MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The fiscal years referenced herein are as follows:
Fiscal Year Year Ended
----------- ----------
1996 - January 31, 1997
1995 - January 31, 1996
1994 - January 31, 1995
Income and Expense Items as a Percentage of Revenues
Fiscal Year 1996 1995 1994
- ------------------------------------------------------------
Revenues
Information services 47.6% 43.4% 40.6%
Product sales 40.5 43.4 44.1
Maintenance and support 11.9 13.2 15.3
- ------------------------------------------------------------
Total revenues 100.0 100.0 100.0
Costs of Revenues (1)
Cost of information services 78.5 77.0 77.0
Cost of product sales 46.3 46.9 46.2
Cost of maintenance and support 67.4 69.0 72.0
- ------------------------------------------------------------
Total gross profit 35.9 37.1 37.3
Operating Expenses
Sales and marketing 12.5 12.8 13.5
Research and development 3.0 2.8 2.6
General and administrative 10.0 11.3 11.2
Acquisition and special charges 2.4 -- 2.9
- -------------------------------------------------------------
Income from operations 8.0 10.2 7.1
Income from continuing operations
before income taxes 8.0 9.2 5.7
Income from continuing operations 4.1% 5.5% 4.0%
============================================================
(1) As a percentage of the respective revenue caption.
National Computer Systems, Inc. (the Company or NCS) is an information services
company, providing services and systems for the collection, management and
interpretation of data. The Company markets these products and services
predominantly in education, but also to business, government and health care
markets through its various operating units.
RECAP OF 1996 RESULTS
Total revenues from continuing operations in fiscal 1996 increased 10.1% over
the prior year to $331.2 million. The Company's overall gross profit dollars on
those revenues increased by $7.0 million or 6.3%. Total gross margin as a
percentage of revenues declined, principally due to the product/service mix of
those revenues. Operating expenses declined as a percent of revenue, except for
research and development, which reflects additional investments in both hardware
and software products. NCS recorded a pre-tax operating charge of $7.9 million
($.45 per share after tax) principally for acquired in-process research and
development from the purchase of Macro Educational Systems, Inc. (Macro). Before
this charge, income from operations increased 12.5% to $34.5 million, and
improved slightly as a percentage of revenues. Year-to-year favorable changes in
non-operating income and expense primarily reflect the impact of the proceeds
from the sale of the Company's Financial Systems business in July 1996. Net
income for fiscal 1996 from continuing operations was $13.7 million or $.88 per
share. However, excluding the acquisition related charges, net income from
continuing operations would have been $20.7 million compared to $16.6 million in
fiscal 1995, a 24.6% increase. A reconciliation of earnings per share for 1996
and 1995 is as follows:
1996 1995
---- ----
Earnings per share, as reported $3.18 $1.42
Less gain on disposition
and discontinued operations (2.30) (.36)
---- ----
Continuing operations .88 1.06
Plus acquisition related charges .45 -
----- -----
Pro forma earnings per share $1.33 $1.06
===== =====
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 1996 versus Fiscal 1995. Total revenues for fiscal 1996 were up 10.1% to
$331.2 million from $300.9 million in fiscal 1995. By revenue category, fiscal
1996 compares to fiscal 1995 as follows:
Information services + 20.8%
Product sales + 2.7%
Maintenance and support - 0.8%
The growth in information services revenues is predominantly the result of
significantly higher volumes of educational assessment services and
international service business. During fiscal 1996, the Company invested in two
small international businesses, principally service in nature, and NCS was
awarded a new long-term service contract in Mexico. These transactions fueled
the Company's growth in the international service business. Overall,
international revenues were up 42.1% from fiscal 1995. Product sales increases
were essentially due to higher education administrative software and scannable
forms revenues. These improvements, however were somewhat offset by lower
proprietary hardware revenues. Maintenance and support revenues were down 0.8%
due to lower third-party hardware maintenance revenues, partially offset by
higher software support revenues.
