
By revenue category, fiscal 1999 compares to fiscal 1998 as follows:
Services + 35.1%
Product sales + 5.7%
The Services revenue growth came from several sources, especially K-12
assessment testing, which grew by approximately $35 million over the prior year.
Student loan processing and other government outsourcing services grew
approximately $29 million. Electronic testing, commercial outsourcing, and
professional services related to education software also contributed to year on
year growth in services revenues. Fiscal 1999 increases in product sales came
principally from education software licensing and image scanning systems.
By major market, for fiscal 1999, revenues grew 25.2% from the education market
and 22.7% from the large scale data management (non-education) market. For
fiscal 1999 the education market accounted for approximately three-fourths of
total NCS revenues. Approximately 2% of the Company's overall revenue growth in
fiscal 1999 came from current year acquisitions.
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:
Services + 33.1%
Product sales + 11.5%
The 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 services growth. Fiscal 1998 increases in product sales came
principally from education software licensing and related network hardware.
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 1998
acquisitions.
COST OF REVENUES AND GROSS PROFITS
Fiscal 1999 versus Fiscal 1998. The Company's overall gross profit dollars
increased $50.7 million, or 26.6%. As a percentage of revenue, gross margin
increased 0.6 percentage points to 38.3% from 37.7%. This increase reflects
increases in both revenue categories. Gross margins on services improved in all
the Company's business segments in 1999, but most notably in the NCS Services
segment which does government and commercial outsourcing services.
Product margins improved principally due to the mix of product moving toward
higher margin software offerings of the Education Software segment.
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 0.3 percentage points to 37.7% from 38.0%. This modest decline is due
entirely to revenue mix, as gross margins on both revenue lines improved. The
rapid growth of services influenced the overall gross margin percentage decline.
OPERATING EXPENSES
Fiscal 1999 versus Fiscal 1998. Sales and marketing expense increased $4.7
million or 7.2% in fiscal 1999 over the prior fiscal year. As a percentage of
revenues, sales and marketing declined by 1.8 percentage points, due to
relatively lower selling costs on services revenues.
Research and development costs increased $8.0 million or 64%, increasing as a
percent revenue from 2.5% to 3.2% from 1998 to 1999. This reflects an increased
level of investment in Internet delivered products and services, particularly
for the Education Software segment, as well as other product and service
offerings.
General and administrative expenses for fiscal 1999 increased by $23.7 million,
and as a percentage of revenue were up 1.7% over fiscal 1998. These expenses
increased due to several factors, including amortization of goodwill,
information technology costs (including Year 2000), expanded vacation benefits
and accruals established for variable compensation plans due to favorable
operating results.
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 Year 2000), and accruals established for
variable compensation plans due to favorable operating results.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
incurred approximately $2.0 million of costs during 1999 and about $7 million in
total in connection with remediating its systems. The Company is not aware of
any material problems resulting from Year 2000 issues, either with its products,
its internal systems, or the products and services of third parties. The Company
will continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
INTEREST EXPENSE
Interest expense decreased slightly in fiscal 1999 from fiscal 1998, and in
fiscal 1998 from fiscal 1997. These decreases are due to lower average borrowing
levels as debt has become insignificant in total. 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 the three fiscal years
presented.
INCOME TAXES
The effective income tax rate was 37.3%, 39.9%, and 40.0% for fiscal 1999, 1998
and 1997, respectively. See Note 5 of Notes to Consolidated Financial Statements
for a reconciliation to the statutory rate. The effective income tax rate for
fiscal 1999 was lower than the statutory rate and prior years' effective rates
primarily due to the one-time tax benefit from the sale of a foreign subsidiary.
Without this one-time benefit, the 1999 effective tax rate would have been
40.3%.
CAPITAL RESOURCES AND LIQUIDITY
The Company began fiscal 1999 with $16.3 million of cash and cash equivalents.
During fiscal 1999, NCS generated $87.9 million of cash from operating
activities, which was an unusually high level - even considering the increased
volume - due to the buildup of a number of large accruals, particularly
long-term compensation and other employee benefits, which will actually be paid
in future years. Cash was used for the acquisition of NovaNET Learning, Inc.
