-----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, GKVeGTl4np1+nQThK3xjir6eXELFQ+gP4Emd3h7tv8IM/3MyLtAC5+HaQDWDHh43 CqsPxeKzttdYXoz3rubUsQ== 0000069999-99-000008.txt : 19990428 0000069999-99-000008.hdr.sgml : 19990428 ACCESSION NUMBER: 0000069999-99-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990427 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: 99601518 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 31, 1999 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: 612/829-3000 ------------------------ 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. ____ State the aggregate market value of the voting shares held by non-affiliates of the registrant as of March 31, 1999. Common Shares, $.03 par value -- $701,358,000. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of April 20, 1999. Common Shares, $.03 par value - 31,593,000 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the year ended January 31, 1999 are incorporated by reference into Parts I, II and IV. Portions of the definitive proxy statement for the Annual Meeting of Stockholders to be held on May 27, 1999 are incorporated by reference into Part III. PART I ITEM 1. BUSINESS National Computer Systems, Inc. ("NCS" or the "Company") is a global information services company, which provides services, software and systems for the collection, management and interpretation of data. The Company's headquarters are located at 11000 Prairie Lakes Drive, Eden Prairie, Minnesota 55344, telephone 612/829-3000. MARKETS SERVED NCS serves two broad markets: Education and Large Scale Data Management. Education NCS develops and markets data collection services and systems for the Education market. These services and systems provide optical scanning, image-based or electronic data collection and computer processing services for the high accuracy, large volume and complex processing needs of major test publishers, federal and state education agencies, universities and colleges, and local school districts. NCS also develops and markets enterprise application software for the administration and management of curriculum, student instruction, and financial data at the classroom, school, school district, and state levels. NCS provides training, consulting, and project management services for the Education market. In addition, NCS offers network services, including design, hardware, and software procurement; Internet utilization, maintenance and support; network administration; and outsourcing for its K-12 customers. The Company's information processing services are also provided in support of federal student financial aid programs for post-secondary education. By using the Company's optical scanning and image-based systems and forms, individual school districts can perform in-house student assessment testing applications, including teacher created or administration developed norm- or criterion-referenced tests; administrative applications such as attendance, scheduling, grade reporting and registration; library and inventory management; and financial management and payroll. Large Scale Data Management NCS develops, markets and manages complex data collection, processing and reporting services and products targeted for certain key applications in the Large Scale Data Management market. NCS provides scanners and forms for customers to do their own paper-based data collection. The Company also provides solutions to more complex information management needs. Its services and products include comprehensive data collection technologies, database management, software development, document imaging, telecommunications support and information dissemination systems. All of these processing, data management and reporting services are available from NCS in support of customers that prefer to outsource these services. In addition, NCS offers network design, hardware and software acquisition, implementation, maintenance and support services. Finally, NCS' network administration services include network and system security, help desk, Internet connectivity and training. BUSINESS SEGMENTS NCS delivers its products and services through five business units. Assessments and Testing Services NCS is the largest commercial processor of academic assessment tests for grades K-12 in the United States. NCS markets test scoring services to major test publishers, state education agencies, the federal government, local school districts and commercial customers. For these customers, NCS service offerings include program design; test item development; program management; software development; printing, packaging, distribution and collection logistics; and scoring, editing, analysis and final reporting. Scoring services include selected response scoring and professional scoring of constructed response test items such as essays. Both optical mark reading (OMR) and image scanning technologies are utilized in the scoring process. The Company offers a secure Internet-based electronic testing delivery and reporting capability, which allows NCS to participate in the professional licensure and certification market. It also permits NCS to offer an electronic testing option to traditional statewide grade K-12 testing programs. The Company also publishes and distributes tests and provides scoring services to industrial and clinical psychologists, psychiatrists, human resource professionals and educators. These tests and scoring services include personality assessment and psychological diagnostic testing and career development, guidance counseling and human resource organizational assessments. In addition, to provide tools for workforce development, the Company's test and scoring services have been expanded to include assessments for personnel selection and skill and career assessment. Education Software and Services A principal strategy of the Company in servicing the education marketplace is to concentrate on enterprise software for school administration. NCS' software products include student administrative software to assist educators in student management, including applications such as academic reporting, attendance gathering and scheduling. The Company's instructional and curriculum management software products manage information about student achievement against educational objectives. In conjunction with its instructional management software, NCS offers model curriculum and test item databases to assist schools in establishing and meeting stated or mandated curriculum objectives. With the acquisition of American Cybercasting Corporation, also known as Educational Structures, in fiscal 1998, the Company began offering Internet-based products that allow educators to access customized lesson plans in social studies, language arts, mathematics and science with appropriate student/teacher resources. NCS products also include financial management software for schools and school districts. The Company provides software for accounting and financial reporting, payroll, human resources, inventory and many other financial and administrative functions. The Company offers teacher desktop tools for applications such as staff development, gradebook systems, and delivery and receipt of student information. NCS offers services related to its enterprise software to assist with the design and implementation of these installations. Services offered by NCS include: professional consulting; project management; network planning, design and implementation; systems installation, integration and maintenance; training; and help desk and ongoing support. The Company also offers outsourcing services to install its software and third party computing and network hardware and to operate the system on a day-to-day basis for school districts. NCS Services NCS provides a comprehensive package of services and products that include: systems analysis and design; software development; comprehensive data collection technologies, including paper-based imaging and electronic; forms management; telecommunication and telephone call center support; information management and dissemination; and network support, such as Internet connectivity; and training. These services and products can be delivered on-site or outsourced off-site to NCS. The Company's services also include: sales/marketing applications such as sales/order entry, billing, quality measurement, product warranty and customer satisfaction surveys and customer data collection; payroll; human resource applications such as applicant tracking, organizational development, employee attitude surveys, benefits enrollment and employee evaluation; telephone equal access carrier selection; and general data collection, analysis, management and reporting. More recently, the Company has offered medical device tracking services to help medical manufacturers comply with the 1990 Safe Medical Devices Act. NCS provides its large scale data management services to several federal government customers. The U.S. Department of Education, which is the Company's largest single customer, outsources projects to NCS, including the processing and eligibility calculation of the free federal application for student aid in post-secondary education. Under contract, NCS also manages the wide area network over which this information is distributed to and from member colleges, universities, and other post-secondary institutions. Other federal agencies that are customers of NCS include the U.S. Department of Labor, the U.S. Department of Health and Human Services, the Internal Revenue Service, and the U.S. Bureau of Census. Data Collection Systems NCS manufactures OMR scanners that can read data from specially designed forms printed by the Company with specifically formulated inks. Computing capability is built into most scanners. Scanners usually incorporate, or interface directly with, software developed by the Company. Optical scanning equipment is most effective for applications that require the highest accuracy, precise response definition and cost effective data capture. The Company's lines of OMR hardware include scanners marketed as OpScan(R) products. The scanners provide a wide range of capabilities to meet the needs of customers. The OMR scanning systems utilize a proprietary mark discrimination system to distinguish valid marks, which provides a very high degree of accuracy in processing responses. To enhance the usefulness of the OpScan scanners, the Company offers optional features, such as bar code reading capability, a transport printer to print alphanumeric messages on scanned documents, optional read formats and upgraded computer capability options. NCS markets image-based data collection systems that represent an extension of the Company's optical mark reading technology. These products contain NCS proprietary character recognition technology as well as integrated third-party technologies. When attached to a computer workstation and using sophisticated software, these scanners allow customers to efficiently and accurately collect and interpret a wide range of information from a printed form, including machine- and hand-printed data. NCS offers a number of utility software and standard application programs for use with NCS data collection systems. Processing and application software is an important component of its scanning products and services. The Company also offers non-proprietary data collection products and technology to address specific customer needs. The Company designs, manufactures and sells scannable forms, including multiple-page booklets. A variety of custom forms are tailored to meet specific customer needs. In addition, standardized forms are used in applications such as testing, attendance, scheduling and student evaluation in the Education market and applications such as customer surveys or market research in the Large Scale Data Management market. The Company believes that the use of a properly designed and printed form is an essential element in assuring that a scanning system performs with greatest accuracy and optimum capability. In order to assure a high degree of consistency, reliability, and accuracy, the Company prints its forms to exacting specifications and recommends them for use with its scanning systems. International NCS' products and services are sold internationally. The Company's OMR and image-based data collection systems and scannable forms and booklets are utilized outside the United States by ministries of education for testing and assessment and by commercial or governmental customers for data collection, data management and reporting applications. The Company's international business strategy is to focus on certain countries with services-led applications. The applications center on testing and assessment in the Education market and on telecom deregulation for commercial or governmental. In-country services include professional consulting; project management; comprehensive data collection technology and processing; forms management; telecommunication and telephone call center operations and support; data base management; and information dissemination. Additional Business Segment Data For financial information regarding each of the Company's business segments see Note 10 of Notes to Consolidated Financial Statements that are included in the Annual Report to Stockholders for the fiscal year ended January 31, 1999, and incorporated herein by reference. MARKETING NCS markets its data collection hardware and software and its data collection and computer processing services in the United States directly through sales employees and indirectly through business partners, original equipment manufacturers and resellers. Outside the United States, the Company's systems, products, and services are sold through sales employees, distributors and independent sales agents. The Company's published test products and related test-scoring services are marketed in North America through telemarketing, direct mail, professional journal advertising and professional trade convention attendance and outside North America through distributors. Each of the Company's sales organizations are supported by marketing and sales support personnel. SOFTWARE SUPPORT, TECHNICAL SUPPORT AND MAINTENANCE Software support is provided on a contractual basis to customers licensing application software systems from the Company. NCS assists customers with installation, training, hardware or software upgrades and development of specific customer application software on a fee-for-service basis. The Company offers technical support and hardware maintenance to customers purchasing or leasing its equipment either on a contractual basis or through its national network of customer service and support engineers. NCS emphasizes prompt, reliable service and close customer relationships. Technical and maintenance support includes labor, parts and operational training, and, where applicable, programming of the equipment and design of forms. The Company supports its large scale, complex data management projects with information processing expertise in areas such as needs assessment, software development, data collection technologies, data base management, secure Internet applications, networking, telecommunications, help desk services and system acquisition and implementation. The Company also provides ongoing training and support. DEVELOPMENT OF PRODUCTS AND SERVICES The Company's development efforts are directed toward new product development and enhancements to existing products. During the fiscal years ended January 31, 1999, 1998 and 1997, the Company's product development expenses were approximately $12.4 million, $8.6 million and $9.9 million, respectively. The expenditures related principally to software product development (primarily focused on applications software) and scanning software and equipment development. For a description of new products acquired through acquisitions, see Note 2 of Notes to Consolidated Financial Statements that are included in the Annual Report to Stockholders for the fiscal year ended January 31, 1999, and incorporated herein by reference. MANUFACTURING The Company assembles its scanning equipment from electronic components, metal stampings, molded plastic parts and mechanical sub-assemblies. These parts are generally available from multiple sources. The Company assembles most of the scanning systems equipment at its Eagan, Minnesota facility. Computer hardware is purchased from other manufacturers. Scannable forms are produced at NCS' printing facilities in Columbia, Pennsylvania; Owatonna, Minnesota; Melbourne, Victoria, Australia; and Rotherham, South Yorkshire, England. The ink and paper used in forms production are produced to the Company's specifications by a limited number of suppliers. Although the Company has no long-term supply contracts with its paper or ink suppliers, the Company has had long-term relationships with such suppliers and believes that these relationships are good. COMPETITION Competition in the data collection and information management industry is intense. Numerous companies offer various combinations of data collection and data management services. Optical scanning and imaging are only two of the numerous data collection methods available and successfully in use in the marketplace today. The Company continues to focus on the development of market niches where scanning technology has advantages over other data entry technologies. In addition to competition provided by