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, 1998
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 September 2, 1998, was 31,222,664.
<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,
-------------------
1998 1997
------ ------
(In thousands, except
per share amounts)
REVENUES
Information services $ 73,497 $45,488
Product sales 41,556 38,857
Maintenance and support 13,075 11,684
-------- -------
Total revenues 128,128 96,029
COST OF REVENUES
Cost of information services 50,592 32,152
Cost of product sales 17,482 17,804
Cost of maintenance and support 8,778 8,006
-------- -------
Gross margin 51,276 38,067
OPERATING EXPENSES
Sales and marketing 16,508 13,688
Research and development 2,383 1,549
General and administrative 15,671 10,957
-------- -------
INCOME FROM OPERATIONS 16,714 11,873
Interest expense 215 310
Other (income) expense, net 157 (48)
-------- -------
INCOME BEFORE INCOME TAXES 16,342 11,611
Income taxes 6,600 4,600
-------- -------
NET INCOME $ 9,742 $ 7,011
======== =======
EARNINGS PER SHARE
Basic $0.31 $0.23
Diluted 0.30 0.22
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 30,987 30,368
Diluted 32,524 31,704
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Six Months
Ended July 31,
-------------------
1998 1997
------ ------
(In thousands, except
per share amounts)
REVENUES
Information services $122,282 $ 79,352
Product sales 78,065 72,894
Maintenance and support 25,696 22,754
-------- --------
Total revenues 226,043 175,000
COST OF REVENUES
Cost of information services 86,982 57,648
Cost of product sales 33,495 33,039
Cost of maintenance and support 16,767 15,435
-------- --------
Gross margin 88,799 68,878
OPERATING EXPENSES
Sales and marketing 31,580 26,126
Research and development 4,716 3,702
General and administrative 26,828 19,877
-------- --------
INCOME FROM OPERATIONS 25,675 19,173
Interest expense 533 635
Other expense, net 305 179
-------- --------
INCOME BEFORE INCOME TAXES 24,837 18,359
Income taxes 10,000 7,300
-------- --------
NET INCOME $ 14,837 $ 11,059
======== =======
EARNINGS PER SHARE
Basic $0.48 $0.37
Diluted 0.46 0.35
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 30,900 30,257
Diluted 32,416 31,592
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
July 31, January 31,
1998 1998
--------- -----------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 10,436 $ 23,267
Receivables 114,609 101,334
Inventories:
Finished products 5,662 5,166
Scoring services and work in process 22,617 8,218
Raw materials and purchased parts 2,035 2,855
-------- --------
Total inventories 30,314 16,239
Prepaid expenses and other 7,120 6,562
-------- --------
TOTAL CURRENT ASSETS 162,479 147,402
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 57,789 57,281
Machinery and equipment 154,046 141,949
Accumulated depreciation (113,504) (105,206)
-------- --------
Net property, plant and equipment 98,331 94,024
INTELLECTUAL PROPERTIES, NET
Acquired and internally developed
software products 13,062 14,967
Assessment instruments 9,572 10,317
-------- --------
Total intellectual properties 22,634 25,284
OTHER ASSETS, NET
Goodwill 44,442 45,634
Other assets 6,969 3,070
-------- --------
Total other assets 51,411 48,704
-------- --------
TOTAL ASSETS $334,855 $315,414
======== ========
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
July 31, January 31,
1998 1998
---------- -----------
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 3,460 $ 6,448
Accounts payable 26,165 26,767
Accrued expenses 43,360 36,237
Deferred income 35,851 29,026
Income taxes 3,773 4,156
-------- --------
TOTAL CURRENT LIABILITIES 112,609 102,634
LONG-TERM DEBT -- less current maturities 7,712 12,396
DEFERRED INCOME TAXES 5,347 6,390
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock--issued and outstanding -
31,081 and 30,846 shares, respectively 935 925
Paid-in capital 7,709 4,518
Retained earnings 206,077 194,348
Accumulated other comprehensive income -
Foreign currency translation adjustment (3,104) (2,343)
Deferred compensation (2,430) (3,454)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 209,187 193,994
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $334,855 $315,414
======== ========
See Notes to Consolidated Financial Statements.
