<PAGE>
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, 1997
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, 1997, was 15,362,939.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months
Ended July 31,
-------------------
1997 1996
------ ------
(In thousands, except
per share amounts)
REVENUES
Information services $45,488 $37,016
Product sales 38,857 34,097
Maintenance and support 11,684 9,851
------- -------
Total revenues 96,029 80,964
COST OF REVENUES
Cost of information services 32,152 27,665
Cost of product sales 17,804 15,539
Cost of maintenance and support 8,006 6,472
------- -------
Gross margin 38,067 31,288
OPERATING EXPENSES
Sales and marketing 13,688 10,417
Research and development 1,549 2,332
General and administrative 10,957 8,663
------- ------
INCOME FROM OPERATIONS 11,873 9,876
Interest expense 310 625
Other (income) expense, net (48) (532)
------- -------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 11,611 9,783
Income taxes 4,600 3,890
------- -------
INCOME FROM CONTINUING OPERATIONS 7,011 5,893
------- -------
Loss from discontinued operations,
net of tax benefit of $1,000 - (1,859)
Gain on disposition, net of taxes of $29,031 - 38,143
------- -------
NET INCOME $ 7,011 $42,177
======= =======
EARNINGS PER SHARE
Continuing operations $0.45 $0.38
Discontinued operations - (0.12)
Gain on disposition - 2.44
------- -------
Net income $0.45 $2.70
======= =======
AVERAGE SHARES OUTSTANDING 15,581 15,633
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Six Months
Ended July 31,
-------------------
1997 1996
------ ------
(In thousands, except
per share amounts)
REVENUES
Information services $ 79,352 $ 68,020
Product sales 72,894 63,905
Maintenance and support 22,754 19,546
-------- --------
Total revenues 175,000 151,471
COST OF REVENUES
Cost of information services 57,648 51,017
Cost of product sales 33,039 29,327
Cost of maintenance and support 15,435 13,101
------- -------
Gross margin 68,878 58,026
OPERATING EXPENSES
Sales and marketing 26,126 20,109
Research and development 3,702 4,496
General and administrative 19,877 16,964
------- ------
INCOME FROM OPERATIONS 19,173 16,457
Interest expense 635 1,193
Other (income) expense, net 179 120
------- -------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 18,359 15,144
Income taxes 7,300 6,050
------- -------
INCOME FROM CONTINUING OPERATIONS 11,059 9,094
------- -------
Loss from discontinued operations,
net of tax benefit of $1,360 - (2,229)
Gain on disposition, net of taxes of $29,031 - 38,143
------- -------
NET INCOME $11,059 $45,008
======= =======
EARNINGS PER SHARE
Continuing operations $0.71 $0.58
Discontinued operations - (0.14)
Gain on disposition - 2.44
------- -------
Net income $0.71 $2.88
======= =======
AVERAGE SHARES OUTSTANDING 15,545 15,636
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
July 31, January 31,
1997 1997
--------- -----------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,518 $ 58,079
Receivables 91,753 79,056
Inventories:
Finished products 5,651 4,765
Scoring services and work in process 13,001 9,221
Raw materials and purchased parts 3,298 4,190
-------- --------
Total inventories 21,950 18,176
Prepaid expenses and other 5,886 5,526
-------- --------
TOTAL CURRENT ASSETS 128,107 160,837
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 52,752 51,741
Machinery and equipment 121,155 111,921
Accumulated depreciation (94,637) (87,353)
-------- --------
Net property, plant and equipment 79,270 76,309
OTHER ASSETS
Acquired and internally developed
software products 16,180 17,578
Non-current receivables, investments
and other assets 23,400 11,640
Goodwill 44,420 7,556
-------- --------
Total other assets 84,000 36,774
-------- --------
TOTAL ASSETS $291,377 $273,920
======== ========
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
July 31, January 31,
1997 1997
---------- -----------
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities $ 3,523 $ 3,819
Accounts payable 21,761 20,886
Accrued expenses 30,250 28,832
Deferred income 31,636 23,079
Income taxes 2,481 5,556
-------- --------
TOTAL CURRENT LIABILITIES 89,651 82,172
DEFERRED INCOME TAXES 6,668 5,385
LONG-TERM DEBT -- less current maturities 14,163 16,329
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock--issued and outstanding -
15,301 and 15,235 shares, respectively 460 457
Paid-in capital 1,542 -
Retained earnings 181,990 173,564
Deferred compensation (3,097) (3,987)
-------- --------
Total stockholders' equity 180,895 170,034
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $291,377 $273,920
======== ========
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended
July 31,
------------------
1997 1996
------- -------
(In thousands)
OPERATING ACTIVITIES
Net income $11,059 $45,008
Less - gain on disposition - (38,143)
Depreciation, amortization and other
noncash expenses 14,015 13,496
Provision for deferred income taxes (383) (4,603)
Changes in operating assets and liabilities:
Accounts receivable (6,834) 5,492
Inventory and other current assets (3,281) (18)
Accounts payable and accrued expenses (5,351) (7,647)
Deferred income 3,212 3,691
------- -------
Net cash provided by
operating activities 12,437 17,276
------- -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (9,188) (6,038)
Acquisitions, net (32,192) (3,158)
Capitalized software products - (1,553)
Net proceeds from disposition - 92,278
Other, net (3,620) 457
------- -------
Net cash provided (used) in
investing activities (45,000) 81,986
------- -------
FINANCING ACTIVITIES
Net increase in revolving credit borrowing - -
Repayment of secured notes - (15,000)
Net repayments of other borrowings (1,506) (218)
Repurchase of common stock, net (12,750) (2,279)
Dividends paid (2,742) (2,774)
------- -------
Net cash used by financing activities (16,998) (20,271)
------- -------
(Decrease) increase in cash (49,561) 78,991
CASH AND CASH EQUIVALENTS - beginning of period 58,079 5,174
------- -------
CASH AND CASH EQUIVALENTS - end of period $ 8,518 $84,165
======= =======
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, 1997, are not necessarily indicative of the
operating results that may be expected for the entire fiscal year ending January
31, 1998.
