EXHIBIT 13
FIVE YEAR FINANCIAL DATA
(Dollars in thousands, except per share amounts)
YEAR ENDED JANUARY 31,
-----------------------------------------------------------
1998 1997(2) 1996 1995(3) 1994(4)
-------- -------- -------- -------- --------
Financial Results
Revenues $406,015 $331,159 $300,883 $284,874 $257,813
Income from operations 43,044 26,646 30,704 20,323 17,318
Income from continuing operations
before income taxes 41,975 26,533 27,760 16,119 16,733
Income from continuing operations 25,175 13,666 16,580 11,281 9,744
Discontinued operations, net of taxes - (2,229) 5,679 2,117 (12,253)
Gain on disposition, net of taxes - 38,143 - - -
Net income (loss) 25,175 49,580 22,259 13,398 (2,509)
Income per share from continuing
operations(1)
Basic earnings per share $ 0.83 $ 0.45 $ 0.54 $ 0.38 $ 0.32
Diluted earnings per share $ 0.80 $ 0.44 $ 0.53 $ 0.37 $ 0.31
Dividends paid per share $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.18
Financial Position
Total assets 315,414 273,920 219,724 209,375 194,833
Long-term debt, including
current maturities 18,844 20,148 27,008 49,864 47,351
Stockholders' equity 193,994 170,034 128,198 113,123 100,147
<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) Includes an acquisition related charge of $7,895 pre-tax, $6,992 after tax
or $.23 per diluted share.
(3) Includes a special charge of $8,164 pre-tax, $3,252 after-tax or $.11 per
diluted share.
(4) Includes a special charge of $2,200 pre-tax, $1,364 after-tax or $.04 per
diluted share.
</FN>
STOCK EXCHANGE LISTING
Common Stock of National Computer Systems, Inc. trades on the Nasdaq Stock
Market(TM) under the symbol "NLCS"and is listed in the newspaper stock tables as
NtCptr or NtlCptrSys.
QUARTERLY MARKET DATA
NCS had approximately 2,000 and 1,900 Common Stockholders of record as of
January 31, 1998 and 1997, respectively.
Fiscal Year 1997
-----------------------------------------
Three Months Ended
-----------------------------------------
Year Ended January 31, 1998 April 30 July 31 October 31 January 31
- --------------------------- -------- ------- ---------- ----------
High $13.37 $14.75 $19.75 $19.50
Low 11.37 12.50 13.75 15.50
Close 12.56 13.75 19.00 17.12
Dividends per share 0.045 0.045 0.045 0.045
Fiscal Year 1996
-----------------------------------------
Three Months Ended
-----------------------------------------
Year Ended January 31, 1997 April 30 July 31 October 31 January 31
- --------------------------- -------- ------- ---------- ----------
High $11.81 $12.62 $11.62 $13.25
Low 9.00 9.62 9.69 10.00
Close 10.87 10.12 10.75 12.22
Dividends per share 0.045 0.045 0.045 0.045
QUARTERLY RESULTS OF OPERATIONS (unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
----------------------------------------------
April 30 July 31 October 31 January 31
-------- ------- ---------- ----------
Year Ended January 31, 1998
Revenues $78,971 $96,029 $115,387 $115,628
Gross profit 30,811 38,067 40,743 44,817
Income from continuing
operations 4,048 7,011 6,026 8,090
Net income 4,048 7,011 6,026 8,090
Basic earnings per share $ 0.13 $ 0.23 $ 0.20 $ 0.27
Diluted earnings per share $ 0.13 $ 0.22 $ 0.19 $ 0.26
Year Ended January 31, 1997
Revenues $70,507 $80,864 $ 88,783 $ 90,905
Gross profit 26,738 31,288 28,645 32,087
Income from continuing
operations 3,201 5,893 4,950 (378)(2)
Net income 2,831 42,177(1) 4,950 (378)(2)
Basic earnings per share:
Continuing operations $ 0.11 $ 0.19 $ 0.16 $ (0.01)
Discontinued operations (0.01) (0.06) - -
Gain on disposition - 1.26 - -
------- ------- ------- -------
Net income $ 0.10 $ 1.39 $ 0.16 $ (0.01)
======= ======= ======= =======
Diluted earnings per share:
Continuing operations $ 0.10 $ 0.19 $ 0.16 $ (0.01)
Discontinued operations (0.01) (0.06) - -
Gain on disposition - 1.22 - -
------- ------- ------- -------
Net income $ 0.09 $ 1.35 $ 0.16 $ (0.01)
======= ======= ======= =======
(1) Includes a gain on disposition, net of taxes, of $38,143 or $1.22 per
diluted share.
(2) Includes an acquisition related charge of $6,992 after tax or $.23 per
diluted share.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The fiscal years referenced herein are as follows:
Fiscal Year Year Ended
----------- ----------
1997 January 31, 1998
1996 January 31, 1997
1995 January 31, 1996
Income and Expense Items as a Percentage of Revenues
Fiscal Year 1997 1996 1995
- ------------------------------------------------------------
Revenues
Information services 48.2% 47.6% 43.4%
Product sales 39.9 40.5 43.4
Maintenance and support 11.9 11.9 13.2
- ------------------------------------------------------------
Total revenues 100.0 100.0 100.0
Costs of Revenues (1)
Cost of information services 76.7 78.5 77.0
Cost of product sales 42.0 46.3 46.9
Cost of maintenance and support 69.5 67.4 69.0
- ------------------------------------------------------------
Total gross profit 38.0 35.9 37.1
Operating Expenses
Sales and marketing 14.0 12.5 12.8
Research and development 2.1 3.0 2.8
General and administrative 11.3 10.0 11.3
Acquisition related charges - 2.4 -
- ------------------------------------------------------------
Income from operations 10.6 8.0 10.2
Income from continuing operations
before income taxes 10.3 8.0 9.2
Income from continuing operations 6.2% 4.1% 5.5%
============================================================
(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 in education, but also to business, government and other markets
through its various operating units.