alternative methods of data capture (including on-line terminal keyboards and optical character readers), other scanning vendors supply products that directly compete with those of the Company. Enterprise software for the Education market is competitive with in-house systems, national and regional software and service providers, data processing service bureaus, test publishers and providers of educational curriculum and instruction management products and services. The Company's scannable forms compete with forms produced by commercial and specialized printers. Principal competitive factors in the scannable forms printing industry are product quality, service and price. NCS' test processing, test publishing and computer processing services compete with several test publishers and data processing service bureaus. The Company's customer support and maintenance organization competes with services provided by manufacturers, national service companies, and local providers of maintenance services. PATENTS, TRADEMARKS AND LICENSES The Company holds certain patents, registered and unregistered trademarks and copyrights. The Company also has rights under licensing arrangements to a number of patents, trademarks, copyrights and manufacturing processes and materials. These licensing arrangements are with publishers of various copyrighted psychological, aptitude and achievement tests. These publishers license NCS to distribute these tests, to print and sell answer sheets for such tests, and to score such tests. Payment of royalties is usually based upon the volume of tests distributed, answer sheets sold, and tests scored. NCS believes that its business is not dependent upon any one individual patent, trademark, copyright or license right or group thereof. "OpScan" and "NCS" are registered trademarks of the Company. EMPLOYEES As of February 26, 1999, the Company employed approximately 3,700 full-time employees. The Company believes that its employee relations are excellent. EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages and positions of all of the executive officers of the Company as of February 26, 1999 are listed below along with their business experience during the past five years. NAME AGE POSITION - ------------------------ ----- ------------------------------------ Russell A. Gullotti 56 Chairman of the Board, President and Chief Executive Officer Robert C. Bowen 57 Senior Vice President Michael C. Brewer 52 Vice President and General Counsel Jay V. Clark 57 Vice President John W. Fenton, Jr. 58 Secretary-Treasurer Clive M. Hay-Smith 41 Vice President Robert C. Hickcox 45 Vice President Gary L. Martini 48 Vice President Michael A. Morache 48 Vice President David W. Smith 54 Vice President Jeffrey W. Taylor 45 Vice President and Chief Financial Officer Adrienne T. Tietz 52 Vice President Mr. Gullotti has been President and Chief Executive Officer since October, 1994 and Chairman of the Board since May, 1995. Prior to that he held senior executive positions in sales and marketing, services and administration with Digital Equipment Corporation (computer manufacturing and services) for more than five years. Mr. Bowen has been a Senior Vice President of NCS for more than five years. Mr. Brewer has been Vice President and General Counsel of NCS since May, 1995. Prior to that he was General Counsel of NCS from May, 1992 until May, 1995. Mr. Clark has been a Vice President of NCS for more than five years. Mr. Fenton has been Secretary-Treasurer of NCS for more than five years. Mr. Hay-Smith has been a Vice President of NCS for more than five years. Mr. Hickcox has been a Vice President of NCS since February, 1997 and was Director, Methods and Tools of NCS from April, 1995 to February, 1997. Prior to that he was Manager, Tools and Systems with Digital Equipment Corporation (computer manufacturing and services) for more than five years. Mr. Martini has been a Vice President of NCS since August, 1997. Prior to that he was owner and President of Martini & Associates (organizational development consulting) for more than five years. Mr. Morache has been a Vice President of NCS since May, 1996. Prior to that he was a Vice President of Unisys Corporation (information management company) from September, 1995 to May, 1996. Previously, he was a Senior Vice President with ALLTEL Information Services, Inc. (information-processing management, outsourcing services, and application software) for more than five years. Mr. Smith has been a Vice President of NCS for more than five years. Mr. Taylor has been Vice President and Chief Financial Officer since May, 1994 and prior to that Vice President and Corporate Controller of NCS for more than five years. Ms. Tietz has been a Vice President of NCS for more than five years. Officers are elected annually by the Board of Directors. There are no family relationships among these officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. PRIVATE SECURITIES LITIGATION REFORM ACT In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby filing, as Exhibit 99 hereto, cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward looking statements of the Company made by, or on behalf of, the Company. ITEM 2. PROPERTIES The Company's principal facilities are as follows: SQUARE LOCATION FOOTAGE GENERAL PURPOSE - --------------- ----------- ------------------------------- Mesa, AZ (1) 96,000 Education software and services general offices, sales and marketing, product development and support Foothill Ranch, CA 37,000 Education software and services, product development and support Cedar Rapids, IA 205,000 Data processing services and warehouse Iowa City, IA Assessment and test processing Building 1 (1) 168,000 and data processing services, Building 2 (1) 142,000 operations and general offices Lawrence, KS 90,000 Data processing services, general offices and operations Eagan, MN (1) 109,000 Scanner hardware development and manufacturing; NCS services general offices, sales and marketing; customer support services general offices and operations; and international operations general offices, sales and marketing Eden Prairie, MN 67,000 Executive general offices; electronic test processing operations, general offices, sales and marketing Edina, MN (1) 101,000 Data collection systems and services general offices, data processing services, sales and marketing; and scanner software development Minnetonka, MN (1) 54,000 Assessments and test publishing and scoring general offices and operations Owatonna, MN (1) 128,000 Documents design and production Columbia, PA (1) 121,000 Documents design and production Austin, TX Data processing services, Building 1 35,000 general offices and Building 2 41,000 operations Nunawading, Victoria 30,000 NCS Australasia Pty. Ltd, (Melbourne) (joint venture) general offices, Australia (1) data processing services, sales and marketing, documents design and production Rotherham, South Yorkshire 34,000 Documents design and production, England (1) general offices, sales and marketing - -------------------------- (1) Denotes owned facility. The Company believes that its facilities will be adequate to meet its current needs. ITEM 3. LEGAL PROCEEDINGS On April 30, 1997, the Company was served with a Summons and Complaint in a lawsuit filed against the Company by Edu-Cap, Inc. ("Edu-Cap"), formerly University Support Services, Inc., in the United States District Court, District of Minnesota, Fourth Division. In the lawsuit, Edu-Cap alleges certain claims against the Company in connection with three student loan processing and servicing agreements between the Company and Edu-Cap. Edu-Cap seeks out-of-pocket damages, lost profits and compensation for extraordinary defaults and lost interest that it claims resulted from NCS' breaches of such agreements. In the lawsuit, Edu-Cap also seeks to have NCS acquire from Edu-Cap certain student loans with unpaid principal, interest, and late charges, which loans it claims are or have been in default and were incorrectly processed or serviced by NCS. The Company tendered the defense of the claims to its insurer, and the insurer accepted the defense subject to a reservation of rights. The Company has filed an Answer to Edu-Cap's Complaint denying Edu-Cap's claims, and the Company intends to vigorously defend against the lawsuit. In addition, the Company has filed a Counterclaim against Edu-Cap and a claim against a corporation affiliated with Edu-Cap seeking compensatory damages and contribution and indemnity. The Company does not believe that the outcome of this litigation would result in a material adverse effect on the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted during the fourth quarter of the fiscal year ended January 31, 1999 to a vote of security holders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS "Quarterly Market Data" included in the Annual Report to Stockholders for the year ended January 31, 1999 is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA "Five Year Financial Data" included in the Annual Report to Stockholders for the year ended January 31, 1999 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Results of Operations and Financial Condition" included in the Annual Report to Stockholders for the year ended January 31, 1999 is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK "Management's Discussion and Analysis of Results of Operations and Financial Condition" included in the Annual Report to Stockholders for the year ended January 31, 1999 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements and supplementary data of the registrant and its subsidiaries, included in the Annual Report to Stockholders for the year ended January 31, 1999, are incorporated herein by reference: Consolidated Balance Sheets -- January 31, 1999 and 1998 Consolidated Statements of Income -- Years ended January 31, 1999, 1998 and 1997 Consolidated Statements of Changes in Stockholders' Equity -- Years ended January 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows -- Years ended January 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements -- January 31, 1999 Report of Independent Auditors dated March 1, 1999 Quarterly Results of Operations (Unaudited) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT "Election of Directors" included in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 27, 1999 and "Executive Officers of the Registrant" in Part I of this report are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION "Summary Compensation Table" and "Stock Options" included in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 27, 1999 are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT "Election of Directors" and "Ownership of NCS Common Stock by Certain Beneficial Owners and Executive Officers" included in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 27, 1999 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS "Election of Directors" included in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 27, 1999 is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) List of Financial Statements and Financial Statement Schedules (1) The following consolidated financial statements of National Computer Systems, Inc. and subsidiaries, included in the Annual Report to Stockholders for the year ended January 31, 1999, are incorporated by reference in Item 8: Consolidated Balance Sheets -- January 31, 1999 and 1998 Consolidated Statements of Income -- Years ended January 31, 1999, 1998 and 1997 Consolidated Statements of Changes in Stockholders' Equity -- Years ended January 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows -- Years ended January 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements -- January 31, 1999 Report of Independent Auditors dated March 1, 1999 (2) Consolidated financial statement schedules of National Computer Systems, Inc. and subsidiaries required to be filed by Item 14(d): All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (3) Listing of Exhibits: EXHIBIT 3.1 Restated Articles of Incorporation, as amended, are incorporated herein by reference to Exhibit 3.1 to the NCS Form 10-K for the fiscal year ended January 31, 1998. 3.2 Bylaws, as amended and restated, are incorporated herein by reference to Exhibit 3.2 to the NCS Form 8-K dated March 4, 1996. 4.1 Instruments with respect to long-term debt where the total debt authorized thereunder does not exceed 10% of the consolidated total assets of the registrant are not being filed; the registrant will furnish a copy of any such instrument to the Commission upon request. 4.2 Second Amended and Restated Rights Agreement dated as of December 8, 1998 between NCS and Norwest Bank Minnesota, National Association (including the form of Right Certificate attached as Exhibit B thereto) is incorporated herein by reference to Exhibit 1 to Amendment No. 3 to Form 8-A/A dated December 15, 1998. 4.3 Credit Agreement dated as of November 17, 1997 between NCS and The First National Bank of Chicago (as Agent); Norwest Bank Minnesota, National Association; Suntrust Bank, Central Florida, National Association; and The Bank of Tokyo - Mitsubishi Ltd., Chicago Branch is incorporated herein by reference to Exhibit 4 to the Company's Form 10-Q for the quarter ended October 31, 1997. *10.1 Amended and Restated Change In Control Agreement dated as of May 21, 1998, by and between NCS and certain executives of NCS is incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q for the fiscal quarter ended October 31, 1998. *10.2 Amended and Restated Severance Agreement dated December 8, 1998, by and between NCS and Russell A. Gullotti is incorporated herein by reference to Exhibit 10.2 to the Company's Form 10-Q for the fiscal quarter ended October 31, 1998. *10.3 Description of Retirement Arrangements with David C. Malmberg is incorporated herein by reference to Exhibit 19 to the Company's Form 10-Q for the fiscal quarter ended October 31, 1992. *10.4 Agreement dated August 22, 1994 between NCS and Charles W. Oswald is incorporated herein by reference to Exhibit 10(b) to the Company's Form 10-Q for the fiscal quarter ended October 31, 1994. *10.5 NCS 1986 Employee Stock Option Plan is incorporated herein by reference to Exhibit 10D to the Company's Form 10-K for the fiscal year ended January 31, 1986. *10.6 NCS Non-Employee Director Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 10.4 to the Company's Form 10-K for the fiscal year ended January 31, 1998. *10.7 Oswald Stock Option Plan is incorporated herein by reference to Exhibit 10O to the Company's Form 10-K for the fiscal year ended January 31, 1995. *10.8 NCS 1990 Employee Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended October 31, 1995. *10.9 NCS 1995 Employee Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended October 31, 1995. *10.10 NCS 1997 Employee Stock Option Plan is incorporated herein by reference to Exhibit 10.14 to the Company's Form 10-K for the year ended January 31, 1997. *10.11 NCS 1999 Employee Stock Option Plan. *10.12 NCS 1999 Non-Employee Director Stock Option Plan. *10.13 NCS 1998 Employee Stock Purchase Plan is incorporated herein by reference to Exhibit 10.17 to the Company's Form 10-K for the fiscal year ended January 31, 1998. *10.14 NCS 1990 Long-Term Incentive Plan, as amended, is incorporated herein by reference to Exhibit 10.3 to the Company's Form 10-Q for the quarter ended October 31, 1995. *10.15 NCS 1997 Long-Term Incentive Plan is incorporated herein by reference to Exhibit 10.13 to the Company's Form 10-K for the year ended January 31, 1997. *10.16 NCS Supplemental Deferred Compensation Plan is incorporated herein by reference to Exhibit 4 to the Company's Form S-8 dated March 26, 1999. *10.17 NCS Corporate Management Incentive Plan -- 1998 is incorporated herein by reference to Exhibit 10.16 to the Company's Form 10-K for the fiscal year ended January 31, 1998. *10.18 NCS Corporate Management Incentive Plan -- 1999. 13 Portions of NCS' Annual Report to Stockholders for the fiscal year ended January 31, 1999. 21 Significant Subsidiaries. 23 Consent of Independent Auditors. 24 Power of Attorney authorizing J.W. Fenton, Jr. to sign the NCS Form 10-K for the year ended January 31, 1999 on behalf of other officers and directors. 27 Financial Data Schedule. 99 Cautionary statements identifying important factors that could cause the Company's actual results to differ from those projected in forward looking statements. - ---------------- * Indicates management contract or compensatory plan or arrangement required to be filed as an exhibit to this report. (b) Reports on Form 8-K There were no reports on Form 8-K filed for the three months ended January 31, 1999. (c) Exhibits The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules Financial Statement Schedules have been omitted because they are not required or are inapplicable. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL COMPUTER SYSTEMS, INC. Dated: April 23, 1999 By: /s/ J. W. FENTON, JR. J. W. Fenton, Jr. SECRETARY-TREASURER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By RUSSELL A. GULLOTTI * Chairman of the Board of Directors, --------------------- President and Chief Executive Russell A. Gullotti Officer (principal executive officer) By William J. Cadogan * Director --------------------- William J. Cadogan By DAVID C. COX * Director --------------------- David C. Cox By DELORES M. ETTER * Director --------------------- Delores M. Etter By MOSES S. JOSEPH * Director --------------------- Moses S. Joseph By JEAN B. KEFFELER * Director --------------------- Jean B. Keffeler By STEPHEN G. SHANK * Director --------------------- Stephen G. Shank By JOHN E. STEURI * Director --------------------- John E. Steuri By JEFFREY W. TAYLOR * Vice President and Chief - ------------------------- Financial Officer (principal Jeffrey W. Taylor financial officer and principal accounting officer) * Executed on behalf of the indicated officers and directors of the registrant by J. W. Fenton, Jr., Secretary-Treasurer, duly appointed attorney-in-fact. /s/ J. W. FENTON, JR. - ----------------------------------- Dated: April 23,1999 J. W. Fenton, Jr. (ATTORNEY-IN-FACT) FORM 10-K NATIONAL COMPUTER SYSTEMS, INC. FOR THE FISCAL YEAR ENDED JANUARY 31, 1999 EXHIBIT INDEX EXHIBIT - ------------- 10.11 NCS 1999 Employee Stock Option Plan. 10.12 NCS 1999 Non-Employee Director Stock Option Plan 10.18 NCS Corporate Management Incentive Plan -- 1999. 13 Portions of NCS' Report to Stockholders for the fiscal year ended January 31, 1999. 21 Significant Subsidiaries. 23 Consent of Independent Auditors. 24 Power of Attorney authorizing a certain person to sign the NCS Form 10-K for the year ended January 31, 1999 on behalf of other officers and directors. 27 Financial Data Schedule. 99 Cautionary statements identifying important factors that could cause the Company's actual results to differ from those projected in forward looking statements. EX-10 2 1999 EMPLOYEE STOCK OPTION PLAN EXHIBIT 10.11 NATIONAL COMPUTER SYSTEMS, INC. 1999 EMPLOYEE STOCK OPTION PLAN (1,400,000 shares authorized) 1. Objectives of Plan. This 1999 Employee Stock Option Plan (the "Plan") has been adopted by the Board of Directors of National Computer Systems, Inc., a Minnesota corporation (herein called the "Company"), to secure the advantages of stock ownership on the part of its present and future key employees, including salaried officers and directors, and including salaried officers and directors of any one or more subsidiary corporations wholly owned by it (herein called "related companies"), and to provide incentives for such individuals to remain with the Company or related companies and to devote their energies to strengthen and maintain the continued success of the Company through stock ownership. Options granted under this Plan may be either incentive stock options ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options which do not qualify as Incentive Stock Options. 2. Administration of Plan. (A) The Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board"). The Committee shall be composed of not less than such number of directors as shall be required to permit the Plan to qualify under Section 16b-3 ("Section 16b-3") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Each member of the Committee shall be a "disinterested person" with respect to the Plan within the meaning of Section 16b-3 and shall be an "outside director" within the meaning of Section 162(m) of the Code. (B) Subject to the provisions of the Plan, the Committee shall have authority, in its discretion: (1) To construe and interpret the Plan and all options granted hereunder, and to determine the terms and provisions (and amendments thereof) of the options granted under the Plan (which need not be identical). (2) To determine individuals to whom and the time or times at which options shall be granted, the number of shares to be subject to each option, the option price, and the duration of leaves of absence which may be granted to participants without constituting a termination of their employment for the purposes of the Plan. (3) To adopt, amend and rescind rules and regulations relating to administration of the Plan and make all determinations necessary or advisable for the administration of the Plan, which shall be binding and conclusive on all participants in the Plan and on their legal representatives and beneficiaries. (4) To determine and accelerate the time at which all or any part of an option may be exercised. 3. Participants. Options may be granted under the Plan to such key full or part time executive, administrative, supervisory, technical, or professional employees (including salaried officers and directors) of the Company, or related companies including related companies which become such after adoption of the Plan, in such amounts as shall be determined from time to time by the Committee. In determining the persons to whom options shall be granted and the number of shares subject to each option, the Committee may take into account the nature of services rendered by the proposed grantees, their past, present and potential contributions to the success of the Company, and such other factors as the Committee in its discretion shall deem relevant. A person who has been granted an option under this Plan may be granted an additional option or options under the Plan if the Committee shall so determine; provided, however, that to the extent that the aggregate fair market value, determined at the time an Incentive Stock Option is granted, of the stock with respect to which all Incentive Stock Options owned by a Participant are exercisable for the first time by such optionee during any calendar year under all plans of the employer corporation and its parent and subsidiary corporations exceeds $100,000, such options shall be treated as options that do not qualify as Incentive Stock Options. No person may be granted options under the Plan for more than 100,000 shares in the aggregate in any calendar year. 4. Number of Shares Available for Options. Under this Plan, options may be granted for shares of the Company's Common Stock, $.03 per value. The Common Stock subject to options shall be authorized but unissued shares. Subject to the provisions of paragraph 5 hereof, the number of shares of Common Stock that may be made the subject of options shall not exceed the aggregate of 1,400,000 shares. In the event that any outstanding option under the Plan for any reason expires or is terminated unexercised, the common shares allocable to the unexercised portion of such option may again be subject to an option under the Plan. 5. Adjustments. If there shall be any change in the Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other change in the capitalization or corporate structure of the Company, the Committee shall make appropriate adjustments in the Plan and any options outstanding under the Plan. Such adjustments shall include, where appropriate, changes in the aggregate number of shares subject to the Plan and such changes in the number of shares and the price per share subject to outstanding options as are necessary in order to prevent dilution or enlargement of option rights. 6. Term of Plan. No option shall be granted pursuant to this Plan later than January 31, 2009, but options theretofore granted may extend beyond that date in accordance with their terms. 7. Terms and Conditions of Options. Options granted hereunder shall be evidenced by a written notice from the Company to the participant evidencing the granting of an option hereunder, or shall be evidenced by an agreement in such form as the Committee shall from time to time require. Said notice or agreement shall refer to this Plan, and make acceptance thereof by a participant subject to the provisions hereof. Such option shall comply with and be subject to the following terms and conditions: (A) Number of Shares. Each option shall state the number of shares to which it pertains. (B) Option Price. Each option shall state the option price, which shall not be less than 100% of the fair market value of the shares of the Common Stock of the Company on the date of the granting of the option. The fair market value per share shall be the "last trade price" of the Common Stock as reported by The Nasdaq Stock Market(R). If the Common Stock is listed on a national stock exchange or exchanges, such fair market value shall be deemed to be the highest closing price of the Common Stock on such stock exchange or exchanges on the date the option is granted. If on the date as of which the fair market value is being determined, the Common Stock is not publicly traded, then the next preceding day on which there was a sale of such stock will be used. Subject to the foregoing, the Committee in fixing the option price shall have full authority and discretion and be fully protected in doing so. (C) Option Period and Exercise of Option. (1) No option period shall exceed ten years, and except as otherwise provided in sections (D), (E) and (F) hereof, no option period shall be for less than one year. (2) Any option granted under the Plan may be exercised by notifying the Company in writing of such exercise prior to the termination of such option. The option price for the number of shares of Common Stock for which the option is exercised shall become immediately due and payable; provided, however, that in lieu of cash an optionee may exercise an option by tendering to the Company shares of the Common Stock of the Company already owned by the optionee and with the certificates therefor registered in the optionee's name, having a fair market value equal to the cash exercise price of the shares being purchased. (3) During the lifetime of the optionee, the option shall be exercisable only by the optionee and shall not be assignable or transferable, and no other person shall acquire any rights therein. Except as provided in Subdivisions (D) and (F) hereof, no option may be exercised at any time unless the holder thereof is then an employee of the Company or a related company. (4) In order to comply with all applicable federal and state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal and state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of an optionee, are withheld or collected from such optionee. In order to assist an optionee in paying all minimum federal and state taxes required to be withheld or collected upon exercise of an option which does not qualify as an Incentive Stock Option hereunder, the Company shall, in lieu of cash, permit the optionee to satisfy all or part of such tax obligation by (i) electing to have the Company withhold a portion of the shares otherwise to be delivered upon exercise of the option with a fair market value, determined in accordance with subsection 7(B), equal to such taxes or (ii) delivering to the Company common shares, other than the shares issuable upon exercise of such option, with a fair market value, determined in accordance with subsection 7 (B), equal to such taxes. (D) Termination of Employment Except Due to Gross and Willful Misconduct, Death or Disability. In the event an optionee shall cease to be employed by the Company or a related company for any reason other than gross and willful misconduct, death or disability, then, and in that event, but subject to the condition that no option shall be exercisable after its expiration date, such optionee shall have the right to exercise the option at any time within three months (or such longer period as the Committee in its discretion shall determine to be appropriate) after such termination of employment, to the extent the optionee's right to exercise same shall accrue pursuant to such optionee's option granted and had not previously been exercised. Whether authorized leaves of absence or absence because of military or governmental service shall constitute termination of employment, for the purpose of the Plan, shall be determined by the Committee, which determination shall be final and conclusive. (E) Termination Due to Gross and Willful Misconduct. In the event that an optionee shall cease to be employed by the Company or a related company by reason of gross and willful misconduct during the course of employment, including but not limited to wrongful appropriation of funds of the Company or a related company or the commission of a gross misdemeanor or felony, the option shall be terminated as of the date of the misconduct. (F) Disability and Death of Optionee and Transfer of Option. If any optionee shall die while in the employ of the Company or a related company, or within a period of three months (or such longer period as the Committee in its discretion shall determine to be appropriate) after the termination of employment or the optionee's employment is terminated because optionee has become disabled (within the meaning of Code Section 22 (e)(3)) while in the employ of the Company or related companies and shall not have fully exercised the option, said option may be exercised (subject to the condition that no option shall be exercisable after its expiration date), to the extent that the optionee's right to exercise such option had accrued pursuant to such optionee's option granted (i) at the time of optionee's disability and had not previously been exercised, at any time within one year after the optionee's disability, by the optionee or a duly appointed guardian of the optionee; or (ii) at the time of death and had not previously been exercised, at any time within one year after the optionee's death, by the executors or administrators of the optionee or by any person or persons who shall have acquired the option directly from the optionee by bequest or inheritance. No option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution. (G) 10 - Percent Shareholder Rule. Notwithstanding any other provision in the Plan, if at the time an Option is otherwise to be granted pursuant to the Plan, the optionee owns directly or indirectly (within the meaning of Section 424 (d) of the Code) Common Stock of the Company possessing more than 10% of the total combined voting power of all classes of stock of the Company or its parent or subsidiary corporations, if any (within the meaning of Section 422(b)(6) of the Code), then any Incentive Stock Option to be granted to such optionee pursuant to the Plan shall satisfy the requirements of Section 422(c)(5) of the Code, and the option price shall be not less than 110% of the fair market value of the Common Stock of the Company on the date of grant, determined as described herein, and such option by its terms shall not be exercisable after the fifth anniversary of the date of grant. (H) Rights as a Shareholder. An optionee or a transferee of an option shall have no rights as a shareholder with respect to any shares covered by an option until the date of the issuance of a stock certificate for such shares. No adjustment shall be made for dividends (ordinary or extraordinary whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Article 5 hereof. (I) Discontinuance and Amendment of the Plan. The Board may, from time to time, alter, amend, suspend, or discontinue the Plan; provided, however, that, notwithstanding any other provision of the Plan or any award agreement, without the approval of the shareholders of the Company, no such amendment, alteration, suspension, discontinuation or termination shall be made that: (i) requires the approval of the Company's shareholders under any rules or regulations of the Nation Association of Securities Dealers, Inc. or any securities exchange that are applicable to the Company; or (ii) requires the approval of the Company's shareholders under the Code in order (a) to permit Incentive Stock Options to be granted under the Plan or (b) to permit any compensation expense resulting from the grant or exercise of stock options issued hereunder to be deductible under Section 162(m) of the Code. (J) Compliance with Laws Relating to Sale of Securities. Notwithstanding any other provisions contained herein, the Company shall have the right, in its exclusive discretion, to withhold the issuance of any certificates for shares of stock in respect of which any option has been exercised until, in the opinion of counsel for the Company, any applicable registration requirements of the Securities Act of 1933, as amended, any applicable listing requirements of any national securities exchange on which the stock may then be listed, and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery, shall have been duly complied with. Pending the receipt of such opinion of counsel for the Company, the Company may issue certificates for such stock provided they contain a legend indicating that said stock represented thereby is not registered and may not be sold except in compliance with applicable law or the release of said restrictions by the Company, and, in such event, the Company shall have the right to instruct the transfer agent and registrar of its common shares to effect "stop-transfer" procedures with respect to such shares. Until the shares reserved for options are registered and/or listed, if required by law, the Committee may condition the delivery of any certificate for option shares upon the receipt of a written representation from the participant that at the time of exercising such option the participant intends to acquire the shares being purchased for investment and not for resale or further distribution. (K) Other Provisions. The option agreements authorized under the Plan shall contain such other provisions as the Committee shall deem advisable. 