UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: July 31, 1994
Commission File Number: 0-3713
NATIONAL COMPUTER SYSTEMS, INC.
- - -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0850527
- - ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11000 Prairie Lakes Drive
Eden Prairie, Minnesota 55344
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612)829-3000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and
(2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the last practicable date:
The number of shares of common stock, par value $.03 per
share,outstanding on August 31, 1994, was 15,284,918.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
<CAPTION>
Three Months
Ended July 31,
-----------------
1994 1993
---- ----
(In thousands, except
per share amounts)
<S> <C> <C>
REVENUES
Net sales $63,699 $58,500
Maintenance and support 16,432 17,169
------- -------
Total revenues 80,131 75,669
COST OF REVENUES
Cost of sales 37,850 31,920
Cost of maintenance and support 11,116 12,753
------- -------
Gross margin 31,165 30,996
OPERATING EXPENSES
Sales and marketing 10,438 11,848
Research and development 2,620 1,998
General and administrative 9,505 9,919
------- -------
INCOME FROM OPERATIONS 8,602 7,231
Interest expense 821 418
Other (income) expense, net 31 (8)
------- -------
INCOME BEFORE INCOME TAXES 7,750 6,821
Income tax provision 3,035 2,588
------- -------
NET INCOME $ 4,715 $ 4,233
======= =======
NET INCOME PER SHARE $ .31 $ .27
AVERAGE SHARES OUTSTANDING 15,074 15,792
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
<CAPTION>
Six Months
Ended July 31,
-----------------
1994 1993
---- ----
(In thousands, except
per share amounts)
<S> <C> <C>
REVENUES
Net sales $116,668 $109,141
Maintenance and support 32,213 35,042
-------- --------
Total revenues 148,881 144,183
COST OF REVENUES
Cost of sales 67,972 60,098
Cost of maintenance and support 22,663 26,300
-------- --------
Gross margin 58,246 57,785
OPERATING EXPENSES
Sales and marketing 21,818 23,376
Research and development 5,542 4,410
General and administrative 18,493 19,617
-------- --------
INCOME FROM OPERATIONS 12,393 10,382
Interest expense 1,550 972
Other (income) expense, net (97) (205)
-------- --------
INCOME BEFORE INCOME TAXES 10,940 9,615
Income tax provision 4,275 3,650
-------- --------
NET INCOME $ 6,665 $ 5,965
======== ========
NET INCOME PER SHARE $ .44 $ .38
AVERAGE SHARES OUTSTANDING 15,068 15,867
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS (unaudited)
<CAPTION>
July 31, January 31,
1994 1994
--------- -----------
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,243 $ 1,724
Receivables:
Trade 72,130 70,100
Other 1,347 5,328
-------- --------
Total receivables 73,477 75,428
Inventories:
Finished products 5,934 6,348
Scoring services and work in process 8,568 6,117
Raw materials and purchased parts 4,323 4,905
-------- --------
Total inventories 18,825 17,370
Prepaid expenses and other 8,887 9,198
-------- --------
TOTAL CURRENT ASSETS 102,432 103,720
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 41,822 37,254
Machinery and equipment 93,141 88,950
Rotable service parts 10,064 11,085
Equipment held for lease 7,772 8,205
Accumulated depreciation (79,011) (75,988)
-------- --------
Net property, plant and equipment 73,788 69,506
OTHER ASSETS
Acquired and internally developed
software products 24,780 20,092
Non-current receivables, investments
and other assets 20,987 21,896
Goodwill 5,588 4,959
-------- --------
Total other assets 51,355 46,947
-------- --------
TOTAL ASSETS $227,575 $220,173
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS (unaudited)
<CAPTION>
July 31, January 31,
1994 1994
--------- -----------
(In thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 3,732 $ 2,677
Accounts payable 13,250 18,777
Accrued expenses 22,598 27,093
Deferred income 20,487 18,956
Income taxes 1,725 -
-------- --------
TOTAL CURRENT LIABILITIES 61,792 67,503
DEFERRED INCOME TAXES 8,824 7,849
LONG-TERM DEBT -- less current maturities 48,530 44,674
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock--issued and outstanding -
15,248 and 14,983 shares,
respectively 457 449
Paid-in capital 3,091 -
Retained earnings 110,729 106,771
Deferred compensation (5,848) (7,073)
-------- --------
Total stockholders' equity 108,429 100,147
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $227,575 $220,173