<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended
July 31,
------------------
1998 1997
------- -------
(In thousands)
OPERATING ACTIVITIES
Net income $ 14,837 $ 11,059
Depreciation, amortization and other
noncash expenses 16,322 14,015
Provision for deferred income taxes (1,043) (383)
Changes in operating assets and liabilities:
Accounts receivable (13,275) (6,834)
Inventory and other current assets (14,633) (3,281)
Accounts payable and accrued expenses 7,572 (5,351)
Deferred income 6,825 3,212
------- -------
Net cash provided by operating activities 16,605 12,437
------- -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (11,588) (9,188)
Purchases of business systems (3,775) (1,000)
Acquisitions, net (4,600) (32,192)
Other, net (984) (2,620)
------- -------
Net cash used in investing activities (20,947) (45,000)
------- -------
FINANCING ACTIVITIES
Net repayment of borrowings (5,770) (1,506)
Issuance (repurchase) of common stock, net 389 (12,750)
Dividends paid (3,108) (2,742)
------- -------
Net cash used by financing activities (8,489) (16,998)
------- -------
(Decrease) in cash and cash equivalents (12,831) (49,561)
CASH AND CASH EQUIVALENTS - beginning of period 23,267 58,079
------- -------
CASH AND CASH EQUIVALENTS - end of period $10,436 $ 8,518
======= =======
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, 1998, are not necessarily indicative of the
operating results that may be expected for the entire fiscal year ending January
31, 1999.
Note B - Earnings per share are calculated in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share."
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 (in thousands, except per share data):
Three Months Six Months
Ended July 31, Ended July 31,
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
Earnings:
Net income
Basic earnings per share $ 9,742 $ 7,011 $14,837 $11,059
Adjustments for dilutive securities:
Interest expense on convertible
debentures, net of tax 54 64 105 128
------- ------- ------- -------
Adjusted net income for diluted
earnings per share $ 9,796 $ 7,075 $14,942 $11,187
======= ======= ======= =======
Weighted Average Shares:
Basic average shares 30,987 30,368 30,900 30,257
Adjustments for dilutive securities:
Employee stock options, net of
tax proceeds 956 483 928 470
Contingent stock awards, net of
tax proceeds 73 270 79 282
Convertible debentures 508 583 509 583
------- ------- ------- -------
Diluted average shares 32,524 31,704 32,416 31,592
======= ======= ======= =======
Basic earnings per share $ 0.31 $ 0.23 $ 0.48 $ 0.37
======= ======= ======= =======
Diluted earnings per share $ 0.30 $ 0.22 $ 0.46 $ 0.35
======= ======= ======= =======
<PAGE>
Note C - The Company has 10,000,000 shares of $.01 par value Preferred Stock
authorized of which none is outstanding. 100,000,000 shares of $.03 par value
Common Stock are authorized.
Note D - As of February 1, 1998, the Company adopted Statement of Financial
Accounting Standard (SFAS) 130, Reporting Comprehensive Income. SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. SFAS 130 requires the Company's
foreign currency translation adjustments, which prior to adoption were reported
in retained earnings to be separately classified as other comprehensive income.
Prior year financial statements have been reclassified to conform to the current
requirements.
The components of Comprehensive income, for the three month and six month
periods ended July 31, 1998 and 1997 are as follows (in thousands):
Quarter Year-to-date
1998 1997 1998 1997
------- ------- ------- -------
Net income $ 9,742 $ 7,011 $14,837 $11,059
Foreign currency translation
adjustments (776) 11 (761) 109
------- ------- ------- -------
Comprehensive income $ 8,966 $ 7,022 $14,076 $11,168
======= ======= ======= =======
Note E - 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 consolidated financial
position or results of operations.
<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
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 operating units.
Recap of 1998 Second Quarter Results
For the quarter ended July 31, 1998, total revenues increased by $32.1 million
or 33.4% from the quarter ended July 31, 1997. Overall gross margin improved by
0.4 percentage point as a percent of revenue and gross margin dollars increased
$13.2 million or 34.7%. Income from operations for the quarter increased $4.8
million or 40.8% over the prior year second quarter. Net income increased 39.0%
over the quarter ended July 31, 1997, and earnings per share (diluted) increased
36.4% to $.30 per share from $.22 in the prior year second quarter.
For the six months ended July 31, 1998, revenues increased $51.0 million or
29.2% over the same period of the prior year. The gross margin percentage
remained relatively constant at 39.3% and 39.4% for July 31, 1998 and 1997,
respectively. Operating expenses increased 27.0%, however, as a percentage of
revenue, these expenses decreased 0.5%. Income from operations was 35.3% higher
than the six months ended July 31, 1997, and earnings per share (diluted)
increased 31.4% to $.46 from $.35 in the prior year.
Revenues
Total revenues for the three and six month periods ended July 31, 1998 were up
33.4% and 29.2%, respectively. Approximately 3 percentage points of revenue
growth in second quarter and 5 percentage points of revenue growth for the six
months were due to acquisitions completed in July 1997. By revenue category,
1998 compares to 1997 as follows:
Quarter Year-to-date
------- ------------
Information services +61.6% +54.1%
Product sales + 6.9% + 7.1%
Maintenance and support +11.9% +12.9%
Most of the $32 million of overall revenue increase in the second quarter of
1998 was attributable to growth in information services. That growth was
principally due to increased assessment and testing services, particularly,
increased volumes of statewide K-12 assessments. The new state assessment
program in California had a significant impact on these volumes and revenues.