8. Notification of Disposition. If an optionee shall dispose of any of the shares of Common Stock of the Company acquired pursuant to the exercise of an Incentive Stock Option issued pursuant to the Plan within two years from the date said option was granted or within one year after the transfer of any such shares to the optionee upon exercise of said option, then, in order to provide the Company with the opportunity to claim the benefit of any income tax deduction which may be available to it under the circumstances, the optionee shall promptly notify the Company of the dates of acquisition and disposition of such shares, the number of shares so disposed of, and the consideration, if any, received for such shares. The Company may take such action as it deems appropriate to insure notice to the Company of any disposition of the Common Stock of the Company within the time periods described above. 9. Reliance on Information. Each member of the Committee and the Board and each officer and employee of the Company shall be fully justified in relying or acting upon any information furnished in connection with the administration of the Plan by any other person or persons. In no event shall any person who is or shall have been a member of the Committee or of the Board or an officer or employee of the Company, be liable for any determination made or other action taken or omission to act in reliance upon any such information or for any action (including the furnishing of information) taken or any failure to act, if in good faith. 10. Application of Funds. The proceeds received by the Company from the sale of its Common Stock pursuant to options will be used for general corporate purposes. 11. No Obligation to Exercise Option. The granting of an option hereunder shall impose no obligation upon the optionee to exercise such option, nor shall it be deemed to or construed to impose any obligation on the Company or any related company to retain the optionee in its employ for any period of time. 12. Compliance with Section 16b-3. The Plan is intended to comply with all applicable conditions of Section 16b-3 or its successors. All transactions involving persons subject to Section 16(b) of the Exchange Act ("Insider-Participants") are subject to such conditions regardless of whether the conditions are expressly set forth in the Plan and any provision of the Plan that is contrary to the conditions of Section 16b-3 shall not apply to Insider-Participants. - --------------------------- Original Plan - Approved by the Board on March 2, 1999 - Approved by the Company's Shareholders on ______________ EX-10 3 1999 NON-EMPLOYEE DIRECTOR S/O PLAN EXHIBIT 10.12 NATIONAL COMPUTER SYSTEMS, INC. 1999 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN 1. Purpose of Plan This plan shall be known as the "National Computer Systems, Inc. 1999 Non-Employee Director Stock Option Plan" and is hereinafter referred to as the "Plan." The purpose of the Plan is to promote the interests of National Computer Systems, Inc., a Minnesota corporation (the "Company"), by enhancing its ability to attract and retain the services of experienced and knowledgeable non-employee directors and by providing additional incentive for such directors to increase their interest in the Company's long-term success and progress. Options granted under this Plan shall be nonqualified stock options which do not qualify as incentive stock options within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Stock Subject to Plan Under this Plan, options may be granted for shares of the Company's Common Stock, $.03 par value. The Common Stock subject to options shall be authorized but unissued shares. Subject to the adjustment as provided in Section 10 hereof, the maximum number of shares of Common Stock on which options may be exercised under this Plan shall be 100,000 shares. If an option under the Plan expires, or for any reason is terminated or unexercised with respect to any shares, such shares shall again be available for options thereafter granted during the term of the Plan. 3. Administration of Plan The Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board"). The Committee shall have the authority, in its discretion, subject to the express provisions of this Plan, to interpret the Plan, to prescribe, amend, and rescind rules and regulations relating to the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. The Committee's determinations on the foregoing matters shall be final and conclusive. 4. Eligibility Upon approval of the Plan by the Board, but subject to approval of the Plan by shareholders of the Company pursuant to Section 12 hereof, each director of the Company who is not otherwise an employee of the Company or any subsidiary of the Company (an "Eligible Director") shall automatically be granted, on each date (beginning with the date of the annual meeting of shareholders in May, 2000), that he or she is elected or reelected as a director of the Company, an option to acquire 3,500 shares of Common Stock under the Plan. 5. Price The option price for all options granted under the Plan shall be the fair market value of the shares covered by the option on the date the option is granted. For purposes of this Plan, the fair market value of the Common Stock on a given date shall be (i) the last trade price of the Common Stock as reported on The Nasdaq Stock Market on such date, if the Common Stock is then quoted on The Nasdaq Stock Market; or (ii) the closing price of the Common Stock on such date on a national securities exchange, if the Common Stock is then being traded on a national securities exchange. If on the date as of which the fair market value is being determined, the Common Stock is not publicly traded, then the next preceding date on which there was a trade will be used. 6. Term Each option and all rights and obligations thereunder shall, subject to the provisions of Section 8 herein, expire ten years from the date of granting of the option. 7. Exercise of Option (a) Options granted under the Plan shall not be exercisable for a period of six months after date of grant, or until shareholder approval of the Plan has been obtained, whichever occurs later, but thereafter will be exercisable in full at any time or from time to time during the term of the option, subject to the provisions of Section 8 hereof. (b) The exercise of any option granted hereunder shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of Common Stock pursuant to such exercise will not violate any state or federal securities or other laws. An optionee desiring to exercise an option may be required by the Company, as a condition of the effectiveness of any exercise of an option granted hereunder, to agree in writing that all Common Stock to be acquired pursuant to such exercise shall be held for his or her own account without a view to any further distribution thereof, that the certificates for such shares shall bear an appropriate legend to that effect and that such shares will not be transferred or disposed of except in compliance with applicable federal and state securities laws. (c) An optionee electing to exercise an option shall give written notice to the Company of such election and of the number of shares subject to such exercise. The full purchase price of such shares shall be tendered with such notice of exercise. Payment shall be made to the Company either (i) in cash (including check, bank draft or money order), or (ii) by delivering the Company's Common Stock already owned by the optionee having a fair market value on the date of exercise equal to the full purchase price of the shares, or (iii) by any combination of cash and the method specified in (ii) of this sentence. For purposes of the preceding sentence, the fair market value of Common Stock tendered shall be determined as provided in Section 5 hereof as of the date of exercise. Until such person has been issued a certificate or certificates for the shares subject to such exercise, he or she shall possess no rights as a shareholder with respect to such shares. 8. Effect of Termination of Directorship or Death (a) In the event that an optionee shall cease to be a director of the Company for any reason other than his or her gross and willful misconduct or his or her death, such optionee shall have the right to exercise the option at any time within the remaining term of the option. (b) In the event that an optionee shall cease to be a director of the Company by reason of his or her gross and willful misconduct during the course of his or her service as a director of the Company, including but not limited to wrongful appropriation of funds of the Company or the commission of a gross misdemeanor or felony, any unexercised option granted pursuant to the Plan shall be terminated as of the date of the misconduct. (c) If the optionee shall die and such optionee shall not have fully exercised any option granted under the Plan, such option may be exercised at any time within twelve months after his or her death by the personal representatives, administrators or, if applicable, by any person or persons to whom the option is transferred by will or the applicable laws of descent and distribution, to the extent of the full number of shares he or she was entitled to purchase under the option on the date of death, and subject to the condition that no option shall be exercisable after the expiration of the term of the option. (d) Nothing in this Plan or in any agreement hereunder shall confer on any optionee any right to continue as a director of the Company or affect in any way any legal rights with respect to termination of such directorship or removal of such optionee as a director. 9. Transferability (a) No options granted under the Plan shall be transferable by optionee, other than as provided in Section 8(c) or in Section 9(b) herein. (b) During the lifetime of an optionee, an outstanding option may be transferred to (i) the spouse, children, grandchildren, nieces or nephews of the optionee ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership in which such Immediate Family Members are the only partners, provided that (a) there may be no consideration for any such transfer and (b) subsequent transfers of transferred options shall be prohibited except for transfers required by will or the laws of descent and distribution. Following transfer, such options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer; provided that for purposes of each option agreement, the term "optionee" shall be deemed to refer to the transferee. 10. Dilution or Other Adjustments If there shall be any change in the Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend (of whatever amount), stock split or other change in the corporate structure, appropriate adjustments in the Plan and outstanding options shall be made. In the event of any such changes, adjustments shall include, where appropriate, changes in the aggregate number of shares subject to the Plan, the number of shares subject to outstanding options and the exercise prices thereof in order to prevent dilution or enlargement of option rights. 11. Amendment or Discontinuance of Plan The Board may amend, alter, suspend, discontinue or terminate the Plan; provided, however, that, notwithstanding any other provision of the Plan or any award agreement, without the approval of the shareholders of the Company, no such amendment, alteration, suspension, discontinuation or termination shall be made that requires the approval of the Company's shareholders under any rules or regulations of the National Association of Securities Dealers, Inc. or any securities exchange that are applicable to the Company. The Board shall not alter or impair any option theretofore granted under the Plan without the consent of the holder of the option. 12. Effective Date and Termination of Plan (a) The Plan was approved by the Board on March 2, 1999, and shall be approved by shareholders of the Company within 12 months thereafter. (b) Unless the Plan shall have been discontinued as provided in Section 11 hereof, the Plan shall terminate on January 31, 2009. No option may be granted after such termination, but termination of the Plan shall not without consent of the optionee, alter or impair any rights or obligations under any option theretofore granted. - ---------------- Plan approved by stockholders on May __, 1999. EX-10 4 MANAGEMENT INCENTIVE PLAN EXHIBIT 10.18 NATIONAL COMPUTER SYSTEMS, INC MANAGEMENT INCENTIVE PLAN 1999 It is NCS' intent to compensate its senior management employees in a manner which permits the Corporation to attract, retain, and motivate outstanding people. The NCS Management Incentive Plan (MIP) is designed to reward key senior managers for achieving specific annual NCS financial goals and for individual performance in accomplishing these goals. It aligns the interests of NCS senior management with NCS business and financial plans. PLAN ELIGIBILITY Participation in the plan is determined by position. Eligible positions and target incentive amounts are determined each year and may change from year to year. Participants must be full-time NCS employees. Eligibility is limited and includes those positions which significantly impact financial results. The eligible positions and participants will be reviewed and approved annually by the CEO. Positions and participants in the plan will be selected from the following: o CEO o Corporate staff officers o NCS Business presidents, senior vice presidents and, on a selected basis, their management reports o Selected other vice presidents o Selected key employees Any position or participant exceptions, exclusions, and inclusions to the above must be documented and approved by the CEO. TARGET INCENTIVE OPPORTUNITY Each approved position will be eligible for a specific target incentive award. This target incentive opportunity will be a percentage of the May 31, 1999 annual base salary for the participant. The target incentive is tied directly to corporate or a participant's business unit financial performance (revenue and contribution or EPS) and an overall evaluation of each individual's performance. Potential earned payouts range from 0% at threshold minimum, 100% at target performance, up to a pre-defined overachievement percentage for each participant at maximum. INCENTIVE COMPONENTS The potential target incentive opportunity will be based on achievement of financial goals and the overall evaluation of the participant's performance during the fiscal year. The overall evaluation will include performance against defined individual objectives and a subjective evaluation of performance relative to the following criteria: 1. What have you done to improve shareholder value? 2. How have you improved customer satisfaction and NCS' ability to serve the customer? 3. What have you done to improve the quality/predictability of your business? 4. What have you done to develop your organization? 5. How have you demonstrated personal leadership and corporate-wide perspectives/orientation? DETERMINATION OF AWARDS Generally speaking, actual financial results will not include extraordinary gains or losses. In any such matters, including acquisitions, the CEO will make the appropriate approval decisions. PAYOUTS AND PRO-RATA AMOUNTS Earned award payouts will be made no later than April 15 following the end of the fiscal plan year. Any participant must be a full-time employee and be actively employed by NCS on the last day of the fiscal year to be eligible to receive a payout. In coming into or out of an MIP eligible position, participants will be given pro-rata earned award payouts based on the length of time in such position, however, participants must be in the plan at least three (3) full months during the fiscal year to be eligible to receive any pro-rata award. Pro-rata payouts will be subject to review and approval by the CEO. DISABILITY, DEATH, OR SPECIAL CIRCUMSTANCES In the case of disability, death, or other special circumstances impacting a plan participant, the CEO may approve pro-rata award payouts. PLAN EXCEPTIONS AND ADMINISTRATION The CEO must approve exceptions and/or modifications to the plan. Exceptions and/or modifications to the plan must be in writing. All decisions made are final. DISCLAIMER Participation in this plan is not to be considered as an employment contract or agreement by the participant. EX-13 5 REPORT TO SHAREHOLDERS EXHIBIT 13
FIVE YEAR FINANCIAL DATA (Dollars in thousands, except per share amounts) YEAR ENDED JANUARY 31, ----------------------------------------------------------- 1999 1998 1997(2) 1996 1995(3) -------- -------- -------- -------- -------- Financial Results Revenues $505,372 $406,015 $331,159 $300,883 $284,874 Income from operations 55,271 43,044 26,646 30,704 20,323 Income from continuing operations before income taxes 54,111 41,975 26,533 27,760 16,119 Income from continuing operations 32,511 25,175 13,666 16,580 11,281 Discontinued operations, net of taxes - - (2,229) 5,679 2,117 Gain on disposition, net of taxes - - 38,143 - - Net income (loss) 32,511 25,175 49,580 22,259 13,398 Net income per share from continuing operations(1) Basic earnings per share $ 1.05 $ 0.83 $ 0.45 $ 0.54 $ 0.38 Diluted earnings per share $ 1.00 $ 0.80 $ 0.44 $ 0.53 $ 0.37 Dividends paid per share $ 0.20 $ 0.18 $ 0.18 $ 0.18 $ 0.18 Financial Position Total assets 362,471 315,414 273,920 219,724 209,375 Long-term debt, including current maturities 9,355 18,844 20,148 27,008 49,864 Stockholders' equity 226,866 193,994 170,034 128,198 113,123 (1) All references to share and per share data have been adjusted to give retroactive effect to the 2-for-1 stock split declared in March 1998. (2) Includes an acquisition related charge of $7,895 pre-tax, $6,992 after tax or $.23 per diluted share. (3) Includes a special charge of $8,164 pre-tax, $3,252 after-tax or $.11 per diluted share.
