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, 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 August 31, 1996, was 15,271,421.
<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 July 31,
-------------------
1996 1995
------ ------
(In thousands, except
per share amounts)
<S> <C> <C>
REVENUES
Net sales $71,113 $66,438
Maintenance and support 9,851 10,274
------- -------
Total revenues 80,964 76,712
COST OF REVENUES
Cost of sales 43,204 40,778
Cost of maintenance and support 6,472 6,744
------- -------
Gross margin 31,288 29,190
OPERATING EXPENSES
Sales and marketing 10,417 9,704
Research and development 2,332 1,869
General and administrative 8,663 8,907
------- -------
INCOME FROM OPERATIONS 9,876 8,710
Interest expense 625 918
Other (income) expense, net (532) (351)
------- -------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 9,783 8,143
Income taxes 3,890 3,189
------- -------
INCOME FROM CONTINUING OPERATIONS 5,893 4,954
------- -------
Income (loss) on discontinued operations,
net of taxes of $(1,000) and
$446, respectively (1,859) 690
Gain on disposition, net of taxes of
$29,031 38,143 -
------- -------
NET INCOME $42,177 $5,644
======= =======
EARNINGS PER SHARE
Continuing operations $0.38 $0.32
Discontinued operations (0.12) 0.04
Gain on disposition 2.44 -
------- -------
Net income $2.70 $0.36
======= =======
AVERAGE SHARES OUTSTANDING 15,633 15,728
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
Six Months
Ended July 31,
--------------------
1996 1995
-------- --------
(In thousands, except
per share amounts)
<S> <C> <C>
REVENUES
Net sales $131,925 $120,224
Maintenance and support 19,546 20,497
-------- --------
Total revenues 151,471 140,721
COST OF REVENUES
Cost of sales 80,344 72,152
Cost of maintenance and support 13,101 13,426
------- -------
Gross margin 58,026 55,143
OPERATING EXPENSES
Sales and marketing 20,109 19,238
Research and development 4,496 4,159
General and administrative 16,964 16,935
------- -------
INCOME FROM OPERATIONS 16,457 14,811
Interest expense 1,193 1,961
Other (income) expense, net 120 20
------- -------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 15,144 12,830
Income taxes 6,050 5,024
------- -------
INCOME FROM CONTINUING OPERATIONS 9,094 7,806
------- -------
Income (loss) on discontinued operations,
net of taxes of $(1,360) and
$126, respectively (2,229) 203
Gain on disposition, net of taxes of
$29,031 38,143 -
------- -------
NET INCOME $45,008 $8,009
======= =======
EARNINGS PER SHARE
Continuing operations $0.58 $0.50
Discontinued operations (0.14) 0.01
Gain on disposition 2.44 -
------- -------
Net income $2.88 $0.51
======= =======
AVERAGE SHARES OUTSTANDING 15,636 15,618
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
July 31, January 31,
1996 1996
--------- -----------
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 84,165 $ 5,154
Receivables 64,721 68,713
Inventories:
Finished products 5,744 6,012
Scoring services and work in process 8,716 8,694
Raw materials and purchased parts 4,232 3,630
-------- --------
Total inventories 18,692 18,336
Prepaid expenses and other 8,114 8,460
Investment in discontinued operations - 17,557
-------- --------
TOTAL CURRENT ASSETS 175,692 118,220
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 49,813 49,350
Machinery and equipment 109,161 104,551
Accumulated depreciation (84,640) (79,072)
-------- --------
Net property, plant and equipment 74,334 74,829
OTHER ASSETS
Acquired and internally developed
software products 9,411 11,865
Non-current receivables, investments
and other assets 12,842 12,384
Goodwill 3,357 2,426
-------- --------
Total other assets 25,610 26,675
-------- --------
TOTAL ASSETS $275,636 $219,724
======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
July 31, January 31,
1996 1996
---------- -----------
(In thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities $ 3,706 $ 2,473
Accounts payable 14,703 16,416
Accrued expenses 25,028 23,137
Deferred income 19,557 16,148
Income taxes 31,694 4,458
-------- --------
TOTAL CURRENT LIABILITIES 94,688 62,632
DEFERRED INCOME TAXES 3,866 4,359
LONG-TERM DEBT -- less current maturities 7,228 24,535
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock--issued and outstanding -
15,325 and 15,365 shares,
respectively 460 461
Paid-in capital 1,378 3,427
Retained earnings 172,392 130,007
Deferred compensation (4,376) (5,697)
-------- --------
Total stockholders' equity 169,854 128,198
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $275,636 $219,724