RECAP OF 1997 RESULTS
Total revenues increased 22.6% in fiscal 1997 to $406.0 million compared to last
year's $331.2 million, with approximately half of the increase attributable to
acquisitions. Refer also to Note 2 of Notes to Consolidated Financial Statements
for further discussion of acquisitions. The Company's overall gross margin on
revenues increased $35.7 million to 38.0% as a percentage of total revenues,
versus last year's gross margin percentage of 35.9%. Operating expenses,
however, increased to 27.4% of revenues in fiscal 1997, compared to 25.5% of
revenues in fiscal 1996, before acquisition related charges. These year-to-year
margin and expense increases were partially caused by the acquired businesses,
as they are predominantly intellectual property businesses (software and
assessment products) with higher gross margins and higher operating expenses,
relative to the remainder of the Company. Nonetheless, overall operating margins
increased to 10.6% of revenue in fiscal 1997 from 10.4% in fiscal 1996 and
operating income in dollars increased 24.6% to $43.0 million. Income tax rates
were consistent with the prior year before the effects of the special items
described below. Income from continuing operations in fiscal 1997 totaled $25.2
million or $0.80 per diluted share outstanding. This compares to a fiscal 1996
pro forma income from continuing operations of $20.7 million and $0.67 per
diluted share. In fiscal 1996, the reported net income of $1.59 included a
significant one-time net gain on the disposition of the Company's Financial
Systems business and a special charge related to the acquisition of Macro
Educational Systems, Inc. (Macro). A reconciliation of diluted earnings per
share follows:
1997 1996 1995
----- ----- -----
Earnings per share, as reported $ .80 $ 1.59 $ .71
Less gain on disposition
and discontinued operations - (1.15) (.18)
----- ----- -----
Continuing operations .80 .44 .53
Plus acquisition related charges - .23 -
----- ----- -----
Pro forma earnings per share $ .80 $ .67 $ .53
===== ===== =====
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 1997 versus Fiscal 1996. Total revenues for fiscal 1997 were up 22.6% to
$406.0 million from $331.2 million in fiscal 1996, with approximately half of
the year-on-year revenue growth due to acquisitions. The exact annual growth in
revenues attributable to acquisitions is impracticable to determine due to the
total integration of many of these operations into existing Company operations,
the elimination of duplicate or overlapping product lines, and the packaging of
existing and acquired offerings into new offerings not previously possible.
By revenue category, fiscal 1997 compares to fiscal 1996 as follows:
Information services + 24.3%
Product sales + 20.7%
Maintenance and support + 22.1%
The growth in information services came from several sources, both internal and
acquired, but most significantly from the Company's international business,
where acquisitions in Australia and Canada, as well as significant internal
growth in Mexico, contributed approximately one-third of the total growth.
Testing and assessment services and services related to the Company's education
software also contributed significant year-on-year revenue growth. The growth in
product sales, as well as the related support revenues, were due primarily to
growth in licensing of the Company's enterprise software for schools, which
realized 150% year-on-year growth. Products and technologies acquired during the
past two years made large contributions to this growth. Sales of assessment
instruments also contributed to the growth in product sales, as a result of the
acquisition of the London House product line.
By market, the Company's revenues from the Education market grew approximately
29% in fiscal 1997, and account for over 70% of total revenue. Large Scale Data
Management (non-education) grew just under 10% year-on-year.
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.
COST OF REVENUES AND GROSS PROFITS
Fiscal 1997 versus Fiscal 1996. The Company's overall gross margin as a
percentage of revenue improved to 38.0% in fiscal 1997 compared to 35.9% in
fiscal 1996. The most impactive factor in this fiscal 1997 improvement is the
greater volumes and higher margins of education software products, and, to a
lesser extent, the increase in sales and margins of assessment instruments. In
both instances, the gross margin on incremental sales is quite favorable. Gross
margins on information services also improved slightly in fiscal 1997 due to a
number of contributing factors. Gross margins on maintenance and support
declined slightly in fiscal 1997, due to a greater complement of software
support, carrying a lower margin compared to hardware maintenance.
Fiscal 1996 versus Fiscal 1995. The Company's overall gross profit dollars
increased $7.0 million or 6.3% with the largest 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.
OPERATING EXPENSES
Fiscal 1997 versus Fiscal 1996. The overall growth in operating expenses in
fiscal 1997 over fiscal 1996 is heavily impacted by the Company's 1997
acquisitions. Beyond the increase in operating expenses due simply to added
volume, these businesses by their nature (intellectual property licensing and
sales, mainly software and assessment instruments) carry higher gross margins
and higher operating expense percentages compared to the rest of the Company.
Therefore, sales and marketing and general and administrative expenses increased
not only in dollars, but as a percentage of revenues in fiscal 1997.
Research and development expenses declined nominally in 1997 as certain of the
acquisitions offset the need for internal research and development spending and
allowed faster time to market.
