EXHIBIT 13
FIVE YEAR FINANCIAL DATA
(Dollars in thousands, except per share amounts)
January 29, January 31,
----------- -----------------------------------------------
Year ended 2000 1999 1998 1997(2) 1996
----------- -------- -------- -------- --------
Financial Results
Revenues $629,545 $505,372 $406,015 $331,159 $300,883
Income from operations 69,588 55,271 43,044 26,646 30,704
Income from continuing operations
before income taxes 68,430 54,111 41,975 26,533 27,760
Income from continuing operations 42,930 32,511 25,175 13,666 16,580
Discontinued operations, net of taxes - - - (2,229) 5,679
Gain on disposition, net of taxes - - - 38,143 -
Net income 42,930 32,511 25,175 49,580 22,259
Net income per share from continuing
operations(1)
Basic earnings per share 1.35 1.05 0.83 0.45 0.54
Diluted earnings per share 1.30 1.00 0.80 0.44 0.53
Dividends paid per share 0.20 0.20 0.18 0.18 0.18
Financial Position
Total assets 449,880 362,471 315,414 273,920 219,724
Long-term debt, including
current maturities 1,786 9,355 18,844 20,148 27,008
Stockholders' equity $276,388 $226,866 $193,994 $170,034 $128,198
<FN>
(1) All references to share and per share data have been adjusted to give
retroactive effect to the 2-for-1 stock split declared in March 1998.
(2) Continuing operations include an acquisition related charge of $7,895
pre-tax, $6,992 after tax or $.23 per diluted share.
</FN>
QUARTERLY RESULTS OF OPERATIONS (unaudited)
(Dollars in thousands, except per share amounts)
Thirteen weeks ended May 1 July 31 October 30 January 29
-------- -------- ---------- ----------
Year Ended January 29, 2000
Revenues $125,817 $167,664 $162,920 $173,144
Gross profit 48,131 70,164 61,023 61,748
Net income 6,653 13,160 9,568 13,549
Basic earnings per share $ 0.21 $ 0.42 $ 0.30 $ 0.42
Diluted earnings per share $ 0.20 $ 0.40 $ 0.29 $ 0.41
Three months ended April 30 July 31 October 31 January 31
-------- -------- ---------- ----------
Year Ended January 31, 1999
Revenues $ 97,915 $128,128 $135,408 $143,921
Gross profit 37,522 51,276 47,375 54,241
Net income 5,095 9,742 7,758 9,916
Basic earnings per share $ 0.17 $ 0.31 $ 0.25 $ 0.32
Diluted earnings per share $ 0.16 $ 0.30 $ 0.24 $ 0.30
STOCK EXCHANGE LISTING
Common Stock of National Computer Systems, Inc. trades on The Nasdaq Stock
Market(R) under the symbol "NLCS".
QUARTERLY MARKET DATA
NCS had 2,438 and 2,128 Common Shareholders of record as of January 29, 2000 and
January 31, 1999, respectively.
Fiscal 1999
-----------------------------------------
Thirteen Weeks Ended
-----------------------------------------
May 1 July 31 October 30 January 29
------- ------- ---------- ----------
High $39.13 $35.88 $40.38 $41.75
Low 23.00 27.13 31.63 32.50
Close 28.00 34.25 37.81 36.06
Dividends per share $ 0.05 $ 0.05 $ 0.05 $ 0.05
Fiscal 1998
-----------------------------------------
Three Months Ended
-----------------------------------------
April 30 July 31 October 31 January 31
-------- ------- ---------- ----------
High $25.25 $27.00 $31.38 $38.25
Low 16.88 20.00 20.50 28.13
Close 25.00 22.25 28.00 38.25
Dividends per share $ 0.05 $ 0.05 $ 0.05 $ 0.05
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The fiscal years referenced herein are as follows:
Fiscal Year Year Ended
----------- ----------
1999 January 29, 2000
1998 January 31, 1999
1997 January 31, 1998
Income and Expense Items as a Percentage of Revenues
Fiscal Year 1999 1998 1997
- ------------------------------------------------------------
Revenues
Services 69.7% 64.3% 60.1%
Product sales 30.3 35.7 39.9
- ------------------------------------------------------------
Total revenues 100.0 100.0 100.0
Costs of Revenues (1)
Cost of services 71.7 74.3 75.2
Cost of product sales 38.7 40.8 42.0
- ------------------------------------------------------------
Total gross profit 38.3 37.7 38.0
Operating Expenses
Sales and marketing 11.0 12.8 14.0
Research and development 3.2 2.5 2.1
General and administrative 13.0 11.5 11.3
- ------------------------------------------------------------
Income from operations 11.1 10.9 10.6
Income before income taxes 10.9 10.7 10.3
Net income 6.8% 6.4% 6.2%
============================================================
(1) As a percentage of the respective revenue caption.
National Computer Systems, Inc. (the Company or NCS) is an information services
company, providing software, services and systems for the collection, management
and interpretation of data. The Company markets these products and services
predominantly to the education market, but also provides large scale data
collection and management services and products to business, government and
other markets.
RECAP OF 1999 RESULTS. Total revenues increased 24.6% in fiscal 1999 to $629.5
million compared to the prior year's $505.4 million. The Company's overall gross
margin on revenues increased 26.6% to $50.7 million, and as a percentage of
revenues, gross margin increased to 38.3% in fiscal 1999 from 37.7% in the prior
year. Operating expenses increased to 27.2% of revenues in fiscal 1999, compared
to 26.7% of revenues in fiscal 1998. Operating margins increased to 11.1% of
revenue in fiscal 1999 from 10.9% in fiscal 1998 and operating income in dollars
increased 25.9% to $69.6 million. Income tax rates were consistent with the
prior year, except for a one-time $2.0 million tax benefit described below. Net
income in fiscal 1999 totaled $42.9 million or $1.30 per diluted share
outstanding ($1.24 before the one-time tax benefit). This compares to the fiscal
1998 net income of $32.5 million and $1.00 per diluted share.