Fiscal 1995 versus Fiscal 1994. Total revenues for fiscal 1995 were up 5.6% to
$300.9 million from $284.9 million in fiscal 1994. By revenue category, fiscal
1995 compares to fiscal 1994 as follows:
Information services + 12.7%
Product sales + 4.1%
Maintenance and support - 8.7%
Information services revenue grew in fiscal 1995 primarily as a result of higher
volumes of educational assessments and student financial aid services. Higher
education software revenue was the principal factor in the year-to-year increase
in product sales. Maintenance and support revenues were down as a result of
lower third-party hardware maintenance revenues, somewhat offset by higher
software support revenues.
COST OF REVENUES AND GROSS PROFITS
Fiscal 1996 versus Fiscal 1995. The Company's overall gross profit dollars
increased $7.0 million or 6.3% with the largest dollar increases being in state
educational assessments, international services and education administrative
software. As a percent of revenue, overall gross profit declined to 35.9% of
total revenues from 37.1% in fiscal 1995, principally reflecting the Company's
revenue growth in information services revenues. Gross profit changes by revenue
category were largely offsetting, however, the gross profit on information
services revenues did decline due to lower first-year margins on multi-year
federal student financial aid contracts.
Fiscal 1995 versus Fiscal 1994. The Company's overall gross profit dollars
increased $5.4 million or 5.1% in fiscal 1995 over the prior year. As a percent
of revenue, the overall gross profit of 37.1% in fiscal 1995 was essentially
unchanged from fiscal 1994. The gross profit on net product sales declined by
0.7 percentage points year-to-year primarily due to lower margins on education
software and international forms revenues. Maintenance and support margins
improved by 3.0 percentage points in fiscal 1995 over the prior year, with the
year-to-year improvement coming from software support margins.
OPERATING EXPENSES
Fiscal 1996 versus Fiscal 1995. Sales and marketing expenses increased by $2.7
million or 7.0% in fiscal 1996 from the prior year. The year-to-year increase is
primarily the result of additional expenditures in introducing and selling new
image processing systems to the marketplace.
Research and development expenses increased $1.4 million in fiscal 1996 over
fiscal 1995. This increase relates principally to enhancements to the Company's
scanning and imaging technology and school administrative software.
General and administrative expenses decreased by $.9 million or 2.7% in fiscal
1996 from the prior year. As a percent of revenues, these expenses declined by
1.3 percentage points, to 10.0 % of total revenues. The decrease reflects
specific emphasis on reducing general and administrative expenses, and is net of
a $1.0 million increase in expenses to upgrade the Company's internal
information systems.
Fiscal 1995 versus Fiscal 1994. In fiscal 1995, sales and marketing expenses
were essentially unchanged from fiscal 1995 to fiscal 1994. However, as a
percentage of revenues these expenses declined by 0.7 percentage points to 12.8%
of total revenues. This decline was the result of a Company-wide effort to
manage these expenses.
Research and development expenses increased $1.1 million or 15.7% in fiscal 1995
over fiscal 1994, relating principally to enhancements to the Company's scanning
and imaging technology and related software.
General and administrative expenses increased by $1.9 million or 6.0% in fiscal
1995 from the prior year. The increase reflects additional spending of $1.0
million to introduce and install enhanced product and project management methods
and tools. As a percent of revenues, these expenses remained constant
year-to-year.
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 (See
Note 2 of Financial Statements).
In 1994, the Company recorded an $8.2 million pretax charge for the
restructuring of the Company's German operations and write-down of certain
non-operating assets (See Note 3 of Financial Statements).
INTEREST EXPENSE
Interest expense decreased by $1.6 million in fiscal 1996 from fiscal 1995. The
year-to-year decrease is the result of lower borrowing levels for fiscal 1996.
See Capital Resources and Liquidity below for further discussion of cash flow
and debt.