QUARTERLY RESULTS OF OPERATIONS (unaudited) (Dollars in thousands, except per share amounts) Three Months Ended ---------------------------------------------- April 30 July 31 October 31 January 31 -------- ------- ---------- ---------- Year Ended January 31, 1999 Revenues $97,915 $128,128 $135,408 $143,921 Gross profit 37,522 51,276 47,375 54,241 Net income 5,095 9,742 7,758 9,916 Basic earnings per share $ 0.17 $ 0.31 $ 0.25 $ 0.32 Diluted earnings per share $ 0.16 $ 0.30 $ 0.24 $ 0.30 Year Ended January 31, 1998 Revenues $78,971 $ 96,029 $115,387 $115,628 Gross profit 30,811 38,067 40,743 44,817 Net income 4,048 7,011 6,026 8,090 Basic earnings per share $ 0.13 $ 0.23 $ 0.20 $ 0.27 Diluted earnings per share $ 0.13 $ 0.22 $ 0.19 $ 0.26 STOCK EXCHANGE LISTING Common Stock of National Computer Systems, Inc. trades on The Nasdaq Stock Market(R) under the symbol "NLCS". QUARTERLY MARKET DATA NCS had 2,128 and 1,957 Common Stockholders of record as of January 31, 1999 and 1998, respectively. Fiscal 1998 ----------------------------------------- Three Months Ended ----------------------------------------- Year Ended January 31, 1999 April 30 July 31 October 31 January 31 - --------------------------- -------- ------- ---------- ---------- High $25.25 $27.00 $31.38 $38.25 Low 16.88 20.00 20.50 28.13 Close 25.00 22.25 28.00 38.25 Dividends per share $ 0.05 $ 0.05 $ 0.05 $ 0.05 Fiscal 1997 ----------------------------------------- Three Months Ended ----------------------------------------- Year Ended January 31, 1998 April 30 July 31 October 31 January 31 - --------------------------- -------- ------- ---------- ---------- High $13.37 $14.75 $19.75 $19.50 Low 11.37 12.50 13.75 15.50 Close 12.56 13.75 19.00 17.12 Dividends per share $0.045 $0.045 $0.045 $0.045 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The fiscal years referenced herein are as follows: Fiscal Year Year Ended ----------- ---------- 1998 January 31, 1999 1997 January 31, 1998 1996 January 31, 1997 Income and Expense Items as a Percentage of Revenues Fiscal Year 1998 1997 1996 - ------------------------------------------------------------ Revenues Information services 53.9% 48.2% 47.6% Product sales 35.7 39.9 40.5 Maintenance and support 10.4 11.9 11.9 - ------------------------------------------------------------ Total revenues 100.0 100.0 100.0 Costs of Revenues (1) Cost of information services 76.1 76.7 78.5 Cost of product sales 40.8 42.0 46.3 Cost of maintenance and support 65.0 69.5 67.4 - ------------------------------------------------------------ Total gross profit 37.7 38.0 35.9 Operating Expenses Sales and marketing 12.8 14.0 12.5 Research and development 2.5 2.1 3.0 General and administrative 11.5 11.3 10.0 Acquisition related charges - - 2.4 - ------------------------------------------------------------ Income from operations 10.9 10.6 8.0 Income from continuing operations before income taxes 10.7 10.3 8.0 Income from continuing operations 6.4% 6.2% 4.1% ============================================================ (1) As a percentage of the respective revenue caption. National Computer Systems, Inc. (the Company or NCS) is an information services company, providing software, services and systems for the collection, management and interpretation of data. The Company markets these products and services predominantly to the education market, but also provides large scale data collection and management services and products to business, government and other markets. RECAP OF 1998 RESULTS Total revenues increased 24.5% in fiscal 1998 to $505.4 million compared to last year's $406.0 million. The Company's overall gross margin on revenues increased $36.0 million. Total gross margin as a percentage of revenues declined to 37.7% in fiscal 1998 from 38.0% in fiscal 1997, due to the product mix of revenues although gross margins in each of the three primary revenue lines improved. Operating expenses decreased to 26.7% of revenues in fiscal 1998, compared to 27.4% of revenues in fiscal 1997. Overall operating margins increased to 10.9% of revenue in fiscal 1998 from 10.6% in fiscal 1997 and operating income in dollars increased 28.4% to $55.3 million. Income tax rates were consistent with the prior year. Net income in fiscal 1998 totaled $32.5 million or $1.00 per diluted share outstanding. This compares to the fiscal 1997 net income of $25.2 million and $0.80 per diluted share. In fiscal 1996, the reported net income of $1.59 per share included a significant one-time net gain on the disposition of the Company's Financial Systems business and special charges related to the acquisition of Macro Educational Systems, Inc. (Macro). A reconciliation of diluted earnings per share follows: 1998 1997 1996 ----- ----- ----- Earnings per share, as reported $1.00 $ .80 $ 1.59 Less gain on disposition and discontinued operations - - (1.15) ----- ----- ----- Continuing operations 1.00 .80 .44 Plus acquisition related charges - - .23 ----- ----- ----- Pro forma earnings per share $1.00 $ .80 $ .67 ===== ===== ===== During fiscal 1996, the Company sold its Financial Systems business. See Note 3 of Notes to Consolidated Financial Statements for further discussion on the sale, the gain on disposition and discontinued operations. The following discussion relates to continuing operations only. REVENUES Fiscal 1998 versus Fiscal 1997. Total revenues for fiscal 1998 were up 24.5% to $505.4 million from $406.0 million in fiscal 1997. By revenue category, fiscal 1998 compares to fiscal 1997 as follows: Information services + 39.1% Product sales + 11.5% Maintenance and support + 8.8% Three-fourths of the $99.4 million of overall revenue increases in fiscal 1998 was attributed to growth in information services, which grew 39.1% year on year. The information services growth came from several sources, but approximately half was attributable to assessment and testing services, which achieved over $16 million of growth through one new state assessment program. Government and commercial outsourcing and professional services related to education software also contributed to information services growth. Fiscal 1998 increases in product sales came principally from education software licensing and related network hardware. Increased maintenance and support revenue were the result of increased support revenues related to education software. By major market, for fiscal 1998, revenues grew 28.8% from the education market and 12.2% from the large scale data management (non-education) market. For fiscal 1998 the education market accounted for 75% of total NCS revenues. Less than 2% of the Company's overall revenue growth in fiscal 1998 came from acquisitions. Fiscal 1997 versus Fiscal 1996. Total revenues for fiscal 1997 were up 22.6% to $406.0 million from $331.2 million in fiscal 1996, with approximately half of the year-on-year revenue growth due to acquisitions. The exact annual growth in revenues attributable to acquisitions is impracticable to determine due to the total integration of many of these operations into existing Company operations, the elimination of duplicate or overlapping product lines, and the packaging of existing and acquired offerings into new offerings not previously possible. By revenue category, fiscal 1997 compares to fiscal 1996 as follows: Information services + 24.3% Product sales + 20.7% Maintenance and support + 22.1% The growth in information services came from several sources, both internal and acquired, but most significantly from the Company's international business, where acquisitions in Australia and Canada, as well as significant internal growth in Mexico, contributed approximately one-third of the total growth. Testing and assessment services and services related to the Company's education software also contributed significant year-on-year revenue growth. The growth in product sales, as well as the related maintenance and support revenues, were due primarily to growth in licensing of the Company's enterprise software for schools, which realized 150% year-on-year growth. Products and technologies acquired during the past two years made large contributions to this growth. Sales of assessment instruments also contributed to the growth in product sales, as a result of the acquisition of the London House product line. By market, the Company's revenues from the Education market grew approximately 29% in fiscal 1997, and account for over 70% of total revenue. Large Scale Data Management (non-education) grew just under 10% year-on-year. COST OF REVENUES AND GROSS PROFITS Fiscal 1998 versus Fiscal 1997. The Company's overall gross profit dollars increased $36.0 million, or 23.3%. As a percentage of revenue, gross margin declined .3 percentage points to 37.7% from 38.0%. This modest decline is due entirely to revenue mix, as gross margins on each revenue line (information services, product sales, and maintenance and support) improved. The rapid growth of information services influenced the overall gross margin percentage decline. Maintenance and support margins improved most significantly, owing to better margins on education software support revenues. Fiscal 1997 versus Fiscal 1996. The Company's overall gross margin as a percentage of revenue improved to 38.0% in fiscal 1997 compared to 35.9% in fiscal 1996. The most impactive factor in this fiscal 1997 improvement is the greater volumes and higher margins of education software products, and, to a lesser extent, the increase in sales and margins of assessment instruments. In both instances, the gross margin on incremental sales is quite favorable. Gross margins on information services also improved slightly in fiscal 1997 due to a number of contributing factors. Gross margins on maintenance and support declined slightly in fiscal 1997, due to a greater complement of software support, carrying a lower margin compared to hardware maintenance. OPERATING EXPENSES Fiscal 1998 versus Fiscal 1997. Sales and marketing expense increased $8.1 million or 14.3% in fiscal 1998 over the prior fiscal year. As a percentage of revenues, sales and marketing declined by 1.2 percentage points, due to relatively lower selling costs on information services revenues. Research and development costs increased $3.8 million, increasing only slightly as a percent revenue, in fiscal 1998. The increase in research and development reflects the Company's investment in software products and test processing technology. General and administrative expenses for fiscal 1998 increased by $11.9 million, and were up slightly as a percentage of revenue over fiscal 1997. These expenses increased due to several factors, including amortization of goodwill, information technology costs (including Y2K), and accruals established for variable compensation plans due to favorable operating results. Fiscal 1997 versus Fiscal 1996. The overall growth in operating expenses in fiscal 1997 over fiscal 1996 is heavily impacted by the Company's 1997 acquisitions. Beyond the increase in operating expenses due simply to added volume, these businesses by their nature (intellectual property licensing and sales, mainly software and assessment instruments) carry higher gross margins and higher operating expense percentages compared to the rest of the Company. Therefore, sales and marketing and general and administrative expenses increased not only in dollars, but as a percentage of revenues in fiscal 1997. Research and development expenses declined nominally in 1997 as certain of the acquisitions offset the need for internal research and development spending and allowed faster time to market. IMPACT OF YEAR 2000 Many currently installed computer systems and software are coded to accept only two-digit entries in the date code fields. These date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. This problem could result in system failures or miscalculations causing disruptions of business operations (including, among other things, a temporary inability to process transactions, send invoices or engage in other similar business activities). As a result, many companies' computer systems and software will need to be upgraded or replaced in order to comply with Year 2000 requirements. The potential global impact of the Year 2000 problem is not known, and, if not corrected in a timely manner, could affect the Company and the U.S. and world economy generally. The Company's product development processes currently contain steps to include Year 2000 compliance verification for all current and future products. Most of the Company's products are currently Year 2000 compliant, and all continuing products will be compliant before December 31, 1999. The Company named a full-time Year 2000 program leader and a team (consisting of representatives from each of its business units) to address internal and external Year 2000 issues. The Company's internal financial and other "IT" computer systems have been reviewed to assess and remediate Year 2000 problems, as have other "non-IT" systems such as security, HVAC, and telephone systems. In addition, executive management regularly monitors the status of the Company's Year 2000 remediation plans. The Company's Year 2000 compliance program includes the following phases: identifying systems with date sensitive points that will need to be addressed; carrying out remediation work to modify those systems or convert to new systems; conducting validation testing of systems and applications to ensure compliance; and transition preparedness activities. As of January 31, 1999, the Company believes it was approximately 75% completed with its total Year 2000 effort. The Company expects to be substantially complete by July, 1999, with the exception of transition activities described later. Through January 31, 1999, the Company has spent approximately $4.8 million addressing Year 2000 issues ($1.5 million in fiscal 1997 and $3.3 million in fiscal 1998.) The Company expects to incur approximately $2.0 million of Year 2000 expenses in fiscal 1999. These costs are below the costs that were originally estimated and consist of primarily the use of internal resources, with relatively minor external costs. All amounts are being expensed currently and are included in the Company's future operating plans and expectations. In addition, the Company has also made, and will continue to make, significant capital investments to enhance its internal business and service delivery systems. However, these investments are not driven principally by Year 2000 considerations. In addition, the Company is requesting assurances from its major suppliers that they are addressing the Year 2000 issue and that products purchased by the Company from such suppliers will function properly in the Year 2000. Also, contacts are being made with the Company's major customers. These actions are intended to help mitigate the possible external impact of the Year 2000 problem. However, it is impossible to fully assess the potential consequences to the Company of the Year 2000 problem in the event service interruptions from suppliers occur or in the event that there are disruptions in such infrastructure areas as utilities, communications, transportation, banking and government. Based on its assessments to date, the Company believes it will not experience any material disruption as a result of Year 2000 problems in internal processes, information processing or interfaces with major customers, or with processing orders and billing. However, if certain critical third-party providers, such as those providers supplying electricity, water or telephone service, experience difficulties resulting in disruption of service to the Company, a shutdown of the Company's operations at individual facilities could occur for the duration of the disruption. While the Company currently believes such disruptions of basic services and facility shutdowns are unlikely, there can be no absolute assurance that they will not occur. It is the Company's current belief that the more likely worst case Year 2000 scenario will be that NCS products do not operate properly for customers who have not installed Year 2000 compliant versions of NCS products or have not updated their own computing platform or network infrastructure to be operational in the Year 2000. The Company has developed, and continues to refine, transition preparedness plans to respond to a significantly increased number of customer calls at all its support locations to address these problems. The Company is also developing contingency plans to provide for continuity of processing in Year 2000 based on the outcome of its validation phase of its Year 2000 compliance program and the results of surveying its major suppliers and customers. Assuming no major disruption in service from utility companies or other critical third-party providers, the Company believes that it will be able to manage its total Year 2000 transition without any material effect on the Company's consolidated results of operations or financial condition. OTHER SIGNIFICANT TRANSACTIONS During fiscal 1996, in conjunction with the acquisition of Macro, NCS recorded one-time charges totaling $7.9 million, including $5.6 million of purchased research and development plus $2.3 million of acquisition related costs. INTEREST EXPENSE Interest expense decreased slightly in fiscal 1998 from fiscal 1997, and in fiscal 1997 from fiscal 1996. These decreases are due to slightly lower average borrowing levels. See Capital Resources and Liquidity below for further discussion of cash flow and debt. OTHER INCOME AND EXPENSE Other income and expense, net, was insignificant for fiscal 1998. Other income in fiscal 1997 decreased $1.3 million, due to lower invested cash balances as $48.8 million was used to fund acquisitions. Other income in fiscal 1996 includes interest income of $2.8 million principally from investment of the proceeds from the sale of the Company's Financial Systems business, and also from internally generated cash flows. INCOME TAXES The effective income tax rate was 39.90%, 40.0%, and 48.5% for fiscal 1998, 1997 and 1996, respectively. See Note 6 of Notes to Consolidated Financial Statements for a reconciliation to the statutory rate. The effective income tax rate for fiscal 1996 was higher than the statutory rate primarily as a result of the one time write-off of non-deductible purchased research and development. CAPITAL RESOURCES AND LIQUIDITY The Company began fiscal 1998 with $23.3 million of cash and cash equivalents. During fiscal 1998, NCS generated $58.7 million of cash from operating activities. Cash was used for acquisitions of $17.2 million, principally American Cybercasting Corporation (Education Structures), and $27.1 million was used for investments in property, plant, and equipment, including a significant expansion of facilities in Mesa, Arizona, and consolidation of three southern California facilities into one. Financing activities included the repayment of the $5.3 million unsecured note and $2.3 million (net) of convertible debentures. The Company paid dividends of $6.2 million during fiscal 1998. During fiscal 1997, the Company generated $49.5 million of cash from operating activities. Cash was used for acquisitions of $48.8 million, including $13.6 million to repurchase shares in the open market to offset shares issued to effect the acquisition of Virtual University Enterprises. $25.2 million was used for property, plant and equipment acquisitions including a new Company-owned facility in Melbourne, Australia and the outfitting of new leased facilities in Cedar Rapids, Iowa and Lawrence, Kansas. Investments totaling $7.1 million were made in internal administrative and service delivery systems during fiscal 1997, and the Company paid dividends of $5.5 million. The Company had long-term debt balances, including current maturities, of $9.4 million, $18.8 million and $20.1 million at January 31, 1999, 1998, and 1997, respectively. The items causing the changes in debt balances are described above. At January 31, 1999, the Company's debt to total capital ratio was 4.0% compared to 8.9% a year earlier and 10.6% two years earlier. The Company believes that the current debt to total capital ratio is at a level which will allow the Company significant flexibility to fund future growth initiatives. Accounts receivable, goodwill, accounts payable, accrued expenses and deferred income were impacted by acquisitions made in 1997 and by the increased level of operations during fiscal 1998 and 1997. The market risk inherent in the Company's market risk sensitive instruments is the potential loss arising from adverse changes in foreign currency exchange rates due to amounts permanently invested in foreign subsidiaries. The amount permanently invested in foreign subsidiaries and affiliates translated to dollars using the year end exchange rates is $16 million at January 31, 1999. The potential loss in fair value resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates is $1.6 million. Actual results may differ. The Company's exposure to interest rate changes upon the fair value of long term debt is immaterial. Looking toward fiscal 1999, the Company maintains a $50.0 million revolving credit facility, all of which was available at January 31, 1999. The Company expects its cash flows from operations, the revolving credit facility and cash on hand to be adequate to meet foreseeable cash requirements, including internal growth and potential acquisitions. NEW ACCOUNTING STANDARDS Certain accounting standards have been issued which the Company is not yet required to adopt. See Notes to Consolidated Financial Statements for a discussion of the applicable standards. The statements which are not historical or current facts or are "goals" or "expectations" contained in this annual report constitute `forward looking' statements, as defined in the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially. The cautionary statements filed by the Company as Exhibit 99 to a filing made with the SEC on Form 10-K for the fiscal year ended January 31, 1998, are incorporated herein by reference and investors are specifically referred to such cautionary statements for a discussion of factors which could affect the Company's operations and forward-looking statements contained herein. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS January 31 (in thousands) 1999 1998 -------- -------- Assets Current Assets Cash and cash equivalents $ 16,310 $ 23,267 Receivables 128,751 101,334 Inventories 21,791 16,239 Prepaid expenses and other 7,225 6,562 -------- -------- Total Current Assets 174,077 147,402 -------- -------- Property, Plant and Equipment Land, buildings and improvements 63,018 57,281 Machinery and equipment 152,414 141,949 Accumulated depreciation (109,416) (105,206) -------- -------- 106,016 94,024 -------- -------- Intellectual Properties, net Acquired and internally developed software products 12,170 14,967 Assessment instruments 8,835 10,317 -------- -------- 21,005 25,284 -------- -------- Other Assets, net Goodwill 52,840 45,634 Other assets 8,533 3,070 -------- -------- 61,373 48,704 -------- -------- Total Assets $362,471 $315,414 ======== ======== See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS January 31 (in thousands) 1999 1998 -------- -------- Liabilities and Stockholders' Equity Current Liabilities Current maturities of long-term debt $ 3,758 $ 6,448 Accounts payable 35,809 26,767 Accrued expenses 51,779 36,237 Deferred income 32,209 29,026 Income taxes 3,883 4,156 -------- -------- Total Current Liabilities 127,438 102,634 -------- -------- Long-Term Debt - less current maturities 5,597 12,396 Deferred Income Taxes 2,570 6,390 Commitments and Contingencies - - Stockholders' Equity Preferred stock - - Common stock - issued and outstanding - 31,467 and 30,846 shares, respectively 944 925 Paid-in capital 10,760 4,518 Retained earnings 220,625 194,348 Accumulated other comprehensive income - Foreign currency translation adjustment (3,880) (2,343) Deferred compensation (1,583) (3,454) -------- -------- Total Stockholders' Equity 226,866 193,994 -------- -------- Total Liabilities and Stockholders' Equity $362,471 $315,414 ======== ======== See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year (in thousands, except per share amounts) 1998 1997 1996 -------- -------- -------- Revenues Information services $272,252 $195,793 $157,511 Product sales 180,634 161,977 134,144 Maintenance and support 52,486 48,245 39,504 -------- -------- -------- Total revenues 505,372 406,015 331,159 Costs of Revenues Cost of information services 207,151 150,106 123,718 Cost of product sales 73,696 67,950 62,075 Cost of maintenance and support 34,110 33,521 26,608 -------- -------- -------- Gross profit 190,415 154,438 118,758 Operating Expenses Sales and marketing 64,797 56,675 41,258 Research and development 12,388 8,628 9,883 General and administrative 57,959 46,091 33,076 Acquisition related charges: Purchased research and development - - 5,637 Other - - 2,258 -------- -------- -------- Income from Operations 55,271 43,044 26,646 Interest expense 936 1,353 1,677 Other (income) expense, net 224 (284) (1,564) -------- -------- -------- Income from Continuing Operations Before Income Taxes 54,111 41,975 26,533 Income taxes 21,600 16,800 12,867 -------- -------- -------- Income from Continuing Operations 32,511 25,175 13,666 Income (loss) from discontinued operations, net of taxes of $(1,360) in 1996 - - (2,229) Gain on disposition, net of taxes of $29,031 in 1996 - - 38,143 -------- -------- -------- Net Income $ 32,511 $ 25,175 $ 49,580 ======== ======== ======== Basic Earnings per share Continuing operations $ 1.05 $ .83 $ .45 Discontinued operations - - (0.07) Gain on disposition - - 1.26 -------- -------- -------- Net Income per share $ 1.05 $ .83 $ 1.64 ======== ======== ======== Weighted Average Shares Outstanding 31,022 30,391 30,257 Diluted Earnings per share Continuing operations $ 1.00 $ .80 $ .44 Discontinued operations - - (0.07) Gain on disposition - - 1.22 -------- -------- -------- Net Income per share $ 1.00 $ .80 $ 1.59 ======== ======== ======== Weighted Average Shares Outstanding and Dilutive Potential Common Shares 32,589 31,864 31,069
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, 1996 30,729 $ 922 $ 2,966 $131,820 $(1,813) $(5,697) $128,198 Shares issued for employee stock purchase and option plans 490 15 3,475 - - - 3,490 Repurchase of common stock (724) (22) (6,860) (1,194) - - (8,076) Restricted stock awards (forfeitures), net (26) (1) 25 - - (24) - ESOP debt payment - - - - - 1,000 1,000 Restricted stock compensation accrual - - 394 - - 734 1,128 Cash dividends paid - $.18 per share - - - (5,521) - - (5,521) Net income - - - 49,580 - - 49,580 Foreign currency translation adjustment - - - - 235 - 235 ------- Subtotal - Comprehensive Income - - - - - - 49,815 -------------------------------------------------------------------------- Balance, January 31, 1997 30,469 914 - 174,685 (1,578) (3,987) 170,034 Shares issued for employee stock purchase and option plans 283 8 2,693 - - - 2,701 Repurchase of common stock (1,082) (32) (13,467) - - - (13,499) Restricted stock awards 91 3 1,758 - - (1,761) - Shares issued for business acquisition 1,085 32 13,534 - - - 13,566 ESOP debt payment - - - - - 1,000 1,000 Restricted stock compensation accrual - - - - - 1,294 1,294 Cash dividends paid - $.18 per share - - - (5,512) - - (5,512) Net income - - - 25,175 - - 25,175 Foreign currency translation adjustment - - - - (765) - (765) ------- Subtotal - Comprehensive Income - - - - - - 24,410 -------------------------------------------------------------------------- Balance, January 31, 1998 30,846 925 4,518 194,348 (2,343) (3,454) 193,994 Shares issued for employee stock purchase and option plans 512 15 3,656 - - - 3,671 Restricted stock awards (forfeitures), net (66) (1) (209) - - (1,410) (1,620) Shares issued for convertible debenture 175 5 2,795 - - - 2,800 ESOP debt payment - - - - - 1,000 1,000 Restricted stock compensation accrual - - - - - 2,281 2,281 Cash dividends paid - $.20 per share - - - (6,234) - - (6,234) Net income - - - 32,511 - - 32,511 Foreign currency translation adjustment - - - - (1,537) - (1,537) ------- Subtotal - Comprehensive Income - - - - - - 30,974 --------------------------------------------------------------------------- Balance, January 31, 1999 31,467 $ 944 $10,760 $220,625 $(3,880) $(1,583) $226,866 ====== ===== ======= ======== ======= ======= ========
See Notes to Consolidated Financial Statements. NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year (in thousands) 1998 1997 1996 ------- ------- ------- Operating Activities Net income $32,511 $25,175 $49,580 Less - gain on disposition - - (38,143) Adjustments to reconcile to net cash provided by operating activities: Depreciation 20,755 16,825 15,620 Amortization 12,049 13,291 9,647 Deferred income taxes and other (2,237) (661) (2,053) Non-cash charges - - 6,637 Changes in operating assets and liabilities (net of acquired amounts): Accounts receivable (26,967) (15,361) (4,318) Inventory and other current assets (6,249) 1,712 2,495 Accounts payable and accrued expenses 26,341 8,087 (3,856) Deferred income 2,461 424 2,912 ------- ------- ------- Net Cash Provided By Operating Activities 58,664 49,492 38,521 ------- ------- ------- Investing Activities Acquisitions, net (17,246) (35,216) (11,192) Purchases of property, plant and equipment (27,145) (25,174) (14,909) Purchases of business systems (8,928) (7,108) (1,048) Capitalized software products - - (1,553) Net proceeds from disposition - - 64,071 Other - net 719 1,148 3,296 ------- ------- ------- Net Cash Provided By (Used In) Investing Activities (52,600) (66,350) 38,665 ------- ------- ------- Financing Activities Repayment of secured notes - - (15,000) Net increase (decrease) in other borrowings (6,413) (676) 846 Repurchase of common stock, net (374) (11,766) (4,586) Dividends paid (6,234) (5,512) (5,521) ------- ------- ------- Net Cash Used In Financing Activities (13,021) (17,954) (24,261) ------- ------- ------- Increase (Decrease) In Cash and Cash Equivalents (6,957) (34,812) 52,925 Cash and Cash Equivalents - Beginning of Year 23,267 58,079 5,154 ------- ------- ------- Cash and Cash Equivalents - End of Year $16,310 $23,267 $58,079 ======= ======= =======
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 ----------- ---------- 1998 - January 31, 1999 1997 - January 31, 1998 1996 - January 31, 1997 PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions between consolidated entities have been eliminated. Certain reclassifications have been made to prior year presentations to conform to current year presentation. USE OF ESTIMATES: The consolidated financial statements have been prepared in accordance with the generally accepted accounting principles which require management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Those assumptions and estimates are subject to constant revision, and actual results could differ from those estimates. CASH AND EQUIVALENTS: All investments purchased with an original maturity of three months or less are considered to be cash equivalents. Cash equivalents are available for sale, are carried at cost which approximates fair market value and consist principally of corporate commercial paper. INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or market. Components of inventory as of January 31, are summarized as follows: 1999 1998 - ---------------------------------------------------------------- Finished goods $ 5,096 $ 5,166 Scoring services and work in process 14,442 8,218 Raw materials and purchased parts 2,253 2,855 - ---------------------------------------------------------------- $21,791 $16,239 ================================================================ PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost and depreciated over the estimated useful lives of the assets, ranging from two to forty years, using principally the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Significant improvements are capitalized to property, plant and equipment accounts, while maintenance and repairs are expensed currently. ACQUIRED AND INTERNALLY DEVELOPED SOFTWARE PRODUCTS: Acquired software product amounts originate from the allocation of purchase prices of acquired companies and direct acquisition of software, or rights to software. These products are generally large, complex, mission-critical application software packages with established market positions. Products in this category are generally assigned lives of five to ten years. Internally developed software products represent costs capitalized in accordance with Statement of Financial Accounting Standards (SFAS) No. 86. Accordingly, software production costs incurred subsequent to establishing technological feasibility, as defined, are capitalized. Amortization of these products is computed on a product by product basis ratably as a percentage of estimated revenue, subject to minimum straight-line amortization over the products' estimated useful lives of five years or less. Expected revenues and useful lives are estimates which are subject to changes in technology and marketplace requirements and are, therefore, subject to revision. The Company periodically evaluates its software products for impairment by comparison of the carrying value of the product against anticipated product margins. The carrying value is adjusted, if necessary. A summary of software activity is as follows: Internally Accumulated Acquired Developed Amortization Net - ------------------------------------------------------------------------------- Balance, January 31, 1996 $10,324 $18,532 $(17,189) $11,667 Additions 13,000 - - 13,000 Write-downs and dispositions - (6,539) 4,517 (2,022) Amortization - - (5,067) (5,067) - ------------------------------------------------------------------------------- Balance, January 31, 1997 23,324 11,993 (17,739) 17,578 Additions 1,010 - - 1,010 Amortization - - (3,621) (3,621) - ------------------------------------------------------------------------------- Balance, January 31, 1998 24,334 11,993 (21,360) 14,967 Additions 900 - - 900 Write-downs and dispositions (225) (555) 566 (214) Amortization - - (3,483) (3,483) - ------------------------------------------------------------------------------- Balance, January 31, 1999 25,009 11,438 Accumulated Amortization (12,839) (11,438) (24,277) - ------------------------------------------------------------------------------- Net Balance, January 31, 1999 $12,170 $ - $12,170 =============================================================================== ASSESSMENT INSTRUMENTS: These amounts originate from the allocation of purchase prices of acquired companies and direct acquisition of assessment instruments. These products gain prominence over time and generally have relatively long market lives once established. Products in this category are assigned amortizeable lives of ten years or less. Expected revenues and amortizeable lives are subject to revision and balances are periodically evaluated for possible impairment. Accumulated amortization at January 31, 1999 and 1998 was $5,331 and $3,849, respectively. GOODWILL: Goodwill arising from business acquisitions is amortized on a straight-line basis over periods ranging from five to twenty years. Amortization expense was $4,489, $3,047, and $703 in fiscal 1998, 1997 and 1996, respectively. Accumulated amortization was $11,480 and $7,130 as of January 31, 1999 and 1998, respectively. The Company periodically evaluates its goodwill for impairment by comparison of the carrying value against anticipated business performance. ACCRUED EXPENSES: Major components of accrued expenses consisted of the following as of January 31: 1999 1998 - ------------------------------------------------ Employee compensation $27,899 $17,604 Taxes other than income 4,473 3,558 Other 19,407 15,075 - ------------------------------------------------ $51,779 $36,237 ================================================ REVENUE RECOGNITION: Revenue from product sales and software licensing is recognized at the time of shipment, except in instances where material fulfillment obligations exist beyond shipment. In such cases, revenue is not recognized until such obligations are substantially fulfilled or is recognized in accordance with specific contract terms. Revenue from information services is recognized when such service is performed. Hardware maintenance and software support revenues are recognized ratably over the contractual period. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, Software Revenue Recognition, which requires that each element of a software licensing arrangement be separately identified and accounted for based on the relative fair values of each element. The Company's software revenue recognition policies and related procedures were in compliance with the SOP, therefore, the effect of adoption as of February 1, 1998 on transactions occurring in fiscal 1998 was not material. PER SHARE DATA: Earnings per share are calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share". The following table is a reconciliation of the earnings numerator and the weighted-average shares denominator used in the calculations of basic and diluted earnings per share (in thousands, except per share data):
1998 1997 1996 ------- -------- ------- Earnings: Income from continuing operations Basic earnings per share $32,511 $25,175 $13,666 Adjustments for dilutive securities: Interest expense on convertible debentures, net of tax 222 256 7 ------- ------- ------- Adjusted income from continuing operations for diluted earnings per share $32,733 $25,431 $13,673 ======= ======= ======= Weighted Average Shares: Basic average shares 31,022 30,391 30,257 Adjustments for dilutive securities: Employee stock options, net of tax proceeds 981 620 402 Contingent stock awards, net of tax proceeds 81 270 394 Convertible debentures 505 583 16 ------- ------- ------- Diluted average shares 32,589 31,864 31,069 ------- ------- ------- Basic earnings per share from continuing operations $ 1.05 $ 0.83 $ 0.45 ======= ======= ======= Diluted earnings per share from continuing operations $ 1.00 $ 0.80 $ 0.44 ======= ======= =======
