-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TBlK0qYFCPwIrKodyrEUota+s6dgMfMnOgk4dIVpkV0KQNM77xW7rVgL6WeawCBO ICnhK1fgPbZM4NmvDDPk+A== 0000069999-00-000004.txt : 20000427 0000069999-00-000004.hdr.sgml : 20000427 ACCESSION NUMBER: 0000069999-00-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL COMPUTER SYSTEMS INC CENTRAL INDEX KEY: 0000069999 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 410850527 STATE OF INCORPORATION: MN FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-03713 FILM NUMBER: 609404 BUSINESS ADDRESS: STREET 1: 11000 PRAIRIE LAKES DR CITY: MINNEAPOLIS STATE: MN ZIP: 55344 BUSINESS PHONE: 6128293000 MAIL ADDRESS: STREET 1: P O BOX 9365 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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 ------------------------ 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 ------------------------ Securities registered pursuant to Section 12(g) of the Act: Common Shares -- par value $.03 a share (Title of Class) Rights to Purchase Series A Participating Preferred Stock (Title of Class) ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. X State the aggregate market value of the voting shares held by non-affiliates of the registrant as of 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 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. 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 - ------------------------ (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. 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. 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. 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. 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) 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. EX-10 2 MANAGEMENT INCENTIVE PLAN 2000 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. EX-10 3 2000 LONG-TERM INCENTIVE PROGRAM 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. EX-13 4 REPORT TO STOCKHOLDERS EXHIBIT 13 FIVE YEAR FINANCIAL DATA (Dollars in thousands, except per share amounts)
January 29, January 31, ----------- ----------------------------------------------- Year ended 2000 1999 1998 1997(2) 1996 ----------- -------- -------- -------- -------- 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 (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.
QUARTERLY RESULTS OF OPERATIONS (unaudited) (Dollars in thousands, except per share amounts)
Thirteen weeks ended May 1 July 31 October 30 January 29 -------- -------- ---------- ---------- Year Ended January 29, 2000 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
Three months ended April 30 July 31 October 31 January 31 -------- -------- ---------- ---------- Year Ended January 31, 1999 Revenues $ 97,915 $128,128 $135,408 $143,921 Gross profit 37,522 51,276 47,375 54,241 Net income 5,095 9,742 7,758 9,916 Basic earnings per share $ 0.17 $ 0.31 $ 0.25 $ 0.32 Diluted earnings per share $ 0.16 $ 0.30 $ 0.24 $ 0.30
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 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. 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. 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. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year (in thousands, except per share amounts) 1999 1998 1997 -------- -------- -------- Revenues 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.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Accumulated --------------- Paid-In Retained Comprehensive Deferred (in thousands, except per share amounts) Shares Amount Capital Earnings Income Compensation Total ------ ------ ------- -------- ------------- ------------- ------- 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.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year (in thousands) 1999 1998 1997 ------- ------- ------- Operating Activities 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.
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:
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 - --------------- --------- --------- ----------------- ---------- --------- $ 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 ========= =======
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. The table below presents information by reportable segment.
Assessments Education Data & Testing Software & NCS Collection Services Services Services Systems International Totals ---------- ----------- ---------- ----------- -------------- -------- 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
The following table is a reconciliation of reportable segment information to the Company's consolidated totals.
Fiscal Year 1999 1998 1997 -------- -------- -------- 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 ======== ======== ========
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. 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 EX-21 5 SIGNIFICANT SUBSIDIARIES 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. EX-23 6 CONSENT OF INDEPENDENT AUDITORS 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 EX-24 7 POWER OF ATTORNEY 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 EX-27 8 FDS --
5 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. 1000 U.S. Dollars 12-MOS JAN-29-2000 FEB-01-1999 JAN-29-2000 1 26,592 0 151,870 0 33,619 9,932 257,763 (125,654) 449,880 171,334 0 0 0 970 275,418 449,880 190,890 629,545 73,933 388,479 171,478 0 725 68,430 25,500 42,930 0 0 0 42,930 1.35 1.30
EX-99 9 CAUTIONARY STATEMENT 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. -----END PRIVACY-ENHANCED MESSAGE-----