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.
IMPACT OF YEAR 2000
Some of the older software in use today was written using two digits rather than
four to define the applicable year. As a result, those computer programs have
date-sensitive software that recognize a date using "00" as the year 1900 rather
than the year 2000. This could cause a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar normal business activities.
The Company has substantially completed an assessment of both its product
software and internal business systems and will have to modify or replace
portions of that software so that it will function properly with respect to
dates in the year 2000 and thereafter. The Company spent approximately $1.5
million in fiscal 1997 on assessment and modification of this software. It
expects to spend approximately $11.5 million toward this end in fiscal 1998,
which should allow the Company to complete the majority of the estimated effort.
Approximately $4.0 million of this amount is incremental expenditure and the
remainder represents the redirection of existing resources. The Company expects
fiscal 1999 expenditures to be significantly reduced from that of fiscal 1998.
All amounts are being expensed currently, and are included in the Company's
future operating plans and expectations. The Company has also made, and will
continue to make, significant capital investments in its internal administrative
and service delivery systems and infrastructure (see Capital Resources and
Liquidity below), though these investments are not driven principally by year
2000 considerations. The Company has also completed an assessment of its
customers, suppliers and other vendor relationships to identify year 2000
exposures and will be working with these entities to mitigate or eliminate them.
The costs and timing of the project are based on management's best estimates,
which were derived utilizing numerous assumptions of future events; as a result,
there can be no guarantee that these estimates will be achieved. While the
Company believes it can address the year 2000 issues under its control in time
to prevent any material impact on its operations, there can be no guarantee that
the Company's customers and suppliers can do likewise, which in turn could have
an adverse impact on the Company. Contingency plans will be developed, where
necessary, so that the Company's operations will not be materially affected by
the year 2000.
OTHER SIGNIFICANT TRANSACTIONS
During fiscal 1996, in conjunction with the acquisition of Macro, NCS recorded
one-time charges totaling $7.9 million, including $5.6 million of purchased
research and development plus $2.3 million of acquisition related costs.
INTEREST EXPENSE
Interest expense decreased slightly in fiscal 1997 from fiscal 1996 due to
slightly lower average borrowing levels.
Interest expense decreased by $1.6 million in fiscal 1996 from fiscal 1995, also
the result of lower borrowing levels. See Capital Resources and Liquidity below
for further discussion of cash flow and debt.
OTHER INCOME AND EXPENSE
Other income in fiscal 1997 decreased due to lower invested cash balances as
$48.8 million was used to fund the aforementioned acquisitions.
Other income in fiscal 1996 includes interest income of $2.8 million principally
from investment of the proceeds from the sale of the Company's Financial Systems
business, and also from internally generated cash flows.
Other income and expense for 1995 included no large or unusual items.
INCOME TAXES
The effective income tax rate was 40.0%, 48.5% and 40.3% for fiscal 1997, 1996
and 1995, respectively. See Note 6 of Notes to Consolidated Financial Statements
for a reconciliation to the statutory rate. The effective income tax rate for
fiscal 1996 was higher than the statutory rate primarily as a result of the one
time write-off of non-deductible purchased research and development.
CAPITAL RESOURCES AND LIQUIDITY
The Company began fiscal 1997 with $58.1 million of cash and cash equivalents,
due largely to the 1996 divestiture of its Financial Systems business. During
fiscal 1997, the Company further generated $49.5 million of cash from operating
activities. Cash was used for acquisitions of $48.8 million, including $13.6
million to repurchase shares in the open market to offset shares issued to
effect the acquisition of Virtual University Enterprises. Further, $25.2 million
was used for property, plant and equipment acquisitions including a new
Company-owned facility in Melbourne, Australia and the outfitting of new leased
facilities in Cedar Rapids, Iowa and Lawrence, Kansas. Investments totaling $7.1
million were made in internal administrative and service delivery systems during
fiscal 1997. Debt repayments were nominal and the Company paid its normal
dividends of $5.5 million. At January 31, 1998 the Company had $23.3 million in
cash and cash equivalents.
During fiscal 1996, NCS generated $38.5 million of cash from operating
activities and $64.1 million, net, from the sale of its Financial Systems
business. 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 724,000 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 and $7.0
million of convertible debentures issued in connection with the Macro
acquisition.
The Company had long-term debt balances, including current maturities, of $18.8
million, $20.1 million and $27.0 million at January 31, 1998, 1997, and 1996,
respectively. The items causing the changes in debt balances are described
above. At January 31, 1998, the Company's debt to total capital ratio was 8.9%
compared to 10.6% a year earlier and 17.4% 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 the acquisitions made in 1997 and by the increased level
of operations during the year.
Looking toward fiscal 1998, the Company maintains a $50.0 million revolving
credit facility, all of which was available at January 31, 1998. The Company
expects its cash flows from operations, the revolving credit facility and cash
on hand to be adequate to meet foreseeable cash requirements, including internal
growth and potential acquisitions.
NEW ACCOUNTING STANDARDS
Certain accounting standards have been issued which the Company is not yet
required to adopt. See Notes to Consolidated Financial Statements for a
discussion of the applicable standards.