IMPAIRMENT OF LONG-LIVED ASSETS: The Company is in compliance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present. STOCK-BASED COMPENSATION: The Company has elected to continue to account for stock options and awards to employees under the provisions of Accounting Principles Board (APB) Opinion No. 25 and disclose the impact of SFAS No. 123, as if adopted, in Note 7. INTERNAL USE SOFTWARE: In March, 1998, the AICPA issued Statement of Position (SOP) 98-1 Accounting for the Costs of Computer Software Developed for or Obtained for Internal Use. The SOP requires the capitalization of certain costs incurred in connection with developing or obtaining software for internal use. The Company already complies with the provisions of the SOP. DERIVATIVES AND HEDGING: In June, 1998, the FASB issued SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, which requires the Company to recognize all derivatives on the balance sheet at fair value effective February 1, 2000. The Company does not anticipate that the adoption of this Statement will have a significant effect on its result of operations or financial position. NOTE 2 - ACQUISITIONS In September 1998, the Company acquired all of the common and preferred stock of American Cybercasting Corporation (ACC), also known as Educational Structures, a business specializing in customized K-12 teacher support tools for lesson planning and curriculum support. The purchase price was approximately $12.6 million. The excess of the purchase price over book value of the net assets acquired, as adjusted for deferred taxes, was $10.8 million, all of which was allocated to goodwill and is being amortized over 20 years. The acquisition was accounted for as a purchase and, accordingly, operating results of Educational Structures are included in the Company's consolidated financial statements subsequent to the date of acquisition. In April 1997, the Company acquired all of the common and preferred stock of Virtual University Enterprises (VUE), an electronic course registration and training administration company. The purchase price was approximately $14.6 million and consisted of stock of the Company (1,085,264 shares at $12.50 per share) and cash. The excess of the purchase price, as adjusted for deferred taxes, over book value of the net assets acquired was $16.4 million, of all of which was allocated to goodwill and is being amortized over 20 years. In July 1997, the Company acquired the assets of two businesses from The McGraw-Hill Companies for $29.5 million in cash. The acquisition included London House, a pre-employment assessment business, and McGraw Hill School Systems, a school administrative software business. The purchase price was allocated primarily to goodwill, $20.4 million, and assessment instruments, $9.1 million, which are being amortized over 10 years. The Company made two additional acquisitions in fiscal 1997 whose acquisition prices totaled $5.0 million, of which $4.2 million was allocated to goodwill. All of the fiscal 1997 acquisitions described above were accounted for as purchases and, accordingly, operating results of these businesses subsequent to the date of acquisition were included in the Company's consolidated financial statements. The following is a summary of pro forma operating results as if the fiscal 1997 acquisitions had taken place at the beginning of fiscal 1996: Fiscal Year (unaudited) 1997 1996 -------- -------- Total revenues $420,843 $384,923 Income from continuing operations before income taxes 39,497 18,158 Income from continuing operations 23,698 8,641 Basic earnings per share $ 0.78 $ 0.29 Diluted earnings per share $ 0.75 $ 0.28 The pro forma information is provided for informational purposes only. It is based on historical information and does not purport to be indicative of the results that would have occurred had the acquisitions been made at the beginning of fiscal 1996,or of future results, as significant changes to their operations, products and cost and expense structures have taken place since acquisition. On January 21, 1997, the Company acquired all of the common stock of Macro Educational Systems, Inc. (Macro), a California-based developer of administrative software for the K-12 educational market, for approximately $13.9 million, through the issuance of $7.0 million of convertible debentures and cash. Additional payments up to $6.0 million may be earned between 1998 and 2001, subject to achieving certain earnings levels. The acquisition was accounted for as a purchase and, accordingly, operating results of this business subsequent to the date of acquisition were included in the Company's fiscal 1996 consolidated financial statements. The excess of the purchase price, as adjusted for deferred taxes, over book value of the net assets acquired was $22.4 million, of which $13.0 million was allocated to acquired software, $5.6 million to purchased in-process research and development and $3.8 million to goodwill and other intangible assets. The purchased in-process research and development was charged to operations upon acquisition, and the goodwill and other intangible assets are being amortized over 10 years. In connection with the acquisition, the Company recorded a $2.3 million pre-tax charge related to impairments and redundancies in the Company's existing administrative software business. This included a $1.0 million non-cash charge to write-down software assets and $1.3 million to cover other costs directly related to the merger of the two operations. The Company made three additional acquisitions in fiscal 1996, whose acquisition prices totaled $5.1 million, of which $1.9 million was allocated to goodwill. NOTE 3 - DISCONTINUED OPERATIONS The Company sold its Financial Systems segment on July 10, 1996 to SunGard Data Systems, Inc. for $95.0 million in cash. The gain on the sale, recorded in the second quarter 1996, was $38.1 million net of tax. The results of the Financial Systems segment up to disposition have been classified as discontinued operations in the accompanying financial statements. The segment's 1996 revenues through the date of sale were $17.1 million. NOTE 4 - LEASES The Company leases office facilities under noncancelable operating leases which expire in various years through 2004. Rental expense for all operating leases was $12,921 in fiscal 1998, $9,167 in fiscal 1997, and $8,544 in fiscal 1996. Future minimum rental expense as of January 31, 1999, for noncancelable operating leases with initial or remaining terms in excess of one year is $27,031 and is payable as follows: fiscal 1999 - $6,920; fiscal 2000 - $6,038; fiscal 2001 - $5,726; fiscal 2002 - $4,441; fiscal 2003 - $2,125 and $1,781 beyond. In August 1997, the Company entered into a five-year operating lease agreement for a facility in Cedar Rapids, Iowa. The total cost of the assets covered by the lease as of January 31, 1999 was $12,403. The lease provides for a substantial residual value guarantee by the Company at the end of the initial term and includes purchase and renewal options at fair market values. The amounts of future minimum operating lease payments listed above excludes any payment related to the residual value guarantee which is due upon termination of the lease. The Company has the right to exercise a purchase option with respect to the leased building or the building can be sold to a third party. The Company expects the fair market value of the building, subject to the purchase option or sale to a third party, to substantially reduce or eliminate the Company's payment under the residual value guarantee. The Company is obligated to pay the difference between the maximum amount of the residual value guarantee and the fair market value of the building at the termination of the lease. At January 31, 1999 the maximum amount of the residual value guarantee relative to the assets under lease is approximately $10,500. NOTE 5 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS Long-term debt at January 31, consisted of the following: 1999 1998 - -------------------------------------------------- Revolving credit borrowing $ - $ - Convertible debentures 4,700 7,000 Unsecured note - 5,228 ESOP borrowing 1,000 2,000 Other borrowings 3,655 4,616 - -------------------------------------------------- 9,355 18,844 Less current maturities (3,758) (6,448) - -------------------------------------------------- Long-term debt $ 5,597 $12,396 ================================================== Revolving Credit Borrowings: The Company has a $50,000 unsecured revolving credit facility that terminates November 1, 2002. Interest on debt outstanding under this facility is computed, at the Company's discretion, based on the prime rate or the London Interbank Offered Rate (LIBOR). The Company pays a fee at an annual rate of .15% on the facility amount. The credit facility contains covenants with which the Company is in compliance. Convertible Debentures: In January 1997 the Company issued Convertible Debentures as partial consideration for the stock purchase of Macro, see Note 2. These debentures are due in annual installments, carry an interest rate of approximately 6.1%, and are convertible into common stock at $12.00 per share. Unsecured Note: This unsecured term note was repaid in full in May 1998. ESOP Borrowing: The ESOP loan, secured by unallocated shares of Common Stock and guaranteed by the Company, is due in May 1999. The loan has annual payments of $1,000, with an interest rate of .75% over LIBOR. Scheduled Maturities: The aggregate principal amounts of long-term debt scheduled for repayment in each of the five fiscal years 1999 through 2003 are $3,758, $1,986, $1,708, $106 and $101, respectively, with $1,696 due thereafter. In each fiscal year, interest paid approximates interest expense. NOTE 6 - INCOME TAXES The components of the provision for income taxes from continuing operations are as follows: Current ----------------------- Fiscal Year Federal State Foreign Deferred Total - ----------------------------------------------------------------- 1998 $18,495 $3,003 $1,682 $(1,580) $21,600 1997 14,540 2,806 1,300 (1,846) 16,800 1996 16,197 1,320 864 (5,514) 12,867 - ----------------------------------------------------------------- The provision for income taxes from discontinued operations was $27,671 for the fiscal year 1996. Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of January 31, are as follows: 1999 1998 ------ ------ Deferred tax assets: Reserves for uncollectibles $ 3,513 $2,561 Foreign operating loss carryforwards 3,659 2,826 Accrued vacation pay 2,051 1,792 Rotable service parts amortization 700 980 Intangible amortization 1,552 1,453 Other 2,900 602 Deferred expenses 794 783 Valuation allowance (3,659) (2,826) - ------------------------------------------------------------ Total deferred tax assets 11,510 8,171 - ------------------------------------------------------------ Deferred tax liabilities: Acquired intangible amortization 5,132 7,688 Accelerated depreciation 5,070 4,542 Net capitalized software 3,706 1,921 Other 172 410 - ------------------------------------------------------------ Total deferred tax liabilities 14,080 14,561 - ------------------------------------------------------------ Net deferred tax liabilities $ 2,570 $ 6,390 ============================================================ A reconciliation of the Company's statutory and effective tax rate from continuing operations is presented below: 1998 1997 1996 ------ ------ ------ Statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 3.6 4.4 3.2 Intangible amortization 0.5 1.0 1.7 Affordable housing and other credits (0.8) (0.9) (2.1) Foreign operating losses 1.6 1.1 3.2 Purchased research and development - - 7.4 Other - (0.6) 0.1 - ---------------------------------------------------------------- Effective rate 39.9% 40.0% 48.5% ================================================================ The Company made income tax payments of $19,623, $18,991 and $47,693 in the fiscal years 1998, 1997, and 1996, respectively. NOTE 7 - STOCKHOLDERS' EQUITY The Company has 10,000,000 shares of $.01 par value Preferred Stock authorized and issuable in one or more series as the Board of Directors may determine; none is outstanding. 100,000,000 shares of $.03 par value Common Stock are authorized. There are no restrictions on retained earnings. In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the Company continues to elect to utilize APB Opinion No. 25 and related interpretations in accounting for its stock option plans, restricted stock plans and its employee stock purchase plan. If the Company had elected to recognize compensation cost based on the fair value of the options granted, restricted shares awarded and shares sold pursuant to the purchase plan as prescribed by SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below for the fiscal years 1998, 1997, and 1996: 1998 1997 1996 ------- ------- ------- Net income - as reported $32,511 $25,175 $49,580 Net income - pro forma 30,041 23,988 49,069 Earnings per share - as reported: Basic $ 1.05 $ .83 $ 1.64 Diluted 1.00 .80 1.59 Earnings per share - pro forma: Basic $ .97 $ .79 $ 1.62 Diluted .93 .76 1.58 SFAS No. 123 is applicable only to options granted after December 31, 1994; as a result, its pro forma effect will not be fully impacted until these options become fully exercisable. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions for the fiscal years shown: 1998 1997 1996 ------- ------- ------- Expected dividend yield .26% .58% .78% Expected stock price volatility 35% 30% 45% Risk-free interest rate 5.16% 6.23% 6.18% Expected life of options 5 years 5 years 5 years The weighted-average fair value of the options granted during fiscal years 1998, 1997, and 1996 were $8.53, $4.40, and $5.16, respectively. The Company has four Employee Stock Option Plans (1986, 1990, 1995 and 1997). Options to purchase Common Stock of the Company are granted to employees at 100% of fair market value on the date of grant and are exercisable over a 60 or 63 month period. Shares available for grant under the Plans totaled 278,780, 669,700, and 454,000 at January 31, 1999, 1998 and 1997, respectively. Outstanding options under all plans, including non-qualified options discussed below are summarized as follows: Weighted Average Price Shares Per Share ------- ------------- Balance, January 31, 1996 1,893,900 $ 7.60 Granted 451,700 11.37 Cancelled (188,900) 8.27 Exercised (462,580) 7.43 --------- ----- Balance, January 31, 1997 1,694,120 8.57 Granted 862,148 13.13 Cancelled (92,908) 9.51 Exercised (309,246) 7.57 --------- ------ Balance, January 31, 1998 2,154,114 10.50 Granted 600,900 23.23 Cancelled (64,380) 14.44 Exercised (417,320) 7.87 --------- ------ Balance, January 31, 1999 2,273,314 $14.15 ========= ====== Options for 633,537; 679,182; and 627,140 shares were exercisable at January 31, 1999, 1998 and 1997, with weighted average exercise prices of $9.76, $8.07, and $7.43, respectively. Exercise prices for options outstanding as of January 31, 1999 are summarized as follows:
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 - 8.00 308,434 $ 6.20 1.5 years 226,737 $ 6.17 8.38 - 12.00 579,740 10.45 2.3 years 271,460 10.26 12.25 - 18.75 797,740 13.48 4.0 years 117,340 13.78 20.00 - 35.19 587,400 22.89 4.9 years 18,000 21.50 --------- ------ ------- ------ 2,273,314 $14.15 633,537 $ 9.76 ========= ====== ======= ======
During fiscal 1998 and 1997, pursuant to the 1997 Long-Term Incentive Plan (L-TIP), non-qualified options to purchase 129,000 and 336,000 shares of Common Stock of the Company were granted to participants at 100% of fair market value on date of grant. These options are exercisable 67 months after date of grant and expire 72 months after date of grant. Vesting can be accelerated to 36 months from date of grant on achievement of specified cumulative earnings per share and stock price targets during the three fiscal years then ended. At January 31, 1999, there were 465,000 options shares outstanding at a weighted average exercise price per share of $14.61. The Company also has a long term cash incentive program, which pays for performance in excess of the three year earnings per share and stock price targets. The Company has an Employee Stock Purchase Plan. There were 422,267 shares available for purchase under the Plan at January 31, 1999. NOTE 8 - EMPLOYEE BENEFIT PLANS EMPLOYEE SAVINGS PLAN: The Company has a qualified 401(k) Employee Savings Plan covering substantially all employees. Company contributions are discretionary. The Company's contributions to the Plan, representing 401(k) matching contributions only, were $3,011, $2,195, and $1,638 in fiscal years 1998, 1997 and 1996, respectively. EMPLOYEE STOCK OWNERSHIP PLAN: The Company has an Employee Stock Ownership Plan (ESOP) covering substantially all employees. Benefits, to the extent vested, become available upon retirement or termination of employment. During 1989, the ESOP Trust borrowed $10,000 to purchase 1,584,000 shares of Common Stock. Each year, the Company makes contributions to the ESOP which are charged to compensation expense, and used by the ESOP Trust to make loan interest and principal payments. With each principal payment, a portion of the Common Stock is allocated to participating employees. In fiscal 1998, the Company's contribution to the Plan was $1,000 plus interest of $17, which is net of dividends on unallocated shares of $63. The Company's contribution to the Plan was $1,000 in fiscal 1997 and fiscal 1996, and interest, which was totally offset by dividends on unallocated shares, was $61 in fiscal 1997 and $77 in fiscal 1996. There were 158,400 and 316,800 unallocated shares at January 31, 1999 and 1998, respectively. The ESOP Trust borrowing, which is guaranteed by the Company, is reflected in long-term debt, and the Company's obligation to make future contributions to the ESOP for debt repayment is reflected as a reduction of Stockholders' Equity in the consolidated financial statements. NOTE 9 - CONTINGENCY On April 30, 1997, the Company was served with a summons and complaint in a lawsuit filed against the Company by a former customer. The lawsuit alleges certain claims against the Company in connection with certain loan processing and servicing agreements and seeks out-of-pocket damages, lost profits and compensation for extraordinary defaults and lost interest that it claims resulted from breaches by the Company. The customer also seeks to have the Company acquire certain student loans with unpaid principal, interest and late charges, which loans it claims are or have been in default and were incorrectly processed or serviced by the Company. The Company has tendered the defense of the claims to its insurer, and the insurer accepted the defense subject to a reservation of rights. The Company has filed an answer to the complaint denying the claims, and the Company intends to vigorously defend against the lawsuit. In addition, the Company has filed a counterclaim against the former customer and a corporate affiliate seeking compensatory damages and contribution and indemnity. The Company does not believe that the outcome of this litigation would result in a material adverse effect on the Company's consolidated financial position or results of operations. NOTE 10 - BUSINESS SEGMENT INFORMATION The Company has five reportable segments as follows: o Assessments and Testing Services - provides comprehensive K-12 academic testing services to states, and test scoring services in support of major test publishers. This segment also provides clinical psychology and workforce development assessment instruments and electronic certification and licensure examinations. o Education Software and Services - provides student, curriculum, instructional management, and financial management software, software support, and professional implementation services, and network design and installation services. o NCS Services - delivers principally outsourcing services for large-scale data management projects for government and business. o Data Collection Systems - manufactures and sells optical mark and image scanning systems and scannable forms. o International - provides many of the same products and services mentioned above, but sells and serves customers outside the United States through subsidiaries in Australia, Canada, Mexico, Hong Kong, and the U.K. and through distributors in other geographies. The Company's reportable segments are business units that offer different, but related, products and services to customer sets which can overlap. The reportable segments are managed separately by corporate officers who report directly to the CEO. The Company evaluates performance and allocates resources based on profit or loss from operations before interest and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The table below presents information by reportable segment.