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<CAPTION>
Six Months Ended
July 31,
------------------
1994 1993
------ -----
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,665 $ 5,965
Depreciation, amortization and other
noncash expenses 11,761 12,517
Changes in operating assets and liabilities:
Decrease in accounts receivable 2,937 2,060
Increase in inventory and other
current assets (1,110) (2,798)
Decrease in accounts payable and
accrued expenses (8,609) (7,382)
Increase (decrease) in deferred income 1,531 (841)
-------- -------
Net cash provided by
operating activities 13,175 9,521
------- -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (12,385) (9,769)
Capitalized software products (3,209) (5,223)
Other - net (1,454) (376)
------- --------
Net cash used in investing activities (17,048) (15,368)
------- --------
FINANCING ACTIVITIES
Net increase in revolving
credit borrowing 4,700 1,700
Net proceeds of other borrowings 1,161 931
Issuance (repurchase) of common stock, net 230 (3,980)
Dividends paid (2,699) (2,839)
------ -------
Net cash provided (used)
in financing activities 3,392 (4,188)
------ -------
Decrease in cash and cash equivalents (481) (10,035)
CASH AND CASH EQUIVALENTS - beginning of period 1,724 10,767
------- -------
CASH AND CASH EQUIVALENTS - end of period $ 1,243 $ 732
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - The accompanying unaudited Consolidated Financial
Statements have been prepared in accordance with the instructions
to Form 10-Q and, therefore, do not include all the information
and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position,
results of operations and cash flows for all periods presented
have been made. The results of operations for the period ended
July 31, 1994, are not necessarily indicative of the operating
results that may be expected for the entire fiscal year ending
January 31, 1995.
Note B - Earnings per share for the respective operating periods
are computed based on average shares outstanding and common stock
equivalents.
Note C - The Company has 10,000,000 shares of $.01 par value
Preferred Stock authorized of which none is outstanding.
50,000,000 shares of $.03 par value Common Stock are authorized.
Note D - In July, 1994, the Company completed the acquisition of
Abacus Data Group, a developer of Windows-based instructional
management software for the education market. The purchase price
was approximately $3.8 million in a combination of cash and NCS
stock, plus contingent earn-out payments, and was allocated
principally to software products and goodwill.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
National Computer Systems, Inc. is an information services
company serving the business, education, assessment and financial
markets. The Company's 1993 Annual Report contains a description
of its activities in each of its four primary business units:
Technology, Education, Assessments, and Financial.
Recap of 1994 Results
For the quarter ended July 31, 1994, total revenues were up by
$4.5 million or 5.9% from the same period in 1993. However,
overall gross margin as a percentage of revenue decreased 2.1
percentage points from the prior year, reducing the impact of the
higher revenues. These factors, along with significantly reduced
sales and marketing expenses compared to the prior year, resulted
in a $1.4 million or 19% increase in operating income.
For the six months ended July 31, 1994, total revenues were up
$4.7 million or 3.3% from the same period in 1993. Though
overall gross margin as a percentage of revenue declined by 1.0
percentage point due to the second quarter performance, the
increased revenues and lower overall operating expenses resulted
in an increase in income from operations of $2.0 million or 19%.
The second quarter and six month operating income improvements
over the prior year are the net result of four significant
factors: (1) the Ultrust product discontinuation, which
contributed to substantial improvement in the results of NCS
Financial, (2) significantly improved performance at the
Company's Iowa City service center within NCS Education, (3)
reduced sales and marketing, and general and administrative
expenses across the Company, offset by (4) lower operating income
from international business within NCS Technology, due
principally to a significant one-time international scanning
systems order in the first quarter of the prior year.