Interest expense decreased by $0.2 million in fiscal 1995 from the prior year.
The year-to-year decrease is primarily the result of lower average borrowing
levels for the latter half of the year, somewhat offset by slightly higher
interest rates.
OTHER INCOME AND EXPENSE
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, but also from internally generated cash flows.
Other income and expense for 1995 and 1994 included no large or unusual items.
INCOME TAXES
The effective income tax rate for fiscal 1996 was 48.5%, which was higher than
the statutory rate primarily as a result of the one time write-off of
non-deductible purchased research and development and losses from foreign
subsidiaries for which the Company is unable to recognize a benefit in its 1996
tax provision.
The effective income tax rate for fiscal 1995 was 40.3%, which was higher than
the statutory rate as a result of losses from foreign subsidiaries for which the
Company is unable to recognize a benefit in its 1995 tax provision.
The effective income tax rate for fiscal 1994 was 30.0% which was significantly
reduced by the net tax benefits related to the reorganization of the Company's
German operations.
CAPITAL RESOURCES AND LIQUIDITY
With the net proceeds from the sale of the Financial Systems business and cash
generated from ongoing operations, the Company ended fiscal 1996 with $58.1
million of cash and cash equivalents. During fiscal 1996, NCS generated $38.5
million of cash from operating activities. The Company invested $14.9 million in
property, plant and equipment and $11.2 million in acquisitions consisting of
Macro and three additional smaller entities. The Company also repurchased
362,000 shares of Common Stock during fiscal 1996, using $8.1 million of cash.
Other financing activities included the early repayment of the $15.0 million,
9.88% Secured Notes.
During fiscal 1995, the Company generated $51.9 million of cash from operating
activities. Cash was used for capital expenditures and other investing
activities totaling $19.5 million, debt reduction of $21.0 million, dividends of
$5.6 million and stock repurchases, net of issuances, of $1.9 million. The
Company had paid off its revolving debt balances by January 31, 1996, and had
accumulated cash and cash equivalents of $5.2 million, an increase of $4.0
million from a year earlier.
The Company had long-term debt balances, including current maturities, of $20.1
million, $27.0 million and $49.9 million at January 31, 1997, 1996, and 1995,
respectively. The items causing the changes in debt balances are described
above. At January 31, 1997, the Company's debt to total capital ratio was 10.6%
compared to 17.4% a year earlier and 30.6% two years earlier. The Company
believes that the current debt to total capital ratio is at an acceptable level
which will allow the Company flexibility to fund future growth initiatives.
Accounts receivable, accrued expenses and deferred income were impacted by the
acquisitions made in 1996 and by the increased level of operations during the
year.
Looking toward fiscal 1997, the Company maintains a $40.0 million revolving
credit facility, all of which was available at January 31, 1997. 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.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JANUARY 31,
--------------------
1997 1996
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 58,079 $ 5,154
Receivables 79,056 68,713
Inventories 18,176 18,336
Prepaid expenses and other 5,526 8,460
Investment in discontinued operations - 17,557
-------- --------
Total Current Assets 160,837 118,220
-------- --------
Property, Plant and Equipment
Land, buildings and improvements 51,741 49,350
Machinery and equipment 111,921 105,075
Accumulated depreciation (87,353) (79,596)
-------- --------
76,309 74,829
-------- --------
Other Assets, net