($19.0 million), and for investments in property, plant, and equipment ($42.6
million), including a significant expansion of facilities in Austin, Texas and
several smaller testing centers around the U.S. Financing activities included
the repayment of $2.3 million of borrowings. The Company paid dividends of $6.4
million during fiscal 1999.
During fiscal 1998, the Company 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 for investments in
property, plant, and equipment ($27.1 million), 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.
The Company had long-term debt balances, including current maturities, of $1.8
million, $9.4 million and $18.8 million at January 29, 2000 and January 31, 1999
and 1998, respectively. At January 29, 2000, the Company's debt to total capital
ratio was 0.7% compared to 4.0% a year earlier and 8.9% 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 1998 and by the increased level of
operations during fiscal 1999 and 1998.
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 29, 2000.
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 2000, the Company maintains a $50.0 million revolving
credit facility, all of which was available at January 29, 2000. 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.
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 29, 2000, 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 29, January 31,
(in thousands) 2000 1999
----------- -----------
Assets
Current Assets
Cash and cash equivalents $ 26,592 $ 16,310
Receivables 151,870 128,751
Inventories 33,619 21,791
Prepaid expenses and other 9,932 7,225
-------- --------
Total Current Assets 222,013 174,077
-------- --------
Property, Plant and Equipment
Land, buildings and improvements 67,928 63,018
Machinery and equipment 189,835 152,414
Accumulated depreciation (125,654) (109,416)
-------- --------
132,109 106,016
-------- --------
Intellectual Properties, net
Software products 9,371 12,170
Educational content and assessment instruments 23,306 8,835
-------- --------
32,677 21,005
-------- --------
Other Assets, net
Goodwill 50,263 52,840
Other assets 12,818 8,533
-------- --------
63,081 61,373
-------- --------
Total Assets $449,880 $362,471
======== ========
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 29, January 31,
(in thousands) 2000 1999
----------- -----------
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt $ 1,270 $ 3,758
Accounts payable 38,546 35,809
Accrued expenses 73,163 51,779
Deferred income 51,785 32,209
Income taxes 6,570 3,883
-------- --------
Total Current Liabilities 171,334 127,438
-------- --------
Long-Term Debt - less current maturities 516 5,597
Deferred Income Taxes 1,642 2,570
Commitments and Contingencies - -
Stockholders' Equity
Preferred stock - -
Common stock - issued and outstanding -
32,348 and 31,467 shares, respectively 970 944
Paid-in capital 22,596 10,760
Retained earnings 257,195 220,625
Accumulated other comprehensive income -
Foreign currency translation adjustment (2,969) (3,880)
Deferred compensation (1,404) (1,583)
-------- --------
Total Stockholders' Equity 276,388 226,866
-------- --------
Total Liabilities and Stockholders' Equity $449,880 $362,471
======== ========
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)
1999 1998 1997
-------- -------- --------
Revenues
<S> <C> <C> <C>
Services $438,655 $324,738 $244,038
Product sales 190,890 180,634 161,977
-------- -------- --------
Total Revenues 629,545 505,372 406,015
Costs of Revenues
Cost of services 314,546 241,261 183,627
Cost of product sales 73,933 73,696 67,950
-------- -------- --------
Gross Profit 241,066 190,415 154,438
Operating Expenses
Sales and marketing 69,456 64,797 56,675
Research and development 20,358 12,388 8,628
General and administrative 81,664 57,959 46,091
-------- -------- --------
Income from Operations 69,588 55,271 43,044
Interest expense 725 936 1,353
Other (income) expense, net 433 224 (284)
-------- -------- --------
Income Before Income Taxes 68,430 54,111 41,975
Income taxes 25,500 21,600 16,800
-------- -------- --------
Net Income $ 42,930 $ 32,511 $ 25,175
======== ======== ========
Basic Earnings per share $ 1.35 $ 1.05 $ .83
======== ======== ========
Diluted Earnings per share $ 1.30 $ 1.00 $ .80
======== ======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
<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, 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
Shares issued for employee stock
purchase and option plans 463 13 5,760 - - - 5,773
Restricted stock awards 60 2 1,787 - - (1,789) -
Shares issued for convertible debenture 358 11 4,289 - - - 4,300
ESOP debt payment - - - - - 1,000 1,000