Interest expense increased by $.4 million and $.6 million,
respectively, in the quarter and six-month periods ended July 31,
1994, as compared to the same periods of 1993. The Company's
1994 second quarter net income was $4.7 million ($.31 per share),
an 11% increase over the second quarter of 1993. On a year-to-
date basis, the Company's net income was $6.7 million ($.44 per
share) in 1994, a 12% increase over the prior year. A more
detailed discussion of the various income statement items
follows.
Revenues by Primary Business
Total revenues for the quarter ended July 31, 1994 were up 5.9%
to $80.1 million from $75.7 million in the comparable 1993
quarter. On a year-to-date basis, revenues were up 3.3% to
$148.9 million from $144.2 million a year earlier. Total second
quarter and year-to-date revenues in the Company's four major
business units compared to the prior year were as follows:
Second Quarter Year-to-Date
Technology - 2% - 8%
Education +14% +15%
Assessments + 2% - 4%
Financial + 2% + 3%
Total revenues for NCS Technology were down for both the quarter
and year-to-date periods principally due to lower sales of
scanning systems internationally. In addition, NCS Technology
revenues were impacted by lower third-party maintenance revenues.
Total revenues for NCS Education were up for both the quarter and
year-to-date periods primarily due to significantly higher
processing volumes at the Company's Iowa City service center.
While NCS Assessments revenue increased slightly for the quarter
as compared to the prior year quarter, year-to-date revenue
declined by 4% as a result of a lower first quarter volume of
clinical assessment revenues. Total revenues for NCS Financial
increased for both the three and six-month periods ended July 31,
1994, as a result of higher hardware sales and software support
revenues, offset by lower software licensing revenues. These
revenue changes for the quarter and six month periods ended July
31, 1994, are not necessarily indicative of the revenue changes
expected for the entire fiscal year ended January 31, 1995.
Cost of Revenues and Gross Margins
For the quarter ended July 31, 1994, the Company's overall gross
margin percentage on total revenues was 38.9%, down from 41.0%
for the same period in the prior year. The quarter to quarter
decline was primarily due to two factors: lower processing
margins in NCS Education's Iowa City service center as a result
of start up costs on new contracts, and lower margins in NCS
Financial, as a result of a greater complement of hardware and a
lesser complement of software in its sales mix. Offsetting these
factors, gross margins on maintenance and support revenues
improved by 6.7 percentage points in the second quarter as
compared to the prior year second quarter principally due to
improved hardware maintenance margins in NCS Technology and
improved software support margins in NCS Financial due primarily
to the discontinuance of Ultrust.
For the six months ended July 31, 1994, the Company's overall
gross margin declined by 1.0 percentage points to 39.1%. This
decline is principally related to the factors cited above, plus
the lack of high margin international hardware sales in NCS
Technology, which was predominantly a first quarter factor.
Gross margins on maintenance and support revenues improved by
4.7 percentage points for the six months ended July 31, 1994, as
compared to the prior year, principally due to the same factors
listed above.
<PAGE>
Operating Expenses
Sales and marketing expenses decreased $1.4 million or 11.9% in
the quarter ended July 31, 1994 from the prior year quarter.
Similarly, sales and marketing expenses decreased $1.6 million or
6.7% for the six month period ended July 31, 1994 as compared to
the same period of 1993. These decreases are the result of
specific efforts to control these expenses to more productive
levels in 1994. For fiscal 1994, sales and marketing expenses
will continue to be below prior year levels as these efforts
continue.
Research and development expenses increased by $.6 million in the
quarter ended July 31, 1994, over the year earlier quarter. For
the six months ended July 31, 1994, research and development
expenses were up $1.1 million over the same period of 1993. The
increase came principally in NCS Financial and NCS Technology and
is related to further enhancements of NCS Financial software
products and continuing development of scanning hardware and
related software. These expenses are likely to continue at
levels higher than the previous year.