======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Six Months Ended
July 31,
------------------
1996 1995
------- -------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 45,008 $ 8,009
Less - gain on disposition (38,143) -
Depreciation, amortization and other
noncash expenses 13,496 15,095
Change in deferred income taxes (4,603) (97)
Changes in operating assets and liabilities:
Decrease in accounts receivable 5,492 18,035
Increase in inventory and other
current assets (18) (2,687)
Decrease in accounts payable and
accrued expenses (7,647) (10,872)
Increase in deferred income 3,691 699
------- -------
Net cash provided by operating
activities 17,276 28,182
------- -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (6,038) (8,585)
Capitalized software products (1,553) (2,221)
Net proceeds from disposition 92,278 -
Other, net (2,681) (2,320)
------- -------
Net cash provided by (used in) investing
activities 82,006 (13,126)
------- -------
FINANCING ACTIVITIES
Net decrease in revolving credit borrowing - (14,600)
Repayment of secured notes (15,000) -
Net proceeds (repayments) of other borrowings (218) 1,141
Issuance (repurchase) of common stock, net (2,279) 1,755
Dividends paid (2,774) (2,771)
------- -------
Net cash used in financing activities (20,271) (14,475)
------- -------
Increase in cash and cash equivalents 79,011 581
CASH AND CASH EQUIVALENTS - beginning of period 5,154 1,195
------- -------
CASH AND CASH EQUIVALENTS - end of period $84,165 $ 1,776
======= =======
See Notes to Consolidated Financial Statements.
</TABLE>
<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, 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 second quarter and year-to-date periods presented represent
those operations only through July 10, 1996. Second quarter revenues of this
business were $6.0 million and $11.7 million for the periods ending July 10,
1996 and July 31, 1995, respectively. Year-to-date revenues for the periods
ended July 10, 1996 and July 31, 1995, were $17.1 million and $22.0 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.
<PAGE>
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 Second Quarter Results
For the quarter ended July 31, 1996, total revenues were up by $4.3 million or
5.5% from the quarter ended July 31, 1995. Overall gross margin improved 0.5
percentage point as a percent of revenue from the prior year, and overall
operating expenses increased 4.6%, resulting in a quarter-to-quarter increase in
income from operations of $1.2 million or 13.4%.
On a year-to-date basis, revenues increased 7.6% in the six months ended July
31, 1996 over the prior year. Gross margin percent decreased 0.9 percentage
points. Operating expenses increased only 3.1%, resulting in an increase in
operating income of $1.6 million or 11.1%. A more detailed discussion of the
various income statement items follows.
Revenues
Total revenues for the quarter ended July 31, 1996 were up 5.5% to $81.0 million
from $76.7 million in the prior year. Increases over the prior year principally
came in federal student financial aid services, education software, and
education state assessment and publisher testing services.
For the six months ended July 31, 1996 revenues increased 7.6% to $151.5 million
from $140.7 million. In addition to the second quarter revenue increases noted
above, higher sales were realized in data collection systems sales in the
commercial market and higher scannable forms revenue in the education market.
Cost of Revenues and Gross Margins
For the quarter ended July 31, 1996, the Company's overall gross margin
increased from 38.1% to 38.6% compared to the prior year. The gross margin on
net sales revenue increased by 0.6 percentage point from the same period in
fiscal 1995. The quarter-to-quarter increase was principally due to higher
margins on education state assessment and publisher testing revenues at the
Company's Iowa City service center and higher education software margins. Gross
margins on maintenance and support revenues were flat as higher margins on
education software support were offset by lower margins on the decreasing (as
expected) base of third-party hardware maintenance. For the six months ended
July 31, 1996, the Company's overall gross margin dollars increased by 5.2%,
however, gross margin as a percent of revenue declined by nearly 1 percentage
point. This reflects the items noted above and also lower margins on certain
U.S. Department of Education student financial aid service contracts
successfully rebid in late 1995.