Assessments Education Data & Testing Software & NCS Collection Services Services Services Systems International Totals ---------- ----------- ---------- ----------- -------------- -------- For the Period Ended 1/31/99 Revenues $160,958 $116,214 $99,371 $84,239 $44,590 $505,372 Income from operations 25,365 11,917 11,594 23,250 3,182 75,308 Depreciation and Amortization 10,022 8,563 2,572 4,794 2,649 28,600 Segment assets 106,996 88,857 47,934 41,950 28,924 314,661 For the Period Ended 1/31/98 Revenues $118,661 $ 88,474 $76,212 $82,692 $39,976 $406,015 Income from operations 20,289 9,266 7,375 21,767 1,912 60,609 Depreciation and Amortization 8,546 7,475 2,876 5,289 1,833 26,019 Segment assets 94,731 75,337 40,559 41,087 28,497 280,211 For the Period Ended 1/31/97 Revenues $ 98,959 $ 52,025 $70,679 $80,299 $29,197 $331,159 Income from operations 18,601 5,290 7,489 19,311 (723) 49,968 Acquisition Related Charges - (7,895) - - - (7,895) Depreciation and Amortization 5,855 6,077 2,361 5,057 1,583 20,933 Segment assets 48,134 55,295 39,619 38,162 24,980 206,190
The following table is a reconciliation of reportable segment information to the Company's consolidated totals. Fiscal -------------------------------- 1998 1997 1996 -------- -------- -------- Total Consolidated Revenue: $505,372 $406,015 $331,159 ======== ======== ======== Income From Operations: Total for reportable segments $ 75,308 $ 60,609 $ 49,968 Acquisition Related Charges - - 7,895 Unallocated amounts: Central G & A Expenses 20,037 17,565 15,427 Interest Expense 936 1,353 1,677 Other (Income) Expense 224 (284) (1,564) -------- -------- -------- Income from continuing operations before income taxes $ 54,111 $ 41,975 $ 26,533 ======== ======== ======== Depreciation and Amortization: Total for reportable segments $ 28,600 $ 26,019 $ 20,933 Corporate 4,204 4,097 4,334 -------- -------- -------- Total Depreciation and Amortization $ 32,804 $ 30,116 $ 25,267 ======== ======== ======== Assets: Total for reportable segments $314,661 $280,211 $206,190 Corporate Assets 47,810 35,203 67,730 -------- -------- -------- Total Consolidated Assets $362,471 $315,414 $273,920 ======== ======== ======== The Company's foreign operations and export sales are individually less than 10% of total revenues. Sales to all government agencies for the fiscal years ended January 31, 1999, 1998 and 1997 were $262,511; $185,186; and $180,993, of which $67,601; $63,005; and $62,278, respectively, were to U.S. government agencies, principally the U.S. Department of Education, with the remainder to state and local government agencies, predominantly school districts and state departments of education. The Company considers its credit risk in trade receivables to be minimal with regard to the governmental customers described above. With regard to the Company's non-governmental customers, credit investigations are performed to minimize credit losses, which historically have been insignificant. Note 11 - ACCUMULATED OTHER COMPREHENSIVE INCOME As of February 1, 1998, the Company adopted Statement of Financial Accounting Standard (SFAS) 130, Reporting Comprehensive Income. SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or stockholders' equity. SFAS 130 requires the Company's foreign currency translation adjustments, which prior to adoption were reported in retained earnings to be separately classified as other comprehensive income. Prior year financial statements have been reclassified to conform to the current requirements. The earnings associated with the Company's investment in its' foreign subsidiary are considered to be permanently invested and no provision for U.S. federal and state income taxes on those earnings or translation adjustment has been provided. EX-21 6 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 Professional Assessment Services Division of National Computer Systems, Inc. Macro Educational Systems, Inc. California National Computer Systems, Inc. Education Software and Services Division of National Computer Systems, Inc. Note: No other subsidiary of National Computer Systems, Inc. meets the conditions to be deemed a significant subsidiary. EX-23 7 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 1, 1999, included in the 1998 Annual Report to Stockholders of National Computer Systems, Inc. and subsidiaries. We also consent to the incorporation by reference in: Registration Statement No. 33-9830 on Form S-3 (Selling Shareholder), Registration Statement No. 33-21511 on Form S-8 (1986 Employee Stock Option Plan), Registration Statement No.333-00377 on Form S-8 (1989 Non-Employee Director Stock Option Plan), Registration Statements No.33-48509 and 333-00381 on Form S-8 (1990 Employee Stock Option Plan), Registration Statement No. 333-00379 on Form S-8 (1990 Long-Term Incentive Plan), Registration Statement No. 33-48510 on Form S-8 (1992 Employee Stock Purchase Plan), Registration Statement No. 33-68854 on Form S-8 (Option held by former director), Registration Statement No. 333-00383 on Form S-8 (1995 Employee Stock Option Plan), Registration Statement No. 333-25523 on Form S-3 (VUE Selling shareholders), Registration Statement No. 333-25343 on Form S-8 (NCS/VUE Stock Option Plan), Registration Statement No. 333-51053 on Form S-8 (Oswald Stock Option Plan), Registration Statement No. 333-58947 on Form S-8 (1997 Long-Term Incentive Plan), Registration Statement No. 333-58949 on Form S-8 (1998 Employee Stock Purchase Plan), Registration Statement No. 333-58951 on Form S-8 (1997 Employee Stock Option Plan), and Registration Statement No. 333-75165 on Form S-8 (Supplemental Deferred Compensation Plan) of our report dated March 1, 1999 with respect to the consolidated financial statements incorporated herein by reference in this Annual Report (Form 10-K) of National Computer Systems, Inc. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota April 23, 1999 EX-24 8 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY FORM 10-K FOR YEAR ENDED JANUARY 31, 1999 The undersigned directors and officers of NATIONAL COMPUTER SYSTEMS, INC. hereby constitute and appoint J. W. Fenton, Jr., their true and lawful attorney-in-fact and agent, for each of them and in their name, place and stead, in any and all capacities (including without limitation, as Director and/or principal Executive Officer, principal Financial Officer, principal Accounting Officer or any other officer of the Company), to sign its Annual Report on Form 10-K for the year ended January 31, 1999, which is to be filed with the Securities and Exchange Commission, with all exhibits thereto, and any and all documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done, and hereby ratifying and confirming all that said attorney-in-fact and agent may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands this 2nd day of March, 1999. /s/ Russell A. Gullotti /s/ Moses S. Joseph - ------------------------- ------------------------ Russell A. Gullotti Moses S. Joseph /s/ /s/ Stephen G. Shank - ------------------------- ------------------------ William J. Cadogan Stephen G. Shank /s/ David C. Cox /s/ John E. Steuri - ------------------------- ------------------------ David C. Cox John E. Steuri /s/ Delores M. Etter /s/ Jeffrey W. Taylor - ------------------------- ------------------------ Delores M. Etter Jeffrey W. Taylor /s/ Jean B. Keffeler - ------------------------- Jean B. Keffeler POWER OF ATTORNEY FORM 10-K FOR YEAR ENDED JANUARY 31, 1999 The undersigned directors and officers of NATIONAL COMPUTER SYSTEMS, INC. hereby constitute and appoint J. W. Fenton, Jr., their true and lawful attorney-in-fact and agent, for each of them and in their name, place and stead, in any and all capacities (including without limitation, as Director and/or principal Executive Officer, principal Financial Officer, principal Accounting Officer or any other officer of the Company), to sign its Annual Report on Form 10-K for the year ended January 31, 1999, which is to be filed with the Securities and Exchange Commission, with all exhibits thereto, and any and all documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done, and hereby ratifying and confirming all that said attorney-in-fact and agent may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands this 2nd day of March, 1999. - ------------------------- ------------------------ Russell A. Gullotti Moses S. Joseph /s/ William J. Cadogan - ------------------------- ------------------------ William J. Cadogan Stephen G. Shank - ------------------------- ------------------------ David C. Cox John E. Steuri - ------------------------- ------------------------ Delores M. Etter Jeffrey W. Taylor - ------------------------- Jean B. Keffeler EX-27 9 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 31, 1999, and is qualified in its entirety by reference to such financial statements. 0000069999 NATIONAL COMPUTER SYSTEMS, INC. 1,000 U.S. Dollars 12-MOS JAN-31-1999 FEB-01-1998 JAN-31-1999 1.0 16,310 0 128,751 0 21,791 174,077 215,432 (109,416) 362,471 127,438 0 0 0 944 225,922 362,471 180,634 505,372 73,696 314,957 135,144 0 936 54,111 21,600 32,511 0 0 0 32,511 1.05 1.00
EX-99 10 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, including, but not limited to, the Company's need to modify or replace software to properly function in the year 2000. Difficulties or delays in the development, production, testing and marketing of the Company's products, including, but not limited to, a failure to ship new products and technologies when anticipated, (e.g., school administrative software products or new data collections services and systems) or delays or failures of acquired businesses in meeting projected business cases. The effects of, and changes in, trade, monetary and fiscal policies, laws and regulations, other activities of government agencies, particularly the U.S. Department of Education and local taxing authorities which fund education, and similar organizations; changes in social and economic conditions, such as trade restrictions or prohibitions, inflation and monetary fluctuations, import and other charges or taxes; the ability or inability of the Company to obtain, or hedge against, foreign currency, foreign exchange rates and fluctuations in those rates; unstable governments and legal systems, and intergovernmental disputes. Occurrences affecting the slope or speed of the life cycle curve for many of the Company's existing products, or affecting the Company's ability to reduce product and other costs, and to increase productivity. Difficulties in, and cost of, obtaining raw materials, supplies, electronic components and any other items needed for the production of the Company's scanning devices, scannable forms, and other products; and capacity constraints limiting the amounts of orders for these items causing effects on the Company's ability to ship its products. The costs and other effects of legal and administrative cases and proceedings; claims of customers, both current and former; settlements and investigations; and changes in those items; developments or assertions by or against the Company relating to intellectual property rights and licenses; adoption of new, or changes in, accounting policies and practices and the application of such policies and practices. The amount, and rate of growth in, the Company's selling, general and administrative expenses; and the impact of unusual items resulting from the Company's ongoing evaluation of its business strategies, asset valuations and organizational structures. The Company does NOT undertake and specifically declines any obligations to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. -----END PRIVACY-ENHANCED MESSAGE-----