General and administrative expenses decreased by $.4 million or
4.2% in the second quarter from the comparable prior year
quarter, resulting from lower expense levels in all the primary
businesses. On a year-to-date basis, general and administrative
expenses were down similarly, $1.1 million, or 5.7%. This
favorable comparison to the prior year should continue throughout
fiscal 1994.
Non-operating Expenses
Interest expense increased by $.4 million and $.6 million,
respectively, in the three and six-month periods ended July 31,
1994, from the comparable prior year periods. These increases
are due to higher aggregate borrowing levels and higher interest
rates.
Provision for Income Taxes
The effective income tax rate of 39.1% for the first six months
of fiscal 1994, was greater than the 38.0% effective rate for the
first six months of fiscal 1993. This year-to-year net increase
in the effective income tax rate is due to a number of factors,
including the result of new Federal tax legislation enacted in
the third quarter of 1993.
Liquidity and Capital Resources
For the six-month period ended July 31, 1994, the Company
generated $13.2 million of cash flow from operating activities.
This compares favorably to the corresponding prior-year period
due to increased net income and overall favorable operating asset
and liability changes. Borrowings increased $4.7 million to
fund, along with cash provided from operations and cash on hand,
$16.1 million of investment in property, plant and equipment and
software products. See also Note D of Notes to Consolidated
Financial Statements. It is anticipated that the Company's
revolving credit or other borrowings will increase over the
remainder of fiscal 1994 to fund seasonal operating needs and
increased investments in property, plant and equipment over the
prior year. Funds to be generated from operations and funds
available from the Company's existing revolving credit facility
are expected to be adequate to meet current cash requirements.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10. Resignation Arrangements with Norman A. Cocke III.
27. Financial Data Schedule.
(b) There were no reports on Form 8-K filed for the three
months ended July 31, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
NATIONAL COMPUTER SYSTEMS, INC.
/s/ Jeffrey W. Taylor
---------------------------
Jeffrey W. Taylor
Vice President and
Chief Financial Officer
Dated: September 7, 1994
<PAGE>
FORM 10-Q
NATIONAL COMPUTER SYSTEMS, INC.
For the quarterly period ended July 31, 1994
---------------
EXHIBIT INDEX
---------------
Exhibit 10 - Resignation Arrangements with Norman A. Cocke III
27 - Financial Data Schedule
EXHIBIT 10
Resignation Arrangements with Norman A. Cocke III
On May 15, 1994, Norman A. Cocke ("Cocke") resigned as
Senior Vice President and Chief Financial Officer of National
Computer Systems, Inc. (the "Company") and terminated employment
with the Company. In connection with Cocke's resignation, the
Company agreed to, (a) pay Cocke $15,000 per month for a period
of 12 months from the date of resignation, (b) reimburse Cocke
for costs of medical and life insurance benefits similar to
coverage provided by the Company to Cocke as an employee for a
period of 12 months from the date of resignation, and (c)
reimburse Cocke for certain expenses, including out-placement
services. In consideration for such payments and benefits, Cocke
agreed not to institute any claims of any nature against the
Company arising out of his employment with or separation from the
Company.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES, FOR
THE QUARTERLY PERIOD ENDED JULY 31, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> QTR-2
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-END> JUL-31-1994
<CASH> 1,243
<SECURITIES> 0
<RECEIVABLES> 72,130
<ALLOWANCES> 0
<INVENTORY> 18,825
<CURRENT-ASSETS> 102,432
<PP&E> 152,799
<DEPRECIATION> (79,011)
<TOTAL-ASSETS> 227,575
<CURRENT-LIABILITIES> 61,792
<BONDS> 48,530
<COMMON> 457
0
0
<OTHER-SE> 107,972
<TOTAL-LIABILITY-AND-EQUITY> 227,575
<SALES> 63,699
<TOTAL-REVENUES> 80,131
<CGS> 37,850
<TOTAL-COSTS> 48,966
<OTHER-EXPENSES> 22,563
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 821
<INCOME-PRETAX> 7,750
<INCOME-TAX> 3,035
<INCOME-CONTINUING> 4,715
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,715
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
</TABLE>