The statements which are not historical or current facts or are "goals" or
"expectations" contained in this annual report constitute `forward looking'
statements, as defined in the Private Securities Litigation Reform Act of 1995
and are subject to certain risks and uncertainties that could cause actual
results to differ materially. The cautionary statements filed by the Company as
Exhibit 99 to a filing made with the SEC on Form 10-K for the fiscal year ended
January 31, 1998, are incorporated herein by reference and investors are
specifically referred to such cautionary statements for a discussion of factors
which could affect the Company's operations and forward-looking statements
contained herein.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31 (in thousands) 1998 1997
-------- --------
Assets
Current Assets
Cash and cash equivalents $ 23,267 $ 58,079
Receivables 101,334 79,056
Inventories 16,239 18,176
Prepaid expenses and other 6,562 5,526
-------- --------
Total Current Assets 147,402 160,837
-------- --------
Property, Plant and Equipment
Land, buildings and improvements 57,281 51,741
Machinery and equipment 141,949 120,395
Accumulated depreciation (105,206) (92,722)
-------- --------
94,024 79,414
-------- --------
Intellectual Properties, net
Acquired and internally developed software products 14,967 17,578
Assessment instruments 10,317 2,340
-------- --------
25,284 19,918
-------- --------
Other Assets, net
Goodwill 45,634 7,556
Other assets 3,070 6,195
-------- --------
48,704 13,751
-------- --------
Total Assets $315,414 $273,920
======== ========
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31 (in thousands) 1998 1997
-------- --------
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt $ 6,448 $ 3,819
Accounts payable 26,767 20,886
Accrued expenses 36,237 28,832
Deferred income 29,026 23,079
Income taxes 4,156 5,556
-------- --------
Total Current Liabilities 102,634 82,172
-------- --------
Long-Term Debt - less current maturities 12,396 16,329
Deferred Income Taxes 6,390 5,385
Commitments and Contingencies - -
Stockholders' Equity
Preferred stock - -
Common stock - issued and outstanding -
30,846 and 30,469 shares, respectively 925 914
Paid-in capital 4,518 -
Retained earnings 192,005 173,107
Deferred compensation (3,454) (3,987)
-------- --------
Total Stockholders' Equity 193,994 170,034
-------- --------
Total Liabilities and Stockholders' Equity $315,414 $273,920
======== ========
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year (in thousands, except per share amounts) 1997 1996 1995
-------- -------- --------
Revenues
Information services $195,793 $157,511 $130,432
Product sales 161,977 134,144 130,648
Maintenance and support 48,245 39,504 39,803
-------- -------- --------
Total revenues 406,015 331,159 300,883
Costs of Revenues
Cost of information services 150,106 123,718 100,459
Cost of product sales 67,950 62,075 61,233
Cost of maintenance and support 33,521 26,608 27,453
-------- -------- --------
Gross profit 154,438 118,758 111,738
Operating Expenses
Sales and marketing 56,675 41,258 38,544
Research and development 8,628 9,883 8,490
General and administrative 46,091 33,076 34,000
Acquisition related charges:
Purchased research and development - 5,637 -
Other - 2,258 -
-------- -------- --------
Income from Operations 43,044 26,646 30,704
Interest expense 1,353 1,677 3,276
Other (income) expense, net (284) (1,564) (332)
-------- -------- --------
Income from Continuing Operations Before Income Taxes 41,975 26,533 27,760
Income taxes 16,800 12,867 11,180
-------- -------- --------
Income from Continuing Operations 25,175 13,666 16,580
Income (loss) from discontinued operations,
net of taxes of $(1,360) in 1996 and
$3,570 in 1995 - (2,229) 5,679
Gain on disposition, net of taxes of $29,031 in 1996 - 38,143 -
-------- -------- --------
Net Income $ 25,175 $ 49,580 $ 22,259
======== ======== ========
Basic Earnings per share
Continuing operations $ .83 $ .45 $ .54
Discontinued operations - (0.07) .19
Gain on disposition - 1.26 -
-------- -------- --------
Net Income per share $ .83 $ 1.64 $ .73
======== ======== ========
Average Shares Outstanding 30,391 30,257 30,565
Diluted Earnings per share
Continuing operations $ .80 $ .44 $ .53
Discontinued operations - (0.07) .18
Gain on disposition - 1.22 -
-------- -------- --------
Net Income per share $ .80 $ 1.59 $ .71
======== ======== ========
Average Shares Outstanding and
Dilutive Potential Common Shares 31,864 31,069 31,319
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
--------------- Paid-In Retained Deferred
(in thousands, except per share amounts) Shares Amount Capital Earnings Compensation Total
------ ------ ------- -------- ------------ -----------
Balance, January 31, 1995 30,621 $ 919 $ 3,335 $114,546 $(5,677) $113,123
Shares issued for employee stock
purchase and option plans 413 12 2,440 - - 2,452
Repurchase of common stock (466) (14) (4,438) - - (4,452)
Restricted stock awards 161 5 1,574 - (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 - $.18 per share - - - (5,570) - (5,570)
Foreign currency translation adjustment - - - (1,228) - (1,228)
------ ----- ------- -------- ------- --------
Balance, January 31, 1996 30,729 922 2,966 130,007 (5,697) 128,198
Shares issued for employee stock
purchase and option plans 490 15 3,475 - - 3,490
Repurchase of common stock (724) (22) (6,860) (1,194) - (8,076)
Restricted stock awards (forfeitures), net (26) (1) 25 - (24) -
ESOP debt payment - - - - 1,000 1,000
Restricted stock compensation accrual - - 394 - 734 1,128
Net income - - - 49,580 - 49,580
Cash dividends paid - $.18 per share - - - (5,521) - (5,521)
Foreign currency translation adjustment - - - 235 - 235
------ ----- ------- -------- ------- --------
Balance, January 31, 1997 30,469 914 - 173,107 (3,987) 170,034
Shares issued for employee stock
purchase and option plans 283 8 1,725 - - 1,733
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
Net income - - - 25,175 - 25,175
Cash dividends paid - $.18 per share - - - (5,512) - (5,512)
Foreign currency translation adjustment
and other - - 968 (765) - 203
------ ----- ------- -------- ------- --------
Balance, January 31, 1998 30,846 $ 925 $ 4,518 $192,005 $(3,454) $193,994
====== ===== ======= ======== ======= ========
See Notes to Consolidated Financial Statements.