Restricted stock compensation accrual - - - - - 968 968
Cash dividends paid - $.20 per share - - - (6,360) - - (6,360)
Net income - - - 42,930 - - 42,930
Foreign currency translation adjustment - - - - 911 - 911
--------
Subtotal - Comprehensive Income - - - - - - 43,841
-------------------------------------------------------------------------
Balance, January 29, 2000 32,348 $ 970 $22,596 $257,195 $(2,969) $(1,404) $276,388
====== ===== ======= ======== ======= ======= ========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year (in thousands) 1999 1998 1997
------- ------- -------
Operating Activities
<S> <C> <C> <C>
Net income $42,930 $32,511 $25,175
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation 24,996 20,755 16,825
Amortization 10,172 12,049 13,291
Deferred income taxes and other (349) (2,237) (661)
Changes in operating assets and liabilities
(net of acquired amounts):
Accounts receivable (21,903) (26,967) (15,361)
Inventory and other current assets (14,289) (6,249) 1,712
Accounts payable and accrued expenses 30,540 26,341 8,087
Deferred income 15,850 2,461 424
------- ------- -------
Net Cash Provided By Operating Activities 87,947 58,664 49,492
------- ------- -------
Investing Activities
Acquisitions, net of cash acquired (19,034) (17,246) (35,216)
Purchases of property, plant and equipment (42,618) (27,145) (25,174)
Purchases of business systems (8,679) (8,928) (7,108)
Other - net (1,678) 719 1,148
------- ------- -------
Net Cash Used In Investing Activities (72,009) (52,600) (66,350)
------- ------- -------
Financing Activities
(Decrease) Increase in other borrowings (2,269) (6,413) (676)
Issuance (Repurchase) of common stock, net 2,973 (374) (11,766)
Dividends paid (6,360) (6,234) (5,512)
------- ------- -------
Net Cash Used In Financing Activities (5,656) (13,021) (17,954)
------- ------- -------
Increase (Decrease) In Cash and Cash Equivalents 10,282 (6,957) (34,812)
Cash and Cash Equivalents - Beginning of Year 16,310 23,267 58,079
------- ------- -------
Cash and Cash Equivalents - End of Year $26,592 $16,310 $23,267
======= ======= =======
See Notes to Consolidated Financial Statements.
</TABLE>
<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
----------- ----------------
1999 - January 29, 2000
1998 - January 31, 1999
1997 - January 31, 1998
Effective February 1, 1999 the Company adopted a 52/53 week accounting cycle,
with the fiscal year ending on the Saturday nearest to January 31. The impact of
this change on the Company's quarterly and annual financial results in 1999 was
insignificant.
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 the
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 CASH 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 the fiscal year end are summarized as
follows:
January 29, January 31,
2000 1999
- -----------------------------------------------------------------
Finished goods $ 5,881 $ 5,096
Scoring services and work in process 23,157 14,442
Raw materials and purchased parts 4,581 2,253
- -----------------------------------------------------------------
$33,619 $21,791
=================================================================
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.
SOFTWARE PRODUCTS: Acquired software products held for sale 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, and are amortized on a straight line basis.
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 amortized internally
developed products is computed on a product by product basis and ratably as a
percentage of estimated revenue, subject to minimum straight-line amortization
over the products' estimated useful lives, of five years or less. At January 29,
2000 all such capitalized amounts were fully amortized.
The Company periodically evaluates its software products for impairment by
comparison of the carrying value of the product against undiscounted cash flows.
Amortization expense of software products was $2,513 in 1999; $3,483 in 1998;
and $3,621 in 1997. Accumulated amortization of all software products was
$24,708 at January 29, 2000 and $24,277 at January 31, 1999.
EDUCATIONAL CONTENT AND ASSESSMENT INSTRUMENTS: These amounts originate from the
allocation of purchase prices of acquired companies and direct acquisition of
assessment instruments. These products gain prominence over time and generally
have relatively long market lives once established. Products in this category
are assigned amortizable lives of ten years or less. Amortizable lives are
subject to revision and balances are periodically evaluated for possible
impairment, based upon profitability goals and undiscounted cash flows.