Acquired and internally developed software products 17,578 11,667
Non-current receivables and other assets 11,640 12,582
Goodwill 7,556 2,426
-------- --------
36,774 26,675
-------- --------
Total Assets $273,920 $219,724
======== ========
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JANUARY 31,
--------------------
1997 1996
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 3,819 $ 2,473
Accounts payable 20,886 16,416
Accrued expenses 28,832 23,137
Deferred income 23,079 16,148
Income taxes 5,556 4,458
-------- --------
Total Current Liabilities 82,172 62,632
-------- --------
Deferred Income Taxes 5,385 4,359
Long-Term Debt - less current maturities 16,329 24,535
Commitments and Contingencies - -
Stockholders' Equity
Preferred stock - -
Common stock - issued and outstanding -
15,235 and 15,365 shares, respectively 457 461
Paid-in capital - 3,427
Retained earnings 173,564 130,007
Deferred compensation (3,987) (5,697)
-------- --------
Total Stockholders' Equity 170,034 128,198
-------- --------
Total Liabilities and Stockholders' Equity $273,920 $219,724
======== ========
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR
------------------------------
1996 1995 1994
-------- -------- --------
Revenues
Information services $157,511 $130,432 $115,723
Product sales 134,144 130,648 125,557
Maintenance and support 39,504 39,803 43,594
-------- -------- --------
Total revenues 331,159 300,883 284,874
Cost of Revenues
Cost of information services 123,718 100,459 89,133
Cost of product sales 62,075 61,233 58,034
Cost of maintenance and support 26,608 27,453 31,405
-------- -------- --------
Gross profit 118,758 111,738 106,302
Operating Expenses
Sales and marketing 41,258 38,544 38,397
Research and development 9,883 8,490 7,341
General and administrative 33,076 34,000 32,077
Acquisition related charges:
Purchased research and development 5,637 - -
Other 2,258 - -
Special charges - - 8,164
-------- -------- --------
Income From Operations 26,646 30,704 20,323
Interest expense 1,677 3,276 3,465
Other (income) expense, net (1,564) (332) 739
-------- -------- --------
Income from Continuing Operations Before Income Taxes 26,533 27,760 16,119
Income taxes 12,867 11,180 4,838
-------- -------- --------
Income from Continuing Operations 13,666 16,580 11,281
Income (loss) from discontinued operations,
net of taxes of $(1,360), $3,570 and $912 (2,229) 5,679 2,117
Gain on disposition, net of taxes of $29,031 38,143 - -
-------- -------- --------
Net Income $ 49,580 $ 22,259 $ 13,398
======== ======== ========
Earnings Per Share
Continuing operations $ 0.88 $ 1.06 $ 0.74
Discontinued operations (0.14) 0.36 0.14
Gain on disposition 2.44 - -
-------- -------- --------
Net Income Per Share $ 3.18 $ 1.42 $ 0.88
======== ======== ========
Average Shares Outstanding 15,555 15,685 15,225
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK
--------------- PAID-IN RETAINED DEFERRED
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION TOTAL
------ ------ ------- -------- ------------ -----------
Balance, January 31, 1994 14,983 $ 449 $ - $106,771 $(7,073) $100,147
Shares issued for employee stock
purchase and option plans 152 5 1,492 - - 1,497
Repurchase of common stock (32) (1) (359) - - (360)
Restricted stock awards (forfeitures), net (59) (2) (430) - 432 -
Shares issued for business acquisition 266 8 3,092 - - 3,100
ESOP debt payment - - - - 1,000 1,000
Restricted stock compensation accrual - - - - (36) (36)
Net income - - - 13,398 - 13,398
Cash dividends paid - $.36 per share - - - (5,453) - (5,453)
Foreign currency translation adjustment - - - (170) - (170)
------ ------ ------ -------- -------- --------
Balance, January 31, 1995 15,310 459 3,795 114,546 (5,677) 113,123
Shares issued for employee stock
purchase and option plans 208 6 2,446 - - 2,452
Repurchase of common stock (233) (7) (4,445) - - (4,452)