REVENUES
Fiscal 1999 versus Fiscal 1998. Total revenues for fiscal 1999 were up 24.6% to
$629.5 million from $505.4 million in fiscal 1998. Revenues increased in all
five business segments.
By revenue category, fiscal 1999 compares to fiscal 1998 as follows:
Services + 35.1%
Product sales + 5.7%
The Services revenue growth came from several sources, especially K-12
assessment testing, which grew by approximately $35 million over the prior year.
Student loan processing and other government outsourcing services grew
approximately $29 million. Electronic testing, commercial outsourcing, and
professional services related to education software also contributed to year on
year growth in services revenues. Fiscal 1999 increases in product sales came
principally from education software licensing and image scanning systems.
By major market, for fiscal 1999, revenues grew 25.2% from the education market
and 22.7% from the large scale data management (non-education) market. For
fiscal 1999 the education market accounted for approximately three-fourths of
total NCS revenues. Approximately 2% of the Company's overall revenue growth in
fiscal 1999 came from current year acquisitions.
Fiscal 1998 versus Fiscal 1997. Total revenues for fiscal 1998 were up 24.5% to
$505.4 million from $406.0 million in fiscal 1997.
By revenue category, fiscal 1998 compares to fiscal 1997 as follows:
Services + 33.1%
Product sales + 11.5%
The Services growth came from several sources, but approximately half was
attributable to assessment and testing services, which achieved over $16 million
of growth through one new state assessment program. Government and commercial
outsourcing and professional services related to education software also
contributed to services growth. Fiscal 1998 increases in product sales came
principally from education software licensing and related network hardware.
By major market, for fiscal 1998, revenues grew 28.8% from the education market
and 12.2% from the large scale data management (non-education) market. For
fiscal 1998 the education market accounted for 75% of total NCS revenues. Less
than 2% of the Company's overall revenue growth in fiscal 1998 came from 1998
acquisitions.
COST OF REVENUES AND GROSS PROFITS
Fiscal 1999 versus Fiscal 1998. The Company's overall gross profit dollars
increased $50.7 million, or 26.6%. As a percentage of revenue, gross margin
increased 0.6 percentage points to 38.3% from 37.7%. This increase reflects
increases in both revenue categories. Gross margins on services improved in all
the Company's business segments in 1999, but most notably in the NCS Services
segment which does government and commercial outsourcing services.
Product margins improved principally due to the mix of product moving toward
higher margin software offerings of the Education Software segment.
Fiscal 1998 versus Fiscal 1997. The Company's overall gross profit dollars
increased $36.0 million, or 23.3%. As a percentage of revenue, gross margin
declined 0.3 percentage points to 37.7% from 38.0%. This modest decline is due
entirely to revenue mix, as gross margins on both revenue lines improved. The
rapid growth of services influenced the overall gross margin percentage decline.
OPERATING EXPENSES
Fiscal 1999 versus Fiscal 1998. Sales and marketing expense increased $4.7
million or 7.2% in fiscal 1999 over the prior fiscal year. As a percentage of
revenues, sales and marketing declined by 1.8 percentage points, due to
relatively lower selling costs on services revenues.
Research and development costs increased $8.0 million or 64%, increasing as a
percent revenue from 2.5% to 3.2% from 1998 to 1999. This reflects an increased
level of investment in Internet delivered products and services, particularly
for the Education Software segment, as well as other product and service
offerings.
General and administrative expenses for fiscal 1999 increased by $23.7 million,
and as a percentage of revenue were up 1.7% over fiscal 1998. These expenses
increased due to several factors, including amortization of goodwill,
information technology costs (including Year 2000), expanded vacation benefits
and accruals established for variable compensation plans due to favorable
operating results.
Fiscal 1998 versus Fiscal 1997. Sales and marketing expense increased $8.1
million or 14.3% in fiscal 1998 over the prior fiscal year. As a percentage of
revenues, sales and marketing declined by 1.2 percentage points, due to
relatively lower selling costs on information services revenues.
Research and development costs increased $3.8 million, increasing only slightly
as a percent revenue, in fiscal 1998. The increase in research and development
reflects the Company's investment in software products and test processing
technology.
General and administrative expenses for fiscal 1998 increased by $11.9 million,
and were up slightly as a percentage of revenue over fiscal 1997. These expenses
increased due to several factors, including amortization of goodwill,
information technology costs (including Year 2000), and accruals established for
variable compensation plans due to favorable operating results.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
incurred approximately $2.0 million of costs during 1999 and about $7 million in
total in connection with remediating its systems. The Company is not aware of
any material problems resulting from Year 2000 issues, either with its products,
its internal systems, or the products and services of third parties. The Company
will continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
INTEREST EXPENSE
Interest expense decreased slightly in fiscal 1999 from fiscal 1998, and in
fiscal 1998 from fiscal 1997. These decreases are due to lower average borrowing
levels as debt has become insignificant in total. See Capital Resources and
Liquidity below for further discussion of cash flow and debt.
OTHER INCOME AND EXPENSE
Other income and expense, net, was insignificant for the three fiscal years
presented.
INCOME TAXES
The effective income tax rate was 37.3%, 39.9%, and 40.0% for fiscal 1999, 1998
and 1997, respectively. See Note 5 of Notes to Consolidated Financial Statements
for a reconciliation to the statutory rate. The effective income tax rate for
fiscal 1999 was lower than the statutory rate and prior years' effective rates
primarily due to the one-time tax benefit from the sale of a foreign subsidiary.
Without this one-time benefit, the 1999 effective tax rate would have been
40.3%.
CAPITAL RESOURCES AND LIQUIDITY
The Company began fiscal 1999 with $16.3 million of cash and cash equivalents.
During fiscal 1999, NCS generated $87.9 million of cash from operating
activities, which was an unusually high level - even considering the increased
volume - due to the buildup of a number of large accruals, particularly
long-term compensation and other employee benefits, which will actually be paid
in future years. Cash was used for the acquisition of NovaNET Learning, Inc.