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year (in thousands) 1997 1996 1995
------- ------- -------
Operating Activities
Net income $25,175 $49,580 $22,259
Less - gain on disposition - (38,143) -
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation 16,825 15,620 15,643
Amortization 13,291 9,647 11,791
Deferred income taxes and other (661) (2,053) 3,747
Non-cash charges - 6,637 -
Changes in operating assets and liabilities
(net of acquired amounts):
Accounts receivable (15,361) (4,318) (2,133)
Inventory and other current assets 1,712 2,495 542
Accounts payable and accrued expenses 8,087 (3,856) 272
Deferred income 424 2,912 (190)
------- ------- -------
Net Cash Provided By Operating Activities 49,492 38,521 51,931
------- ------- -------
Investing Activities
Acquisitions, net of cash acquired (35,216) (11,192) -
Purchases of property, plant and equipment (25,174) (14,909) (14,091)
Purchases of business systems (7,108) (1,048) (1,897)
Capitalized software products - (1,553) (4,826)
Net proceeds from disposition - 64,071 -
Other - net 1,148 3,296 1,342
------- ------- -------
Net Cash Provided By (Used In)
Investing Activities (66,350) 38,665 (19,472)
------- ------- -------
Financing Activities
Decrease in revolving credit borrowing - - (13,065)
Repayment of secured notes - (15,000) -
Net increase (decrease) in other borrowings (676) 846 (7,920)
Repurchase of common stock, net (11,766) (4,586) (1,945)
Dividends paid (5,512) (5,521) (5,570)
------- ------- -------
Net Cash Used In Financing Activities (17,954) (24,261) (28,500)
------- ------- -------
Increase (Decrease) In Cash and Cash Equivalents (34,812) 52,925 3,959
Cash and Cash Equivalents - Beginning of Year 58,079 5,154 1,195
------- ------- -------
Cash and Cash Equivalents - End of Year $23,267 $58,079 $ 5,154
======= ======= =======
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
----------- ----------
1997 January 31, 1998
1996 January 31, 1997
1995 January 31, 1996
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its subsidiaries. All intercompany accounts and
transactions between consolidated entities have been eliminated. Certain
reclassifications have been made to prior year presentations to conform to
current year presentation.
USE OF ESTIMATES: The consolidated financial statements have been prepared in
accordance with the generally accepted accounting principles which require
management to make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Those assumptions
and estimates are subject to constant revision, and actual results could differ
from those estimates.
CASH AND EQUIVALENTS: All investments purchased with an original maturity of
three months or less are considered to be cash equivalents. Cash equivalents are
available for sale, are carried at cost which approximates fair market value and
consist principally of corporate commercial paper.
INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or
market. Components of inventory as of January 31, are summarized as follows:
1998 1997
- ----------------------------------------------------------------
Finished goods $ 5,166 $ 4,765
Scoring services and work in process 8,218 9,221
Raw materials and purchased parts 2,855 4,190
- ----------------------------------------------------------------
$16,239 $18,176
================================================================
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, 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
Additions 1,010 - - 1,010
Amortization - - (3,621) (3,621)
- ----------------------------------------------------------------------------
Balance, January 31, 1998 24,334 11,993
Accumulated Amortization (10,768) (10,592) $(21,360)
- ----------------------------------------------------------------------------
Net Balance, January 31, 1998 $13,566 $ 1,401 $14,967
============================================================================
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. Expected revenues and amortizable lives
are subject to revision and balances are periodically evaluated for possible
impairment. Accumulated amortization at January 31, 1998 and 1997 was $3,849 and
$2,754, respectively.
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 $3,047, $703 and $624 in fiscal 1997, 1996
and 1995, respectively. Accumulated amortization was $7,130 and $3,843 as of
January 31, 1998 and 1997, 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:
1998 1997
- ------------------------------------------------
Employee compensation $17,604 $13,376
Taxes other than income 3,558 2,875
Royalties 2,630 2,065
Other 12,445 10,516
- ------------------------------------------------
$36,237 $28,832
================================================
REVENUE RECOGNITION: Revenue from product sales and software licensing is
recognized at the time of shipment, except in instances where material
fulfillment obligations exist beyond shipment. In such cases, revenue is not
recognized until such obligations are substantially fulfilled or is recognized
in accordance with specific contract terms. Revenue from information services is
recognized when such service is performed. Hardware maintenance and software
support revenues are recognized ratably over the contractual period.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, Software Revenue Recognition, which requires
that each element of a software licensing arrangement be separately identified
and accounted for based on the relative fair values of each element. The SOP is
effective for transactions that the Company will enter into beginning February
1, 1998 and, based upon current revenue recognition policies, management
believes that the effect of the adoption will not be material.
PER SHARE DATA: In 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings per Share. SFAS 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the SFAS 128
requirements.
