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: October 31, 1996
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 shares,
outstanding on November 30,1996, was 15,277,439.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
Three Months
Ended October 31,
-------------------
1996 1995
------ ------
(In thousands, except
per share amounts)
<S> <C> <C>
REVENUES
Net sales $78,578 $69,939
Maintenance and support 10,205 9,773
------- -------
Total revenues 88,783 79,712
COST OF REVENUES
Cost of sales 53,302 45,498
Cost of maintenance and support 6,836 6,957
------- -------
Gross margin 28,645 27,257
OPERATING EXPENSES
Sales and marketing 10,331 9,620
Research and development 2,595 2,117
General and administrative 7,937 8,637
------- -------
INCOME FROM OPERATIONS 7,782 6,883
Interest expense 232 682
Other income, net (850) (186)
------- -------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 8,400 6,387
Income taxes 3,450 2,600
------- -------
INCOME FROM CONTINUING OPERATIONS 4,950 3,787
------- -------
Income on discontinued operations,
net of taxes of $1,500 - 2,385
Gain on disposition - -
------- -------
NET INCOME $ 4,950 $6,172
======= =======
EARNINGS PER SHARE
Continuing operations $0.32 $0.24
Discontinued operations - 0.15
Gain on disposition - -
------- -------
Net income $0.32 $0.39
======= =======
AVERAGE SHARES OUTSTANDING 15,463 15,821
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended October 31,
--------------------
1996 1995
-------- --------
(In thousands, except
per share amounts)
<S> <C> <C>
REVENUES
Net sales $210,503 $190,163
Maintenance and support 29,751 30,270
-------- --------
Total revenues 240,254 220,433
COST OF REVENUES
Cost of sales 133,646 117,650
Cost of maintenance and support 19,937 20,383
------- -------
Gross margin 86,671 82,400
OPERATING EXPENSES
Sales and marketing 30,440 28,858
Research and development 7,091 6,276
General and administrative 24,901 25,572
------- -------
INCOME FROM OPERATIONS 24,239 21,694
Interest expense 1,425 2,643
Other income, net (730) (166)
------- -------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 23,544 19,217
Income taxes 9,500 7,624
------- -------
INCOME FROM CONTINUING OPERATIONS 14,044 11,593
------- -------
Income (loss) on discontinued operations,
net of taxes of $(1,100) and
$1,626, respectively (2,229) 2,588
Gain on disposition, net of taxes of
$29,031 38,143 -
------- -------
NET INCOME $49,958 $14,181
======= =======
EARNINGS PER SHARE
Continuing operations $0.90 $0.74
Discontinued operations (0.14) 0.16
Gain on disposition 2.44 -
------- -------
Net income $3.20 $0.90
======= =======
AVERAGE SHARES OUTSTANDING 15,575 15,688
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
October 31, January 31,
1996 1996
--------- -----------
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 72,532 $ 5,154
Receivables 64,811 68,713
Inventories:
Finished products 5,560 6,012
Scoring services and work in process 11,222 8,694
Raw materials and purchased parts 3,635 3,630
-------- --------
Total inventories 20,417 18,336
Prepaid expenses and other 8,208 8,460
Investment in discontinued operations - 17,557
-------- --------
TOTAL CURRENT ASSETS 165,968 118,220
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 50,554 49,350
Machinery and equipment 111,044 104,551
Accumulated depreciation (86,501) (79,072)
-------- --------
Net property, plant and equipment 75,097 74,829
OTHER ASSETS
Acquired and internally developed
software products 8,260 11,865
Non-current receivables, investments
and other assets 11,454 12,384
Goodwill 3,903 2,426
-------- --------
Total other assets 23,617 26,675
-------- --------
TOTAL ASSETS $264,682 $219,724
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
October 31, January 31,
1996 1996
---------- -----------
(In thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities $ 3,203 $ 2,473
Accounts payable 18,999 16,416
Accrued expenses 26,098 23,137
Deferred income 21,881 16,148
Income taxes 10,469 4,458
-------- --------
TOTAL CURRENT LIABILITIES 80,650 62,632
DEFERRED INCOME TAXES 3,356 4,359
LONG-TERM DEBT -- less current maturities 8,098 24,535
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock--issued and outstanding -
15,263 and 15,365 shares,
respectively 458 461
Paid-in capital - 3,427
Retained earnings 176,129 130,007
Deferred compensation (4,009) (5,697)
-------- --------
Total stockholders' equity 172,578 128,198
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $264,682 $219,724
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
October 31,
------------------
1996 1995
------- -------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 49,958 $14,181
Less - gain on disposition (38,143) -
Depreciation, amortization and other
noncash expenses 20,344 22,038
Change in deferred income taxes (1,003) 1,118
Changes in operating assets and liabilities:
Decrease in accounts receivable 6,659 15,290
Increase in inventory and other
current assets (1,272) (5,468)
Decrease in accounts payable and
accrued expenses (438) (5,030)
Increase (decrease)in deferred income 5,617 (1,027)
------- -------
Net cash provided by operating
activities 41,722 41,102
------- -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (9,661) (10,623)
Capitalized software products (1,553) (3,785)
Net proceeds from disposition 64,071 -
Other, net (3,834) 113
------- -------
Net cash provided by (used in) investing
activities 49,023 (14,295)
------- -------
FINANCING ACTIVITIES
Net decrease in revolving credit borrowing - (19,600)
Repayment of secured notes (15,000) -
Net repayments of other borrowings (466) (1,618)
Issuance (repurchase) of common stock, net (3,752) 1,700
Dividends paid (4,149) (4,172)
------- -------
Net cash used in financing activities (23,367) (23,690)
------- -------
Increase in cash and cash equivalents 67,378 3,117
CASH AND CASH EQUIVALENTS - beginning of period 5,154 1,195
------- -------
CASH AND CASH EQUIVALENTS - end of period $72,532 $ 4,312
======= =======
</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 October 31, 1996, are not necessarily indicative of the
operating results that may be expected for the entire fiscal year ending January
31, 1997.