($19.0 million), and for investments in property, plant, and equipment ($42.6
million), including a significant expansion of facilities in Austin, Texas and
several smaller testing centers around the U.S. Financing activities included
the repayment of $2.3 million of borrowings. The Company paid dividends of $6.4
million during fiscal 1999.
During fiscal 1998, the Company generated $58.7 million of cash from operating
activities. Cash was used for acquisitions of $17.2 million, principally
American Cybercasting Corporation (Education Structures), and for investments in
property, plant, and equipment ($27.1 million), including a significant
expansion of facilities in Mesa, Arizona, and consolidation of three southern
California facilities into one. Financing activities included the repayment of
the $5.3 million unsecured note and $2.3 million (net) of convertible
debentures. The Company paid dividends of $6.2 million during fiscal 1998.
The Company had long-term debt balances, including current maturities, of $1.8
million, $9.4 million and $18.8 million at January 29, 2000 and January 31, 1999
and 1998, respectively. At January 29, 2000, the Company's debt to total capital
ratio was 0.7% compared to 4.0% a year earlier and 8.9% two years earlier. The
Company believes that the current debt to total capital ratio is at a level
which will allow the Company significant flexibility to fund future growth
initiatives.
Accounts receivable, goodwill, accounts payable, accrued expenses and deferred
income were impacted by acquisitions made in 1998 and by the increased level of
operations during fiscal 1999 and 1998.
The market risk inherent in the Company's market risk sensitive instruments is
the potential loss arising from adverse changes in foreign currency exchange
rates due to amounts permanently invested in foreign subsidiaries. The amount
permanently invested in foreign subsidiaries and affiliates translated to
dollars using the year end exchange rates is $16 million at January 29, 2000.
The potential loss in fair value resulting from a hypothetical 10% adverse
change in quoted foreign currency exchange rates is $1.6 million. Actual results
may differ. The Company's exposure to interest rate changes upon the fair value
of long term debt is immaterial.
Looking toward fiscal 2000, the Company maintains a $50.0 million revolving
credit facility, all of which was available at January 29, 2000. The Company
expects its cash flows from operations, the revolving credit facility and cash
on hand to be adequate to meet foreseeable cash requirements, including internal
growth and potential acquisitions.
The statements which are not historical or current facts or are "goals" or
"expectations" contained in this annual report constitute `forward looking'
statements, as defined in the Private Securities Litigation Reform Act of 1995
and are subject to certain risks and uncertainties that could cause actual
results to differ materially. The cautionary statements filed by the Company as
Exhibit 99 to a filing made with the SEC on Form 10-K for the fiscal year ended
January 29, 2000, are incorporated herein by reference and investors are
specifically referred to such cautionary statements for a discussion of factors
which could affect the Company's operations and forward-looking statements
contained herein.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 29, January 31,
(in thousands) 2000 1999
----------- -----------
Assets
Current Assets
Cash and cash equivalents $ 26,592 $ 16,310
Receivables 151,870 128,751
Inventories 33,619 21,791
Prepaid expenses and other 9,932 7,225
-------- --------
Total Current Assets 222,013 174,077
-------- --------
Property, Plant and Equipment
Land, buildings and improvements 67,928 63,018
Machinery and equipment 189,835 152,414
Accumulated depreciation (125,654) (109,416)
-------- --------
132,109 106,016
-------- --------
Intellectual Properties, net
Software products 9,371 12,170
Educational content and assessment instruments 23,306 8,835
-------- --------
32,677 21,005
-------- --------
Other Assets, net
Goodwill 50,263 52,840
Other assets 12,818 8,533
-------- --------
63,081 61,373
-------- --------
Total Assets $449,880 $362,471
======== ========
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 29, January 31,
(in thousands) 2000 1999
----------- -----------
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt $ 1,270 $ 3,758
Accounts payable 38,546 35,809
Accrued expenses 73,163 51,779
Deferred income 51,785 32,209
Income taxes 6,570 3,883
-------- --------
Total Current Liabilities 171,334 127,438
-------- --------
Long-Term Debt - less current maturities 516 5,597
Deferred Income Taxes 1,642 2,570
Commitments and Contingencies - -
Stockholders' Equity
Preferred stock - -
Common stock - issued and outstanding -
32,348 and 31,467 shares, respectively 970 944
Paid-in capital 22,596 10,760
Retained earnings 257,195 220,625
Accumulated other comprehensive income -
Foreign currency translation adjustment (2,969) (3,880)
Deferred compensation (1,404) (1,583)
-------- --------
Total Stockholders' Equity 276,388 226,866
-------- --------
Total Liabilities and Stockholders' Equity $449,880 $362,471
======== ========
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year (in thousands, except per share amounts)
1999 1998 1997
-------- -------- --------
Revenues
Services $438,655 $324,738 $244,038
Product sales 190,890 180,634 161,977
-------- -------- --------
Total Revenues 629,545 505,372 406,015
Costs of Revenues
Cost of services 314,546 241,261 183,627
Cost of product sales 73,933 73,696 67,950
-------- -------- --------
Gross Profit 241,066 190,415 154,438
Operating Expenses
Sales and marketing 69,456 64,797 56,675
Research and development 20,358 12,388 8,628
General and administrative 81,664 57,959 46,091
-------- -------- --------
Income from Operations 69,588 55,271 43,044
Interest expense 725 936 1,353
Other (income) expense, net 433 224 (284)
-------- -------- --------
Income Before Income Taxes 68,430 54,111 41,975
Income taxes 25,500 21,600 16,800
-------- -------- --------
Net Income $ 42,930 $ 32,511 $ 25,175
======== ======== ========
Basic Earnings per share $ 1.35 $ 1.05 $ .83
======== ======== ========
Diluted Earnings per share $ 1.30 $ 1.00 $ .80
======== ======== ========
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Accumulated
--------------- Paid-In Retained Comprehensive Deferred
(in thousands, except per share amounts) Shares Amount Capital Earnings Income Compensation Total
------ ------ ------- -------- ------------- ------------- -------