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 for the last three fiscal years:
1997 1996 1995
------- -------- -------
Earnings:
Income from Continuing Operations -
Basic earnings per share $25,175 $13,666 $16,580
Adjustments for dilutive securities:
Interest expense on convertible debentures,
net of tax 256 7 -
------- ------- -------
Adjusted income for diluted earnings per share $25,431 $13,673 $16,580
======= ======= =======
Weighted Average Shares:
Basic weighted-average shares 30,391 30,257 30,565
Adjustments for dilutive securities:
Employee stock options, net of tax proceeds 620 402 382
Contingent stock awards, net of tax proceeds 270 394 372
Convertible debentures 583 16 -
------- ------- -------
Dilutive potential common shares 1,473 812 754
------- ------- -------
Diluted weighted-average shares 31,864 31,069 31,319
======= ======= =======
Basic earnings per share $ 0.83 $ 0.45 $ 0.54
======= ======= =======
Diluted earnings per share $ 0.80 $ 0.44 $ 0.53
======= ======= =======
IMPAIRMENT OF LONG-LIVED ASSETS: The Company evaluates its long-lived assets for
impairment losses when indicators of impairment are present by comparing the
undiscounted cash flows to the assets' carrying amount. An impairment loss is
recorded if necessary.
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 year ending January 31, 1996 and thereafter. 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.
SEGMENT DISCLOSURES: In June 1997, the FASB issued SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information, which requires
disclosure of certain information of a company's internal operating segments.
This Statement is effective for the Company's fiscal 1998 yearend, and will have
no effect on its basic financial statements, but will require additional
disclosures.
COMMON STOCK SPLIT: On March 3, 1998, the Board of Directors declared a
two-for-one stock split of the Company's Common Stock. The stock split is in the
form of a 100 percent stock dividend payable March 26, 1998 to shareholders of
record on March 16, 1998. The number of shares issued and outstanding at January
31, 1998, after giving retroactive effect to the split was 30,846,000. All share
and per share information, including stock option, stock purchase and stock
ownership plan information, has been restated for all years presented to reflect
the split.
NOTE 2 - ACQUISITIONS
During fiscal 1997, the Company made several individually small acquisitions. 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. In accordance with SFAS No. 109, Accounting for Income Taxes,
the purchase price has been adjusted by $1.7 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 $16.4 million, of all of which was allocated to goodwill and
is being amortized over 20 years.
In July 1997, the Company acquired the assets of two businesses from The
McGraw-Hill Companies for $29.5 million in cash. The acquisition included London
House, a pre-employment assessment business, and McGraw Hill School Systems, a
school administrative software business. The purchase price was allocated
primarily to goodwill, $20.4 million, and assessment instruments, $9.1 million,
which are being amortized over 10 years.
The Company made two additional acquisitions in fiscal 1997 whose acquisition
prices totaled $5.0 million, of which $4.2 million was allocated to goodwill.
All of the fiscal 1997 acquisitions described above were accounted for as
purchases and, accordingly, operating results of these businesses subsequent to
the date of acquisition were included in the Company's consolidated financial
statements.
The following is a summary of pro forma operating results as if the acquisitions
had taken place at the beginning of fiscal 1996:
Fiscal Year (unaudited) 1997 1996
-------- --------
Total revenues $420,843 $384,923
Income from continuing operations
before income taxes 39,497 18,158
Income from continuing operations 23,698 8,641
Basic earnings per share $ 0.78 $ 0.29
Diluted earnings per share $ 0.75 $ 0.28
The pro forma information is provided for informational purposes only. It is
based on historical information and does not purport to be indicative of the
results that would have occurred had the acquisitions been made at the beginning
of fiscal 1996,or of future results, as significant changes to their operations,
products and cost and expense structures have taken place since acquisition.
On January 21, 1997, the Company acquired all of the common stock of Macro
Educational Systems, Inc. (Macro), a California-based developer of
administrative software for the K-12 educational market, for approximately $13.9
million, through the issuance of $7.0 million of convertible debentures and
cash. Additional payments up to $6.0 million may be earned between 1998 and
2001, subject to achieving certain earnings levels.
The acquisition was accounted for as a purchase and, accordingly, operating
results of this business subsequent to the date of acquisition were included in
the Company's 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.
NOTE 3 - DISCONTINUED OPERATIONS
The Company sold its Financial Systems segment on July 10, 1996 to SunGard Data
Systems, Inc. for $95.0 million in cash. The gain on the sale, recorded in the
second quarter 1996, was $38.1 million net of tax. The results of the Financial
Systems segment up to disposition have been classified as discontinued
operations in the accompanying financial statements. The segment's 1996 revenues
through the date of sale were $17.1 million and revenues for fiscal 1995 were
$58.1 million.
NOTE 4 - LEASES
The Company leases office facilities under noncancelable operating leases which
expire in various years through 2003. Rental expense for all operating leases
was $9,167 in fiscal 1997, $8,544 in fiscal 1996, and $7,987 in fiscal 1995.
Future minimum rental expense as of January 31, 1998, for noncancelable
operating leases with initial or remaining terms in excess of one year is
$17,262 and is payable as follows: fiscal 1998 - $5,979; fiscal 1999 - $4,327;
fiscal 2000 - $3,315; fiscal 2001 - $2,530; fiscal 2002 - $1,040 and $71 beyond.