Amortization expense of these products was $1,659 in 1999; $1,482 in 1998; and
$960 in 1997. Accumulated amortization was $6,080 and $4,339 at January 29, 2000
and January 31, 1999, 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 $5,146, $4,489, and $3,047 in fiscal 1999, 1998, and 1997,
respectively. Accumulated amortization was $16,687 and $11,480 as of January 29,
2000 and January 31, 1999, respectively. The Company periodically evaluates its
goodwill for impairment by comparison of the carrying value against anticipated
business performance based upon profitability goals and undiscounted cash flows.
ACCRUED EXPENSES: Major components of accrued expenses consisted of the
following:
January 29, January 31,
2000 1999
- ------------------------------------------------------
Employee compensation $46,789 $32,766
Taxes other than income 4,275 4,473
Other 22,099 14,540
- ------------------------------------------------------
$73,163 $51,779
======================================================
REVENUE RECOGNITION: Services revenues represent all types of services performed
by the Company, including maintenance and support services. Product sales
include the sale of all tangible products and the licensing of various
intellectual properties, including software and test instruments.
The Company adopted the provisions of Statement of Position (SOP) 97-2, as
amended, for software revenue recognition effective February 1, 1998. Prior to
that date, the Company's software revenue recognition policies were
substantially in compliance with that SOP, and therefore the effect of adoption
of the Statement was not material. The Company recognizes license revenue upon
shipment of a product to the customer if a signed contractual agreement exists,
the fee is fixed and determinable and collection of the resulting receivables is
probable. For contracts with multiple elements, the Company allocates revenue to
each component of the contract based on objective evidence of its fair value,
which is specific to the Company.
The Company recognizes revenue related to hardware maintenance and software
support fees for ongoing customer support and product updates ratably over the
period of the maintenance contract. Payments for these fees are generally made
in advance and are non-refundable. Revenues from professional services such as
training, implementation, and consulting are recognized as the services are
performed. Up-front fees related to subscription type services are recognized
over the period of delivery. Revenues from test scoring and other outsourcing
services are recognized upon completion of major contracted deliverables, or as
units of service are delivered.
PER SHARE DATA: 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):
1999 1998 1997
------- -------- -------
Earnings:
Net Income
Basic earnings per share $42,930 $32,511 $25,175
Adjustments for dilutive securities:
Interest expense on convertible debentures,
net of tax 162 222 256
------- ------- -------
Adjusted net income for diluted earnings per share $43,092 $32,733 $25,431
======= ======= =======
Weighted Average Shares:
Basic average shares 31,721 31,022 30,391
Adjustments for dilutive securities:
Employee stock options, net of tax proceeds 932 981 620
Contingent stock awards, net of tax proceeds 32 81 270
Convertible debentures 369 505 583
------- ------- -------
Diluted average shares 33,054 32,589 31,864
------- ------- -------
Basic earnings per share $ 1.35 $ 1.05 $ 0.83
======= ======= =======
Diluted earnings per share $ 1.30 $ 1.00 $ 0.80
======= ======= =======
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 6.
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 for the
Company's 2001 fiscal year. The Company does not anticipate that the adoption of
this Statement will have a significant effect on its results of operations or
financial position.
NOTE 2 - ACQUISITIONS
On May 28, 1999 the Company acquired NovaNET Learning, Inc. (NovaNET), an
interactive, on-line curriculum content company. The transaction has been
accounted for as a purchase, and, accordingly, NovaNET's operations subsequent
to the closing date are consolidated with the Company's. The purchase price was
$19.0 million in cash and has been primarily allocated to educational content
($16.3 million), goodwill ($5.3 million) and a net deferred tax liability ($2.8
million), in accordance with SFAS 109, Accounting for Income Taxes.
In September 1998, the Company acquired all of the common and preferred stock of
American Cybercasting Corporation, 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, 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 fiscal 1997 acquisitions 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 1997:
Fiscal Year (unaudited) 1997
- ---------------------------------------------
Total revenues $420,843
Income before income taxes 39,497
Net Income 23,698
Basic earnings per share $ 0.78
Diluted earnings per share $ 0.75
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 1997, or of future results, as significant changes to their
operations, products and cost and expense structures have taken place since
acquisition.