Balance, January 31, 1997 30,469 $914 $ - $174,685 $(1,578) $(3,987) $170,034
Shares issued for employee stock
purchase and option plans 283 8 2,693 - - - 2,701
Repurchase of common stock (1,082) (32) (13,467) - - - (13,499)
Restricted stock awards 91 3 1,758 - - (1,761) -
Shares issued for business acquisition 1,085 32 13,534 - - - 13,566
ESOP debt payment - - - - - 1,000 1,000
Restricted stock compensation accrual - - - - - 1,294 1,294
Cash dividends paid - $.18 per share - - - (5,512) - - (5,512)
Net income - - - 25,175 - - 25,175
Foreign currency translation adjustment - - - - (765) - (765)
--------
Subtotal - Comprehensive Income - - - - - - 24,410
-------------------------------------------------------------------------
Balance, January 31, 1998 30,846 925 4,518 194,348 (2,343) (3,454) 193,994
Shares issued for employee stock
purchase and option plans 512 15 3,656 - - - 3,671
Restricted stock awards (forfeitures), net (66) (1) (209) - - (1,410) (1,620)
Shares issued for convertible debenture 175 5 2,795 - - - 2,800
ESOP debt payment - - - - - 1,000 1,000
Restricted stock compensation accrual - - - - - 2,281 2,281
Cash dividends paid - $.20 per share - - - (6,234) - - (6,234)
Net income - - - 32,511 - - 32,511
Foreign currency translation adjustment - - - - (1,537) - (1,537)
--------
Subtotal - Comprehensive Income - - - - - - 30,974
-------------------------------------------------------------------------
Balance, January 31, 1999 31,467 944 10,760 220,625 (3,880) (1,583) 226,866
Shares issued for employee stock
purchase and option plans 463 13 5,760 - - - 5,773
Restricted stock awards 60 2 1,787 - - (1,789) -
Shares issued for convertible debenture 358 11 4,289 - - - 4,300
ESOP debt payment - - - - - 1,000 1,000
Restricted stock compensation accrual - - - - - 968 968
Cash dividends paid - $.20 per share - - - (6,360) - - (6,360)
Net income - - - 42,930 - - 42,930
Foreign currency translation adjustment - - - - 911 - 911
--------
Subtotal - Comprehensive Income - - - - - - 43,841
-------------------------------------------------------------------------
Balance, January 29, 2000 32,348 $ 970 $22,596 $257,195 $(2,969) $(1,404) $276,388
====== ===== ======= ======== ======= ======= ========
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year (in thousands) 1999 1998 1997
------- ------- -------
Operating Activities
Net income $42,930 $32,511 $25,175
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation 24,996 20,755 16,825
Amortization 10,172 12,049 13,291
Deferred income taxes and other (349) (2,237) (661)
Changes in operating assets and liabilities
(net of acquired amounts):
Accounts receivable (21,903) (26,967) (15,361)
Inventory and other current assets (14,289) (6,249) 1,712
Accounts payable and accrued expenses 30,540 26,341 8,087
Deferred income 15,850 2,461 424
------- ------- -------
Net Cash Provided By Operating Activities 87,947 58,664 49,492
------- ------- -------
Investing Activities
Acquisitions, net of cash acquired (19,034) (17,246) (35,216)
Purchases of property, plant and equipment (42,618) (27,145) (25,174)
Purchases of business systems (8,679) (8,928) (7,108)
Other - net (1,678) 719 1,148
------- ------- -------
Net Cash Used In Investing Activities (72,009) (52,600) (66,350)
------- ------- -------
Financing Activities
(Decrease) Increase in other borrowings (2,269) (6,413) (676)
Issuance (Repurchase) of common stock, net 2,973 (374) (11,766)
Dividends paid (6,360) (6,234) (5,512)
------- ------- -------
Net Cash Used In Financing Activities (5,656) (13,021) (17,954)
------- ------- -------
Increase (Decrease) In Cash and Cash Equivalents 10,282 (6,957) (34,812)
Cash and Cash Equivalents - Beginning of Year 16,310 23,267 58,079
------- ------- -------
Cash and Cash Equivalents - End of Year $26,592 $16,310 $23,267
======= ======= =======
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - ACCOUNTING POLICIES
The fiscal years referenced herein are as follows:
Fiscal Year Year Ended
----------- ----------------
1999 - January 29, 2000
1998 - January 31, 1999
1997 - January 31, 1998
Effective February 1, 1999 the Company adopted a 52/53 week accounting cycle,
with the fiscal year ending on the Saturday nearest to January 31. The impact of
this change on the Company's quarterly and annual financial results in 1999 was
insignificant.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its subsidiaries. All intercompany accounts and
transactions between consolidated entities have been eliminated. Certain
reclassifications have been made to prior year presentations to conform to the
current year presentation.
USE OF ESTIMATES: The consolidated financial statements have been prepared in
accordance with the generally accepted accounting principles which require
management to make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Those assumptions
and estimates are subject to constant revision, and actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS: All investments purchased with an original maturity
of three months or less are considered to be cash equivalents. Cash equivalents
are available for sale, are carried at cost which approximates fair market value
and consist principally of corporate commercial paper.
INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or
market. Components of inventory as of the fiscal year end are summarized as
follows:
January 29, January 31,
2000 1999
- -----------------------------------------------------------------
Finished goods $ 5,881 $ 5,096
Scoring services and work in process 23,157 14,442
Raw materials and purchased parts 4,581 2,253
- -----------------------------------------------------------------
$33,619 $21,791
=================================================================
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost
and depreciated over the estimated useful lives of the assets, ranging from two
to forty years, using principally the straight-line method for financial
reporting purposes and accelerated methods for income tax purposes. Significant
improvements are capitalized to property, plant and equipment accounts, while
maintenance and repairs are expensed currently.
SOFTWARE PRODUCTS: Acquired software products held for sale originate from the
allocation of purchase prices of acquired companies and direct acquisition of
software, or rights to software. These products are generally large, complex,
mission-critical application software packages with established market
positions. Products in this category are generally assigned lives of five to ten
years, and are amortized on a straight line basis.