In August 1997, the Company entered into a five-year operating lease agreement
for a facility in Cedar Rapids, Iowa. The total cost of the assets covered by
the lease as of January 31, 1998 was $11,751. The lease provides for a
substantial residual value guarantee by the Company at the end of the initial
term and includes purchase and renewal options at fair market values. The
amounts of future minimum operating lease payments listed above excludes any
payment related to the residual value guarantee which is due upon termination of
the lease. The Company has the right to exercise a purchase option with respect
to the leased building or the building can be sold to a third party. The Company
expects the fair market value of the building, subject to the purchase option or
sale to a third party, to substantially reduce or eliminate the Company's
payment under the residual value guarantee. The Company is obligated to pay the
difference between the maximum amount of the residual value guarantee and the
fair market value of the building at the termination of the lease. At January
31, 1998 the maximum amount of the residual value guarantee relative to the
assets under lease at January 31, 1998 is approximately $9,871.
NOTE 5 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt at January 31, consisted of the following:
1998 1997
- --------------------------------------------------
Revolving credit borrowing $ - $ -
Convertible debentures 7,000 7,000
Unsecured note 5,228 6,535
ESOP borrowing 2,000 3,000
Other borrowings,
principally foreign 4,616 3,613
- --------------------------------------------------
18,844 20,148
Less current maturities (6,448) (3,819)
- --------------------------------------------------
Long-term debt $12,396 $16,329
==================================================
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 $7,000 of
Convertible Debentures as partial 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 $12.00 per share.
Unsecured Note: This unsecured term note is due in April 2001. The note has
annual principal payments of $1,307, 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 an interest rate of .75% over LIBOR.
Scheduled Maturities: The aggregate principal amounts of long-term debt
scheduled for repayment in each of the five fiscal years 1998 through 2002 are
$6,448, $4,611, $2,991, $2,789, and $0, respectively, with $2,005 due
thereafter. In each fiscal year, interest paid approximates interest expense.
NOTE 6 - INCOME TAXES
The components of the provision for income taxes from continuing operations are
as follows:
Current
-----------------------
Fiscal Year Federal State Foreign Deferred Total
- -----------------------------------------------------------------
1997 $14,540 $2,806 $1,300 $(1,846) $16,800
1996 16,197 1,320 864 (5,514) 12,867
1995 10,079 1,465 70 (434) 11,180
- -----------------------------------------------------------------
The provision for income taxes from discontinued operations is $27,671 and
$3,570 in fiscal years 1996 and 1995, 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:
1998 1997
------ ------
Deferred tax assets:
Reserves for uncollectibles $2,561 $2,801
Foreign operating loss carryforwards 2,826 2,778
Accrued vacation pay 1,792 1,511
Rotable service parts amortization 980 1,260
Intangible amortization 1,453 1,198
Deferred expenses 783 689
Other 602 1,431
Valuation allowance (2,826) (2,778)
- ------------------------------------------------------------
Total deferred tax assets 8,171 8,890
- ------------------------------------------------------------
Deferred tax liabilities:
Acquired intangible amortization 7,688 6,592
Accelerated depreciation 4,542 5,197
Net capitalized software 1,921 1,929
Other 410 557
- ------------------------------------------------------------
Total deferred tax liabilities 14,561 14,275
- ------------------------------------------------------------
Net deferred tax liabilities $ 6,390 $ 5,385
============================================================
A reconciliation of the Company's statutory and effective tax rate from
continuing operations is presented below:
1997 1996 1995
------ ------ ------
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 4.4 3.2 3.1
Intangible amortization 1.0 1.7 1.0
Foreign sales corporation (0.2) (0.5) (0.1)
Research and development credits (0.1) (0.6) (0.3)
Affordable housing credit (0.6) (1.0) (1.0)
Foreign operating losses 1.1 3.2 3.2
Purchased research and development - 7.4 -
Other (0.6) 0.1 (0.6)
- ---------------------------------------------------------------
Effective rate 40.0% 48.5% 40.3%
===============================================================
The Company made income tax payments of $18,991, $47,693 and $10,335 in the
fiscal years 1997, 1996, and 1995, respectively.
NOTE 7 - STOCKHOLDERS' EQUITY
The Company has 10,000,000 shares of $.01 par value Preferred Stock authorized
and issuable in one or more series as the Board of Directors may determine; none
is outstanding. 100,000,000 shares of $.03 par value Common Stock are authorized
(post-split). 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 1997, 1996
and 1995:
1997 1996 1995
------- ------- ------
Net income - as reported $25,175 $49,580 $22,259
Net income - pro forma 23,988 49,069 21,925
Earnings per share - as reported:
Basic $ 0.83 $ 1.64 $ 0.73
Diluted 0.80 1.59 0.71
Earnings per share - pro forma:
Basic $ 0.79 $ 1.62 $ 0.72
Diluted 0.76 1.58 0.70
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:
1997 1996 1995
------ ------ ------
Expected dividend yield .58% .78% .78%
Expected stock price volatility 30% 45% 45%
Risk-free interest rate 6.23% 6.18% 6.18%
Expected life of options 5 years 5 years 5 years
The weighted-average fair value of the options granted during fiscal years 1997,
1996 and 1995 were $4.40, $5.16 and $4.20, respectively.