Restricted stock awards 80 3 1,576 - (1,579) -
Shares issued for business acquisition - - 55 - - 55
ESOP debt payment - - - - 1,000 1,000
Restricted stock compensation accrual - - - - 559 559
Net income - - - 22,259 - 22,259
Cash dividends paid - $.36 per share - - - (5,570) - (5,570)
Foreign currency translation adjustment - - - (1,228) - (1,228)
------ ------ ------ -------- ------- --------
Balance, January 31, 1996 15,365 461 3,427 130,007 (5,697) 128,198
Shares issued for employee stock
purchase and option plans 245 7 3,483 - - 3,490
Repurchase of common stock (362) (11) (7,328) (737) - (8,076)
Restricted stock awards (forfeitures), net (13) - 24 - (24) -
ESOP debt payment - - - - 1,000 1,000
Restricted stock compensation accrual - - 394 - 734 1,128
Net income - - - 49,580 - 49,580
Cash dividends paid - $.36 per share - - - (5,521) - (5,521)
Foreign currency translation adjustment - - - 235 - 235
------ ------ ------ -------- -------- --------
Balance, January 31, 1997 15,235 $457 $ - $173,564 $(3,987) $170,034
====== ====== ====== ======== ======== ========
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR
------------------------------
1996 1995 1994
-------- -------- --------
Operating Activities
Net income $49,580 $22,259 $13,398
Less gain on disposition (38,143) - -
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation 15,620 15,643 15,559
Amortization 9,647 11,791 8,412
Deferred income taxes and other (2,053) 3,747 (400)
Acquisition related charges 6,637 - -
Non-cash special charges - - 10,375
Changes in operating assets and liabilities
(net of acquired amounts):
Accounts receivable (4,318) (2,133) (3,392)
Inventory and other current assets 2,495 542 (4,285)
Accounts payable and accrued expenses (3,856) 272 3,183
Deferred income 2,912 (190) (613)
------- ------- -------
Net Cash Provided By Operating Activities 38,521 51,931 42,237
------- ------- -------
Investing Activities
Acquisitions, net (11,192) - (3,216)
Purchases of property, plant and equipment (14,909) (14,091) (29,185)
Capitalized software products (1,553) (4,826) (6,928)
Net proceeds from disposition 64,071 - -
Other - net 2,248 (555) (3,245)
------- ------- -------
Net Cash Provided By (Used In)
Investing Activities 38,665 (19,472) (42,574)
Financing Activities
Net increase (decrease) in revolving credit borrowing - (13,065) 1,100
Repayment of secured notes (15,000) - -
Net increase (decrease) in other borrowings 846 (7,920) 3,024
Issuance (repurchase) of common stock, net (4,586) (1,945) 1,137
Dividends paid (5,521) (5,570) (5,453)
------- ------- -------
Net Cash Used In Financing Activities (24,261) (28,500) (192)
------- ------- -------
Increase (Decrease) In Cash and Cash Equivalents 52,925 3,959 (529)
Cash and Cash Equivalents - Beginning of Year 5,154 1,195 1,724
------- ------- -------
Cash and Cash Equivalents - End of Year $58,079 $ 5,154 $ 1,195
======= ======= =======
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
----------- ----------
1996 - January 31, 1997
1995 - January 31, 1996
1994 - January 31, 1995
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.
In order to provide improved financial reporting, the revenue and related costs
of the information services operations have been segregated on the accompanying
consolidated statements of income.
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:
1997 1996
- ----------------------------------------------------------------
Finished goods $ 4,765 $ 6,012
Scoring services and work in process 9,221 8,694
Raw materials and purchased parts 4,190 3,630
- ----------------------------------------------------------------
$18,176 $18,336
================================================================
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. Rental income from equipment
held for lease is recognized as earned using the operating method of accounting
for such leases.