NOTE 3 - LEASES
The Company leases office facilities under noncancelable operating leases which
expire in various years through 2006. Rental expense for all operating leases
was $14,349 in fiscal 1999, $12,921 in fiscal 1998, and $9,167 in fiscal 1997.
Future minimum rental expense as of January 29, 2000, for noncancelable
operating leases with initial or remaining terms in excess of one year is
$59,831 and is payable as follows: fiscal 2000 - $13,438; fiscal 2001 - $12,896;
fiscal 2002 - $10,687; fiscal 2003 - $8,689; fiscal 2004 - $7,527 and $6,594
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 29, 2000 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
29, 2000 the maximum amount of the residual value guarantee relative to the
assets under lease is approximately $10,500.
NOTE 4 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt at year end consisted of the following:
January 29, January 31,
2000 1999
- --------------------------------------------------------
Revolving credit borrowing $ - $ -
Convertible debentures 400 4,700
ESOP borrowing - 1,000
Other borrowings 1,386 3,655
- --------------------------------------------------------
1,786 9,355
Less current maturities (1,270) (3,758)
- --------------------------------------------------------
Long-term debt $ 516 $ 5,597
========================================================
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 an acquired
company. These debentures have been due in installments, carry an interest rate
of approximately 6.1%, and are convertible into Common Stock at $12.00 per
share.
ESOP Borrowing: The ESOP loan was secured by unallocated shares of Common Stock
and guaranteed by the Company and was fully paid in May 1999.
Scheduled Maturities: The aggregate principal amounts of long-term debt
scheduled for repayment is $1,270 and $516 in fiscal years 2000 and 2001,
respectively. In each fiscal year, interest paid approximates interest expense.
NOTE 5 - INCOME TAXES
The components of the provision for income taxes from continuing operations are
as follows:
Current
-----------------------
Fiscal Year Federal State Foreign Deferred Total
- -----------------------------------------------------------------
1999 $21,155 $3,700 $2,280 $(1,635) $25,500
1998 18,495 3,003 1,682 (1,580) 21,600
1997 14,540 2,806 1,300 (1,846) 16,800
- -----------------------------------------------------------------
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 year end are as follows:
January 29, January 31,
2000 1999
----------- -----------
Deferred tax assets:
Reserves for uncollectibles $ 4,905 $ 3,513
Foreign operating loss carryforwards - 3,659
Acquired operating loss benefit 3,800 -
Accrued vacation pay 2,981 2,051
Intangible amortization 1,905 1,552
Deferred expenses and other 2,855 4,394
Valuation allowance - (3,659)
- ---------------------------------------------------------------
Total deferred tax assets 16,446 11,510
- ---------------------------------------------------------------
Deferred tax liabilities:
Purchased intangible amortization 9,234 5,132
Accelerated depreciation 4,788 5,070
Net capitalized software 4,077 3,706
Other (11) 172
- ---------------------------------------------------------------
Total deferred tax liabilities 18,088 14,080
- ---------------------------------------------------------------
Net deferred tax liability $1,642 $2,570
===============================================================
The deferred tax asset for the foreign operating loss carryforwards at January
31, 1999 and the related valuation allowance were eliminated due to the
December, 1999 sale of the stock of the United Kingdom subsidiary that incurred
these losses. This stock sale resulted in no material gain or loss for book
purposes; however, since the Company's stock basis for federal and state income
tax purposes was substantially higher than for book purposes, the Company's
income tax expense for 1999 was reduced approximately $2,000 as a result of this
transaction.
The acquired net operating loss benefits expire beginning January, 2004, through
January, 2019, with $2,632 expiring in 2017 or after.
A reconciliation of the Company's statutory and effective tax rate is presented
below:
1999 1998 1997
------ ------ ------
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 3.5 3.6 4.4
Intangible amortization 0.8 0.5 1.0
Benefit from sale of foreign subsidiary (3.0) - -
Other 1.0 0.8 (0.4)
- ----------------------------------------------------------------------
Effective rate 37.3% 39.9% 40.0%
======================================================================
The Company made income tax payments of $23,822, $19,623 and $18,991 in the
fiscal years 1999, 1998, and 1997, respectively.