The Company has five Employee Stock Option Plans (1984, 1986, 1990, 1995 and
1997). Options to purchase Common Stock of the Company are granted to employees
at 100% of fair market value on the date of grant and are exercisable over a 60
or 63 month period. Shares available for grant under the Plans totaled 669,700,
454,000 and 760,500 at January 31, 1998, 1997 and 1996, 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, 1995 1,895,000 $ 6.85
Granted 459,500 9.26
Cancelled (131,900) 7.57
Exercised (328,700) 5.62
--------- -----
Balance, January 31, 1996 1,893,900 7.60
Granted 451,700 11.37
Cancelled (188,900) 8.27
Exercised (462,580) 7.43
--------- -----
Balance, January 31, 1997 1,694,120 8.57
Granted 862,148 13.13
Cancelled (92,908) 9.51
Exercised (309,246) 7.57
--------- ------
Balance, January 31, 1998 2,154,114 $10.50
========= ======
Options for 679,182; 627,140 and 746,500 shares were exercisable at January 31,
1998, 1997 and 1996, with weighted average exercise prices of $8.07, $7.43 and
$7.24, respectively. Exercise prices for options outstanding as of January 31,
1998 are summarized as follows:
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Remaining Average
Range of Number Exercise Contractual Number Exercise
Exercise Prices of Shares Price Life of Shares Price
- --------------- --------- --------- ----------------- ---------- ---------
$ 4.02 - 8.00 647,334 $ 6.72 1.7 years 437,828 $ 6.78
8.38 -12.00 664,580 10.44 3.4 years 198,654 10.14
12.25 -18.75 842,200 13.52 5.1 years 42,700 12.99
--------- ------ ------- ------
2,154,114 $10.50 679,182 $ 8.07
========= ====== ======= ======
The Company has two Long-Term Incentive Plans (L-TIP) approved by the
shareholders, (1990 and 1997). During fiscal 1990, pursuant to the 1990 L-TIP,
342,800 shares were issued to participants on a restricted basis. At January 31,
1998, 30,690 shares remained restricted, 83,210 shares distributed and the
balance having been forfeited. The shares distributed and the remaining
restricted shares which vest on January 31, 1999, contingent on continued
employment, were earned by participants during fiscal 1996.
During fiscal 1995 and 1996, pursuant to the 1990 L-TIP, 199,800 shares were
issued to participants on a restricted basis; 129,828 shares have been earned
and distributed with the balance having been forfeited.
During fiscal 1997, pursuant to the 1990 L-TIP, 150,000 shares were issued on a
restricted basis. At January 31, 1998, 93,750 shares remain restricted with the
balance having been earned and distributed. The restricted shares are earned
upon attainment of specified Common Stock market prices and are contingent on
continued employment.
During fiscal 1997, pursuant to the 1997 L-TIP, non-qualified options to
purchase 336,000 shares of Common Stock of the Company were granted to
participants at 100% of fair market value on date of grant and are exercisable
over 67 to 72 month periods. Vesting can be accelerated to January 31, 2000 on
achievement of specified cumulative earnings per share amounts during the three
fiscal years then ended. At January 31, 1998, there were 336,000 options shares
outstanding at a weighted average exercise price per share of $12.54.
The Company has an Employee Stock Purchase Plan. There were 57,784 shares
available for purchase under the Plan at January 31, 1998.
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 $2,195, $1,638 and $1,900 in fiscal years 1997, 1996
and 1995, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN: The Company has an Employee Stock Ownership Plan
(ESOP) covering substantially all employees. Benefits, to the extent vested,
become available upon retirement or termination of employment. During 1989, the
ESOP Trust borrowed $10,000 to purchase 1,584,000 shares of Common Stock. Each
year, the Company makes contributions to the ESOP which are charged to
compensation expense, and used by the ESOP Trust to make loan interest and
principal payments. With each principal payment, a portion of the Common Stock
is allocated to participating employees. In fiscal 1997, the Company's
contribution to the Plan was $1,000 plus interest of $61, which is net of
dividends on unallocated shares of $87. The Company's contribution to the Plan
was $1,000 in fiscal 1996 and fiscal 1995, and interest, which was totally
offset by dividends on unallocated shares, was $77 in fiscal 1996 and $63 in
fiscal 1995. There were 316,800 and 475,200 unallocated shares at January 31,
1998 and 1997, 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
Certain claims asserted against the Company by a former customer and discussed
in prior years were reduced to a formal complaint served on the Company on April
30, 1997. The lawsuit alleges certain claims against the Company in connection
with three loan processing and servicing agreements; the claims are for
expenses, an undisclosed amount of lost profits and damages associated with loan
defaults. The Company has tendered the defense of this claim to its insurer, and
the insurer accepted the defense subject to a reservation of rights. The Company
has filed an answer to the complaint denying the claims and the Company will
vigorously defend this litigation. In addition, the Company has filed a
counterclaim against the former customer and its' corporate affiliate seeking
compensatory damages in an amount to be determined at trial. The Company does
not believe the outcome of this litigation would result in a material adverse
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 software, services
and systems for the collection, management and interpretation of data. The
Company markets these products and services to the education, commercial and
government markets, through its various units.
The Company's foreign operations and export sales are individually less than 10%
of total revenues. Sales to all government agencies for the fiscal years ended
January 31, 1998, 1997 and 1996 were $185,186, $180,993 and $148,313 of which
$63,005, $62,278, and $42,664, 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 31, 1998 and 1997, 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 31, 1998.
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 generally accepted auditing
standards. 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 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 1998, in conformity with generally
accepted accounting principles.
/s/ERNST & YOUNG LLP
Minneapolis, Minnesota
March 2, 1998