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 - On April 30, 1997, the Company was served with a summons and complaint
in a lawsuit from a former customer for expenses, alleged loan defaults, and
other damages related to performance under three loan processing and servicing
agreements. 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 has carefully reviewed the claims set forth in the complaint, denies
such claims, and will vigorously defend against the lawsuit. In addition, the
Company has filed a counterclaim against the former customer and a corporate
affiliate seeking compensatory damages in an amount to be determined at the
trial. The Company does not believe that any adverse outcome in the lawsuit
would result in a material adverse effect on the Company's financial position or
results of operations.
Note E - 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, $19.8 million, and assessment instruments,
included in other assets, $9.3 million.
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 and cash, and was allocated
principally to goodwill. Also, the Company's 51%-owned Australian subsidiary
acquired the assets of a local company in the quarter ended April 30, 1997. The
purchase price, which was approximately $2 million, was primarily allocated to
goodwill.
On the basis of an APB# 16 pro forma consolidation of all acquisitions since
January 31, 1996, as if the acquisitions had taken place at the beginning of the
fiscal year ended January 31, 1997, consolidated net sales would have been
<PAGE>
$188 million and $172 million for the six month periods ended July 31, 1997 and
1996, respectively. Pro forma operating results are not presented, as the
nature of the acquisitions and resulting changes to their operations and
underlying cost and expense structures are collectively so significant that such
a presentation would not be meaningful.
Note F - The Company sold its Financial System segment in July 1996 for $95.0
million of cash. The gain on the sale, recorded in the second quarter 1996, was
$38.1 million. The segment's revenue in the quarter ended July 31, 1996 was
$6.0 million, and the segment's loss for that quarter was $1.9 million, or $.12
per share. For the six-month period ended July 31, 1996 revenues were $17.1
million, and the segments loss was $2.2 million or $.14 per share.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
National Computer Systems, Inc. is a global information services company
providing systems and services for education, testing, assessment and complex
data management solutions. The Company markets these products and services
predominantly in the education market, but also in the business, government and
health care 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 1997 Second Quarter Results
For the quarter ended July 31, 1997, total revenues were up by $15.1 million or
18.6% from the quarter ended July 31, 1996. The overall gross margin improved
by 1.0 percentage points as a percent of revenue and gross margin dollars
increased $6.8 million or 21.7%. Operating expenses, principally sales and
marketing, increased by 22.3%, however, as a percent of revenue, these expenses
increased only 0.9 percentage point. Income from operations increased $2.0
million or 20.2%. Non-operating items, primarily related to interest income and
expense, were slightly unfavorable to the prior year. Pre-tax income was 18.7%
higher than the quarter ended July 31, 1996, and earnings per share were up by
18.4%.
On a year-to-date basis, revenues increased 15.5% in the six months ended July
31, 1997 over the prior year. Gross margin percent increased 1.1 percentage
points. Operating expenses increased 1.0% as a percent of revenue; together
with the gross margin improvement, this generated an increase in operating
income of $2.7 million, or 16.5%.
Revenues
Total revenues for the three and six month periods ended July 31, 1997 were up
18.6% and 15.5%, respectively. By revenue category, 1997 compares to 1996 as
follows:
Quarter Year-to-date
------- ------------
Information services +22.9% +16.7%
Product sales +14.0% +14.1%
Maintenance and support +18.6% +16.4%
For the quarter ended July 31, 1997, increases in information services were
primarily from the international, education software and testing businesses,
reflecting new business contracts awarded in previous quarters in addition to
acquisitions both outside and in the U.S. since July 31, 1996. The increase in
product sales and maintenance and support revenues were primarily due to higher
education administrative software sales and software support revenues resulting
from internal growth as well as a result of incremental revenues attributable to
the fourth quarter 1996 acquisition of Macro Educational Systems, Inc. and, to a
lesser extent, the acquisition of two businesses from The McGraw-Hill Companies.