Operating Expenses
Sales and marketing expenses increased $.7 million or 7.3% in the quarter ended
July 31, 1996, over the prior year quarter. As a percentage of revenues, sales
and marketing expenses increased quarter-to-quarter by 0.2 percentage point. For
the six month periods, these expenses increased 4.5% but decreased 0.4% as a
percent of revenues. Increases in spending were primarily in the Data Collection
Systems business. For the remainder of fiscal 1996, the Company expects sales
and marketing expenses to be slightly higher than fiscal 1995; as a percentage
of revenues, these expenses are expected to remain relatively constant
year-to-year.
Research and development costs increased 24.8% in the quarter ended July 31,
1996 as compared to the prior year quarter. Year-to-date expenditures were up
8.1%. Timing of certain projects caused a shift of R&D spending between the
first and second quarters of 1996 when compared to the same period in 1995.
Spending on image technology was the primary reason for the higher spending
levels. For the full year, these expenses are expected to be at or higher as a
percent of sales for fiscal 1996 than fiscal 1995, as the Company intends to
increase its investment in, among other things, new data collection technologies
and services.
General and administrative expenses decreased by $.2 million or 2.7% for the
quarter ended July 31, 1996, from the prior year quarter. For the six months
ended July 31, 1996, general and administrative expenses were essentially flat
year-to-year, however, as a percent of revenues, these expenses declined by 0.8
percentage point. For fiscal 1996, these expenses are expected to be comparable
or slightly higher than the previous year.
Non-operating Income and Expenses
Interest expense decreased by $.3 million and $0.8 million for the three and
six-month periods ended July 31, 1996, respectively, from the comparable prior
year periods. This decrease was the result of substantially lower debt levels in
fiscal 1996 than fiscal 1995. Other income and expense, net, for the quarter
ended July 31, 1996 compared favorably to the prior year quarter as a result of
$.3 million of interest income earned on the proceeds of the sale of the
Financial Systems business. Other income and expense, net, was negligible for
both the six-month periods ended July 31, 1996 and 1995.
Provision for Income Taxes
The effective income tax rate of 39.9% for the six months ended July 31, 1996
was 0.7% percentage point 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, the
Company ended the quarter with $84.2 million of cash and cash equivalents. For
the six-month period ended July 31, 1996, the Company generated $17.3 million of
cash flow from operating activities. Cash provided from operations and sale
proceeds was used primarily to fund investments in property, plant and equipment
of $6.0 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. Approximately $30 million of the tax liability on the gain
on the sale of the financial systems business remains to be paid between October
1996 and January 1997. In addition, the Company anticipates funding internal
growth and acquisitions with its cash and cash equivalents on hand, excess cash
flows from operations, and its 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
(b) Reports on Form 8-K filed for the three months ended July 30, 1996.
Form 8-K dated July 10, 1996
Item 2. Acquisition or Disposition of Assets
- Disposition of NCS Financial Systems, Inc., a wholly-owned
subsidiary of the Company.
Item 7. Financial Statements and Exhibits
- Pro forma Statement of Income -- Year Ended January 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: September 13, 1996
<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 FISCAL YEAR ENDED JANUARY 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> JUL-31-1996
<CASH> 84,165
<SECURITIES> 0
<RECEIVABLES> 64,721
<ALLOWANCES> 0
<INVENTORY> 18,692
<CURRENT-ASSETS> 175,692
<PP&E> 158,974
<DEPRECIATION> (84,640)
<TOTAL-ASSETS> 275,636
<CURRENT-LIABILITIES> 94,688
<BONDS> 7,228
0
0
<COMMON> 460
<OTHER-SE> 169,394
<TOTAL-LIABILITY-AND-EQUITY> 275,636
<SALES> 71,113
<TOTAL-REVENUES> 80,964
<CGS> 43,204
<TOTAL-COSTS> 49,676
<OTHER-EXPENSES> 21,412
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 625
<INCOME-PRETAX> 9,783
<INCOME-TAX> 3,890
<INCOME-CONTINUING> 5,893
<DISCONTINUED> (1,859)
<EXTRAORDINARY> 38,143
<CHANGES> 0
<NET-INCOME> 42,177
<EPS-PRIMARY> 2.70
<EPS-DILUTED> 2.70
</TABLE>