Internally developed software products represent costs capitalized in accordance
with Statement of Financial Accounting Standards (SFAS) No. 86. Accordingly,
software production costs incurred subsequent to establishing technological
feasibility, as defined, are capitalized. Amortization of amortized internally
developed products is computed on a product by product basis and ratably as a
percentage of estimated revenue, subject to minimum straight-line amortization
over the products' estimated useful lives, of five years or less. At January 29,
2000 all such capitalized amounts were fully amortized.
The Company periodically evaluates its software products for impairment by
comparison of the carrying value of the product against undiscounted cash flows.
Amortization expense of software products was $2,513 in 1999; $3,483 in 1998;
and $3,621 in 1997. Accumulated amortization of all software products was
$24,708 at January 29, 2000 and $24,277 at January 31, 1999.
EDUCATIONAL CONTENT AND ASSESSMENT INSTRUMENTS: These amounts originate from the
allocation of purchase prices of acquired companies and direct acquisition of
assessment instruments. These products gain prominence over time and generally
have relatively long market lives once established. Products in this category
are assigned amortizable lives of ten years or less. Amortizable lives are
subject to revision and balances are periodically evaluated for possible
impairment, based upon profitability goals and undiscounted cash flows.
Amortization expense of these products was $1,659 in 1999; $1,482 in 1998; and
$960 in 1997. Accumulated amortization was $6,080 and $4,339 at January 29, 2000
and January 31, 1999, respectively.
GOODWILL: Goodwill arising from business acquisitions is amortized on a
straight-line basis over periods ranging from five to twenty years. Amortization
expense was $5,146, $4,489, and $3,047 in fiscal 1999, 1998, and 1997,
respectively. Accumulated amortization was $16,687 and $11,480 as of January 29,
2000 and January 31, 1999, respectively. The Company periodically evaluates its
goodwill for impairment by comparison of the carrying value against anticipated
business performance based upon profitability goals and undiscounted cash flows.
ACCRUED EXPENSES: Major components of accrued expenses consisted of the
following:
January 29, January 31,
2000 1999
- ------------------------------------------------------
Employee compensation $46,789 $32,766
Taxes other than income 4,275 4,473
Other 22,099 14,540
- ------------------------------------------------------
$73,163 $51,779
======================================================
REVENUE RECOGNITION: Services revenues represent all types of services performed
by the Company, including maintenance and support services. Product sales
include the sale of all tangible products and the licensing of various
intellectual properties, including software and test instruments.
The Company adopted the provisions of Statement of Position (SOP) 97-2, as
amended, for software revenue recognition effective February 1, 1998. Prior to
that date, the Company's software revenue recognition policies were
substantially in compliance with that SOP, and therefore the effect of adoption
of the Statement was not material. The Company recognizes license revenue upon
shipment of a product to the customer if a signed contractual agreement exists,
the fee is fixed and determinable and collection of the resulting receivables is
probable. For contracts with multiple elements, the Company allocates revenue to
each component of the contract based on objective evidence of its fair value,
which is specific to the Company.
The Company recognizes revenue related to hardware maintenance and software
support fees for ongoing customer support and product updates ratably over the
period of the maintenance contract. Payments for these fees are generally made
in advance and are non-refundable. Revenues from professional services such as
training, implementation, and consulting are recognized as the services are
performed. Up-front fees related to subscription type services are recognized
over the period of delivery. Revenues from test scoring and other outsourcing
services are recognized upon completion of major contracted deliverables, or as
units of service are delivered.
PER SHARE DATA: The following table is a reconciliation of the earnings
numerator and the weighted-average shares denominator used in the calculations
of basic and diluted earnings per share (in thousands, except per share data):
1999 1998 1997
------- -------- -------
Earnings:
Net Income
Basic earnings per share $42,930 $32,511 $25,175
Adjustments for dilutive securities:
Interest expense on convertible debentures,
net of tax 162 222 256
------- ------- -------
Adjusted net income for diluted earnings per share $43,092 $32,733 $25,431
======= ======= =======
Weighted Average Shares:
Basic average shares 31,721 31,022 30,391
Adjustments for dilutive securities:
Employee stock options, net of tax proceeds 932 981 620
Contingent stock awards, net of tax proceeds 32 81 270
Convertible debentures 369 505 583
------- ------- -------
Diluted average shares 33,054 32,589 31,864
------- ------- -------
Basic earnings per share $ 1.35 $ 1.05 $ 0.83
======= ======= =======
Diluted earnings per share $ 1.30 $ 1.00 $ 0.80
======= ======= =======
IMPAIRMENT OF LONG-LIVED ASSETS: The Company is in compliance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present.
STOCK-BASED COMPENSATION: The Company has elected to continue to account for
stock options and awards to employees under the provisions of Accounting
Principles Board (APB) Opinion No. 25 and disclose the impact of SFAS No. 123,
as if adopted, in Note 6.
DERIVATIVES AND HEDGING: In June, 1998, the FASB issued SFAS No. 133 Accounting
for Derivative Instruments and Hedging Activities, which requires the Company to
recognize all derivatives on the balance sheet at fair value effective for the
Company's 2001 fiscal year. The Company does not anticipate that the adoption of
this Statement will have a significant effect on its results of operations or
financial position.
NOTE 2 - ACQUISITIONS
On May 28, 1999 the Company acquired NovaNET Learning, Inc. (NovaNET), an
interactive, on-line curriculum content company. The transaction has been
accounted for as a purchase, and, accordingly, NovaNET's operations subsequent
to the closing date are consolidated with the Company's. The purchase price was
$19.0 million in cash and has been primarily allocated to educational content
($16.3 million), goodwill ($5.3 million) and a net deferred tax liability ($2.8
million), in accordance with SFAS 109, Accounting for Income Taxes.
In September 1998, the Company acquired all of the common and preferred stock of
American Cybercasting Corporation, also known as Educational Structures, a
business specializing in customized K-12 teacher support tools for lesson
planning and curriculum support. The purchase price was approximately $12.6
million. The excess of the purchase price over book value of the net assets
acquired, as adjusted for deferred taxes, was $10.8 million, all of which was
allocated to goodwill and is being amortized over 20 years. The acquisition was
accounted for as a purchase and, accordingly, operating results of Educational
Structures are included in the Company's consolidated financial statements
subsequent to the date of acquisition.