The earnings associated with the Company's investment in its foreign
subsidiaries 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.
NOTE 6 - 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 1999, 1998
and 1997:
1999 1998 1997
------- ------- -------
Net income - as reported $42,930 $32,511 $25,175
Net income - pro forma 39,010 30,041 23,988
Earnings per share - as reported:
Basic $ 1.35 $ 1.05 $ .83
Diluted 1.30 1.00 .80
Earnings per share - pro forma:
Basic $ 1.23 $ .97 $ .79
Diluted 1.18 .93 .76
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:
1999 1998 1997
------- ------- -------
Expected dividend yield:
5 year grants .28% .26% .58%
10 year grants .16% - -
Expected stock price volatility 35% 35% 30%
Risk-free interest rate:
5 year grants 5.77% 5.16% 6.23%
10 year grants 5.86% - -
Expected life of options 5-9 years 5 years 5 years
The weighted-average fair value of the options granted during fiscal years 1999,
1998 and 1997 were $18.00, $8.53 and $4.40, respectively.
The Company has five Employee Stock Option Plans (1986, 1990, 1995, 1997 and
1999). Options to purchase Common Stock of the Company are granted to employees
at 100% of fair market value on the date of grant. Options granted prior to May,
1999 are exercisable over a 63-month period. Options granted from May, 1999 are
exercisable over 10 years. Shares available for grant under the Plans totaled
1,249,640 and 278,780 and 669,700, at the end of fiscal 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, 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
Granted 621,600 35.46
Cancelled (77,773) 23.57
Exercised (443,398) 8.56
---------
Balance, January 29, 2000 2,373,743 $20.47
=========
Options for 590,471 and 633,537 and 679,182 shares were exercisable at January
29, 2000 and January 31, 1999 and 1998, with weighted average exercise prices of
$13.75, $9.76 and $8.07, respectively. Exercise prices for options outstanding
as of January 29, 2000 are summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Remaining Average
Range of Number Exercise Contractual Number Exercise
Exercise Prices of Shares Price Life of Shares Price
- --------------- --------- --------- ----------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 4.02 - 12.00 487,153 $10.06 1.8 years 310,761 $ 9.71
12.25 - 18.75 739,300 13.36 3.1 years 168,480 13.82
20.00 - 26.69 514,940 22.17 3.9 years 85,780 22.64
32.56 - 38.75 632,350 35.40 8.6 years 25,450 33.02
--------- -------
2,373,743 $20.47 590,471 $13.75
========= =======
</TABLE>
During fiscal 1999, 1998 and 1997, pursuant to the 1997 Long-Term Incentive
Plan, non-qualified options to purchase 94,500 and 129,000 and 336,000 shares,
respectively, 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 29, 2000, there were 559,500 options shares
outstanding at a weighted average exercise price per share of $17.77.
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 referred to above.
The Company has an Employee Stock Purchase Plan. There were 299,880 shares
available for purchase under the Plan at January 29, 2000.
NOTE 7 - 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 $3,548, $3,011, and $2,195 in fiscal years 1999, 1998
and 1997, 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 made contributions to the ESOP which were 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
was allocated to participating employees. The loan was repaid in 1999. In fiscal
1999, the Company's contribution to the Plan was $1,000 plus interest of $15,
which was fully offset by dividends on unallocated shares. The Company's
contribution to the Plan was $1,000 in fiscal 1998 and fiscal 1997, plus
interest of $80 and $148, respectively, which was substantially offset by
dividends on unallocated shares. There were no unallocated shares at January 29,
2000 and 158,400 unallocated shares at January 31, 1999.
NOTE 8 - CONTINGENCY
In 1997, the Company was served with a summons and complaint in a lawsuit filed
against the Company by a former customer. In March 2000 the parties reached
settlement on all issues. The settlement had no material adverse effect on the
Company's consolidated financial position or results of operations.
NOTE 9 - 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.
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 described
in the Assessment and Testing, NCS Services, and Data Collection Systems
segments above, but sells to and serves customers outside the United States
through subsidiaries in Argentina, 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
highly 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.
<PAGE>
The table below presents information by reportable segment.