Note B - Earnings per share for the respective operating periods are computed
based on average shares outstanding and dilutive 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 - The Company has received a claim from a 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.
Note E - On May 30, 1996, the Company entered into an agreement to sell its
Financial Systems business for $95 million in cash. The sale transaction was
completed as of the close of business on July 10, 1996, and the discontinued
operations for the year-to-date period presented represent those operations only
through July 10, 1996. Third quarter revenues of this business were $17.6
million for the period ending October 31 1995. Year-to-date revenues for the
periods ended July 10, 1996 and October 31, 1995, were $17.1 million and $39.6
million, respectively. The accompanying consolidated statements have been
presented to report separately the net assets and operating results of these
discontinued operations. After expenses of the transaction and income taxes of
$29.0 million, a gain of $38.1 million was realized on the sale.
Note F - On November 1, 1996 the Company announced that it had signed a letter
of intent to acquire Macro Educational Systems, Inc. ("Macro"), a developer of
administrative software systems for the K-12 education market. Under the
agreement, the Company will pay $7 million in cash at closing and issue $7
million of convertible debentures. The debentures will be convertible into NCS
stock ratably over a five-year term with the conversion price fixed at $24.00
per share. Additional payments may be earned contingent on financial performance
of Macro.
At closing, the Company anticipates that it will take an undetermined one-time
charge for acquired in-process research and development and other acquisition
related costs to be incurred. Preliminary estimates of the one-time charge for
in-process research and development approximate one-third of the $14 million
purchase price referred to above. Such estimates are subject to change based
upon final appraised values. The transaction is expected to be completed before
January 31, 1997. Completion of the transaction is subject to the negotiation
and execution of a definitive acquisition agreement and receiving certain
regulatory approvals.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
National Computer Systems, Inc. is an information services company providing
data collection services and systems to selected segments of the education,
business, government and healthcare markets. The discussion below covers only
the Company's continuing operations and not the discontinued operations of its
Financial Systems business that was sold in July 1996.
Recap of 1996 Third Quarter Results
For the quarter ended October 31, 1996, total revenues were up by $9.1 million
or 11.4% from the quarter ended October 31, 1995. Gross margins, though down as
a percentage of revenue, increased 5.1% in dollars. Operating expenses were held
to a 2.4% increase, resulting in a 13.1% increase in operating income.
Non-operating items, primarily related to interest income and expense, compare
favorably to the prior year, and pre-tax income was 31.5% higher than the
quarter ended October 31, 1995. Earnings per share were up 33.3%.
Year-to-date results reflect a 9.0% increase in total revenues for the nine
months ended October 31, 1996 over the same period of the prior year. Gross
margins, though down as a percentage of revenue, increased 5.2% in dollars,
which combined with a 2.8% increase in operating expenses resulted in a 11.7%
increase in operating income. Non-operating items, as noted above, were
favorable to the prior year, and pre-tax income was 22.5% higher than the nine
months ended October 31, 1995. Earnings per share were up 21.6%. A more detailed
discussion of the various income statement items follows.
Revenues
Total revenues for the quarter ended October 31, 1996 were up 11.4% to $88.8
million from $79.7 million in the prior year period. Domestic revenue increases
were primarily in educational state assessment services and education
administrative software. International revenue increased 47% as a result of two
small mid-year acquisitions and a new long-term service contract in Mexico
awarded in the current quarter.