In April 1997, the Company acquired all of the common and preferred stock of
Virtual University Enterprises (VUE), an electronic course registration and
training administration company. The purchase price was approximately $14.6
million and consisted of stock of the Company (1,085,264 shares at $12.50 per
share) and cash. The excess of the purchase price, as adjusted for deferred
taxes, over book value of the net assets acquired was $16.4 million, all of
which was allocated to goodwill and is being amortized over 20 years.
In July 1997, the Company acquired the assets of two businesses from The
McGraw-Hill Companies for $29.5 million in cash. The acquisition included London
House, a pre-employment assessment business, and McGraw-Hill School Systems, a
school administrative software business. The purchase price was allocated
primarily to goodwill, $20.4 million, and assessment instruments, $9.1 million,
which are being amortized over 10 years.
The fiscal 1997 acquisitions were accounted for as purchases and, accordingly,
operating results of these businesses subsequent to the date of acquisition were
included in the Company's consolidated financial statements.
The following is a summary of pro forma operating results as if the fiscal 1997
acquisitions had taken place at the beginning of fiscal 1997:
Fiscal Year (unaudited) 1997
- ---------------------------------------------
Total revenues $420,843
Income before income taxes 39,497
Net Income 23,698
Basic earnings per share $ 0.78
Diluted earnings per share $ 0.75
The pro forma information is provided for informational purposes only. It is
based on historical information and does not purport to be indicative of the
results that would have occurred had the acquisitions been made at the beginning
of fiscal 1997, or of future results, as significant changes to their
operations, products and cost and expense structures have taken place since
acquisition.
NOTE 3 - LEASES
The Company leases office facilities under noncancelable operating leases which
expire in various years through 2006. Rental expense for all operating leases
was $14,349 in fiscal 1999, $12,921 in fiscal 1998, and $9,167 in fiscal 1997.
Future minimum rental expense as of January 29, 2000, for noncancelable
operating leases with initial or remaining terms in excess of one year is
$59,831 and is payable as follows: fiscal 2000 - $13,438; fiscal 2001 - $12,896;
fiscal 2002 - $10,687; fiscal 2003 - $8,689; fiscal 2004 - $7,527 and $6,594
beyond.
In August 1997, the Company entered into a five-year operating lease agreement
for a facility in Cedar Rapids, Iowa. The total cost of the assets covered by
the lease as of January 29, 2000 was $12,403. The lease provides for a
substantial residual value guarantee by the Company at the end of the initial
term and includes purchase and renewal options at fair market values. The
amounts of future minimum operating lease payments listed above excludes any
payment related to the residual value guarantee which is due upon termination of
the lease. The Company has the right to exercise a purchase option with respect
to the leased building or the building can be sold to a third party. The Company
expects the fair market value of the building, subject to the purchase option or
sale to a third party, to substantially reduce or eliminate the Company's
payment under the residual value guarantee. The Company is obligated to pay the
difference between the maximum amount of the residual value guarantee and the
fair market value of the building at the termination of the lease. At January
29, 2000 the maximum amount of the residual value guarantee relative to the
assets under lease is approximately $10,500.
NOTE 4 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt at year end consisted of the following:
January 29, January 31,
2000 1999
- --------------------------------------------------------
Revolving credit borrowing $ - $ -
Convertible debentures 400 4,700
ESOP borrowing - 1,000
Other borrowings 1,386 3,655
- --------------------------------------------------------
1,786 9,355
Less current maturities (1,270) (3,758)
- --------------------------------------------------------
Long-term debt $ 516 $ 5,597
========================================================
Revolving Credit Borrowings: The Company has a $50,000 unsecured revolving
credit facility that terminates November 1, 2002. Interest on debt outstanding
under this facility is computed, at the Company's discretion, based on the prime
rate or the London Interbank Offered Rate (LIBOR). The Company pays a fee at an
annual rate of .15% on the facility amount. The credit facility contains
covenants with which the Company is in compliance.
Convertible Debentures: In January 1997 the Company issued Convertible
Debentures as partial consideration for the stock purchase of an acquired
company. These debentures have been due in installments, carry an interest rate
of approximately 6.1%, and are convertible into Common Stock at $12.00 per
share.
ESOP Borrowing: The ESOP loan was secured by unallocated shares of Common Stock
and guaranteed by the Company and was fully paid in May 1999.
Scheduled Maturities: The aggregate principal amounts of long-term debt
scheduled for repayment is $1,270 and $516 in fiscal years 2000 and 2001,
respectively. In each fiscal year, interest paid approximates interest expense.
NOTE 5 - INCOME TAXES
The components of the provision for income taxes from continuing operations are
as follows:
Current
-----------------------
Fiscal Year Federal State Foreign Deferred Total
- -----------------------------------------------------------------
1999 $21,155 $3,700 $2,280 $(1,635) $25,500
1998 18,495 3,003 1,682 (1,580) 21,600
1997 14,540 2,806 1,300 (1,846) 16,800
- -----------------------------------------------------------------
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of year end are as follows:
January 29, January 31,
2000 1999
----------- -----------
Deferred tax assets:
Reserves for uncollectibles $ 4,905 $ 3,513
Foreign operating loss carryforwards - 3,659
Acquired operating loss benefit 3,800 -
Accrued vacation pay 2,981 2,051
Intangible amortization 1,905 1,552
Deferred expenses and other 2,855 4,394
Valuation allowance - (3,659)
- ---------------------------------------------------------------
Total deferred tax assets 16,446 11,510
- ---------------------------------------------------------------
Deferred tax liabilities:
Purchased intangible amortization 9,234 5,132
Accelerated depreciation 4,788 5,070
Net capitalized software 4,077 3,706
Other (11) 172
- ---------------------------------------------------------------
Total deferred tax liabilities 18,088 14,080
- ---------------------------------------------------------------
Net deferred tax liability $1,642 $2,570
===============================================================
The deferred tax asset for the foreign operating loss carryforwards at January
31, 1999 and the related valuation allowance were eliminated due to the
December, 1999 sale of the stock of the United Kingdom subsidiary that incurred
these losses. This stock sale resulted in no material gain or loss for book
purposes; however, since the Company's stock basis for federal and state income
tax purposes was substantially higher than for book purposes, the Company's
income tax expense for 1999 was reduced approximately $2,000 as a result of this
transaction.