On a year-to-date basis, increases in revenues were the result of generally the
same factors.
<PAGE>
Cost of Revenues and Gross Margins
For the quarter ended July 31, 1997, the Company's overall gross margin improved
by 1.0 percentage points to 39.6% from 38.6% for the same period in the prior
year. The gross margin on information services revenues reflected higher
margins on testing and assessment services and student financial aid outsourcing
services in the Iowa City service center. Margins also improved on
international services. Gross margins on product sales on a quarter-to-quarter
basis were relatively constant. The gross margin on maintenance and support
revenues increased $.3 million, but decreased by 2.8 percentage points
reflecting the general mix of business toward software support.
On a year-to-year basis, gross margins increased $10.9 million, or 18.7%. As a
percent of revenue, the gross margin percent improved 1.1 percentage points.
Changes in gross margins on information services and maintenance and support
revenues were similar to the most recent quarter. Gross margins on product
sales improved on a year-to-date basis due to increased software revenues in
education.
Operating Expenses
Sales and marketing expenses increased $3.3 million or 31.4% in the quarter
ended July 31, 1997, over the prior year quarter. As a percentage of revenues,
sales and marketing expenses increased quarter-to-quarter by 1.4 percentage
points. For the six month periods, these expenses increased 29.9% and increased
1.6% as a percent of revenues. Increases in spending were primarily due to
acquisitions in 1997 and in the second half of 1996.
Research and development costs decreased $0.8 million in the quarter ended July
31, 1997 as compared to the prior year quarter. Year-to-date expenditures were
also down $0.8 million. The reduction in these expenditures reflects the
Company's more recent approach of adding new offerings through acquiring other
companies, as opposed to developing new products and services internally.
General and administrative expenses increased by $2.3 million or 26.5% for the
quarter ended July 31, 1997, from the prior year quarter. For the six months
ended July 31, 1997, these expenses were up 17.2%. Increases in spending were
primarily in the businesses with acquisitions, including the related
amortization of goodwill, in addition to increased spending for internal
information systems.
Non-operating Expenses
Interest expense decreased by $0.3 million and $0.6 million for the three and
six-month periods ended July 31, 1997, respectively, from the comparable prior
year periods. This decrease was the result of substantially lower debt levels
in fiscal 1997 than fiscal 1996. Other income and expense, net, for the quarter
ended July 31, 1997 compared unfavorably to the prior year quarter as a result
of $0.3 million of interest income earned on the proceeds of the sale of the
Financial Systems business in the 1996 period. Other income and expense, net,
was negligible for both the six-month periods ended July 31, 1997 and 1996.
<PAGE>
Provision for Income Taxes
The Company is providing taxes at an estimated income tax rate of approximately
40% in 1997 as it did through the first six months of 1996.
Liquidity and Capital Resources
For the six-month period ended July 31, 1997, the Company generated $12.4
million of cash from operating activities as compared to $17.3 million in the
same period of the prior year. This quarter-to-quarter decrease is
predominantly the result of higher trade accounts receivable due to growth in
the business. Cash on hand at the beginning of the year was used to fund
acquisitions of $32.2 million, investment in property, plant and equipment of
$9.2 million, stock repurchases (net) of $12.8 million as well as pay dividends
of $2.7 million. The Company expects for the remainder of fiscal 1997 that its
positive cash flows from operations will be adequate to fund its expected
financing and investing activities. In the future, the Company anticipates
funding internal growth and acquisitions with its cash on hand, excess cash
flows from operations, and an available 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 Private Securities Litigation Reform Act of 1995. The Cautionary
Statements filed by the Company as Exhibit 99 to the Annual Report on Form 10-K
for the year ended January 31, 1997, are incorporated herein by reference, and
shareholders and prospective 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) Reports on Form 8-K filed for the three months ended
July 31, 1997.
Form 8-K dated July 1, 1997
Item 2. Acquisition or Disposition of Assets
- Acquisition of all of the assets of the
McGraw-Hill School Systems and McGraw-Hill
London House divisions of The McGraw-Hill Companies
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 12, 1997
<TABLE> <S> <C>
<PAGE>
<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, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JUL-31-1997
<CASH> 8,518
<SECURITIES> 0
<RECEIVABLES> 91,753
<ALLOWANCES> 0
<INVENTORY> 21,950
<CURRENT-ASSETS> 128,107
<PP&E> 173,907
<DEPRECIATION> (94,637)
<TOTAL-ASSETS> 291,377
<CURRENT-LIABILITIES> 89,651
<BONDS> 14,163
0
0
<COMMON> 460
<OTHER-SE> 180,435
<TOTAL-LIABILITY-AND-EQUITY> 291,377
<SALES> 38,857
<TOTAL-REVENUES> 96,029
<CGS> 17,804
<TOTAL-COSTS> 57,962
<OTHER-EXPENSES> 26,194
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 310
<INCOME-PRETAX> 11,611
<INCOME-TAX> 4,600
<INCOME-CONTINUING> 7,011
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,011
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>