For the nine months ended October 31, 1996, revenues increased 9.0% to $240.3
million from $220.4 million. In addition to the third quarter revenue increases
noted above, federal student aid services contributed to the year-to-year
increase.
Cost of Revenues and Gross Margins
For the quarter ended October 31, 1996, the Company's overall gross margin
dollars increased 5.1%, with the largest dollar increases being in educational
state assessments, international services and education software. As a percent
of revenue, overall gross margins declined to 32.3% from 34.2% for the same
period in the prior year, reflecting the revenue growth in the company's lower
margin services business. Gross margins on maintenance and support revenues
improved by 4.2 percentage points primarily as a result of higher margins on
education software support and maintenance.
For the nine months ended October 31, 1996, the Company's overall gross margin
increased 5.2%, while as a percent of revenue, it declined by 1.3 percentage
points. These results reflect the same factors noted above.
Operating Expenses
Sales and marketing expenses increased $.7 million or 7.4% in the quarter ended
October 31, 1996, compared to the prior year quarter. For the nine-month period,
these expenses increased 5.5%. As a percentage of revenues, sales and marketing
expenses decreased 0.4% as a percent of revenues for both reporting periods.
Increases in spending were primarily in the Data Collection Systems business,
and reflect increased efforts in selling and marketing activities.
Research and development costs increased 22.6% in the quarter ended October 31,
1996 as compared to the prior year quarter. Year-to-date expenditures were up
13.0%. Spending on image technology was the primary reason for the higher
spending levels, along with increases in spending on software products and test
development.
General and administrative expenses decreased $.7 million for the three and
nine-month periods ended October 31, 1996 as compared to the prior year periods.
As a percent of revenues, these expenses declined by 1.9 and 1.2 percentage
points, respectively. These variations are due to overall efforts to control
these expenses and no one specific factor.
Non-operating Income and Expenses
Year-to-year changes in non-operating income and expense primarily reflects the
impact of proceeds of the sale of the Financial Systems business. Interest
expense decreased by $.5 million and $1.2 million for the three and nine-month
periods ended October 31, 1996, respectively, from the comparable prior year
periods. Other income and expense, net, for the quarter and year-to-date periods
ended October 31, 1996 includes interest income of $1.2 million and $1.5
million, respectively, principally from investment of the sale proceeds.
Provision for Income Taxes
The effective income tax rate of 40.4% for the nine months ended October 31,
1996 was 0.7 percentage points higher than the effective rate applied for the
same period in the prior year, primarily as a result of lower research and
development credits and non-deductibility of certain foreign losses.
Liquidity and Capital Resources
With the proceeds from the sale of the Company's Financial Systems business
(less federal and state tax payments) and cash generated from on-going
operations, the Company ended the quarter with $72.5 million of cash and cash
equivalents. For the nine-month period ended October 31, 1996, the Company
generated $41.7 million of cash flow from operating activities. Cash provided
from operations and sale proceeds was used primarily for short-term investments,
to fund investments in property, plant and equipment of $9.7 million and for the
early repayment of the Company's $15 million of 9.88% Secured Notes. The Company
expects for the remainder of fiscal 1996 that its cash flows from operations
will be adequate to fund its normal financing and investing activities. In
addition, the Company anticipates funding internal growth and acquisitions with
its cash and cash equivalents on hand, excess cash flows from operations, and
existing revolving credit facility.
The statements which are not historical facts or are "goals" or "expectations"
contained in this Quarterly Report constitute "forward-looking" information, as
defined in the recently enacted Private Securities Litigation Reform Act of
1995. The Cautionary Statements filed by the Company as Exhibit 99 to a filing
made with the SEC on Form 10-K on March 31, 1996, 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.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) There were no reports on Form 8-K filed for the three months ended
October 31, 1996.
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: December 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> OCT-31-1996
<CASH> 72,532
<SECURITIES> 0
<RECEIVABLES> 64,811
<ALLOWANCES> 0
<INVENTORY> 20,417
<CURRENT-ASSETS> 165,968
<PP&E> 161,598
<DEPRECIATION> (86,501)
<TOTAL-ASSETS> 264,682
<CURRENT-LIABILITIES> 80,650
<BONDS> 8,098
0
0
<COMMON> 458
<OTHER-SE> 172,120
<TOTAL-LIABILITY-AND-EQUITY> 264,682
<SALES> 78,578
<TOTAL-REVENUES> 88,783
<CGS> 53,302
<TOTAL-COSTS> 60,138
<OTHER-EXPENSES> 20,863
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 232
<INCOME-PRETAX> 8,400
<INCOME-TAX> 3,450
<INCOME-CONTINUING> 4,950
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,950
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