The acquired net operating loss benefits expire beginning January, 2004, through
January, 2019, with $2,632 expiring in 2017 or after.
A reconciliation of the Company's statutory and effective tax rate is presented
below:
1999 1998 1997
------ ------ ------
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 3.5 3.6 4.4
Intangible amortization 0.8 0.5 1.0
Benefit from sale of foreign subsidiary (3.0) - -
Other 1.0 0.8 (0.4)
- ----------------------------------------------------------------------
Effective rate 37.3% 39.9% 40.0%
======================================================================
The Company made income tax payments of $23,822, $19,623 and $18,991 in the
fiscal years 1999, 1998, and 1997, respectively.
The earnings associated with the Company's investment in its foreign
subsidiaries are considered to be permanently invested and no provision for U.S.
federal and state income taxes on those earnings or translation adjustment has
been provided.
NOTE 6 - STOCKHOLDERS' EQUITY
The Company has 10,000,000 shares of $.01 par value Preferred Stock authorized
and issuable in one or more series as the Board of Directors may determine; none
is outstanding. 100,000,000 shares of $.03 par value Common Stock are
authorized. There are no restrictions on retained earnings.
In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the
Company continues to elect to utilize APB Opinion No. 25 and related
interpretations in accounting for its stock option plans, restricted stock plans
and its employee stock purchase plan. If the Company had elected to recognize
compensation cost based on the fair value of the options granted, restricted
shares awarded and shares sold pursuant to the purchase plan as prescribed by
SFAS No. 123, net income and earnings per share would have been reduced to the
pro forma amounts indicated in the table below for the fiscal years 1999, 1998
and 1997:
1999 1998 1997
------- ------- -------
Net income - as reported $42,930 $32,511 $25,175
Net income - pro forma 39,010 30,041 23,988
Earnings per share - as reported:
Basic $ 1.35 $ 1.05 $ .83
Diluted 1.30 1.00 .80
Earnings per share - pro forma:
Basic $ 1.23 $ .97 $ .79
Diluted 1.18 .93 .76
SFAS No. 123 is applicable only to options granted after December 31, 1994; as a
result, its pro forma effect will not be fully impacted until these options
become fully exercisable. The fair value of each option grant is estimated on
the date of the grant using the Black-Scholes option-pricing model with the
following assumptions for the fiscal years shown:
1999 1998 1997
------- ------- -------
Expected dividend yield:
5 year grants .28% .26% .58%
10 year grants .16% - -
Expected stock price volatility 35% 35% 30%
Risk-free interest rate:
5 year grants 5.77% 5.16% 6.23%
10 year grants 5.86% - -
Expected life of options 5-9 years 5 years 5 years
The weighted-average fair value of the options granted during fiscal years 1999,
1998 and 1997 were $18.00, $8.53 and $4.40, respectively.
The Company has five Employee Stock Option Plans (1986, 1990, 1995, 1997 and
1999). Options to purchase Common Stock of the Company are granted to employees
at 100% of fair market value on the date of grant. Options granted prior to May,
1999 are exercisable over a 63-month period. Options granted from May, 1999 are
exercisable over 10 years. Shares available for grant under the Plans totaled
1,249,640 and 278,780 and 669,700, at the end of fiscal 1999, 1998 and 1997,
respectively.
Outstanding options under all plans, including non-qualified options discussed
below are summarized as follows:
Weighted
Average Price
Shares Per Share
--------- -------------
Balance, January 31, 1997 1,694,120 $ 8.57
Granted 862,148 13.13
Cancelled (92,908) 9.51
Exercised (309,246) 7.57
---------
Balance, January 31, 1998 2,154,114 10.50
Granted 600,900 23.23
Cancelled (64,380) 14.44
Exercised (417,320) 7.87
---------
Balance, January 31, 1999 2,273,314 14.15
Granted 621,600 35.46
Cancelled (77,773) 23.57
Exercised (443,398) 8.56
---------
Balance, January 29, 2000 2,373,743 $20.47
=========
Options for 590,471 and 633,537 and 679,182 shares were exercisable at January
29, 2000 and January 31, 1999 and 1998, with weighted average exercise prices of
$13.75, $9.76 and $8.07, respectively. Exercise prices for options outstanding
as of January 29, 2000 are summarized as follows:
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Remaining Average
Range of Number Exercise Contractual Number Exercise
Exercise Prices of Shares Price Life of Shares Price
- --------------- --------- --------- ----------------- ---------- ---------
$ 4.02 - 12.00 487,153 $10.06 1.8 years 310,761 $ 9.71
12.25 - 18.75 739,300 13.36 3.1 years 168,480 13.82
20.00 - 26.69 514,940 22.17 3.9 years 85,780 22.64
32.56 - 38.75 632,350 35.40 8.6 years 25,450 33.02
--------- -------
2,373,743 $20.47 590,471 $13.75
========= =======
During fiscal 1999, 1998 and 1997, pursuant to the 1997 Long-Term Incentive
Plan, non-qualified options to purchase 94,500 and 129,000 and 336,000 shares,
respectively, of Common Stock of the Company were granted to participants at
100% of fair market value on date of grant. These options are exercisable 67
months after date of grant and expire 72 months after date of grant. Vesting can
be accelerated to 36 months from date of grant on achievement of specified
cumulative earnings per share and stock price targets during the three fiscal
years then ended. At January 29, 2000, there were 559,500 options shares
outstanding at a weighted average exercise price per share of $17.77.
The Company also has a long-term cash incentive program, which pays for
performance in excess of the three year earnings per share and stock price
targets referred to above.