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 Total
- ---------------------------------------------------------------------------
Balance, January 31, 1994 $ 7,000 $14,240 $ (8,636) $12,604
Additions 3,475 4,280 - 7,755
Amortization - - (2,944) (2,944)
- ----------------------------------------------------------------------------
Balance, January 31, 1995 10,475 18,520 (11,580) 17,415
Additions - 320 - 320
Product discontinuation (151) (308) 459 -
Amortization - - (6,068) (6,068)
- ----------------------------------------------------------------------------
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
============================================================================
GOODWILL: Goodwill arising from business acquisitions is amortized on a
straight-line basis over periods ranging from five to twenty years, generally
ten years. Amortization expense was $703, $624 and $1,179 in fiscal 1996, 1995
and 1994, respectively. Accumulated amortization was $3,843 and $3,109 as of
January 31, 1997 and 1996, 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:
1997 1996
- ------------------------------------------------
Employee compensation $13,376 $12,477
Taxes other than income 2,875 3,078
Royalties 2,065 2,176
Other 10,516 5,406
- ------------------------------------------------
$28,832 $23,137
================================================
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.
PER SHARE DATA: Net income per share is based on the weighted average number of
shares of Common Stock and dilutive common stock equivalents outstanding during
the year.
IMPAIRMENT OF LONG-LIVED ASSETS: In March 1995, the Financial Accounting
Standards Board (FASB) issued 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. The Company adopted the Statement in 1996
and it had no impact on the consolidated financial statements.
STOCK-BASED COMPENSATION: In October, 1995, the FASB issued SFAS No. 123,
Accounting for Stock-Based Compensation. The statement requires adoption of the
new standard or footnote disclosure for all transactions entered into during the
fiscal years ended January 31, 1996 and 1997. As permitted by the statement, 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.
NOTE 2 - ACQUISITIONS
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 1997 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 consolidated financial statements. In accordance with SFAS No.
109, Accounting for Income Taxes, the purchase price has been adjusted by $6.0
million to reflect deferred taxes on the intangible assets, whose amortization
will be nondeductible. The excess 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.
The pro forma impact of all acquisitions on 1996 and comparative results for
1995 and 1994 are not significant, other than the $7.0 million after tax
acquisition charges described above.
NOTE 3 - DISCONTINUED OPERATIONS AND SPECIAL CHARGES
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, or $2.44 per share. 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 sale date were $17.1 million; for fiscal
1995 and 1994, revenues were $58.1 and $52.1 million, respectively.
In 1994, the Company recorded an $8.2 million pre-tax special charge for the
restructuring and statutory reorganization of the Company's German operations
and the write-down of certain unconsolidated investments in anticipation of
disposition. The after-tax charge was $3.3 million, or 21 cents per share. The
German restructuring and reorganization was a $3.7 million pre-tax charge,
primarily to write down goodwill and other assets to liquidation values. Because
of significant tax benefits triggered by these actions, however, the net
after-tax effect of this restructuring was only $.5 million. The Company also
recorded a pre-tax special charge of $4.5 million to write down four investments
to their net realizable value upon disposition.
NOTE 4 - LEASES
The Company leases office facilities under noncancelable operating leases which
expire in various years through 2002. Rental expense for all operating leases
was $8,544 in fiscal 1996, $7,987 in fiscal 1995, and $8,818 in fiscal 1994.
Future minimum rental expense as of January 31, 1997, for noncancelable
operating leases with initial or remaining terms in excess of one year is
$11,320 and is payable as follows: fiscal 1997 - $4,274; fiscal 1998 - $2,470;
fiscal 1999 - $1,821; fiscal 2000 - $1,362; fiscal 2001 - $1,026 and $367
beyond.
NOTE 5 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt at January 31, consisted of the following:
1997 1996
- --------------------------------------------------
Revolving credit borrowing $ - $ -
Secured notes - 15,000
Convertible debentures 7,000 -
Unsecured note 6,535 6,535
ESOP borrowing 3,000 4,000
Other borrowings, 3,613 1,473
principally foreign
- --------------------------------------------------
20,148 27,008
Less current maturities (3,819) (2,473)
- --------------------------------------------------
Long-term debt $16,329 $24,535
==================================================
Revolving Credit Borrowings: The Company has a $40,000 unsecured revolving
credit facility that terminates August 1, 1998. 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). During the year ended January
31, 1997, the interest rate approximated 1.0 % below the prime rate. The Company
pays a fee at an annual rate of .25% on the unused facility amount. The credit
facility contains covenants with which the Company is in compliance.