Increases in product sales came principally from assessment instruments and
education software licensing. Increased maintenance and support revenues were
the result of increased support revenues related to education software.
<PAGE>
By major market, revenues from the education market grew over 40% in the second
quarter, due largely to the aforementioned testing volumes. Large scale data
management revenues (non-education) grew over 10% in the second quarter of 1998.
Cost of Revenues and Gross Margins
For the quarter ended July 31, 1998, the Company's overall gross margin improved
by 0.4 percentage point to 40.0% from 39.6% in the same period of the prior
year, with improved margins in each of the Company's revenue categories
(information services, product sales, and maintenance and support). On a
year-to-date basis, as a percentage of revenue, the overall gross margin
declined 0.1 percentage point, due entirely to revenue mix, as gross margins in
each revenue category also improved. The rapid growth of information services
influenced the overall year-to-date gross margin percentage.
Operating Expenses
Sales and marketing expenses increased $2.8 million or 20.6% in the quarter
ended July 31, 1998, over the prior year second quarter. As a percentage of
revenues, second quarter sales and marketing expenses declined by 1.4 percentage
points, due to relatively lower selling costs on information services revenues.
For the six month period ended July 31, 1998 these expenses also decreased 1.0
percentage point as a percent of revenues.
Research and development costs increased $.8 million in the quarter ended July
31, 1998 as compared to the quarter ended July 31, 1997. Year-to-date
expenditures increased $1.0 million, as a percentage of revenues these expenses
remained constant at 2.1% for 1998 and 1997. For the full year, these expenses
are expected to be at modestly higher levels for fiscal 1998 than fiscal 1997,
as the Company continues its investment in software products and test processing
technology.
General and administrative expenses increased by $4.7 million for the quarter
ended July 31, 1998 from the prior year quarter. This quarter-to-quarter
increase is the result of several factors, including acquisitions made in the
second quarter of 1997, (including the related amortization of goodwill), year
2000 costs, and accruals established for variable compensation plans. For the
six months ended July 31, 1998, these expenses were up $7.0 million due to the
same factors.
Non-operating Expenses
Interest expense decreased slightly for the quarter ended July 31, 1998 from the
prior year quarter. On a year-to-date basis, interest expense decreased $0.1
million as a result of lower average debt levels. Other income and expense, net,
was negligible for both the quarter and the year-to-date period ending July 31,
1998 and 1997.
Provision for Income Taxes
The effective income tax rate was 40% for the quarters ended July 31, 1998 and
1997.
<PAGE>
Liquidity and Capital Resources
For the six-month period ended July 31, 1998, the Company generated $16.6
million of cash flow from operating activities as compared to $12.4 million in
the same period of the prior year. Cash was used principally to fund investments
in property, plant and equipment of $11.6 million, business systems of $3.7
million, acquisitions of $4.6 million, net repayment of borrowings of $5.7
million, as well as to pay dividends of $3.1 million. The Company expects for
the remainder of fiscal 1998 that its positive 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 an existing
revolving credit facility. The Company plans to hold relatively constant the
number of shares of common stock outstanding and will, therefore, generally
repurchase shares only to offset new issuances, if any.
Year 2000 Impact
The Company continues to modify or replace portions of its product software and
internal business systems software so that it will function properly in the year
2000 and beyond. The Company believes its efforts continue to be on schedule and
within costs discussed in its most recent annual report and Form 10-K. 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 suppliers and customers 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.
The statements which are not historical or current facts or are "goals" or
"expectations" contained in this Quarterly 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 the Annual Report on Form 10-K for the year ended January 31,
1998, are incorporated herein by reference, and stockholders 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) No reports on Form 8-K were filed for the three months ended July 31,
1998.
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 9, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the financial
statements for National Computer Systems, Inc. and Subsidiaries, for
the fiscal year ended January 31, 1999, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> MAY-1-1998
<PERIOD-END> JUL-31-1998
<EXCHANGE-RATE> 1
<CASH> 10,436
<SECURITIES> 0
<RECEIVABLES> 114,609
<ALLOWANCES> 0
<INVENTORY> 30,314
<CURRENT-ASSETS> 162,479
<PP&E> 211,835
<DEPRECIATION> (113,504)
<TOTAL-ASSETS> 334,855
<CURRENT-LIABILITIES> 112,609
<BONDS> 7,712
0
0
<COMMON> 935
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<TOTAL-LIABILITY-AND-EQUITY> 334,855
<SALES> 41,556
<TOTAL-REVENUES> 128,128
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<EPS-PRIMARY> 0.31
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</TABLE>