<TABLE>
<CAPTION>
Assessments Education Data
& Testing Software & NCS Collection
Services Services Services Systems International Totals
---------- ----------- ---------- ----------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1999
Revenues $202,461 $147,109 $136,372 $89,940 $53,663 $629,545
Income from operations 31,418 17,597 22,082 26,396 5,819 103,312
Depreciation and amortization 8,824 10,968 4,243 3,276 2,951 30,262
Assets 121,281 124,125 62,965 42,894 36,246 387,511
Fiscal 1998
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 3,176 4,190 2,649 28,600
Assets 106,996 88,857 47,934 41,950 28,924 314,661
Fiscal 1997
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
Assets 94,731 75,337 40,559 41,087 28,497 280,211
</TABLE>
<PAGE>
The following table is a reconciliation of reportable segment information to the
Company's consolidated totals.
<TABLE>
<CAPTION>
Fiscal Year 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Total Consolidated Revenue: $629,545 $505,372 $406,015
======== ======== ========
Income From Operations:
Total for reportable segments $103,312 $ 75,308 $ 60,609
Unallocated amounts:
Central G & A expenses 33,724 20,037 17,565
Interest expense 725 936 1,353
Other (Income) expense 433 224 (284)
-------- -------- --------
Income Before Income Taxes $ 68,430 $ 54,111 $ 41,975
======== ======== ========
Depreciation and Amortization:
Total for reportable segments $ 30,262 $ 28,600 $ 26,019
Corporate 4,906 4,204 4,097
-------- -------- --------
Total Depreciation and Amortization $ 35,168 $ 32,804 $ 30,116
======== ======== ========
Assets:
Total for reportable segments $387,511 $314,661 $280,211
Corporate assets 62,369 47,810 35,203
-------- -------- --------
Total Assets $449,880 $362,471 $315,414
======== ======== ========
</TABLE>
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 1999,
1998, and 1997 were $326,845; $262,511; and $185,186; of which $95,220; $67,601;
and $63,005, 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.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of National
Computer Systems, Inc. and subsidiaries as of January 29, 2000 and January 31,
1999, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended January 29, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National Computer
Systems, Inc. and subsidiaries at January 29, 2000 and January 31, 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 29, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/Ernst & Young LLP
Minneapolis, Minnesota
March 6, 2000
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
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 6, 2000, included
in the 1999 Annual Report to Stockholders of National Computer Systems, Inc.
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 6, 2000 with respect to the consolidated financial
statements of National Computer Systems, Inc. and subsidiaries incorporated
herein by reference in this Annual Report (Form 10-K) of National Computer
Systems, Inc. for the year ended January 29, 2000.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
April 25, 2000
EXHIBIT 24
POWER OF ATTORNEY
FORM 10-K FOR YEAR ENDED JANUARY 29, 2000
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 29, 2000, 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 7th day
of March, 2000.
/s/ Russell A. Gullotti /s/ John J. Rando
- ------------------------- -------------------------
Russell A. Gullotti John J. Rando
/s/ William J. Cadogan /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
<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 29, 2000, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-29-2000
<EXCHANGE-RATE> 1
<CASH> 26,592
<SECURITIES> 0
<RECEIVABLES> 151,870
<ALLOWANCES> 0
<INVENTORY> 33,619
<CURRENT-ASSETS> 9,932
<PP&E> 257,763
<DEPRECIATION> (125,654)
<TOTAL-ASSETS> 449,880
<CURRENT-LIABILITIES> 171,334
<BONDS> 0
0
0
<COMMON> 970
<OTHER-SE> 275,418
<TOTAL-LIABILITY-AND-EQUITY> 449,880
<SALES> 190,890
<TOTAL-REVENUES> 629,545
<CGS> 73,933
<TOTAL-COSTS> 388,479
<OTHER-EXPENSES> 171,478
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 725
<INCOME-PRETAX> 68,430
<INCOME-TAX> 25,500
<INCOME-CONTINUING> 42,930
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,930
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.30
</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.
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. These risks are enhanced by the rapid change in
technology being experienced today including, but not limited to,
changes brought on by the Internet, Internet-related technologies and
potential resulting disintermediation.
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.