Secured Notes: The Secured Notes, which carried an interest rate of 9.88%, were
retired in July 1996.
Convertible Debentures: In January 1997, the Company issued $7,000 of
Convertible Debentures as consideration for the stock purchase of Macro, see
Note 2. These debentures are due in five equal annual installments, with the
first installment due on February 21, 1998. These debentures carry an interest
rate of 6.1%, and are convertible into common stock at $24.00 per share.
Unsecured Note: This unsecured term note is due in five annual principal
payments of $1,307 per year beginning in April, 1997 and bears interest at .95%
over LIBOR.
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 interest payable at rates which approximate 2.0% under the prime
rate.
Scheduled Maturities: The aggregate principal amounts of long-term debt
scheduled for repayment in each of the five fiscal years 1997 through 2001 are
$3,819, $5,898, $4,466, $2,781, and $2,707, respectively. 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
-----------------------
Federal State Foreign Deferred Total
- -----------------------------------------------------------------
1996 $16,197 $1,320 $ 864 $(5,514) $12,867
1995 10,079 1,465 70 (434) 11,180
1994 4,905 600 384 (1,051) 4,838
- -----------------------------------------------------------------
The provision for income taxes from discontinued operations is $27,671, $3,570
and $912 in fiscal years 1996, 1995 and 1994, respectively.
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:
1997 1996
------ ------
Deferred tax assets:
Reserves for uncollectibles $2,801 $1,266
Foreign operating loss carryforwards 2,778 2,050
Accrued vacation pay 1,511 1,648
Rotable service parts amortization 1,260 1,510
Intangible amortization 1,198 1,578
Deferred expenses 689 301
Capital loss carryforward - 783
Special charges 61 497
Other 1,370 581
Valuation allowance (2,778) (1,910)
- ------------------------------------------------------------
Total deferred tax assets 8,890 8,304
- ------------------------------------------------------------
Deferred tax liabilities:
Purchased intangible amortization 6,592 1,088
Accelerated depreciation 5,197 5,473
Net capitalized software 1,929 4,787
Production cost amortization 406 1,265
Other 151 50
- ------------------------------------------------------------
Total deferred tax liabilities 14,275 12,663
- ------------------------------------------------------------
Net deferred tax liabilities $ 5,385 $ 4,359
============================================================
A reconciliation of the Company's statutory and effective tax rate from
continuing operations is presented below:
1996 1995 1994
------ ------ ------
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 3.2 3.1 2.1
Intangible amortization 1.7 1.0 3.7
Foreign sales corporation (0.5) (0.1) (0.7)
Research and development credits (0.6) (0.3) (2.0)
Affordable housing credit (1.0) (1.0) (1.7)
Foreign operating losses 3.2 3.2 1.0
Purchased research and development 7.4 - -
Foreign investment loss - - (12.6)
Other, net 0.1 (0.6) 5.2
- ---------------------------------------------------------------
Effective rate 48.5% 40.3% 30.0%
===============================================================
In fiscal year 1994, the tax rate benefit from the foreign investment losses
principally reflects U.S. tax benefits triggered by the restructuring and
reorganization of the Company's German operations discussed in Note 3.
The Company made income tax payments of $47,693, $10,335 and $5,549 in fiscal
years 1996, 1995, and 1994, 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. 50,000,000 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 fiscal years 1996 and 1995:
1996 1995
------- -------
Net income - as reported $49,580 $22,259
Net income - pro forma 49,069 21,925
Earnings per share - as reported $ 3.18 $ 1.42
Earnings per share - pro forma 3.15 1.40
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:
Expected dividend yield. .78%
Expected stock price volatility 45%
Risk-free interest rate 6.18%
Expected life of options 5 years
The weighted-average fair value of the options granted during the fiscal years
1996 and 1995 were $10.33 and $8.40, respectively.