The Company has an Employee Stock Purchase Plan. There were 299,880 shares
available for purchase under the Plan at January 29, 2000.
NOTE 7 - EMPLOYEE BENEFIT PLANS
EMPLOYEE SAVINGS PLAN: The Company has a qualified 401(k) Employee Savings Plan
covering substantially all employees. Company contributions are discretionary.
The Company's contributions to the Plan, representing 401(k) matching
contributions only, were $3,548, $3,011, and $2,195 in fiscal years 1999, 1998
and 1997, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN: The Company has an Employee Stock Ownership Plan
(ESOP) covering substantially all employees. Benefits, to the extent vested,
become available upon retirement or termination of employment. During 1989, the
ESOP Trust borrowed $10,000 to purchase 1,584,000 shares of Common Stock. Each
year, the Company made contributions to the ESOP which were charged to
compensation expense, and used by the ESOP Trust to make loan interest and
principal payments. With each principal payment, a portion of the Common Stock
was allocated to participating employees. The loan was repaid in 1999. In fiscal
1999, the Company's contribution to the Plan was $1,000 plus interest of $15,
which was fully offset by dividends on unallocated shares. The Company's
contribution to the Plan was $1,000 in fiscal 1998 and fiscal 1997, plus
interest of $80 and $148, respectively, which was substantially offset by
dividends on unallocated shares. There were no unallocated shares at January 29,
2000 and 158,400 unallocated shares at January 31, 1999.
NOTE 8 - CONTINGENCY
In 1997, the Company was served with a summons and complaint in a lawsuit filed
against the Company by a former customer. In March 2000 the parties reached
settlement on all issues. The settlement had no material adverse effect on the
Company's consolidated financial position or results of operations.
NOTE 9 - BUSINESS SEGMENT INFORMATION
The Company has five reportable segments as follows:
o Assessments and Testing Services - provides comprehensive K-12 academic
testing services to states, and test scoring services in support of major
test publishers. This segment also provides clinical psychology and
workforce development assessment instruments and electronic certification
and licensure examinations.
o Education Software and Services - provides student, curriculum,
instructional management, and financial management software, software
support, and professional implementation services.
o NCS Services - delivers principally outsourcing services for large-scale
data management projects for government and business.
o Data Collection Systems - manufactures and sells optical mark and image
scanning systems and scannable forms.
o International - provides many of the same products and services described
in the Assessment and Testing, NCS Services, and Data Collection Systems
segments above, but sells to and serves customers outside the United States
through subsidiaries in Argentina, Australia, Canada, Mexico, Hong Kong,
and the U.K. and through distributors in other geographies.
The Company's reportable segments are business units that offer different, but
highly related, products and services to customer sets which can overlap. The
reportable segments are managed separately by corporate officers who report
directly to the CEO. The Company evaluates performance and allocates resources
based on profit or loss from operations before interest and income taxes. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.
The table below presents information by reportable segment.
Assessments Education Data
& Testing Software & NCS Collection
Services Services Services Systems International Totals
---------- ----------- ---------- ----------- -------------- --------
Fiscal 1999
Revenues $202,461 $147,109 $136,372 $89,940 $53,663 $629,545
Income from operations 31,418 17,597 22,082 26,396 5,819 103,312
Depreciation and amortization 8,824 10,968 4,243 3,276 2,951 30,262
Assets 121,281 124,125 62,965 42,894 36,246 387,511
Fiscal 1998
Revenues $160,958 $116,214 $99,371 $84,239 $44,590 $505,372
Income from operations 25,365 11,917 11,594 23,250 3,182 75,308
Depreciation and amortization 10,022 8,563 3,176 4,190 2,649 28,600
Assets 106,996 88,857 47,934 41,950 28,924 314,661
Fiscal 1997
Revenues $118,661 $ 88,474 $76,212 $82,692 $39,976 $406,015
Income from operations 20,289 9,266 7,375 21,767 1,912 60,609
Depreciation and amortization 8,546 7,475 2,876 5,289 1,833 26,019
Assets 94,731 75,337 40,559 41,087 28,497 280,211
The following table is a reconciliation of reportable segment information to the
Company's consolidated totals.
Fiscal Year 1999 1998 1997
-------- -------- --------
Total Consolidated Revenue: $629,545 $505,372 $406,015
======== ======== ========
Income From Operations:
Total for reportable segments $103,312 $ 75,308 $ 60,609
Unallocated amounts:
Central G & A expenses 33,724 20,037 17,565
Interest expense 725 936 1,353
Other (Income) expense 433 224 (284)
-------- -------- --------
Income Before Income Taxes $ 68,430 $ 54,111 $ 41,975
======== ======== ========
Depreciation and Amortization:
Total for reportable segments $ 30,262 $ 28,600 $ 26,019
Corporate 4,906 4,204 4,097
-------- -------- --------
Total Depreciation and Amortization $ 35,168 $ 32,804 $ 30,116
======== ======== ========
Assets:
Total for reportable segments $387,511 $314,661 $280,211
Corporate assets 62,369 47,810 35,203
-------- -------- --------
Total Assets $449,880 $362,471 $315,414
======== ======== ========
The Company's foreign operations and export sales are individually less than 10%
of total revenues. Sales to all government agencies for the fiscal years 1999,
1998, and 1997 were $326,845; $262,511; and $185,186; of which $95,220; $67,601;
and $63,005, respectively, were to U.S. government agencies, principally the
U.S. Department of Education, with the remainder to state and local government
agencies, predominantly school districts and state departments of education. The
Company considers its credit risk in trade receivables to be minimal with regard
to the governmental customers described above. With regard to the Company's
non-governmental customers, credit investigations are performed to minimize
credit losses, which historically have been insignificant.
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of National
Computer Systems, Inc. and subsidiaries as of January 29, 2000 and January 31,
1999, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended January 29, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National Computer
Systems, Inc. and subsidiaries at January 29, 2000 and January 31, 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 29, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/Ernst & Young LLP
Minneapolis, Minnesota
March 6, 2000