The Company has four Employee Stock Option Plans (1984, 1986, 1990 and 1995).
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 227,000 and
380,250 at January 31, 1997 and 1996, respectively.
Outstanding options under all plans are summarized as follows:
Weighted
Average Price
Shares Per Share
------- -------------
Balance, January 31, 1994 952,350 $13.75
Granted 375,250 13.24
Cancelled (76,900) 14.36
Exercised (303,200) 14.30
-------- -----
Balance, January 31, 1995 947,500 13.70
Granted 229,750 18.52
Cancelled (65,950) 15.15
Exercised (164,350) 11.25
-------- -----
Balance, January 31, 1996 946,950 15.20
Granted 225,850 22.75
Cancelled (94,450) 16.55
Exercised (231,290) 14.86
-------- ------
Balance, January 31, 1997 847,060 $17.15
======== ======
Options for 313,570 shares, 373,250 shares and 378,750 shares were exercisable
at January 31, 1997, 1996 and 1995, with weighted average exercise prices of
$14.86, $14.48 and $13.54, respectively. Exercise prices for options outstanding
as of January 31, 1997 ranged from $8.25 to $24.50. The weighted-average
remaining life of those options is 3.1 years.
The Company has an Employee Stock Purchase Plan. There were 80,848 shares
available for purchase under the Plan at January 31, 1997.
During fiscal 1990, pursuant to the Long-Term Incentive Plan approved by the
shareholders (L-TIP), 171,400 shares were issued to participants on a restricted
basis. At January 31, 1997, 65,650 shares remained outstanding with the balance
having been forfeited. The shares were earned by the participants during fiscal
1996 and will be vested at a rate of 40% following January 31, 1997, and 30% on
each of January 31, 1998 and January 31, 1999, contingent upon continued
employment.
During fiscal 1996 and 1995, pursuant to the L-TIP, a total of 99,900 shares
were issued to participants on a restricted basis; 95,563 shares of which were
outstanding at January 31, 1997. During 1996, the award was amended by reducing
the term from three to two years and reducing the award by approximately
one-third. The remaining shares were earned by and will be vested: two-thirds
following January 31, 1997, and one-third on January 31, 1998, contingent upon
continued employment.
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 $1,638, $1,900 and $1,700 in fiscal years 1996, 1995
and 1994, 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 792,000 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 1996, the Company's
contribution to the Plan was $1,000 plus interest of $77, which is net of
dividends on unallocated shares of $114. The Company's contribution to the Plan
was $1,000 in fiscal 1995 and fiscal 1994, and interest, which was totally
offset by dividends on unallocated shares, was $63 in fiscal 1995 and $206 in
fiscal 1994. There were 237,600 and 316,800 unallocated shares at January 31,
1997 and 1996, 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
The Company has received a claim from a former customer for expenses, alleged
loan defaults, and other damages related to performance under a loan processing
and servicing contract. The Company has tendered the defense of this claim to
its insurer, and the insurer has accepted that defense subject to a reservation
of rights. The Company and its insurer intend to vigorously contest this claim.
While the claim has not yet been fully articulated, the Company believes that
any such claim would be substantially covered by insurance and would not have a
material effect on the Company's financial position or results of operations.
NOTE 10 - BUSINESS SEGMENT INFORMATION
The Company operates in a single business segment, providing information
services and systems for the collection, management and interpretation of data.
The Company markets these products and services to the education, business,
government and health care markets through various operating units.
The Company's foreign operations and export sales are less than 10% of total
revenues. Sales to all government agencies for the fiscal years ended January
31, 1997, 1996 and 1995 were $180,993, $148,313, and $143,187 of which $62,278,
$42,664, and $41,455, 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.